Monday, December 29, 2008

The Next Round of Bailouts: The States

So with all these bailouts, one of the effects they are having is greatly increasing the moral hazard throughout society. One of the reasons why we are in the mess we are currently in is that a huge moral hazard was created via the implicit guarantee of Fannie Mae and Freddie Mac. Investors correctly felt that the institutions would be bailed out if they got in trouble and this allowed the two firms to borrow money at a below market rate and pump an excessive amount of capital into housing. So apparently not learning from our lessen, we’re now doing exactly that again with banks, auto makers, your uncle who’s delinquent on his credit card and so on.

So the next one on the list is bailing out state governments. Senator Schumer has stated that his state of New York will likely be getting $5 billion in increased transfer payments via the Obama administration's proposed stimulus package. It has also been suggested that California is to be bailed out. One of the beauties of State governments is that unlike the Federal Government, they cannot borrow endlessly. This is mixed with the fact that if they raise taxes to too high of a level residents and businesses will move out. These two forces combined place a check on State budgets and this forces them to be fiscally responsible and relatively efficient. These two mentioned states, along with many others went on spending sprees in the most recent good years without regard for long-term planning. California’s budget grew almost 30 percent in the past 3 years. But now that the Federal government will step in and bail them out, the moral hazard of over spending has increased greatly for years to come. The California legislature is being resistant to spending cuts currently. Perhaps it’s because they know if they wait long enough, they will be bailed out? Now every state legislature knows it does not need to keep spending in line or create rainy day funds for use in recessions, because every time we get into one, they are going to be bailed out.

This creates the obvious problem of promoting irresponsible behavior on the part of the States, which ends up being paid for by the Federal taxpayer. Beyond that however, is the continued erosion of the notion of the States being sovereign bodies. Rather than being independent levels of government, if the budget processes are now created with the assumption of Federal help, the States become more similar to the French Departments, merely administrative districts rather than separate governments. Power therefore only becomes more centralized and less in touch with constituents. Furthermore, how come New York and California are the ones in which the bailouts are being designed? Why not Rhode Island, Virginia or Arizona, which have huge budget problems themselves? Could it possibly be that both these states are heavily Democrat (and therefore the same party as the current controlling government) with influential Congressmen representing both of them, including the Speaker of the House, the Chairman of the Ways and Means Committee, and a woman soon to be Secretary of State? Bailouts just become another mechanism of corruption and party hackery. Just as soon to be former Senator Stevens was allowed to get away with his abhorrent pork projects because his party controlled Congress, so will those who now have favor with the current government.



It certainly seems like, in this new culture of bailouts, there ought to be an increased risk of the moral hazard that EJB mentions. After all, it stands to reason that if the Federal Government is willing to bailout banks for bad business practices - and now, apparently, some States for their failure to adequately plan for their future - other sectors of business (and indeed, other States) would feel comfortable knowing that their fiscal shortcomings will be federally insured. I'm not sure it's just that simple though. Look especially at the recent automobile bailout. Officially, I guess it is a bailout but the bill never got through Congress; Bush had to semi-legally divert funds to GM from the original "stimulus package." I think it's safe to say that a large contingent of the population (and of Congress) is tired of taxpayer bailouts. This shifting of public will may not allow for further bailouts. Furthermore, all it takes to soften the blow of the moral hazard is one major bailout proposal rejection. We may have seen that with the auto bailout. If the Federal Government refuses to bailout a company or State that is asking for money, other entities won't be so quick to assume that they'll be guaranteed any sort of insurance.

Now to the California and New York stuff. Again, I think it's sort of facile to point out that NY and CA are liberal states and thus, wink wink nudge nudge, they're getting bailed out. I'm not saying there isn't some truth to that, but EJB points out later in the post that Rhode Island isn't being bailed out. Is there a more liberal State than Rhode Island? I've lived there. There is not.

Also, I bet we could discover all sorts of plausible rationales for the bailing out of New York and California. My first thought was to note that these are two of the largest States, by population, in the country. In fact, they are first and third in that category. Thus a State business bailout or a capital injection that props up Medicaid in New York helps more people than a similar plan in Arizona. Perhaps Obama, curtailed by a sinking economy, is implementing a fiscal triage.

But maybe you don't buy this strict utilitarian explanation. Fine. I think another relevant factor in the bailing out of California is the fact that the State is literally out of money. As much as I'd like to back EJB's moral/philosophical argument about moral hazards and learning important lessons, it's probably vitally important to first make sure that each State has enough capital to continue its operations. Otherwise we're simply winning the battle to lose the war. Or perhaps we'd be throwing the baby out with the bathwater. All I know is, there must be some folksy idiom that applies here.

As for NY, another possible explanation for bailing it out is that this could be a very good move for the national economy. NY ranks fifth amongst the States in GDP per capita. Thus it seems logical to conclude that more business is done in NY. Complete the syllogism and it points to the fact that bailing out NY is more economically beneficial for the Federal Government than bailing out Alabama.

So anyway, I'm not sure why they're doing this. Perhaps EJB is correct and this is merely a political pork move. I think there's probably some truth to that. But I propose that there are other, more legitimate, reasons for the NY and CA bailouts.


Tuesday, December 23, 2008

The Next Dick Cheney?

So whether you agree with it or not, we are all aware of the office of the Vice Presidency greatly expanding its role under the Bush administration. Cheney was a key player in many of the major policy decisions of the past years and was privy to information and authority in many areas on par with the President. Though it appears that Biden may not have as a powerful role (symbolically, it has already been announced he will not get a daily national security briefing when the President does), we may be seeing a similar advancement happen elsewhere.

Where that may be? The Hillary Clinton State Department. The New York Times reported that a Clinton aide explained that Clinton wishes to expand the role of the State Department regarding the current economic crisis. She is even hiring one of Bill Clinton's old budget directors to by a deputy on economic issues. This is interesting because this is a role in which the State Department has in the past only been indirectly involved. Trade agreements are negotiated by the US Trade Representative and there are a list of other agencies that deal with foreign aide. Foreign activity dealing with the recent economic crisis has largely been dealt with by the Treasury Department and the Federal Reserve.

But more interesting to me is the idea that this may just be an early sign of things to come. It's commonly known and even joked about on Saturday Night Live over how much Hillary wanted the Presidency, and this is not a weak personality (think Cheney). Armed with connections all over Washington from the Clinton presidency, compared to the relative Washington newcomer, Obama,(once again think Cheney) she may be in a place to greatly increase the power of her office. If she can't have the Presidency in name, perhaps she can have it in effect. Time will only tell.


Saturday, December 20, 2008

Charts Are Fun

Sometimes they're also a bit misleading. This one's probably a little suspect because obviously there are many factors left out. However, that being said - it's still a pretty stark reminder of just what is going down this year.

Click on it to get a better view - it's rather large.
The stats come from this article.

Well, as far as this bailout costing more than these other least we can justify it by pointing out how much more important financial institutions are, right? I mean, seriously, the Marshall Plan? Who cares about Europe immediately post-WWII? They turned out pretty socialist anyway, yeah? And the Louisiana Purchase? Bah. What good has ever come out of Louisiana? In fact, all they ever gave us was James Carville...not worth 217 trillion dollars. The Korean, Vietnam and Iraq wars? Worthless. NASA? Privatize it - we'd be vacationing on Mars today.

All in all, it's pretty clear that these other programs were less than worthy causes. No wonder our government has seen fit to spend more money on bailing out investment banks than it spent on all of these other things combined.


Friday, December 19, 2008

The Auto Bailout Is Here and on Shaky Legal Grounds

So details are yet to come out, but the Treasury announced this morning that GM and Crysler will get a $17.4 billion loan through at least March 31st to be taken out of the TARP program (the $700 billion bank bailout). This is likely only the first installment.

But you've got to love this administration. The bailout failed to get Congressional approval, so they just go around it and do it themselves with the proverbial FU. Where the Treasury gets the legal authoirty to do this when the bill passed uses language that clearly states it is to be used for financial institutions only, is a mystery to me. The bill defines "Financial Institution" as:
FINANCIAL INSTITUTION- The term ‘financial institution’ means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa, or the United States Virgin Islands, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.

But then again since when does this administration or the Federal government in general care about following the law? I will be interested in seeing if and how many Democrat Congressmen come out against this action, considering it is violating the bill but at the same time the end result is something they want and tried to get through Congress. We will have an oportunity to see if the years of complaints by Democrats about the Bush administartion breaking laws was true outrage in principal or whether it was just political opportunism. In this case they are fine with breaking laws as well as long as its for their purposes. I'll be watching.

UPDATE: Obama's reaction:
Today's actions are a necessary step to help avoid a collapse in our auto industry that would have devastating consequences for our economy and our workers. With the short-term assistance provided by this package, the auto companies must bring all their stakeholders together — including labor, dealers, creditors and suppliers — to make the hard choices necessary to achieve long-term viability.

Maybe he would have preffered it go through Congress, but it looks like he's ok with the executive branch stretching and bending both the spirit and letter of the law as well. So much for "change." It will just be a different set of issues in his Presidency in which the end justifies the means.



Sorry for my absence lately, everyone. EJB has done well to hold down the fort while I finish up my finals. It's all over now so, let's get right back into it.

I'm pretty sure that absolutely nobody is shocked by this move. The Bush Administration has done nothing if not circumvent federal law every step of the way. Let's talk about the language of the TARP that EJB highlights.

Clearly, the plain meaning of those words leads to the conclusion that an auto company is NOT a financial institution. I fully expect a lawsuit to climb the court-ladder and be available for certiorari soon (though, the tricky aspect will be who has standing to actually bring the suit). But the Bush Administration has a plan - of this we can be certain. They would not have pushed forward with this move if their legal counsel hadn't advised them of a litigation strategy, should their move be challenged.

One clause, in particular, worries me. That a "financial institution" can be labeled as a "security broker or dealer" or an "insurance company" might be the text that the Bush administration relies on. Do the automakers insure their sales? Do they buy and trade in other company's securities? If so, it is entirely possible that a court could label them a "financial institution." EBAY was so labeled in a case under Delaware Corporate law - despite the obvious fact that EBAY is not a financial institution. But because EBAY dealt in corporate securities - and lots of them - the court found it fit to consider them a securities dealer. This, I think, would have to be Bush's defense plan, should his illegal move be challenged.

And can I just mention one more time, what the hell is going on with this Republican administration!? Congress, despite being strongly Democrat, shoots down a bill that would help auto companies (traditionally a strong Dem interest) and then a Republican president circumvents Congress and exerts fictional Article II powers to redistribute capital!? WHAT!? What country are we in? What year is it? This whole thing blows my mind.


Thursday, December 18, 2008

Summing Up the Total So Far

So pretty much everyone is aware of the $700 billion “bank bailout” and the pending “auto bailout,” but what most people don’t realize, is that these are only a fraction of the total government expenditures and guarantees that have gone on so far over the past year. Government agencies and the Federal Reserve, which get less media attention and have no legislative hurtles have gone about instituting many other programs on their own.

So I was reading a WSJ article this week that has outlined that the Federal Reserve’s balance sheet has exploded in recent months, ballooning from about $800 billion to about $2.2 trillion since September. For the most part, the Fed has essentially printed $1.4 trillion dollars to purchase or borrow other assets. If this is kept in the system for too long once a recovery begins, we will be seeing inflation like we haven’t seen for years. The Fed says that it will tighten its policy when needed, but given their recent track record, I wouldn’t put much faith in that. And the market seems to agree with me as gold has been inching up recently.

But this whole thing got me thinking and I went about grabbing other info I have accumulated recently and came up with a list of all the various programs created over the past year. I’m probably missing a few small ones, but here is what I came up with.

(If amount allocated is yet to be used in it's entirety, the amount used thus far is in italics.)

Federal Reserve - $4.75 Trillion

Commercial Paper Funding Facility - $1.8 trillion ($312 billion)
Buys short term notes from private firms

Term Action Facility - $900 Billion ($415 billion)
Auctions off loans to banks

Term Securities Lending Facility - $250 billion ($190 billion)
Allows financial firms to borrow treasury bonds in exchange for low quality debt

Money market Investor Funding Facility - $540 billion ($0)
Buys assets from financial companies that support money market funds

Credit Extension to AIG - $123 billion ($87 billion)

Citigroup Bailout - $291 Billion
Guarantee of toxic assets

Discount Window - $92 billion
Banks directly borrowing cash from the Fed

Discount Window II - $50 billion
Extends direct bank lending function to securities firms

Commercial Paper Program II - $62 billion
Loans money to banks to buy commercial paper from mutual funds

Bear Stearns Bailout - $29 billion ($27 billion)
Guaranteed assets in brokered JP Morgan buyout

Overnight Bank Loans - $10 billion

Other Assets - $606 billion
Includes treasury bonds purchased with printed cash in order to help finance the government

FDIC - $1.55 Trillion

Temporary Liquidity Guarantee Program, Secured Debt Guarantee Program, Transaction Account Guarantee Program, increase of deposit insurance limit and other interbank lending guarantees - $1.4 Trillion
Various insurance programs backing debt between different parties

GE Capital Bailout - $139 billion
Debt Guarantee to General Electric's lending arm

Citigroup Bailout - $10 billion
Guarantees Citi’s toxic assets

Treasury Department - $947 Billion

Troubled Asset Relief Program - $700 Billion ($336 billion)
Originally for purchasing distressed assess; now for buying equity positions in companies

Stimulus Package - $168 billion
“Rebate Checks” of earlier this year as well as some other minor tax credits

Bank Tax Credits - $29 billion
To compensate for the government wiping out Fannie and Freddie securities held by banks

Treasury Exchange Stabilization Fund - $50 billion
Designed to manipulate currency markets - now used to insure money market funds

Federal Housing Administration- $300 Billion

Loan guarantees for refinanced mortgages for struggling and delinquent home owners

Nationalization of Freddie Mac and Fannie Mae - $5.2 Trillion

Capital Injection - $200 billion ($25 billion)
Government buys preferred shares and opens up line of credit

Mortgage Debt Guarantee - $5 Trillion
Government acquires the guarantee on all mortgage securities sold by the two GSE’s

Total Earmarked: $12.45 Trillion - Used So Far: $8.74 Trillion
Spent: $4.09 trillion
Loans: $1.49 trillion
Guarantees: $6.78 trillion

Likely to be passes soon:
Auto Bailout: $75 to $125 billion
Stimulus Package: $500 to $850 billion

(Sources: FDIC, US Treasury, FHA, Federal Reserve, Washington Post)

Keep in mind too that these are only the new or expanded programs. This list does not include preexisting “normal” expenditures like increased unemployment compensation or the FDIC deposit insurance. Even without these, the totals are mind boggling. With the likely auto bailout and upcoming stimulus package, various government bodies will have spent, loaned out or insured somewhere around $13 trillion in less than a year! To put this into perspective, the entire output of the US economy in a year is about $14.4 trillion. The amount of $13 trillion is larger than the annual economic output of China, India, Brazil and Indonesia combined, the four largest countries not including the US, which include over 2.9 billion people. This amounts to about 30 percent of all financial wealth of all US households combined. Or it translates into about $43,000 per US resident or about $108,000 per household! So this is your piece of the pie so far.

Now all of this isn’t spent money. The majority is either loans or insurance, so all the money will not be lost. Likely, most of the loans will be paid back and not all the insured assets will go bad (though a lot of them will). Furthermore, much of the spent money went to buying assets that will likely have at least some value to sell back later on.

I guess my point however is to show exactly how large and unprecedented this is, and that is goes far beyond the “bail out” bills. At the macro level, the government has essentially taken control over the entire financial system. In broad areas, capital is no longer largely allocated to areas that investors believe are most profitable and therefore most productive, but rather to what areas government has deemed it to go to. And much of this has been done by agencies and the Fed using extremely loose legal interpretations of their powers. The amount of raw power and authority the Fed, FDIC, and Treasury have been allowed to wield without Congressional approval is unbelievable. Distortions are done directly by the partial nationalization of the financial industry (soon to be done with the auto as well), or it’s done by placing guarantees on various assets, incentivizing more capital to flow into these over other alternatives that government bureaucrats deem less worthy. Event the stock market of recent months reacts little to earnings reports and instead has violent swings based one expectations of various government actions.

We are now in a political economy. The gigantic “stimulus package” soon to be passed is going to be the largest pork barrel project in history as every mayor, governor, and special interest down to a city councilman’s cousin who owns a paving company is lining up to the trough for a piece of the handout. This is the closest thing to a command and control economy that this country has faced since WWII. And all this done under the watch of a President whose critics have attacked him for being a “free market ideologue.” If this is what a champion of free market capitalism brings us, I don’t even want to know what the next administration and Congress is going to do. Maybe buying gold is looking good right now.


Saturday, December 13, 2008

Way to be, Portugal

Sticking with the European theme: I wrote here about the complications caused by Obama's eagerness to close down Guantanamo Bay - the major problem being no place to put non-dangerous detainees whose lives were threatened in their home countries. The US was receiving very little help solving this problem, especially from the EU. Until now. Portugal seized advantage of its chance to make itself globally relevant and decided to offer asylum to some of the cleared detainees. They also wrote a letter to the EU urging others to follow its lead. Hopefully this is the first step towards fully dedicated EU aid regarding the Guantanamo problem. If so, then the negative consequences of closing Gitmo are drastically reduced. It would go a long way towards a very peaceful, problem-less transfer of power. Thank you, Portugal. I always knew you'd come through.


Thursday, December 11, 2008

Bailouts: Italian Style

So in the US, we bail out the banks, the auto companies, the insurance industry... So what does the Italian government do? They bail out the Parmesan cheese industry!
Producers sought government help in the face of prices that have fallen some 25 percent over the past five years, said Giorgio Apostoli, who represents dairy farmers for the Coldiretti agriculture lobby. The producers faced pressure from distributors who offer sharp discounts on the grateable cheeses to lure shoppers into supermarkets

So thanks to the industry's lobbying power, at the expense of taxpayers the government will buy up 3 percent of annual production in an attempt to drive the price up. The official reasoning... to buy food in order to give to the poor. But of all the things you can do for a food program, the government decides to go with Parmesan cheese?

In reality, just as the auto companies come crying to the US government looking for money because they make inferior products that can't stand up to competition, so do the cheese makers. So instead of letting consumers purchase the cheese that they want to buy at the given market price, thanks to their elected officials, Italians will now have to use their tax dollars to make their cheese more expensive. Looks like lobbying power wins out again. Instead of spending the resources to innovate, cut costs or find some other way to compete in the marketplace, they instead decide it is worth while spending resources lobbying so the government can use other people's money to keep them in business, harming society as a whole. As Jeff Flake, one of the few Congressmen I actually like famously said, "I would argue this is one cannoli the taxpayer doesn’t want to take a bite of."



When I first read EJB's post, my immediate reaction was to begin my response with some tasteless ethnic jokes about Italians - seeing as both EJB and I are (at least half) Italian, and I figured I could get away with it. On second thought, this might not be the place for such offensiveness. Rest assured, my jokes would NOT have been about smelling bad and beating your wife...

Anyway, I had two non-offensive thoughts after reading the article. First, the Italian government's stated purpose for the "bailout" (they're actually just agreeing to buy one hundred thousand wheels of Parmesan) is that they will donate the cheese-wheels to the needy. So it's win-win; Parmesan cheese-makers get to stay in business and the poor get fed. But wait, they're giving Parmesan cheese to poor people? What are they supposed to do with it, sprinkle it on top of their non-existent soups, salads and all-you-can-eat breadsticks? Who gives someone a wheel of Parmesan cheese when they're hungry? I kind of find this cruel: "Oh you're out of money and starving? Here, have this 66 pound wheel of crumbly, foul-smelling curdled milk." Come on Italy, the last thing your hungry need is Parmesan cheese. Man up and confess that you're only doing this to bailout an important industry that probably donates money to Parliament members.

My second thought was the role the EU plays in the great cheese bailout. The article EJB links to mentions an EU program that is intended to help feed the hungry. It also implies that some of the bailout money will come from the EU itself. From what little I know about EU law (and believe me, I have a very limited knowledge of the black-letter law itself), EU monetary disbursements of this nature only go towards (or primarily benefit - again, I'm not completely sure of the legal language) foods or beverages which have been labeled with "Protected Designation of Origin" status. Sure enough, Parmesan cheese is just such an item. Thus, as European economies continue to stumble alongside ours, we can look forward to other wonderful EU bailouts of Asiago cheese, Champagne and - my personal favorite - "Melton Mowbray pork pies."
I would not eat that.

Sunday, December 7, 2008

So I'm Agreeing with Ralph Nader of all People... Sort Of

So putting aside the debate of to what extent global warming exists, to what extent human carbon emissions are causing it and to what extent mitigation of carbon emissions will lessen temperature change, I am going to assume for the sake of argument that we should indeed implement some kind of national system to reduce carbon emissions. I do this because this is the political reality we are currently in. With the current complying Congress, as soon as Obama and McCain were both nominated, this debate effectively came to an end, as both of these men are in favor of such a system.

With that said though now comes the debate over exactly how to go about doing this. On this topic, Ralph Nader has a very solid piece in the Wall Street Journal earlier this week in which I generally agree. There are essentially two big issues to still deal with in creating a system:

1.Unilateral Action vs a Global Scheme

One of the major problems with the Kyoto Protocol was that it only affected industrialized nations and exempted countries such as China, India and Brazil, the nations with the fastest growing output of emissions. In China’s case, it may actually outtake the US this year for the largest total emissions as well. So why was this bad? Is not getting some nations on board better then none? The problem is that any system that tries to mitigate carbon emissions does so by making the output of carbon more expensive or carbon producing activities more expensive. Therefore there is a substitution effect where firms that emit a lot of carbon simply move their facilities to a country like China that does not have restrictions. The end effect is no global reduction, just substitution, while at the same time deepening the trade deficit and destroying jobs in the developed nations. As Nader states:
Cap-and-traders assume, without much justification, that one country can put a price on carbon emissions while another doesn't without affecting trade or investment decisions. This is a bad assumption… Good intentions to limit big polluters in some countries but not others will turn any meaningful cap into Swiss cheese. It can be avoided by relocating existing and new production of various kinds of CO2-emitting industries to jurisdictions with no or virtually no limits…Because of the sheer scale of the challenge and the state of the hyperglobalized economy, we will need the same price on carbon everywhere, or it won't work anywhere.

This was one of the reasons why the US never signed onto Kyoto and up until last year, Australia didn't either. Doing so may have made a bunch of greens on the west and east coasts feel good about themselves that the US would be emitting less carbon, but all we would have done is export our carbon to other nations and destroy many Midwest factory jobs while we were at it. If there is going to be a carbon limiting system, it must be done on a global scale where virtually every country is on board and must include all the major industrial powers, including China, India, etc. The incoming administration and Congress would be unwise to rush a system into place in order to fulfill a campaign pledge if it is not done in tandem with some type of global arrangement.

2.Cap and Trade or Carbon Tax?

The vogue idea right now is to place a cap and trade system into place. The government will set some cap on the total amount of carbon allowed to be emitted across the economy and will give out or sell credits to various firms. The firms are then allowed to sell them to each other with the theory being that firms that can easily reduce emissions would rather sell the extra credits where firms were it is difficult to do so, will buy extra. This is designed to limit the economic damage of such proposals.

In theory this should work, but is has a tremendous amount of practical problems, that make a carbon tax more appealing. First, this will require a gigantic regulatory scheme and bureaucracy in order to orchestrate this massive planning endeavor. It would likely be very complicated and the cost burden both to the government and to private firms in implementing this would be heavy. As Senator McConnell stated, “This proposes to be the largest restructuring of the American economy since the New Deal.” A carbon tax is a lot more simplistic, applied at a few key areas of production, say at natural gas hubs, or refiners, etc, and then the tax cost will be passed down through the system.

Second, a cap and trade system would become a lobbyist’s paradise as every special interest will want some type of adjustment credit, exemptions, etc. Furthermore, members of Congress with given industries in their states will want exemptions for these firms and will be very happy to oblige to their lobbying power. Because the effective measuring of carbon output at virtually every stage of production is required for this to work, there will be tremendous wiggle room for special interest to effect how this is done so that it is done in their favor. Nader states:
…administering billions of dollars of carbon credits in a cap-and-trade system in an already chaotic regulatory environment would invite a civil war between interest groups seeking billions in carbon credit handouts and the regulator holding the kitty. By contrast, a uniform tax on CO2 emissions levied at a small number of large sites would be relatively clear-cut.

Lastly, a carbon tax is a lot more intellectually honest and straight forward to voters and consumers. Any restriction on emissions will increase the cost of goods to some extent. Whether this is done directly through a tax, or indirectly through cap and trade, it still has the effect of being a consumption tax. Lets then call it for what it is.. a tax. Just as we tax cigarettes in order to dissuade that behavior, but it makes that behavior more expensive for those who still indulge, taxing carbon works in the same manner.

To effectively put in place a cap and trade system, it would require a gigantic federal bureaucracy and one that every political group will wish to fight over for its control, destroying the original intent of the program in the first place while just giving us more ineffective large government.



Let me begin by addressing the issue that EJB neatly puts aside in his first paragraph; I'd like to just briefly touch on the global warming idea because it is obvious that my colleague reserves some doubt regarding its truth. The problem, of course, is the idea behind a "consensus." The best way to criticize a position or theory, regardless of the substance of that theory, is to claim that there is no scientific consensus surrounding its validity. This is obviously because the scientific community is a very large group of people and, quite likely, there will be dissenters. Now, some have claimed that there is a consensus as to human exacerbation of global warming (but, as is clear, there are respected scientists who do not agree). My point though is that consensus should not be the standard by which we evaluate the legitimacy of certain claims. If we did, we would have to seriously doubt evolution and certain precepts of non-Newtonian physics (after all, there are people in the scientific community who would strenuously disagree with those theories). Asking for total agreement on an issue is simply too high a burden. But when the US National Academy of Science and the American Association for the Advancement of Science both claim a relative "consensus" on the issue, I am willing to lend them credence because they really have nothing to personally gain from public belief in those statements.

The Kyoto Protocol is a solid first step towards reducing global carbon emissions because it strengthened and legitimized (as a global concern) the idea that we can help reduce global climate change. EJB's point - that it will not sufficiently or efficiently reduce those emissions because major CO2 producing countries are omitted - is well taken; however, it might be asking too much to posit that the United States should not move forward with carbon reducing initiatives until the point at which everyone in the global community is similarly acting. Negotiating within the global community is extremely difficult because of the large number of nations we would be dealing with. The more parties you enter into negotiation with, the more transaction costs each party incurs. Thus, if we were to hold, as domestic policy, that we would not initiate CO2 reduction plans until the world decided to work in tandem with us, we would be waiting a very long time - not a good move for the world's leading CO2 emitter (though not for long, thank you China).

I would also point out that Nader's argument - as with any good economic argument - is valid only because he restricted the scope and frame of his inquiry. This is the key to winning any good economic or legal battle. While it is true that anti-climate change initiatives would increase operating costs for businesses, corporations are incentivized to relocate their factories elsewhere only if all other conditions are assumed to be equal. To argue, as Nader does, that Company X will simply move to China if we institute a CO2 tax because China does not have one and thus they will save money only makes sense if there are no other better reasons for staying in the United States. We do not hear much about this question and there is no empirical data that I can find which supports the theory that carbon taxes will significantly increase the outsourcing and relocation of American business.

As for the debate over cap-and-trade vs. a carbon tax, I must say I haven't had the opportunity to fully consider either option. EJB (sharing Nader's concerns) seems to argue that we should favor a carbon tax simply because the cap-and-trade method would necessitate the creation of a large bureaucratic system. Perhaps. However, there is reason to believe that cap-and-trade systems need not be plagued with the necessity of creating new bureaucratic institutions. Such a system already exists for the attempted control of acid-rain.

This interesting op-ed piece further suggests that cap-and-trade would work more efficiently than a carbon tax. The author notes the cap-and-trade system already in place within the US for controlling the creation of acid-rain - and that this system has worked astonishingly well. The author also responds to EJB's second argument (regarding the likelihood of special interest lobbying and hand-outs) by noting that taxes, too, are susceptible to exemptions and special treatment of certain groups. This seems patently obvious - interest groups are hard at work attempting to secure tax breaks and reductions for their clients. The major thrust of the argument, and the important policy difference illuminated by the juxtaposition of the two systems is this:
But the key difference between a carbon tax and the cap-and-trade approach comes down to the issue of certainty. A tax provides for cost certainty; the cost is fixed because of the tax. Cap and trade, on the other hand, provides for environmental certainty. What's fixed is the cap itself -- and it is based on an assessment of the level of emissions you need to get to in order to protect the climate.
While the carbon tax may be more "intellectually honest" - and by that I assume EJB means something along the lines of "easier for businesses to calculate and foresee their expenses" - the cap-and-trade system better works to protect the environment by definitively limiting the amount of carbon our country emits.


Thursday, December 4, 2008

Goodbye Gitmo?

In an interview with CBS on 11/16, President-elect Obama maintained his position that he would close the detainee camp at Guantanamo Bay soon after taking office. He reiterated that the move would work to "regain America's moral stature in the world." Perhaps. I think it's clear, though, that there are other reasons for closing Gitmo that strike most people as rather self-evident: a symbolic departure with the Bush Administration's handling of the "war on terror," an attempt to end foreign pressure regarding torture and illegal detention, a need for increased transparency into the actions of the Executive branch. These are all well and good - but I just have to ask...maybe this is coming a bit too soon? I thought I was crazy when, a few weeks ago, I suggested to EJB that we develop a debate case centered on the theory "Obama should not close Gitmo within his first 100 days." The move just seems so morally justified. Thankfully, I've confirmed that I am not crazy - others are just as concerned as I am.


There are a few concerns I'd like to just mention, but, considering length constraints, I'd rather not fully develop arguments for any of them.

First, where will you put the detainees? Domestic prisons will absolutely refuse to accept terrorists amongst their ranks. NIMBY is one reason. Concern over increased prison violence is another.

Second, what of the 100 or more detainees who are still proclaiming to be hostile to the United States? We can't simply deport them - they'll immediately rejoin the ranks of al Qaeda and take up arms against us.

Third, what of the 150 or more detainees who are NOT hostile to the United States, but cannot be deported to their home States? This is a weird concern because the options are 1)continue to illegally detain a non-hostile innocent; or 2) ship the non-hostile innocent back to a country like Syria or Iran where he is wanted and will likely be tortured or executed. Which option is best for the individual's well-being? Do we have the right to act so paternally? What of those detainees whose home country no longer exists and whom no other country is willing to accept?

Fourth, under what system are we to try those who are triable? If we try them under a civilian system, many will be acquitted for lack of evidence. If we try them under a military system (which might not even be allowed under Geneva), we'd still have to find a place to incarcerate them.

Needless to say, this is a difficult situation. I am not sure how to answer any of these questions and thus I cannot profess to side with those who would close Gitmo or those who seek to keep it operational. The only thing this does prove, I believe, is that, considering the delicacy and difficulty of the situation, it would be unwise to move quickly towards any decision. There is absolutely no rush to close Gitmo - it has survived international scrutiny since 9/11. I would be wary of huge political moves made in haste.