Bacon's Rebellion

  • Obama’s Good Idea

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    James A. Bacon

    President Obama recently reprised his proposal for a longer school year. On Monday, Barack Obama was interviewed on NBC’s “Today” Show where he explained that a longer school year for American children would help close the gap between US school-children and kids from other countries. You can read more here.

    This is not the first time that President Obama has made this point. In March, 2009 Obama made essentially the same point. The matter was reported by the Seattle Times. The article can be found here.

    Barack Obama is basically right with his belief that American children spend too little time in school. However, he’s only scratching the surface. Our problems in education go beyond the hours per day or months per year that school is in session.

    Here are just a few additional ideas for President Obama to consider:

    Schools should be competitive. Many Americans wring their hands over the strengths of Japanese school-children, especially in math and science. Since I happen to be in Japan I asked a few people about the schools here. Their descriptions of education in Japan went beyond mere months per year. Japanese students must apply to the best high schools. And where you go to high school has a big bearing on where you’ll go to college and end up in life. This is Thomas Jefferson or Maggie Walker writ large. When I asked if this was fair they bluntly said, “No, but life’s not fair either.”

    Schools should be intense. A Frenchman told me of his daughter’s semester abroad in America. She described her time in a top grade American school as a vacation. Her assigned homework was much less in America than in France. She loves her expanded social life but understands that her studies are slipping while she slacks off in America.

    Schools should use cutting edge technology. One of my friends has a son attending a private school in Northern Virginia. Mandatory laptop computers for every high school student. The lessons are online, there is online tutoring and some homework assignment questions are instantly graded as either right or wrong – with an explanation. A new netbook computer costs about $450 (retail) and (arguably) could last all 4 years of high school. Is this really too much?

    Teachers should be paid for performance. The teaching profession has become old, stale and obsolete in the United States. In New York City it’s so hard to get rid of under-performing teachers that there are special “rubber room” buildings to stockpile teachers while their performance reviews drag on – sometimes for years. You can read more here. Bad teachers should be dispensed with quickly. Good teachers should be paid more than they presently receive.

    Barack Obama is wrong about many things. However, his continuing focus on education is admirable. I especially applaud his practical thinking – if you want to be good at something spend more time doing it.

    Education is the only long term antidote to Boomergeddon.

  • The “Limited Government” Laughingstock

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    James A. Bacon

    The political atmosphere these days seems like a chapter out of the Elmer Gantry novel. Facing failure, the lack of personal responsibility and depravity, our ideas on economics are enjoying a fundamentalist revival. We have the Tea Party movement electing sex-abstinence advocate Christine O’Donnel, Fox News telling us how out of control the federal government and our very own Right Reverend James A. Bacon preaching on the dangers of debt and default. The only things lacking are a big revival tent and a sweaty summer night.
    That’s what makes reading an op-ed piece today in The New York Times so enlightening if not frightening. Anatole Kaletsky, a chief economist for a Hong Kong advisory firm, warns us that too much of that homespun Olde Tyme Religion is setting the United States for a comeuppance as far as influencing economic events that, given the utterly global nature of our economy, could do our country a lot more harm than a few trillion bucks extra in debt.
    Kaletsky’s point is that the Asian nations of China and Japan simply do not buy the Olde Tyme Religion. They will do whatever they think is in their interest to shore up their trading positions even if it involves direct government intervention. On Sept. 15, he points out, the Japanese yen dropped sharply against the dollar, opening the door for a lot more lower-priced Japanese exports. Rather than leave currency valuation to the wonderful magic of the market, Tokyo dropped $23 billion of government money in a single day to give the yen a distinct advantage.
    Kaletsky writes: “Japan’s action suggests that, in the aftermath of the recent financial crisis, the dominance of free-market thinking in international economic management is over. Washington must understand this, or find itself constantly outmanuevered in dealings with the rest of the world.”
    To be sure, Washington has been tussling with Tokyo and Beijing for a few decades now over one-sided currency valuations. And none other than the freemarket Gipper himself, Ronald Reagan, actually played a strong government hand in the 1980s when he defended the dollar on world markets. (But then, Reagan was a secret Keynesian as we now know).
    What disturbs Kaletsky is what happens if the economic fundamentalists, the free market at any price types, prevail? He writes: “In this climate, the market fundamentalism now represented by the Tea Party, based on instinctive aversion to government and a faith that ‘the market is always right’,’ is a global laughingstock.”
    He further states (and I truly agree with this) that “if market forces cannot do something as simple as financing home mortgages, can markets be trusted to restore and maintain full employment, reduce global imbalances or prevent the destruction of the enviroinment and prepare for a future without fossil fuels?”
    Markets can be useful for allocating scarce materials, he says, but they also can fail miserably. Witness the constant short-sightedness of big corporate CEOs who hurt the nation as they push for big returns in the next quarter and lock in their bonuses. Or consider how many respectable banks got addicted to quick profit fixes from the subprime mortgage market and left us with the worse financial crisis since the 1930s.
    Preachers such as Jim Bacon have their points about frugality and the demographic challenges of the Boomer generation. But there is also a dangerous naivete in their philosophy. Tea Party types, Christine O’Donnells, Rand Pauls and the rest may push for a very American fundamentalist view on limited government spending and action. But the rest of the world could give a damn. Lucky for us that many of the ideas of Thomas Jefferson, so beloved in Virginia, did not win out. Otherwise we would be like a big Holland.
    Kaletsky notes that as U.S. power wanes (Jim Bacon, sorry but this idea was around a a bit before your book came out), there is going to be a very tough competition over whose version of democracy and capitalism wins. Will it be the U.S. version? Or will it be an Asian version that is state-led and a lot more authoritarian?
    I personally saw what happened when the socialist Soviet Union fell and an Asian variant of capitalism took over. Sure you could buy sushi on Kutuzovsky Prospekt, but the rest of it was quite ugly. Under Vladimir Putin, civil liberties didn’t exactly flourish. These conflicts will likely dominate the U.S. in coming years. The outcome is a hell of a lot more important in the long term than blowing out a budget.
    Peter Galuszka

  • Is McDonnell All that Bright?

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    James A. Bacon

    Robert F. McDonnell has found his pots of gold. He even looks like a leprechaun.
    An audit of the Virginia Department of Transportation shows more than $1 billion in unspent money, allowing the Republican governor to crow about government mismanagement and toss some dirt the way of his predecessor, Timothy Kaine, who happens to be head of the national Democratic Party on the eve of important midterm elections.
    In announcing the results of a 150-page audit by the Richmond accounting firm of Cherry, Bekaert and Holland, McDonnell bemoaned that the money was sitting around while average Virginians were sitting around in congested traffic. Kaine responded that squirreling away nearly six months worth of rainy-day money reflects prudence, not incompetence, on his part.

    Therein lies a curious flip-flop in values.

    McDonnell very much wants to position himself for future office as a tight-spending, ultra-frugal, anti-government politician. He came into office with a script, written by Republican governors in states such as Michigan, as a streamliner, reformer and privatizer. But the VDOT audit shows a few inconsistencies:
    • If Kaine put away that much — perhaps, too much — money, doesn’t that show that a Democrat can be frugal, too? Do the Republicans have a lock on budget discipline? They sure talk that way. Of course, that’s forgetting Bill Clinton’s surplus and George W. Bush’s free-spending ways.
    • If there are more than a billion unspent bucks in VDOT’s budget, why is there such urgency in selling off the state’s ABC stores, presumably to get desperately needed money for the state’s roads? Or is the ABC plan, which has plenty of quirks and critics, just another complex effort to give McDonnell some kind of legacy?
    • Where is the windfall going to go? It could be that it ends up as the state’s cash portion for a big privatization project to build a new superhighway from Interstate 95 in Petersburg along U.S. 460 to Tidewater. But shouldn’t it go to filling potholes and general maintenance that many of the state’s highways so badly need? U.S. 460 is McDonnell’s pet project and he needs state cash to make it work.
    In any event, Kaine is drawing criticism for being too frugal. That’s a strange charge coming from a limited-government Republican.
    But the entire investigatory nature of McDonnell’s campaign against government is somehow sounding a sour note. What it has turned up is that his Democratic predecessor may have put too much in a rainy day fund. The audit found no evidence of fraud.
    Only nine months into his term, McDonnell has had his share of missteps, from offshore oil drilling to forgetting about slavery to being overshadowed by aggressive, hard-right attorney general Kenneth Cuccinelli. He really wants to be seen as a reformer. Being inconsistent about his philosophy won’t help him.

    This raises another point about McDonnell, given all the contradictions. It may very well be that the guy just isn’t that bright. He’s certainly not a very good politician. He never seems to be ahead of the curve. He’s always putting himself inadvertently in positions that he can’t control. Say what you want about Cuccinelli, but he does seem to be setting agendas rather than reacting to them.

    Lt. Gov. Bill Bolling is trying to set himself up as McDonnell’s successor in the very Virginian traditional approach that dates back to the Byrd Organization days. In this, he has some support in some corners, such as the perennially out-of-touch Richmond Times-Dispatch that still is more than a half a century behind the times. Cuccinelli has made nosies he may challenge Bolling for the Republican nomination.

    It could be that McDonnell has already become a has-been governor.

    Peter Galuszka

  • Colleges Gone Wild

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    James A. Bacon

    USA Today has done a public service by investigating what NCAA schools spend on athletic programs. Among the findings, several Virginia universities support athletic programs through mandatory fees. Six schools — Radford, James Madison, Norfolk State, Longwood and VMI were mentioned by name — charged $1,000 or more in the 2008-2009 school year.

    Given the increasing unaffordability of college education and the mounting debts that students take on to pay for it, this nonsense must end. If students want to support athletic programs, let them do so voluntarily — by buying tickets to athletic events. If that means colleges support fewer athletic programs, then so be it. Our institutions of higher education need to themselves of the purpose of higher education: To friggin’ educate students, not amuse the alumni!

    Check out the searchable database on how much Virginia institutions spend and where the money comes from. A couple of highlights:

    The University of Virginia’s athletic programs: $63.6 million in operating expenses, supported by $11.9 million in student fees.

    Virginia Tech’s athletic programs: $58.9 million in operating expenses, supported by $6.4 million in student fees.

    For less money Tech gets stronger football and basketball teams? Now, there’s an outrage!

  • “Young Gun” Cantor’s Overweening Ambition

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    James A. Bacon


    Bereft of ties and jackets, the three, trim congressmen, coyly glancing this way and that, stride purposefully toward the camera. “These are, The Young Guns!,” says the announcer in an authoritative voice.

    It might have been a Saturday Night Live parody of a trailer for “The Magnificent Seven,” the classic Western movie. Instead, it is, in all seriousness, a Web-streamed ad for a new book by three very ambitious Republican congressmen, Kevin McCarthy of California, Paul Ryan of Wisconsin and Eric Cantor, the House minority whip and wunderkind from Henrico County.

    Released this week, “The Young Guns: A New Generation of Conservative Leaders,” published by a division of Simon & Schuster, pushes the three reform-minded hotshots as the new generation of America’s conservative movement. Ryan, for instance, touts his own “roadmap” for America’s future while McCarthy tackles strategy. Cantor is the “leader” who admits that Republicans fell short on principles in the past and can do much better.

    I haven’t read the book yet, although I tried to find it at my local Barnes & Noble today. According to reviewers, the trio has already raised eyebrows among the GOP elders for being so shamelessly self-promotional.

    In their book, apparently, they rarely mention such Republican powers as House Minority Leader John Boehner, House Republican Conference chairman Mike Pence, RNC Chairman Michael Steele and Senate Republican Leader Mitch McConnell.

    There also seems to be something ironic, if not downright amusing, about Cantor’s positioning himself as some kind of dynamic populist. Given the success of the Tea Party in ousting Republican mainstays in primaries this week, it might indeed be important to portray oneself as a man of the people. But Cantor’s anything but. As the representative of Virginia’s 7th District, he is about as radical as a bowl of Virginia spoonbread.

    His chief aims have been to boost the interests of the monied classes in Richmond, mostly white Henrico County, where he was a real estate lawyer, and other places. He’s an accomplished fund-raiser and talks the usual GOP game about cutting budgets — until it hits home. He’s been a strong backer of federal spending for higher-speed rail so Richmond’s pooh-bahs can get to Washington for meetings without the hassle of Interstate 95.

    And he has backed spending for a jet engine for the new F-35 fighter that the Pentagon doesn’t want. This is because Rolls-Royce, which would help make the engines, has its regional headquarters and is building a big manufacturing plant in Virginia.

    In other words, “Young Gun” Cantor is very much a Main Street Republican.

    The other odd thing is why he considers himself “young.” Cantor is 47 and McCarthy is 44. Ryan is just about to turn 40, making him the baby of the group, relatively speaking.

    Peter Galuszka

  • The Right of Repeal

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    James A. Bacon

    Here’s a hot one for you: This January, the General Assembly will consider proposing a constitutional amendment. The so-called “Repeal Amendment” would give two-thirds of the states the power to repeal any federal law or regulation. Here’s the text:

    Any provision of law or regulation of the United States may be repealed by the several states, and such repeal shall be effective when the legislatures of two-thirds of the several states approve resolutions for this purpose that particularly describe the same provision or provisions of law or regulation to be repealed.

    The idea was floated today in an op-ed piece in the Wall Street Journal. The authors were Randy E. Barnett, a Georgetown law professor, and William J. Howell, Virginia’s speaker of the House.

    “At present, the only way for states to contest a federal law or regulation is to bring a constitutional challenge in federal court or seek an amendment to the Constitution,” write Barnett and Howell. “A state repeal power provides a targeted way to reverse particular congressional acts and administrative regulations without relying on federal judges or permanently amending the text of the Constitution to correct a specific abuse.

    Hear! Hear! The nation desperately needs another mechanism to stem the overweening power of the leviathan state. This should make for a rollicking good debate in the blogosphere this fall. What a bold stroke, gentlemen. Let Virginia lead the nation in reclaiming powers rightfully belonging to the states!

  • “Boomergeddon” Hits France

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    James A. Bacon


    “Boomergeddon” is getting traction in France.

    Today, the lower house of France’ s legislature passed Nicolas Sarkozy’s pension reform package that increases the minimum retirement age to 62 from 60. A vote in the upper house is due Oct.1.
    For the luxury-loving French, called “EuroWeenies” by Boomergeddon author James A. Bacon, the idea of raising the retirement age is bitter medicine. According to Sarkozy, France cannot keep making its earlier-age pension payments, so some sacrifice is required.
    Disgruntled workers more than one million strong have thronged streets to protest advancing the retirement age. A national strike is called for Sept. 23.
    Sarkozy is hanging tough with his reform although a new election will come in 2012.
    The French have been known for eating well, good wine, long vacations and early retirements. They also have been known to take time off around 5 p.m. for sexual trysts.
    Peter Galuszka

  • Executing Teresa Lewis is Wrong

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    James A. Bacon


    Barring a legal miracle Teresa Lewis will be killed by the Commonwealth of Virginia on Sept 23. She will be the first woman executed in Virginia in nearly 100 years. One of the few hopes Ms. Lewis has left is a grant of clemency by Gov. Bob McDonnell. I believe Gov. McDonnell should grant clemency.

    Teresa Lewis is a bad woman. On Oct, 30, 2002 two hired killers murdered Ms. Lewis’ husband and stepson. The killers were hired by Teresa Lewis for $1,200 and a promise to split the proceeds of the stepson’s life insurance policy. The murders were premeditated, cold blooded and heinous.

    Teresa Lewis is guilty. In a plot line which could have come from an episode of Law & Order the murders of Julian and CJ Lewis involved sex, drugs and the suicide of one the hit men. However, in stark contrast to a Law & Order show there has never been much doubt about what happened on that October night in 2002. Teresa Lewis hired two men to slaughter her family. A more detailed account can be found here.

    I don’t want McDonnell to offer clemency because Teresa Lewis is a woman. I could care less. I don’t want her life spared because she has an IQ of 70 or because she was addicted to prescription drugs at the time of the murders. I don’t care about the new theory that one of the hit men was the real mastermind and Teresa Lewis was a patsy.

    I want to see Teresa Lewis’ sentence converted to life without parole because I don’t trust the criminal justice system. I don’t trust the lawyers, I don’t trust the judges and I don’t trust the police. At least, I distrust trust enough of the lawyers, judges and police to want to stop the Commonwealth from killing people in my name. My personal disgust with the whole system was born during the first OJ trial. However, that was far from the only miscarriage of justice which ought to give everybody pause.

    In 1984 Earl Washington was convicted of murder and sentenced to death in Virginia. Like Teresa Lewis, Earl Washington’s “crime” was horrible – the rape and murder of a 19 year old mother of three in her home. Like Teresa Lewis, Earl Washington confessed. Like Teresa Lewis, Earl Washington had a very low IQ (in the general range of 69). Like Teresa Lewis today, Earl Washington was within 9 days of being killed by the state. However, Earl Washington did not murder Rebecca Lynn Williams. In fact, he was subsequently eliminated as a suspect in that crime. He was the mentally challenged victim of a rush to judgement which involved a series of abuses by “the system”. Once Earl Washington was exonerated by DNA testing (after 17 years on death row) the real killer was ultimately found. You can read about it here.

    The simple and obvious fact is that Virginia has condemned people to die for murders they did not commit. Can there be any doubt that Virginia has also executed people for murders they did not commit?

    I don’t want Teresa Lewis to get clemency because she’s not guilty. She almost certainly is guilty. I don’t want Teresa Lewis to get clemency because I am a liberal. I’m not. I want Teresa Lewis to get clemency for the most conservative of reasons – I don’t trust the justice system. And neither should Bob McDonnell.

  • Why Government Bailouts Aren’t All Bad

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    James A. Bacon

    There’s been quite a bit of spirited debate on the Rebellion about bailouts and federal debt, much of it inspired by Jim Bacon’s new book on the financial problems Baby Boomers will face.
    In the heat of discussions, however, it seems that some key points are being lost.
    As bad as government bailouts are, they often actually work. Governments can be a lender of last resort, loan money that buys time for repairs and then it is repaid. Life and the economy go on. It can’t be a long-term debt for the government since they are paid back.
    There are plenty of examples around the world. One is in Sweden which fell into a severe financial crisis in the late 1980s. True Sweden has a lot more social programs than the U.S., making it quite different. The financial crisis had to deal with some complicated government borrowings related to the Swedish krona. One compex issue affecting the country’s currency was how West Germany managed merging its currency with that of East Germany which it was absorbing after the Sovit Bloc failed.
    During the crisis, two of Sweden’s six largest banks, Forsta Sparbanken and Nordbanken, could no longer meet capital requirements required by Swedish regulations. Stockholm’s government bought Nordbanken and helped Forsta with loan guarantees. The government also picked up a failing bank, Gota Bank. The government ended up owning about 22 per cent of the country’s banking assets according to a report by the Cleveland Federal Reserve Bank.
    Two asset management back, sort of “bad” banks, were set up to pick up the weakened banks’ bad loans, skirt regulations on a part-time basis, and inject equity in the troubled banks. They made it a gradual process to take pressure off short term prices. Within a half a decade, the country’s economy picked up sharply and most of the liquidations had been sorted through at a lower cost than originally fared. Crisis over.
    Looking at the U.S.’s devastated economy, one can see signs of progress. Many folks hated the Troubled Asset Management Program (TARP) which spent nearly $800 billion buying up bad assets and injecting public capital into banks to prop them up in the short term. We will be celebrating the second anniversary of TARP this month.
    So what’s happened since? A number of high flying banks have actually repaid their TARP money, according to Pro Publica. American Express returned $3.3 billion on June 9, 2009. Bank of America paid back $45 billion on Dec. 9, 2009. Goldman Sachs paid back $10 billion on June 9, 2009. On the same day, JPMorgan Chase paid back $25 billion.
    To be sure, according to ProPublica, millions in warrants have to be sorted out. As part of the TARP deals, these give the U.S. government the right to buy bank equity at a set price. After the TARP loans are paid back, the warrants are either sold back to the company or auctioned off.
    The point here is that when we all go running around with our adding machines figuring U.S. debt, one has to deduct the billions of TARP dollars that have already been paid back. I do not have a clear number to date. And as the Swedish example shows, sometimes a government can do the right thing by being a last-resort lender and a problem solver. It could very well be that Secretary of the Treasury Henry Paulson, followed by Timothy Geithner, and both George Bush and Barack Obama may have prevented a truly awful recession turn into the Second Great Depression.
    We won’t know for some years if this was the case. In the meantime, let’s watch that deficit hysteria.
    Peter Galuszka

  • ODEC’s Coal Plant Takes a Powder

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    James A. Bacon

    Is the beginning of a big shift in energy use at hand?
    Last week, Old Dominion Electric Cooperative based in Henrico County announced that it was delaying a controversial $6 billion coal-fired generating station in Surry County just an egret’s flight away from Colonial Williamsburg.
    For about two years, ODEC seemed to have been on a roll, sweet-talking residents of the rural county with pig-pickings, throttling reporters who ask too many pesky questions and snagging permit after rezoning ordinance to build its plant in the tiny village of Dendron.
    On Sept. 8, ODEC announced it was “extending its timeline” for building the 1,500 megawatt plant because the “slower than expected growth in the economy” means there’s less demand for electricity. Not to fear, an ODEC spokesman said, there will be growing demand in the future and the delay of up to two years doesn’t change the cooperative’s goal.
    But it seems that ODEC’s announcement is a bit disingenuous. Could it be they can’t line up needed financing?
    Already, consultants have questioned the need for the project and how anxious lending institutions would be to shell out billions. ODEC spokesmen turned aside the concerns.
    Unlike Dominion Virginia Power which has two nuclear statons, a number of coal-fired and gas-fired plants and hydro, ODEC has never built an electric power station of this size before. Its members are a polyglot of small, rural coops from Delaware to Virginia. Its biggest and most urban member, a Northern Virginia coop, left ODEC in a contract dispute a couple of years ago.
    One wonders why ODEC needs such a big slug of power. It could be that ODEC needed to partner with another utility to get loans and failed to do so. There’s no question that enterprises that easily pass the viability test have a hard time getting loans these days after the Big Money banks like Merrill Lynch, Wachovia, and Bank of America all got greedy with dangerous but highly profitable subprime mortgage lending and their derivatives.
    Experienced plant builders and operators like Dominion need either special financial deals worked out through state legislation as was the case with its much smaller Wise County coal-fired plant or federal help. Plans to build another nuclear unit at North Anna won’t fly without massive federal loan guarantees.
    What’s more, Department of Energy figures shows that during the recession, total power demand dropped 4 percent and coal-fired power, which, a few years ago, had supplied more than half of all electricity generated in the country, dropped 11 percent. By contrast, natural gas, hydroelectric and renewable energy sources all showed an increase in the percentage of electricity they generated.
    Could a turning point be in the wind (so to speak)? Or is it just more flotsam from the sinking economy?
    Whatever. With obstacles like these, it’s a wonder ODEC’s plan has survived as long as it has.
    Peter Galuszka

  • Fighting for the Scraps

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    James A. Bacon

    As the U.S. economy limps out of recession, lending to business is showing no sign of revival. And that should worry us all. According to Federal Reserve Bank data, business receivables outstanding held by finance companies were less than $470 billion in July, down 22 percent from 2008. New securities issued by corporations are running at an $830 billion annualized rate this year, down from $2 trillion in 2008.

    But that’s only the beginning of the bad news for small business. To an unprecedented degree in peacetime U.S. history, the federal government dominates the allocation of credit in the economy. As a consequence, politically favored constituencies — real estate, banks, higher education, exports and the green industry, not to mention government itself — are getting all the capital they want (indeed, more than they can profitably use), while everyone else feeds upon the scraps.

    The federal government plays an increasingly intrusive role in the American economy. Federal expenditures account for almost one quarter of the gross domestic product. Meanwhile, government is expanding its regulatory reach over the shrinking portion of the economy not subsumed by government, most recently by means of the Affordable Care Act and the Wall Street Reform and Consumer Protection Act. Less visibly, as I document in my book, “Boomergeddon,” the leviathan state employs a variety of tax incentives, loan guarantees and monetary tricks to ensure that favored industries gain preferential access to capital.

    Uncle Sam has been force-feeding the housing sector like a stuffed goose, even as the other animals on the farm starve. Even before the global financial crisis, the housing industry benefited from deductible interest on loans and federal guarantees for debt issued by Freddie Mac and Fannie Mae. When the housing bubble popped, the Obama administration doubled down by committing $7.4 trillion to more loan guarantees, purchases of mortgage-backed securities, a bailout of Fannie and Freddie and an initiative to rework mortgages for stressed homeowners.

    The banking sector has been another beneficiary of federal favoritism. Over and above the hundreds of billions of dollars funneled to banks by means of the Troubled Asset Relief Program, much of which has been repaid, the Federal Reserve subsidizes the industry on an ongoing basis through its interest rate policies. Thanks to the Fed’s near-zero interest rates, banks can borrow money for nothing and reinvest the funds longer-term in super-safe 10-year Treasuries, around 2.5 percent, pocketing the difference. Easy as pie. Since early 2008, banks have increased their holdings of U.S. securities from $1.1 trillion to more than $1.5 trillion: $400 billion that could have been invested in the private sector. The implied subsidy worth tens of billions of dollars yearly drops straight to the banks’ bottom lines.

    Another privileged sector is higher education. Uncle Sam has guaranteed roughly $850 billion in loans to college students — an indirect subsidy of the higher education industry. The endless supply of credit to students has allowed colleges and universities to jack up tuitions far faster than inflation over the decades. While the higher ed establishment swells in size like a bad bruise, college grads are becoming a new indebted class in American society.

    Municipal governments are another congressional pet. State and local governments have long benefited from the ability to issue tax-free municipal bonds, which lowers the cost of capital not only for building roads and extending sewer lines but also for underwriting convention centers, ballparks and other facilities that hardly rank among the core services of government. But in the recent recession, that advantage was not enough. Congress created a new vehicle for funneling scarce capital to municipal projects: Build America Bonds. The bonds are not tax free, but the feds does pay 35 percent of the interest, resulting in lower interest charges to local government. By the end of 2010, bankers estimate, $150 billion of the bonds will have been sold.

    Whenever Congress wants to bestow benefits on a particular industry without having an embarrassing subsidy showing up as a line item in the budget, a favorite tactic is to create a loan guarantee program. Thus the export-import bank puts the faith and credit of the U.S. government behind big U.S. exporters, while the Department of Energy expedites the flow of capital into everything from nuclear power plants and alternate energy facilities. If you export jet airplanes or build wind power farms, you win the lottery. If not, you must scrounge for money from a smaller pool of capital.

    Who looks out for small business? Well, President Obama has proposed setting aside $30 billion to help fund small businesses, but the sum would replace only a fraction of the cutbacks in bank lending. Moreover, the proposal reinforces a noxious precedent: that the pool of investment capital is something that power brokers in Washington can carve up and dispense as they please. Beneficiaries become supplicants, forced to hire lobbyists and contribute PAC money to keep their fix coming. The politically powerless — small business, foremost among them — fight for the leftovers.

    Originally published in Richmond BizSense, Sept. 20, 2010.

  • Privatization Proves Nettlesome

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    James A. Bacon

    There’s news galore all around the privatization front.
    Selling off the state’s huge Tidewater port facilities has been nixed; a bunch of private firms show interest in a partially state-funded new tollway tracking U.S. 460; and Gov. Bob McDonnell has finally unveiled his big idea for selling off the state’s ABC stores.
    The news, however, is both mixed and quite telling. In every case, funding the right price for the project at hand has been a very nebulous exercise. It shows that privatization, which the state jumped into with great fanfare back in the mid 1990s, is not exactly the cut and paste selloff that its proponents would have you believe.
    As the state Department of Transportatin has found out when it considered selling off the gigantic port facilities built with public money over many years, private business people are what they are for a reason. They will but the price squeeze on you. They want a good deal (even better a one-sided one) and could care less about the neo-Jeffersonian nonsense that the usual “think tanks” and blogs and gubernatorial streamlining commission types would have you believe.
    Take a look at the three proposals:
    • Transportation Secretary Sean Connaughton has pulled the plug on three proposals to operate the Virginia Port Authority facilities in Norfolk, Portsmouth and Newport News. Illinois-based CenterPoint Properties, a partnership of Carrix INc. of Seattle and Wall Street giant Goldman Sachs; and Washington-based Caryle Group with tentacles everywhere all had submitted proposals in 2009. Problem was, the proposals were embarrassing low balls figured on 2009 traffic when the Great Recession had crunched cargo traffic. Upfront cash offers ranged from $250 million to $750 million — not exactly big bucks. A later deal by APM Terminals for VPA to lease its $500 million container facility in Portsmouth for 25 years helped seal the others’ doom.
    • McDonnell badly wants a privatized superhighway through the peanut country of Suffolk and other southeastern counties to Petersburg to replace pokey U.S. 460 and offer a safety valve for the clogged U.S. 64 on the Peninusla. Not a bad idea, but McDonnell somehow expected that the state wouldn’t have to poney up any public cash (the usual GOP pipedream). After no bidders showed up, some undisclosed public money was put on the table. Bids are in from 460 Partners, which includes Skanska USA Civil Southeast, AECOM and Bank of America; Multimodal Solutions LLC, including constructon giant Kiewit Cnstructioon, the Louis Berger Group and Autostrade; and finally, Spain’s Cintra Infraestructuras S.A.U., which is one of the leading public-private infrastructure building outfit on the face of the earth (presumably their executives won’t have to monkey with any anti-Hispanic immigration laws that the hard right wing in this state want so badly). It isn’t clear how the financing will work, but proposals in 2006 flopped in part because they would call for tolls of $13 per vehicle to go only 55 miles.
    • Lastly, McDonnell has finally unveiled his selloff plans for ABC stores. He claims selling off 300 or so ABC stores will bring in $500 million and keep pumping in nearly $250 million annually in taxes. Facing hard oppostion from his own party, he dropped his goofy idea to add a 4 percent tax masquerading as a fee on mixed drinks in bars. In its place is a 2.5 percent tax on bars and restaurants that choose to buy liquor from wholesales and not retailers. Plus there’s a $17.50 per gallon excise tax on spirits that would be higher than the national average and higher than neighboring states. Opponents are readying their attack, saying the governor’s numbers are loopy. What’s worse, the last two states to privatize their ABC system — West Virginia and Iowa — did not make nearly the revenue from the sell-off as they initially thought. The plan — and the funny way McDonnell has come up with figures — will not be this a slam dunk.
    This is a lot to absorb, but it is a “teachable moment” as Barack Obama likes to say. Privatization is a lot harder than it looks. Assessing fair values on properties built with the sweat of Virginia taxpayers is not easy not matter what the dogmatists claim. And when you look at all the effort the McDonnell Administration is putting into these privatization things, you have to ask: Why here? Why now? Why isn’t he concentrating directly on jobs?
    Peter Galuszka

  • America’s Competitive Edge Is Eroding

    Posted on

    by

    James A. Bacon

    The United States, once regarded as the most economically competitive nation in the world, has fallen to 4th place, according to the 2010-2011 Global Competitiveness Report published by the World Economic Forum, the folks who organize the prestigious Davos wonk fests.

    Only two years ago, the U.S. ranked No. 1 in the comprehensive assessment of the competitive strengths of all the world’s nations. In last year’s report, the U.S. fell to No. 2, surpassed by Switzerland. This year, the world’s largest economy was humbled yet again, falling behind Sweden and Singapore, with Germany nipping on its heels.

    While the U.S. still possesses great strengths, in particular the size of its domestic economy, the flexibility of its labor markets and its capacity for innovation, major weaknesses have intensified. The report cites growing distrust of politicians, questions about the government’s ability to maintain arms-length relationships with the private sector, and the wastefulness of government spending. But dysfunctional macroeconomic policy ranks as the biggest concern of all. States the report:

    A lack of macroeconomic stability continues to be the United States’ greatest area of weakness (ranked 87th). Prior to the crisis, the United States had been building up large macroeconomic imbalances, with repeated fiscal deficits leading to burgeoning levels of public indebtedness; this has been exacerbated by significant stimulus spending.

    How does public indebtedness impact national competitiveness? First, it is necessary to understand what the Global Competitiveness Report means by competitiveness: “We define competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country.” The level of productivity dictates the level of prosperity that a country can sustain, as well as the rates of return on investments in physical plant, human capital and technology. A more competitive economy will likely grow faster in the medium- to long-run.

    Continued budget deficits and high public debt crimp productivity in several ways. First, they reduce fiscal flexibility. Government has fewer resources to invest in productivity-enhancing infrastructure, education and public health, or to apply as fiscal stimulus during downturns. Second, as governments borrow more, interest rates will tend to rise, thus driving up the cost of capital for private business.

    Also, the report notes, these effects can be exacerbated by consumer and business expectations. “Because taxes will most likely have to be raised in order to repay debt, economic agents will adapt their growth expectations, investing less and saving more. Taken together those factors may lower growth, making it even more difficult to repay debt in the future and potentially leading to a vicious cycle.”

    For those appraising the long-term fiscal viability of the federal government, here is the takeaway: There is a feedback loop between deficits/debt and economic competitiveness. Growing deficits reduce a nation’s productivity and competitiveness over time. Lagging productivity/competitiveness translates into slower economic growth, weaker tax revenues and even more deficits.

    That feedback loop is masked right now because interest rates are so low. But it will kick in full force later this decade as the global capital glut turns to global capital scarcity and interest rates begin to climb.

  • The Taint of Kochs on McDonnell’s Reform Commission

    Posted on

    by

    James A. Bacon

    Is there a Koch connection to Gov. Robert F. McDonnell’s 31-member commission on government streamlining?
    The Kochs are brothers David H. and Charles who run Wichita-based Koch Industries, a petroleum-based conglomerate that is the second-largest privately held company in the United States. They are hard-right political activists with a libertarian, anti-Obama
    bent, who, according to a recent New Yorker profile, “believe in drastically lower personal and corporate taxes, minimal social services for the needy, and much less oversight of industry — especially environmental regulation.”
    Among the Kochs’ many donations are millions of dollars for the Arlington-based Mercatus Center, a “market-oriented” think tank tied to George Mason University. One Democratic strategist has described Mercatus as “ground zero for deregulation policy in Washington.”
    Maurice McTigue, a former New Zealand politician and a vice president at Mercatus is on McDonnell’s commission. McTigue, who was known as a government streamliner in New Zealand, has advised states such as Louisiana on cutting state functions.
    A spokeswoman for Mercatus says that, except for McTigue, there is no direct tie between the McDonnell commission and the think tank. A source close to the commission reports that McTigue sits in on meetings of subcommittees other than his own. Also, correspondence from a McDonnell staffer that was supplied to me by a source suggests that Mercatus is playing a bigger role by helping the commission “flesh out potential recommendations and ideas.”
    The governor’s goal is to cut back on state spending, privatize as many entities as seem appropriate, end redundancies and make state government more transparent. These may seem like worthy goals to some. But one wonders if it really means having the state throttle the poor and sick and let companies have their way with the state’s rivers, lakes and air, along with the Chesapeake Bay. Will consumers be protected from predatory firms? Or would that be off-limits for state regulators?
    Other questions have been raised about the makeup of McDonnell’s commission. It is being chaired by Fred Malek, a former Army Green Beret and Nixon administration staffer who was involved in President Richard Nixon’s efforts to identify Jews at the Bureau of Labor Statistics. Malek has said he did so reluctantly and later apologized.
    Besides Malek, the rest of the McDonnell commission is very lopsided — to the right. Among its members:
    • Alexandra Liddy Bourne, executive director of American Energy Freedom Center, a Northern Virginia outfit that also employs former Republican Gov. George Allen. The conservative energy lobby pushes for oil drilling off of Virginia’s coast and runs through the usual laundry list of opposition to global warming legislation.
    • Commission member Geoff Segal is a vice president of Macquarie Capital, an Australian firm that is very big into privatized road projects — another McDonnell favorite.
    • “Special advisor” is Mike Thompson, chairman and president of the Thomas Jefferson Institute for Public Policy, a right-wing, libertarian outfit that unfortunately took over the old Bacon’s Rebellion e-zine and turned it into an e-rag for Northern Virginia-based lobbyists pushing privatization and limited government.It isn’t exactly the place to turn to to see a wide spectrum of opinion.
    The Kochs however, are much bigger fish and, according to the New Yorker, they have pumped millions to stymie Barack Obama whom they consider a socialist. The conservative movement has had more than its share of Southwestern or Midwestern oil billionaires, such as the Hunt brothers of Texas, who have the deep pockets for their favorite political charities. These are the kinds of people who attacked John F. Kennedy because he was a Catholic and backed Curtis Lemay, the neo-fascist retired Air Force general, for office. The New Yorker says the Kochs are covertly funding the Tea Party movement, which is a curiosity given the Tea Party’s supposed populism.
    But money, especially oil money, talks.
    Peter Galuszka

  • AN IDEA BAD ENOUGH TO RUIN JIM BACON’S HOLIDAY

    Posted on

    by

    James A. Bacon

    Peter posted a very good Labor Day statement concerning The Wealth Gap and here is another transect through that same frightening territory.

    The current administration is proposing a $100 Billion tax break for Enterprise R&D.

    There are four BIG problems here:

    First: The obvious one that Jim Bacon will focus on: It drives the federal deficit even higher. Boomergeddon sooner!

    Second: It puts more big and mid-sized firms on the dole and generates more political contributions for the existing political Clans.

    Third: It will not provide jobs that the folks who Accurate correctly points out are not contributing their fair share of effort and are the ones who NEED jobs.

    Fourth: R&D, if it is ‘successful,’ will drive Mass OverConsumption, not REAL conservatism – aka, conservation.

    The Enterprises that are large enough to qualify to have an R&D program and have cash flow large enough that make tax breaks attractive are NOT the Enterprises needed to get Main Street to work. Picking up on TMT’s point, getting the tax break will justify even higher CEO compensation.

    The US does not need Garmeen Foundation-scale micro loans but it does need Community Supported Enterprise loans. Bacon has done a nice job of pointing out that banks are using the past rounds of ‘incentives’ to improve their bottom line, not make loans.

    Get citizens involved. Investments should be in activities and Enterprises that investors can see and understand, not in Gambling Venues.

    There are a plethora of ideas that we have uncovered while preparing a series of talks on the application of Regional Metrics to Community prosperity. One is that the CSA idea is spreading from Agriculture to Enterprises. But that news is drowned in the Labor Day ads about discounts on goods made in China.

    Time is short and getting out useful information is critical. The Administration is also proposing $50 Billion in new ‘infrastructure’ programs. There is a better way to spend some of that money:

    Take the infrastructure money that would otherwise go to subsidize dysfunctional human settlement patterns – most of it outside the logical locations of The Clear Edges – and provide it to qualifying Community Colleges for education and information on Community support ideas and programs like CSE.

    What is needed are investments in start-up Neighborhood, Village and Community scale Enterprises.

    Want to support a sustainable economy in your Community, your SubRegion, your Region and by extension in the US?

    Stop reading INC., The Wall Street Journal and The Earth is Flat. Start reading YES, and The Small Mart Revolution.

    Start a study circle in your Cluster around Cheap, The High Cost of Discount Culture and The Story of Stuff. Read The Great Reset but focus on how to make Florida’s view of change benefit, not pillage, your Village and your Community.

    Small is beautiful.

    Happy Labor Day.

    EMR

Now Available

Book cover of 'Dust Mites: A Second American Revolution' by James A. Bacon, featuring astronauts planting a flag with a blue and white emblem on a lunar landscape, with Earth visible in the background.
For sale on Amazon.com

The year: 2075. The American colonies on the Moon are getting restless under Washington’s tyrannical rule….

This second edition of “Dust Mites” has a snazzy new cover, includes helpful lunar maps, and is 5,000 words tighter than the original. The sequel, “Trogs,” is scheduled for publication this summer.

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Bacon’s Rebellion is Virginia’s leading politically non-aligned portal for news, opinions and analysis about state, regional and local public policy. Read more about us here.

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