Howard Rich's Blog

April 30, 2009

Cap-And-Trade: Al Gore’s Cash Cow

From Investor’s Business Daily:

Global Warming: At the cap-and-trade hearings, it was revealed that not everyone will suffer from this growth-killing energy tax. A congresswoman wanted to know why sea levels aren’t rising but Gore’s bank account is.

When Gore left office in January 2001, he was said to have a net worth in the neighborhood of $2 million. A mere eight years later, estimates are that he is now worth about $100 million. It seems it’s easy being green, at least for some.

Gore has his lectures and speeches, his books, a hit movie and Oscar, and a Nobel Prize. But Rep. Marsha Blackburn, R-Tenn., was curious about how a man dedicated to saving the planet could get so wealthy so quickly. She sought out investment advice we all could use in a shaky economy.

Last May, we noted that Big Al had joined the venture capital group Kleiner Perkins Caufield & Byers the previous September. On May 1, 2008, the firm announced a $500 million investment in maturing green technology firms called the Green Growth Fund.

Last Friday, Gore was the star witness at the hearings on cap-and- trade legislation before the House Energy and Commerce Committee. Blackburn asked Gore about Kleiner-Perkins, noting that at last count they “have invested about a billion dollars invested in 40 companies that are going to benefit from cap-and-trade legislation that we are discussing here today.”

Blackburn then asked the $100 million question: “Is that something that you are going to personally benefit from?” Gore gave the stock answer that “the transition to a green economy is good for our economy and good for all of us, and I have invested in it but every penny that I have made I have put right into a nonprofit, the Alliance for Climate Protection, to spread awareness of why we have to take on this challenge.”

Last May, we also noted that on March 1, Gore, while speaking at a conference in Monterey, Calif., admitted to having “a stake” in a number of green investments that he recommended attendees put money in rather than “subprime carbon assets” such as tar sands and shale oil.

He also is co-founder of Generation Investment Management, which sells carbon offsets that allow rich polluters to continue with a clear conscience. It’s a scheme that will make traders of this new commodity rich and Bernie Madoff look like a pickpocket. The other founder is former Goldman Sachs partner David Blood.

As Stephen Milloy, author of “Green Hell,” points out, Goldman Sachs is lobbying for climate change legislation and is part owner of the Chicago Climate Exchange, where carbon credits from cap and trade would be traded.

Others hope to cash in along with Gore. On Earth Day 2007, the various NBC networks gave 75 hours of free air time to Gore to hype climate change. NBC is owned by General Electric, perhaps the largest maker of wind turbines and other green technology in the world. It, too, stands to benefit financially from cap and trade, as Fox News commentator Bill O’Reilly has noted, connecting dots others won’t.

Gore’s altruism is phony. According to a March 6 Bloomberg report, Gore invested $35 million of his own money not in green nonprofits, but with the very profitable Capricorn Investment Group LLC, a Palo Alto, Calif., firm that directs clients to green investments and invests in makers of environmentally friendly products.

As reported on Green Hell Blog, Capricorn was founded by the billionaire former president of eBay Inc., Jeffrey Skoll, who also happens to be an executive producer of Gore’s Oscar-winning documentary, “An Inconvenient Truth.”

Gore has not taken a vow of poverty even as he advocates legislation that will push millions into it. He has said greed and corporate profits are behind the studies disproving his alarmism. Maybe it’s his desire for profits that’s behind his manipulation of the truth.


Congress OKs $3.6 trillion Obama budget

From the Washington Times:

Congress signed off on President Obama’s $3.6 trillion budget largely along party lines Wednesday night, handing him a legislative victory that paves the way for a health care overhaul.

The Senate cleared the plan by a vote of 53 to 43 after the House passed it 223 to 193. Not a single Republican in either chamber voted for the measure. Democratic defections included Sens. Evan Bayh of Indiana, Robert C. Byrd of West Virginia, Ben Nelson of Nebraska and Pennsylvania’s former Republican Sen. Arlen Specter, all of whom joined 17 House Democrats in voting no.

The budget – a nonbinding resolution meant to guide congressional spending – includes a fast-track provision that would block a Senate filibuster on Mr. Obama’s bid to transform the health care system, as well as his plan to change student lending.

In remarks prepared for his evening news conference, Mr. Obama said the budget “builds on the steps we’ve taken over the last 100 days to move this economy from recession to recovery and ultimately to prosperity.”

House and Senate budget chiefs trimmed Mr. Obama’s original $3.6 trillion budget proposal, leaving out certain items, such as additional bailout funding, and scaling back his “Make work pay” tax cut. Lawmakers also opted against reducing the level of charitable tax deductions taken by wealthy Americans.

But the blueprint preserves many of Mr. Obama’s initiatives and tees up efforts by congressional committees to expand government-subsidized health care. It also implements an administration-backed plan to cap greenhouse gas emissions, though it stipulates that the final budget specify how to finance both reforms. Because health care was included under a procedural mechanism known as “reconciliation,” Mr. Obama’s health care plan will require only 51 votes to pass the Senate.

“I think it’s a good beginning,” Senate Budget Committee Chairman Kent Conrad said after the vote. “I do think it is putting us on the right trajectory in the first five years and we have captured the president’s major priorities.”

However, North Dakota’s Mr. Conrad noted, lawmakers must pass tax and entitlement reform “if we’re going to get the country on a sustainable course.”

The budget aims to cut the deficit from an expected $1.2 trillion this year to $523 billion by 2014. The total national debt would skyrocket from $11.2 trillion to $17 trillion.

Republicans, who have used reconciliation in the past to push through the Bush tax cuts and other items, protested its use for health care. They also seized on the budget’s overall spending level, saying it threatens future generations.

“I don’t want a legacy of stealing opportunity from my grandchildren or anybody else’s,” said Sen. Tom Coburn, Oklahoma Republican, who described the plan as “an escape from responsibility.”

A deal on the budget was only reached after Democrats agreed to demands from conservative Blue Dogs to consider legislation, known as pay-go, to help control spending. House Speaker Nancy Pelosi of California and House Majority Leader Steny H. Hoyer of Maryland have pledged to do so in a letter, while Mr. Obama has reportedly promised to help push the cause in the Senate.

April 29, 2009

No “Change” on Pay-to-Play Corruption

A little over 100 days ago, California Sen. Diane Feinstein called the inauguration of Barack Obama “a turning point for real and necessary change” in America.

But the more things were supposed to change, the more they have stayed in the same in Washington D.C., where the culture of corruption is more pervasive now than it ever was.

Today, Senator Feinstein finds herself at the heart of a massive conflict of interest scandal involving billions of taxpayer dollars.

What did she do…?

No “Change” on Pay-to-Play Corruption

April 27, 2009

Lies, Threats, Deal: Paulson, Bernanke, Lewis


The ramifications of the startling revelations about Bank of America’s controversial acquisition of a failing Merrill Lynch are explosive, and they will have a major impact on the tragic drama’s main actors, from BofA chairman Ken Lewis to Federal Reserve Chairman Ben Bernanke, and especially former Treasury Secretary Hank Paulson and whatever legacy he hopes to leave.

The events of December 2008 were absolutely crucial to understanding the financial crisis that threatened global markets. That they have become public four months afterward should trigger congressional hearings and raise once again the specter of machinations worked up by Wall Street and Washington out of public view and quite arguably out of the public interest.

“We have uncovered facts that raise questions about the transparency of the TARP program, as well as about corporate governance and disclosure policies at Bank of America,” reads a letter from New York Attorney General Andrew Cuomo to Sen. Christopher Dodd, D-Conn., Rep. Barney Frank, D-Mass., and Securities and Exchange Commission Chairman Mary Schapiro.

Lewis may well be ousted at the Bank of America annual meeting in May, as many large institutional shareholders have organized a campaign to get a vote for his ouster. Since the Bank of America-Merrill Lynch deal was approved, Bank of America shares have fallen from $14.11 in mid-December to $3.75 a share at the low on March 9, and recovered to a still depressed $8.50 today.

None of the details revealed by Lewis’ testimony to Cuomo’s office–all substantive matters that would have been of keen importance to shareholders of Merrill Lynch and Bank of America–were ever made public before the deal went through on Dec. 31. That is a shocking violation of the requirement to inform shareholders of any material matters that could impact their vote or holding of shares in either company. This nondisclosure of market sensitive information means all the trading between Dec. 15 and April 22–tens of millions of shares of the largest U.S. bank–was executed on the basis of withheld information. This is a shocking violation of 75 years of securities regulation.

Incredibly, the SEC was never informed of any of this: that Merrill was about to report a huge $15 billion loss, that Lewis wanted to kill the deal, that Paulson told Lewis that Bernanke had instructed him to fire Lewis and dismantle his entire board if he refused to go through with the merger. It’s not exactly clear what authority Paulson and Bernanke were going to use to replace Lewis and his board–powers they might assume in a pending systemic breakdown?

“Notably, during Bank of America’s important communications with federal banking officials in late December 2008, the lone federal agency charged with protecting investor interests, the Securities and Exchange Commission, appears to have been kept in the dark,” states Cuomo’s letter to congressional leaders. “Indeed, Secretary Paulson informed this office that he did not keep the SEC chairman in the loop during the discussions and negotiations with Bank of America in December 2008.” In other words, Paulson’s disdain for SEC Chairman Christopher Cox meant that the Treasury was operating in an autonomous, somewhat high-handed fashion.

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A former SEC commissioner tells Croesus today that Lewis certainly violated securities laws by submitting a vote to BofA shareholders in December of 2008 and willfully failing to disclose highly material facts to them and the investing public.

A huge black mark for Lewis is that he never discussed with his board the problem of disclosure to shareholders. As incredible as it may seem, Lewis, at the very least, did not even file an amendment to the merger agreement after it closed on Jan. 1, disclosing all the recent material developments concerning Merrill Lynch and Bank of America. This would have included deterioration of earnings, asset write-downs, his attempt to scuttle the deal and his negotiations with the Bush administration about top-level governance of the bank.

Lewis should be legally liable for not reporting all these machinations to the public and to financial market regulators. Apparently, he has testified that both Paulson and Bernanke urged him to remain silent about the threats to the transaction, using threats of replacing him. If this is true, then it could be argued that these two senior officials suborned information that was crucial to market decisions.

Another major problem that will be aired in hearings is the evidence that the chairman of the Federal Reserve, supposedly an independent institution, apparently dictated to the Treasury secretary an order to replace Lewis if he wouldn’t go along with the deal. Paulson told Cuomo’s office that the government “either could or would remove the board and management.”

This opinion, Paulson explained to Cuomo’s office, “was entirely based on what he was told by Federal Reserve officials.” Late Thursday, however, a Paulson spokesman took a slightly different tack, explaining that “Bernanke did not instruct him [Paulson] to indicate any specific action the Fed might take.” Will the real story please stand up?

If Paulson and Bernanke induced Lewis to violate the securities laws, then they are possibly party to a civil crime. Some investment bankers say that current Treasury Secretary Timothy Geithner is a party to these dealings as well. That would be logical and messy as hell. In all, it’s another black eye to the Wall Street rescue plan and another blow to the small shareholder who had no idea of all this backroom infighting. It’s also a real threat to the whole concept of transparency regarding the decisions that decide the fate of tens of billions of dollars and hundreds of millions of people.

Obama team reverses union transparency

From the Washington Times:

The Obama administration, which has boasted about its efforts to make government more transparent, is rolling back rules requiring labor unions and their leaders to report information about their finances and compensation.

The Labor Department noted in a recent disclosure that “it would not be a good use of resources” to bring enforcement actions against union officials who do not comply with conflict of interest reporting rules passed in 2007. Instead, union officials will now be allowed to file older, less detailed conflict reports.

The regulation, known as the LM-30 rule, was at the heart of a lawsuit that the AFL-CIO filed against the department last year. One of the union attorneys in the case, Deborah Greenfield, is now a high-ranking deputy at Labor, who also worked on the Obama transition team on labor issues.

Labor officials declined to say whether she played a role in the new policy, noting that Ms. Greenfield is abiding by all government ethics rules. In court filings, she and other union attorneys called the 2007 rules “onerous.”

The Labor Department also is rescinding another key labor financial disclosure regulation. The expansion of the so-called LM-2 rule, approved during the last days of the Bush administration, requires unions to report more information about finances and labor leaders’ compensation on annual reports.

Critics worry that the rollback of union reporting requirements will keep hidden potentially corrupt financial arrangements aimed at rooting out corruption, but unions say the Bush administration reporting rules were unfair and burdensome.

“Strong financial disclosure requirements are necessary to root out and combat union-related corruption,” Rep. Howard P. “Buck” McKeon, California Republican, and Rep. John Kline, Minnesota Republican, wrote in a recent letter to the department.

Sen. John Cornyn of Texas sent the department a similar letter signed by more than two dozen other Republicans.

But Labor Department spokeswoman Gloria Della said Secretary Hilda L. Solis “is committed to strong, fair and balanced enforcement of labor-management reporting laws.” She said the department’s move to rescind the expanded LM-2 financial reporting requirements gives the department “the opportunity to evaluate whether we are taking the best actions toward that goal.”

The department declined to comment on the potential for more changes in the financial reporting rules for unions. But officials referred to a lengthy statement the department recently published in the Federal Register.

The statement, by Shelby Hallmark, acting assistant secretary for employment standards, and Andrew D. Auerbach, deputy director for the Office of Labor-Management Standards, deemed it “a mistake” for the Bush administration to propose further changes to LM-2 disclosure regulations. The officials said not enough time had passed since previous reporting rule changes were passed in 2003.

“The department agrees with the contention that financial transparency is necessary to protect against union fraud and corruption and to enhance accountability among union officials, and that it is necessary for members to effectively engage in union-self governance,” the labor regulators wrote.

However, Mark Mix, president of the pro-business National Right to Work Legal Defense Foundation, which provides legal services to workers who say unions have violated their rights, called the rollback of union financial disclosures troubling.

“The department’s decision not to protect simple union disclosure protections creates increased vulnerability for American workers and should serve notice to legislators that now is not the time to grant union bosses more unchecked power over workers and our economy,” he wrote in a recent letter to the department.

He said the AFL-CIO would “benefit greatly” from the delay or rollback of expanded reporting rules. “It immediately allows the AFL-CIO to avoid financial disclosure that is beneficial and necessary to rank-and-file workers who are forced to pay union dues and fees to keep a job,” he said.

Jim Coppess, associate general counsel for the AFL-CIO, discounted the criticism. He said the Labor Department’s recent moves did nothing to affect the transparency of union financial reports or the ability of federal regulators to monitor expenditures.

“All the department has done is propose the withdrawal of a rule hastily adopted on the very last day of the Bush administration and an examination of the actual costs and benefits of extensive reporting requirements imposed on unions in 2003 as the basis for possible future changes,” he wrote in an e-mail to The Washington Times.

Ms. Greenberg’s new role at Labor has prompted Mr. Mix and his group to file a Freedom of Information Act request seeking details about whether she or any other union leaders played a role in the union’s financial disclosure policies.

Ms. Greenfield declined an interview request, although Labor Department spokeswoman Amy Louviere said she is “complying with the president’s ethical guidelines.”

Last year, Ms. Greenfield and AFL-CIO attorneys sued Labor, saying the new conflict of interest forms would force thousands of unpaid union shop stewards to report detailed information about their finances to the department each year.

“Treating individuals, such as shop stewards, who are not on their union’s payroll as ’employees of a labor organization’ sweeps tens of thousands of rank and file union members” into the new reporting requirements, Ms. Greenfield and other union attorneys argued in a 51-page court filing.

Under the Bush administration, the department defended the rules in court. In court filings, government attorneys argued that the new rules were needed to “bring to light a wide variety of financial transactions and arrangements – whether proper or improper – that pose conflicts of interest arising from the relationships between unions, their officers and employees, employers and businesses.”

Ms. Greenfield’s job transfer is one of several appointments that suggest organized labor will hold much greater sway in the Obama administration than during the Bush years. Organized labor, which spent tens of millions of dollars helping to elect Barack Obama as president, has other likely allies, including:

• Patrick Gaspard, White House political affairs director, who worked at the Service Employees International Union.

• T. Michael Kerr, who served as assistant to the secretary-treasurer at SEIU in charge of finance and administration before he was picked to serve as assistant secretary for administration and management at Labor.

In her new job, Ms. Greenfield is in charge of the department’s executive secretariat office, which handles incoming correspondence to Ms. Solis, as well as memoranda and other documents from throughout the department.

April 24, 2009

Global Warming Overreach

Congressman Henry Waxman played to the crowds this week with high-profile hearings designed to boost his climate legislation. To listen to the Energy and Commerce committee chair, a House global warming bill is all but in the recyclable bag.

To listen to Congressman Jim Matheson is something else. During opening statements, the Utah Democrat detailed 14 big problems he had with the bill, and told me later that if he hadn’t been limited to five minutes, “I might have had more.” Mr. Matheson is one of about 10 moderate committee Democrats who are less than thrilled with the Waxman climate extravaganza, and who may yet stymie one of Barack Obama’s signature issues. If so, the president can thank Democratic liberals, who are engaging in one of their first big cases of overreach.

Not that you couldn’t see this coming even last year, when Speaker Nancy Pelosi engineered her coup against former Energy chairman John Dingell. House greens had been boiling over the Michigan veteran’s cautious approach to climate-legislation. Mr. Dingell’s mistake was understanding that when it comes to energy legislation, the divides aren’t among parties, but among regions. Design a bill that socks it to all those manufacturing, oil-producing, coal-producing, coal-using states, and say goodbye to the very Democrats necessary to pass that bill.

Such sense didn’t deter Mrs. Pelosi, who first tried an end-run around Mr. Dingell in 2007 by putting Massachusetts Rep. Edward Markey in charge of a new global-warming committee. When that didn’t get her a bill, she helped her fellow Californian, Mr. Waxman, unseat Mr. Dingell. Environmentalists threw a party, and the Waxman-Markey duo got busy on legislation to please their coastal crowds.

Cap and trade was already going to be a brawl, but the two upped the ante by including tougher targets and restrictions. If that weren’t enough, they rolled in every other item on the green wish list: a renewable electricity standard; a low-carbon fuel standard; a broader renewable fuels policy; new efficiency standards. Any one of these is a monumental fight on its own. Put together they risk an intra-party committee mutiny.

There’s Mr. Matheson, chair of the Blue Dog energy task force, who has made a political career championing energy diversity and his state’s fossil fuels, and who understands Utah is mostly reliant on coal for its electricity needs. He says he sees several ways this bill could result in a huge “income transfer” from his state to those less fossil-fuel dependent. Indiana Democrat Baron Hill has a similar problem; not only does his district rely on coal, it is home to coal miners. Rick Boucher, who represents the coal-fields of South Virginia, knows the feeling.

Or consider Texas’s Gene Green and Charles Gonzalez, or Louisiana’s Charlie Melancon, oil-patch Dems all, whose home-district refineries would be taxed from every which way by the bill. Mr. Dingell remains protective of his district’s struggling auto workers, which would be further incapacitated by the bill. Pennsylvania’s Mike Doyle won’t easily throw his home-state steel industry over a cliff.

Add in the fact that a number of these Democrats hail from districts that could just as easily be in Republicans’ hands. They aren’t eager to explain to their blue-collar constituents the costs of indulging Mrs. Pelosi’s San Francisco environmentalists. Remember 1993, when President Bill Clinton proposed an energy tax on BTUs? The House swallowed hard and passed the legislation, only to have Senate Democrats kill it; a year later, Newt Gingrich was in charge. With Senate Democrats already backing away from the Obama cap-and-trade plans, at least a few House Dems are reluctant to walk the plank.

Rumors were in fact flying earlier this week that Mr. Markey might have to postpone next week’s subcommittee markup. For now, he and Mr. Waxman are busy trying to buy or arm-twist votes. They have some potent tools, in particular the enticement of giving some carbon-emission permits away for free, or allocating them to specific industries. Yet having set expectations so high, the duo risk losing liberal members if they give away too much.

The Obama team is aware it has trouble, which explains last week’s well-timed Environmental Protection Agency “finding” that carbon is a danger. The administration is now using this as a stick to beat Congress to act, arguing that if it doesn’t the EPA will. (Reality: Any EPA actions will be tied up in court for years.) It also helps explain EPA’s Monday analysis claiming the legislation won’t cost all that much. (Reality: The agency could only make this claim by assuming an endless recession.)

The real risk to the president is that his bill goes down at the hands of his own party — with nary a Republican to blame. Whether Mrs. Pelosi and Mr. Waxman considered this as they crafted their gem is unclear. But the overreach has made it a possibility now.

Girl to throw out first pitch at Citi Field

Congratulations to Mackenzie Brown for pitching a perfect game.

From: ESPN Online

BAYONNE, N.J. — On the pitcher’s mound, a 12-year-old girl from New Jersey is perfect.

Mackenzie Brown is the first girl in Bayonne Little League history to throw a perfect game. She retired all 18 boys she faced on Tuesday.

There are no official records of how many perfect games are thrown per season. Little League Baseball in Williamsport, Pa., estimates only 50 to 60 occur each year. No one knows how many have been thrown by girls.

Brown says she knew she had something special going in the fourth inning and just tried not to mess up.

She’ll get to throw out the first pitch at Citi Field on Saturday when the New York Mets host the Washington Nationals.

When Expenses Outweigh Benefits

From Investor’s Business Daily:

Regulation: Should the Environmental Protection Agency place limits on carbon dioxide emissions, the costs to the oil industry, its customers and consumers in general will be stiff. Fighting global warming is not cheap.

For now, we’ll forget that there’s no reason to go to war against a mythical enemy that has been created through vain imaginings and focus on the expenses humanity will incur in the battle to keep man from heating his planet. Because either through EPA regulation or by legislative initiative, there’s a better than even chance carbon emissions will one day be regulated in America, and those rules won’t come without costs.

But before the rules are carved into the cornerstone of the Washington Monument, it’s policymakers’ duty to take a sober look at the price and determine if demon carbon is worth the prohibition crusade.

U.S. petroleum refineries discharge hundreds of million of tons of CO2 into the sky each year. Oil companies don’t spew carbon into the air out of malice toward the environment or through a misanthropic negligence. They do it to make products, in particular motor fuels, the world demands and the global economy needs if it is to continue growing.

The oil industry employs a complex finishing process for crude and will not be able to simply flip a switch that will reduce its carbon dioxide discharges. It will have to make expensive changes in its operations if it is to keep providing the market with energy. The power it uses to run its refineries and light its buildings will cost more. To comply with regulations, oil companies will likely have to sink resources into new equipment that is not as cost-effective as what they are running now.

At the production level, costs will increase as the industry will no longer have the same economies of scale that keep prices down. With demand being lowered by regulation, the volume that oil companies will be able to spread their costs over will shrink, making each unit more expensive to produce.

Karen Campbell, a macroeconomic policy analyst at the Heritage Foundation, says that to operate within the government-imposed limits oil companies will have to cut their production by “about 2.2% below where it would be in the baseline scenario.” In terms of costs to the industry, “Producers of refined petroleum would see their price index (costs) grow 81% more than the baseline.”

Congressional Democrats and agitators on the left would have the public believe that the additional expenses incurred by the oil industry will come out of the pockets of the obscenely (in their minds) wealthy Big Oil executives. Some of it will. If the companies become less profitable, workers at all levels will lose income.

But consumers, some of whom support CO2 caps, will take a hit, as prices are expected to increase by 28% over the next 20 years. Oil industry workers will be affected, as well, with as many as 14,000 in both the oil and coal industries losing their jobs, Campbell reckons.

Meanwhile, investors, some of whom also support CO2 caps, will find that their investments in the oil industry will lose strength.

“The increase in prices and decline in operations is not only bad for consumers and employees, but also bad for all the owners of these stocks — pension funds, mutual funds, 401(k)s, etc. — who would get an average 3.25 percentage points lower return on their equity — about 11%,” said Campbell.

“The power of compounding makes this loss in return, year over year, significant. A $1 million investment would grow at a slower rate over the 20 years resulting in about $20 million less wealth accumulated for the saver or fund that invested in the petroleum industry.”

It’s hard to see how this trade-off could ever be of any real benefit. In exchange for a decrease in anthropogenic emissions of carbon dioxide, American jobs must be sacrificed; investors will have to expect — and receive — lower returns; capital in an essential sector that needs investment to find and produce new sources will be depressed; and consumers will have no choice but to use a greater share of their incomes for energy.

Washington, as is too often the case, has it wrong on CO2 emissions. It is treating speculation as if it were a genuine emergency. The political leadership needs to stop, take a deep breath and rethink the trendy position on carbon.

April 22, 2009

Greatly Depressing

History is written by many people, but those who write government school textbooks tend to hold disproportionate sway.

Sadly, their vision of America – which has driven conventional wisdom and popular opinion for decades – is built on many myths.

The biggest myth of them all?

That capitalism and our free market system caused the Great Depression – and that only a massive expansion of the federal government saved America from permanent economic ruin….

Greatly Depressing

Tea Party Economics


Accounts vary, but it seems that a few hundred thousand people attended one of about 500 Tax Day Tea Parties on April 15. In the aftermath, politicians on both sides of the political aisle were energized. Conservatives hoped the tea parties signaled renewed support for the idea of limited government, while some liberals called the protests unhealthy and unpatriotic. Don’t ya just love politics?

The good news is that economists can take a more dispassionate view. And the way economists contribute to the debate is with public choice theory, an idea fathered by Duncan Black, Gordon Tulluck and the Nobel Prize-winner James Buchanan. While the theory of public choice can be broadly applied, it is the ideas of “special interests” and “rational ignorance” that are useful in understanding last week’s tea parties.

Here’s an example of public choice at work. Let’s say teachers could benefit by $2,000 each per year (in higher pay or benefits, smaller classes, etc.) from a piece of legislation currently under debate. But the cost per taxpayer averages just $15 per year.

The “special interests” (teachers and politicians) have substantial personal incentive to see that the bill is passed. Teachers, who benefit directly, will use time and money to lobby for the bill. And lawmakers will expect campaign contributions, votes or both, in exchange for their support.

But the taxpayer will remain “rationally ignorant” of the whole process. Why spend time even thinking about an issue when the cost is only $15 per year?

A perfect example of this process can be found in the Sunday edition of The Washington Post, in the story “Murtha’s Earmarks Keep Airport Aloft.” The Post reported that John Murtha, D-Pa., using his powerful position on the House Appropriations Committee, has steered $200 million of federal funds to support the John Murtha Airport in Johnstown, Pa. Most voters have never heard of this airport and pay little for it. But passenger traffic is down by half in the past 10 years, even though the congressman uses it frequently. One could only wonder what would happen if all Americans were allowed to vote to continue funding this facility. But that’s not the way the process works.

This is why government will tend to grow in excess of what a true democracy really wants. At least, it will grow until those $15 hits accumulate to such a level that people have finally had enough, and in a seemingly spontaneous eruption, the average voter finds the energy to fight back.

Apparently, this is what happened last week. This same energy was also evident in the midterm elections of 1994 when Newt Gingrich became speaker of the House, and in 1980 when Ronald Reagan became president by tapping into anger about the size and cost of government.

What’s interesting is that many who did not have the energy or ability to attend a tea party last week still wanted to watch them on TV. The coverage of the events by Fox News, which highlighted the protests more than other outlets, attracted more viewers than MSNBC, CNN and CNN Headline News combined. This shows that millions more were paying attention and suggests wider support for the protests.

Some analysts have made the case that Americans are not overtaxed (at the federal level) and that therefore the protests were not justified. But this misses the point. Government spending is exploding, with the Congressional Budget Office projecting $9.3 trillion in deficits over the next 10 years. People know that this spending represents future taxes.

Here is an interesting set of facts. If the government increased the top tax rate from the current rate of 35% to 100% (yes, that’s right 100%), it would only collect an extra $400 billion this year. In other words, confiscating all the income that is currently taxed at 35% would not raise enough revenue to cover any of the annual deficits projected in the next 10 years. There is no way that tax hikes on the rich alone can pay for proposed spending in the current budget.

In addition, state and local taxes are going up, with at least 10 states planning on hiking taxes. And promised future spending on Social Security and health care must also be paid for. Under the Obama administration’s budget, federal government spending in the next 10 years will average 24% of GDP, almost triple what it was back in the 1930s. As a result, when we add together today’s taxes and expected future taxes, Americans will face a bigger tax burden than at any time in history.

Meanwhile, the government is taking over private-sector companies, printing massive amounts of new money and interfering in the free market. And it doesn’t help that this has happened while many government officials are running into trouble over not paying their own taxes, which undermines the Obama administration’s call for the average taxpayer to sacrifice for the greater good.

In the end, the Tax Day Tea Parties are a very interesting case study for public choice theory. Whether or not they suggest a shift in the political landscape is another issue. If government continues to grow and cost more, we would expect to see more spontaneous voter response.

Brian S. Wesbury is chief economist and Robert Stein senior economist at First Trust Advisors in Wheaton, Ill. They write a weekly column for Forbes.

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