Coyote Blog

Bruce McQuain has this take from Obama's oil spill speech last night:

The rest of the speech was an exercise in what Obama does best "“ selling smoke. He begins it with a false premise:

But a larger lesson is that no matter how much we improve our regulation of the industry, drilling for oil these days entails greater risk. After all, oil is a finite resource. We consume more than 20% of the world's oil, but have less than 2% of the world's oil reserves. And that's part of the reason oil companies are drilling a mile beneath the surface of the ocean "“ because we're running out of places to drill on land and in shallow water.

Of course his claim about drilling in deeper water because we're running out of places to drill in shallow water is false. 97% of the shallow water on the Outer Continental Shelf -97%- has been placed off limits by government. The oil companies are forced into deeper water not by the lack of oil, but by government refusing to allow them to drill there.

As an aside, Daniel Foster makes a great point:

There's an added layer of irony here as well. As Planet Gore contributor Chris Horner rehearses at length in his book Power Grab, the prime architect of the cap-and-trade idea was "” you guessed it "” former BP CEO Lord John Browne. So there is a special kind of cognitive dissonance going on in the juxtaposition of BP bullying and carbon tax cheerleading.

Update, via Planet Gore:

So you have a Nobel winner who knows nothing about oil running the Energy Department and you have an environmental lawyer who knows nothing about drilling as the head of MMS, the oil-drilling regulatory body.

So, choosing key people in the Energy department and MMS based on their knowledge of about 2% of the energy world (wind and solar) is a problem?

I have noticed recently that the TSA has created split lines at many airport security screening posts - one for experienced travelers and one for "casual" travelers - i.e. noobs.

I have no problem with the basic idea.  Long ago I began advocating special lines for public electronic devices (airport boarding pass machines, supermarket self-checkout, ATM's) for people with IQ's over 90 because I always seemed to get behind the person who had never even seen a keyboard in their life.

But the actual execution of this concept in airports is laughable.  In the last 4 airports I have been in, the split between passengers who know what they are doing and those who don't is only through the screener who checks ID.  Even the lamest travel noobs are generally able to cough up an ID and boarding pass without too much trouble (though I will say I always seem to get behind the guy traveling on some bizarre 1930's-era League of Nations passport that seems to take forever to process).  However, after this ID screening the two lines come back together and everyone is mixed again.  Just in time to hit the x-ray screening station, where inexperienced travelers can hold up the line for hours.

If you have worked in a large corporation, you probably have witnessed some end of quarter or end of year sales push, to buff up the current period's results.  People who buy cars often get the advice to buy at the end of the month or year to take advantage of this motivation.  A great example of this was in the book Barbarians at the Gate, where RJR would load the channel at the end of each quarter with tons of extra inventory to buff up quarterly profits.  Of course, this just creates the incentive next year to load the channel even more to top the previous quarter's profits that were pumped up by loading.

All of this is both rational and irrational.  From a shareholder standpoint it is irrational -- the end of the reporting period is arbitrary and all the company is doing is shifting some sales a few days, rather than generating new ones.  It can even be negative for shareholders, as in the RJR case when loading caused inventory to sit on shelves for longer and get stale and thereby less appealing to customers.   For employees of the company, this can be entirely rational depending on their incentives.  While pulling sales forward to get a better grade or commission for this quarter feels good now, it can make the next quarter harder.  But who knows what will happen in the next quarter?  In a high turnover world, I could be in a new job or new company next quarter.  Anyone who has worked with corporate incentive programs knows that it is impossible to eliminate all the unintended consequences -- all one can do is minimize them.

But supporters of government superiority to private enterprise argue that this is exactly why government is superior, because it does not have these short-term focused goals.  HAH!

Politicians are among the worst at this.  It used to be they would do short term things to get elected, leaving the following election to take care of itself.  Now, they will take short term actions just to dominate the current news cycle.  Next week? That's an eternity, we have problems now.  Every single action taken over the last two years by both this and the previous administration and the current one relative to the economy have been totally short-term focused.  Let's bail everyone out.  Moral hazard?  That's the next administration's problem.  Just look at cash for clunkers, where the government paid $4000 for cars that blue-booked for $1500 all to pull September sales into August.  But they won the news cycle in August!

But the actual reason for my rant is a note I got from the Arizona Department of Revenue.  Apparently they have a program where large filers have to do a special report to pre-pay June sales tax** collections by June 29  (rather than by July 20 when they would usually be due).  As is so often the case, the law has been changed such that a special requirement for large filers had its threshold changed such that small-medium filers like myself also now have to play.  This is a sort of 13th report one must file (we file reports monthly) and the processing of it takes a lot of private time, plus the state has to hire a number of temps and pay overtime to receive this filing.

So why the special requirement?  Well, Arizona is on a July-June fiscal year, so June 29 is just about the end of their fiscal year.  And they are on a cash accounting basis (like most governments) so any cash that comes in the door, even if it is for a pre-payment of a future liability, counts as current period income.  This means that the state is spending a lot of overtime money shifting income by 21 days just to make its current period look better -- just like RJR or any other dynsfunctional private company.

But what makes this even more short term is that it only works once -- the first time.  It will make the first year this trick is applied look better, but then every year after will go back to being the same, with July losses to the prior year offset by June gains from the forthcoming year.  In fact the only way this game can work twice is if the threshold for pre-paying is lowered -- which is why I am having to fill out an extra form and pay a large bill 3 weeks in advance.  Arizona is looking for another one time gain.  And the larger the gain, the harder it will be to unwind this stupid costly process in the future.

** Footnote:  Actually we don't have a sales tax but a "transaction privilege tax."  However, that term gets me so infuriated, as it is based on the premise that private commercial transactions can be made only as a privilege granted by the government, that I refuse to use the term.  Right from the AZ DOR web site:  "the tax is on the privilege of doing business in Arizona."  Barf.  Don't let anyone tell you Arizona is a wild, libertarian, free market state.

Conservatives, nominally supporters of smaller government and free markets, are yet again torpedoing these principles in the name of short term political expediency.  In order to score a few fleeting points against Obama, they are calling him out over the BP oil spill, saying that this is his Katrina, a massive failure both in regulation and response.

That's stupid.  One can certainly raise some questions about the government -- why have they been collecting an oil spill cleanup tax but not any oil spill cleanup capability or equipment, why are we driving oil companies out of easy oil in shallow waters to crazy-hard oil in deep waters.  But this is not Obama's fault nor the government's fault.  This is BP's fault.  They screwed up and started the spill, and it was they that had no contingency plan for such a disaster.  And its going to cost them a staggering amount of money, as it should.

After all, what are the feds going to do?  They certainly can't be expected to maintain the expertise to deal with this kind of thing, particularly in cutting-edge deep water.  Which is why Obama has had to resort mostly to joggling BP's elbow demanding that hey hurry.

We have the incredible sight of Conservatives, rightly, saying that more regulation could not have prevented the financial crisis because regulators are any better than industry participants in spotting problems when entering uncharted territory.  But here we have exactly the same situation and Conservatives are hammering on Obama for not being authoritarian enough or regulating enough.

Postscript: One of the few things the Obama administration has done is demand BP stop using a certain oil dispersant chemical because it is toxic.  Duh.  So is all the oil.  Which is probably why BP ignored him.  Government is terrible with this type of decision.  We have something really bad happening that we can't control.  But we can make it less bad by doing X, but X has some downsides as well.   In the heat of battle, when discretion is required, government will choose the sin of omission (letting more oil reach the shore) over the sin of commission (using a toxic dispersant), even if this decision is irrational.  In their incentive system, the sin of commission is impossible to sluff off on someone else.  The sin of omission can always be blamed on BP, or Bush, or whoever.  This is one reason why government bureaucratic rules are often so detailed and prescriptive -- given these incentives, certain decisions will never be made in the heat of battle by bureaucrats unless their actions are guided by detailed rules, which then give them cover.

Postscript #2: I think the media has tended to underestimate the difficulty here.  5000 feet of water is really deep and complicated to work in, orders of magnitude harder than shallow water, which in turn is orders of magnitude harder than on land.  In a way, its actually kind of amazing that BP has sealed this thing, given that the Soviets, in much less difficult leaks, reportedly had to resort to nukes to seal the well.

Remember how the US gasoline-powered automobile market would never have developed without the massive government grants to Standard Oil to build out a gas station network?  Yeah, neither do I.

This is from the national ID card portion of the Democrat's immigration proposal:

Tough penalties will be put in place for fraud in procurement of a fraud-proof social security card.

Jim Harper has a thorough analysis of the proposal at the link.  My fear is the Republicans and Democrats will one day realize how similar they are on this issue and agree to an authoritarian compromise.

Apparently the nations of Europe have committed their citizens to helping pay the inflated salaries of a bloated Greek public workforce to the tune of $146 billion.

The package is predicated on the Greeks getting their spending under control, which almost certainly will not happen since the bailout establishes the precedent that if Greece fails to act rationally, it will get bailed out.

I have total sympathy with those who distrust corporations.  Distrust and skepticism are fine things, and are critical foundations to individual responsibility.   History proves that market mechanisms tend to weed out bad behaviors, but sometimes these corrections can take time, and in the mean time its good to watch out for oneself.

However, I can't understand how these same people who distrust the power of large corporations tend to throw all their trust and faith into government.  The government tends to have more power (it has police and jails after all, not to mention sovereign immunity), is way larger, and the control mechanisms and incentives that supposedly might check bad behavior in governments seldom work.

Here is a great example of behavior that is inconcieveable in the private sector, or, if found at a private company, would quickly result in its extinction.

The system that Lower Merion school officials used to track lost and stolen laptops wound up secretly capturing thousands of images, including photographs of students in their homes, Web sites they visited, and excerpts of their online chats, says a new motion filed in a suit against the district.

More than once, the motion asserts, the camera on Robbins' school-issued laptop took photos of Robbins as he slept in his bed. Each time, it fired the images off to network servers at the school district.

Back at district offices, the Robbins motion says, employees with access to the images marveled at the tracking software. It was like a window into "a little LMSD soap opera," a staffer is quoted as saying in an e-mail to Carol Cafiero, the administrator running the program.

"I know, I love it," she is quoted as having replied.

Anyone want to be how many of the guilty in this case will be around in 5 years.  The over / under from Vegas is "all."

I think a majority of small business owners and entrepreneurs are skeptical about government and taxes for a variety of reasons.  Large companies tend to shelter their workers from the vagaries of changing and hostile government regulation, but there is no such shield for people who own their own business.  At tax time this year, I had two thoughts about small business owners and taxes:

1.  We see the cost of taxes directly.  This year my taxes were X higher than I expected, where X is a pretty large five figure number (pretty large for me, at least).  To pay off X, I took the money directly out of an order we were placing for capital investment and new equipment, reducing the order by X.  At our company this year, there was a one-to-one scavenging of capital investment by taxes.

2.  Unlike most workers, entrepreneurs actually write checks for their tax bill rather than have it deducted stealthily from their paycheck.  I have always thought that this was the true purpose of withholding -- not compliance, but to try to hide people's tax bill from them.  If everyone wrote a check  (or four quarterly checks) each year for their tax bill (as I do), there would almost certainly have been a tax revolt years ago.

The blaming of private companies for government procurement errors is one I deal with frequently at my privatization blog.  This seems to be a particularly egregious example:

Maricopa County officials can't sue the Sheriff's Office for buying a $465,000 bus without their approval, so now they want to sue the bus company.

Precisely why Motor Coach Industries would be sued over the internal squabble remains unclear.

The county has maintained in this months-long bus battle that Sheriff Arpaio's office bought the vehicle with Jail Enhancement funds, when it should have used a typical county procurement process.

From the bus company's point of view, though, the Sheriff's Office was a customer with cash. For the county to demand a full refund, without so much as a deduction for the depreciation, seems like a raw deal for MCI.

Cari Gerchick, spokeswoman for the county, says text of the lawsuit won't be released until after the Board of Supervisors votes on it at Monday's meeting. She could not provide the legal justification for the expected lawsuit, beyond saying that MCI "should have known" the MCSO had not followed the county's procurement process.

Get that?  The company should have known that our County's chief law enforcement officer was not following the law.  This is obviously an absurd contention, but further the company had two geographic disadvantages:  1.  Not being from AZ, they don't know just how unethical our sheriff really is; and 2.  Being from Chicago, even if they had recognized unethical behavior, they would have assumed it was perfectly legal

Looking at the chart below, attempt to convince yourself that the cash-for-clunkers program had any real effect on economic activity.

And consider what was NOT purchased by the previous holders of the billions of dollars the government took from them to give to car buyers.

So Obama just signed a new "jobs" package

It's the first of several such measures Democrats have promised this election year to address the public's top worry: jobs. The measure includes about $18 billion in tax breaks and pumps $20 billion into highway and transit programs.

This is fascinating to me.  Let's take it in reverse order, starting with the $20 billion in new spending.  We are going to take 0.14% of the GDP out of some people's hands, who presumably thought they were employing the money productively, and put it into some other people's hands, and that is going to be a net jobs creator? **  Does this Keynesian myth really make sense to thoughtful people any more?

OK, but lets accept the logic - somehow if the government spends the money, it is more stimulative than if private people spend the money.  But then the whole package is contradictory, because it includes $18 billion in tax breaks.   Isn't that just taking money away from that great optimizer, the US Government, and handing it back to yucky old individuals who might just save it or pay down debt or something equally silly in the Keynesian world?

**Postscript- to answer a frequent comment I get, it does not matter if it is borrowed or taxed.  Either way it takes money from some private purpose.  There is only so much capital in the capital markets, and more government borrowing squeezes out private borrowing.

This is pretty scary.  From the Massachusetts state treasurer, the state health care system (essentially the model for the current version of Obamacare) is going bankrupt, and only huge cash infusions from the Federal government are hiding the full disaster.

"If President Obama and the Democrats repeat the mistake of the health insurance reform here in Massachusetts on a national level, they will threaten to wipe out the American economy within four years," Cahill said in a press conference in his office.

Echoing criticism leveled by congressional Republicans in recent weeks, Cahill said, "It is time for the president, the Democratic leadership, to go back to the drawing board and come up with a new plan that does not threaten to bankrupt this country."

[T]he state's health insurance law"¦Cahill said, "has nearly bankrupted the state."

Cahill said the law is being sustained only with the help of federal aid, which he suggested that the Obama administration is funneling to Massachusetts to help the president make the case for a similar plan in Congress.

"The real problem is the sucking sound of money that has been going in to pay for this health care reform," Cahill said. "And I would argue that we're being propped up so that the federal government and the Obama administration can drive it through" Congress.

The Democrats have no good ideas for controlling Medicare costs after a government takeover.  If they did, they would have already implemented these ideas on Medicare or in Massachusetts.  Their only plan is price controls and rationing.  Here is an example of price controls hitting a wall in Medicare:

Walgreens drugstores across the state won't take any new Medicaid patients, saying that filling their prescriptions is a money-losing proposition "” the latest development in an ongoing dispute over Medicaid reimbursement....

In a news release, Walgreens said its decision to not take new Medicaid patients stemmed from a "continued reduction in reimbursement" under the state's Medicaid program, which reimburses it at less than the break-even point for 95 percent of brand-name medications dispensed to Medicaid patents....

Washington was reimbursing pharmacies 86 percent of a drug's average wholesale price until July, when it began paying them just 84 percent. While pharmacies weren't happy about the reimbursement reduction, the Department of Social and Health Services said that move was expected to save the state about $10 million.

Then in September came another blow. The average wholesale price is calculated by a private company, which was accused in a Massachusetts lawsuit of fraudulently inflating its figures. The company did not admit wrongdoing but agreed in a court settlement to ratchet its figures down by about 4 percent.

So the Government is reimbursing retailers at 80% of wholesale costs.  Even forgetting their overhead,  Walgreens was asked to sell dollar bills to the government for 80 cents.

What both stories have in common are government health plans that are subsidized from the outside:  The Feds are pouring money into Massachusetts and money is sucked out of the private medical side to subsidize Medicare.  But what happens when there is only one system, when there is nothing outside of it to subsidize it?  What are they counting on to save them?

Over at my Park Privatization blog, I look at an article in the Huffpo on privatization.  Apparently, the city of Chicago made at least five or six horrible contracting mistakes in outsourcing its parking meters, mistakes a private enterprise of any level of professionalism would never make.  The Huffpo's conclusion -- these mistakes by the city government are proof that privatization is a bad idea and that government needs to retain its size, scope and power.

Many states managed to grow state spending in the last decade far faster than inflation and population growth, soaking up every new dime in bubble-generated tax revenue they could.   It may seem like states were forced to make a lot of hard decisions last year, but in fact they were sheltered from really dealing with the full measure of their own fiscal problems by large influxes of Federal "stimulus" money.  As I demonstrated way back in January of 2009, most of the stimulus was actually ear-marked not for the mythical shovel read project, but for "stabilization" of state and federal budgets.  This is a couple of months old, but still applies:

A historic nosedive in state tax collections extended into the third quarter of the year, and only an infusion of federal economic stimulus money has averted widespread program cuts and worker layoffs.
Tax collections from July through September dropped an average of 8.3% from a year earlier in the eight states that release up-to-date monthly tax figures, a USA TODAY survey found. New York's tax collections fell 8.9%, despite an income tax hike earlier this year. States reporting partial third-quarter results showed a similar downward spiral in tax collections, including 13.2% drop in Arizona.

Federal stimulus money has protected states from making big cuts in the number of government workers, in aid to schools or in spending on Medicaid, the health care program for the poor. But most federal stimulus money ends in December 2010.

This is not a new trend, from Tad DeHaven of Cato:

According to the Goldwater Institute, over a third of the AZ state budget is federal money.

How can there possibly be any accountability for how this is spent, though it actually is larger than the amount raised by state taxes?  If we want the government to buy us goodies in this state, we should at least pay for them ourselves and not take money from others.  By the way, every time I raise this argument, someone says "well our state pays more federal taxes than it gets back."  First, every state says this so it can't possibly be true in every case.  Second, it's a terrible practice from the standpoint of accountability.

Related, via Matt Welch:

The biggest single national political donor in the country during the 2007-08 election cycle, according to OpenSecrets.org, was the overwhelmingly Democrat-supporting teachers union the National Education Association. What category of worker was the biggest single beneficiary of stimulus spending? Public school teachers. Who, according to Vice President Joe Biden, accounted for 325,000 of the first 640,000 jobs "created or saved." While it's true that teachers are Americans (even my brother), in the vast majority of these cases, the jobs in question weren't "created," just maintained, since it is nearly impossible to fire public school teachers.

The Tampa Rail blog has responded to my post criticizing Phoenix light rail (which the Tampa folks used as a glowing example of rail success).  Remember I wrote, in part:

Look, I don't think I have ever argued that Phoenix Light Rail was run poorly or didn't have pretty trains.   And I don't know if moving 18,000 round trip riders a day in a metropolitan area of 4.3 million people is a lot or a little (though 0.4% looks small to me, that is probably just my "pre-web" thinking, whatever the hell that is).The problem is that it is freaking expensive, so it is a beautiful toy as long as one is not paying for it.  Specifically, it's capital costs are $75,000 per daily round trip rider, and every proposed addition is slated to be worse on this metric (meaning the law of diminishing returns dominates network effects, which is not surprising in this least dense of all American cities).

Already, like in Portland and San Francisco, the inflexibility of servicing this capital cost (it never goes away, even in recessions) is causing the city to give up bus service, the exact effect that caused rail to reduce rather than increase transit's total share of commuters in that wet dream of all rail planners, Portland.  Soon, we will have figures for net operating loss and energy use, but expect them to be disappointing, as they have in every other city (and early returns were that fares were covering less than 25% of operating costs).

Of course, as with all government issues, the ultimate argument is that I am some sort of Luddite for actually demanding definable results for billion dollar government spending

Sorry Coyote, save for the topic matter I'm afraid I'm just not going to be much fodder for you. We're years past 'it's an expensive tax thing'.

We know that. We know rail like any capital project is expensive to execute and expensive to maintain - in dollars. But anyone who raises the math to me will wind up with the same big 'so what'. Community investment doesn't bother everyone the same way and different people see different value. There's no way you or I cold supernaturally understand the net benefit for or against light rail. We must simply choose to believe and pick our sides.

If you believe that just because rail is expensive they aren't worthwhile, you need to explain every public vote that has gone for implementing and expanding rail systems around the world even though most operations are publicly subsidized.

Gotta run'em well, and, over time, integrate with a city, but LR is a carefree mobility solution in areas where people choose to support and pay for it.

See, they are well past my neolithic argument, into their little post-modernist world where aesthetics and political correctness trump any actual need to demonstrate money is being used well.  Though it is interesting to see him resorting to faith as a justification.

I have two words for this person -- "opportunity cost."  On one hand, the money for this project must be taken out of private hands to build the rail line -- even leaving out the substantial individual liberties questions here, there is still some obligation to demonstrate the money is better used than it would have been in the private hands from which it is taken.  Ditto, by the way, for the stimulus bill.   On the other hand, to the extent that one wishes to spend government money to move people from A to B, one needs to demonstrate that this method is better than others.  I would argue high speed rail fails both tests.

Update: Joel Epstein and I have a go around the same issues in the Huffpo comments.

I don't know any of the facts of the Toyota recall, so I don't know how pressing the sudden acceleration problems are.  But I found it an interesting conflict of interest that the recall was pressed on Toyota by their competitor:

Transportation Secretary Ray LaHood told WGN Radio in Chicago that the government pressed the company to stop building vehicles linked to the massive recall. LaHood said "the reason Toyota decided to do the recall and to stop manufacturing was because we asked them to."

The US Government, of course, owns a controlling interest of Toyota competitor GM.  One GM dealer had this comment

"Every dog has its day," said Jerry Seiner, who has a group of General Motors and dealers of other brands around Salt Lake City. "Maybe they'll take a second look at us instead of Toyota. . . . When Toyota stumbles, it's our opportunity."

Unfortunately:

The Arizona Supreme Court today unanimously reversed an appellate court ruling on the CityNorth case, saying it erred when it deemed the city of Phoenix's $97 million subsidy of the shopping center unconstitutional.

I discussed this in great depth in a series of posts, including this one.  The purpose of the subsidy was to try to get Nordstrom's to move their planned store about 1 mile from a development planned in Scottsdale over the line to a development planned in Phoenix  (the public cover story was to provide parking for a park and ride).

Fortunately, the ruling seems to be more procedural than anything else, and seems to slam the door in the face of similar private subsidies in the future:

Indeed, in today's unanimous decision, penned by Chief Justice Andrew D. Hurwitz, the five Supreme Court judges say that indirect public benefits -- like, apparently, beating out Scottsdale for the sale tax from Bloomingdales -- aren't enough to justify a giveaway to a private party.

Previous courts who've held that, they say, have misread precedent.

"In short, although neither [of two Supreme Court precedents] held that indirect benefits enjoyed by a public agency as a result of buying something from a private entity constitute consideration, we understand how that notion might have been mistakenly inferred from language in our opinions," they say. Now that they've clarified, the justices seem to be saying, the appellate court must examine whether the direct benefit the city of Phoenix gets -- aka. those parking spaces -- is enough to justify the giveaway.

For the record, the Supreme Court suggests that the parking garage is not, likely, benefit enough to justify such a tax giveaway.

"We find it difficult to believe that the 3,180 parking places have a value anywhere near the payment potentially required under the Agreement," its opinion finds. "The Agreement therefore quite likely violates the Gift Clause."

Kudos to the Goldwater Institute for continuing to push this issue.

Will we look back on 2009 as the tipping point where productive resources began to spiral faster and faster into the government black hole?  A few stories that have caught my eye the last few weeks:

Federal salaries exploding, from USA Today via Q&O

The number of federal workers earning six-figure salaries has exploded during the recession, according to a USA TODAY analysis of federal salary data.

Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession's first 18 months "” and that's before overtime pay and bonuses are counted....

The trend to six-figure salaries is occurring throughout the federal government, in agencies big and small, high-tech and low-tech. The primary cause: substantial pay raises and new salary rules.

The highest-paid federal employees are doing best of all on salary increases. Defense Department civilian employees earning $150,000 or more increased from 1,868 in December 2007 to 10,100 in June 2009, the most recent figure available.

When the recession started, the Transportation Department had only one person earning a salary of $170,000 or more. Eighteen months later, 1,690 employees had salaries above $170,000.

Government Employment Rising, via Glenn Reynolds

Government services rising as a percent of the economy (from the Heritage Foundation via the same Glenn Reynolds link above)

Capital to private firms is increasingly allocated by the state -- the new Corporate State.  First, Representative Paul Ryan in Forbes:

Thirty years later, this crony capitalism is back with a vengeance, accelerated by an aggressive program by President Obama and the Democratic congressional leadership. It is wreaking havoc on economic recovery and fueling continued resentment among the American people.

The actions taken at the height of the financial panic last fall, with credit markets frozen, succeeded in preventing a systemic--and catastrophic--collapse. Since bringing us back from the precipice however, the Troubled Asset Relief Program [TARP] has morphed into crony capitalism at its worst. Abandoning its original purpose providing targeted assistance to unlock credit markets, TARP has evolved into an ad hoc, opaque slush fund for large institutions that are able to influence the Treasury Department's investment decisions behind-the-scenes. No longer concerned with preserving overall financial market stability, Treasury's walking around money continues to be deployed to reward the market's Goliaths while letting its Davids suffer.

Further, via Reuters:

U.S. banks that spent more money on lobbying were more likely to get government bailout money, according to a study released on Monday.

Banks whose executives served on Federal Reserve boards were more likely to receive government bailout funds from the Troubled Asset Relief Program, according to the study from Ran Duchin and Denis Sosyura, professors at the University of Michigan's Ross School of Business.

Banks with headquarters in the district of a U.S. House of Representatives member who serves on a committee or subcommittee relating to TARP also received more funds.

Political influence was most helpful for poorly performing banks, the study found.

"Political connections play an important role in a firm's access to capital," Sosyura, a University of Michigan assistant professor of finance, said in a statement.

The Government has gained new power to allocate capital in the future. This was perhaps one of the most under-reported stories of the last few months (mea culpa as well).

To close out 2009, I decided to do something I bet no member of Congress has done -- actually read from cover to cover one of the pieces of sweeping legislation bouncing around Capitol Hill....

The reading was especially painful since this reform sausage is stuffed with more gristle than meat. At least, that is, if you are a taxpayer hoping the bailout train is coming to a halt.

If you're a banker, the bill is tastier. While banks opposed the legislation, they should cheer for its passage by the full Congress in the New Year: There are huge giveaways insuring the government will again rescue banks and Wall Street if the need arises....

Here are some of the nuggets I gleaned from days spent reading Frank's handiwork:

-- For all its heft, the bill doesn't once mention the words "too-big-to-fail," the main issue confronting the financial system. Admitting you have a problem, as any 12- stepper knows, is the crucial first step toward recovery.

-- Instead, it supports the biggest banks. It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for "no-more-bailouts" talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate's health-care bill look minuscule....

But don't worry, trust Congress to get at the heart of the financial meltdown

The bill calls for more than a dozen agencies to create a position called "Director of Minority and Women Inclusion." People in these new posts will be presidential appointees.

Aptera apparently wants to build electric cars using our tax dollars.  They are looking for a manufacturing plant location.   They seem to be homing on an one of the last locations on the planet I would build a new manufacturing facility:

At least we learn that the company is might soon be closing in on a new production facility as a result of a new application to the DOE's AVTMP [advance vehicle technology manufacturing program]. The loan application asks for a 10-year facility plan, which meant Aptera needed to actually come up with such a plan. Aptera's production schedule "calls for more than 10,000 units in the first 3 years and more than 300 employees," so it is looking for a new place to build the cars somewhere in Southern California, specifically somewhere in San Diego County.

High land prices?  Hugely expensive land use and environmental regulations?  High taxes?  Really high local wages?  Perfect, lets build an auto assembly plant!

The TSA may be unable to successfully seize explosives before they get on an airplane, but they are able to successfully seize the laptops of bloggers who are critical of their organization.

I am done using the phrase "dangers of government trying to pick winners" because it implies that they sometimes might be successful.  They never are.  When governments choose, they choose losers.

I get a lot of pushback on this, because it seems to offend people's intuition.  They will say they know lots of good people they trust in government -- there is no way that all these smart, well-intentioned people are going to be so consistently wrong.

But the argument against government in this case (and in most other cases) is not based on the IQ or goodness of the individuals that populate it.  The argument is that even good people in groups make terrible decisions due to problems with their information and incentives.

The information problem is one that Hayek is famous for addressing.  In short, there is simply too much to know to make decisions for the entire economy.  In fact, folks with high IQ's often do especially poorly in this context, because they tend to overestimate their own knowledge and problem-solving ability.   And, even if one could be omniscient, it is still impossible to pick winners because 300 million people have different preferences and so one solution based on one set of idealized or mean preferences is going to sub-optimize for a lot of people  (remember this now that we all have to have health insurance plans on the exact same terms and coverage).

The incentives issue is perhaps an even more powerful problem.  We only have to look at the most recent health care bill and its progress through the legislative process to understand the power of incentives to shape rules and legislation in absurd ways.

Ethanol is a great illustration.  Scorned by scientists as both bad energy policy and bad environmental policy, ethanol mandates and subsidies do nothing but hurt the environment.  Ethanol generally takes more fossil fuels to produce than it replaces, it does almost nothing to reduce CO2 emissions, and it creates new environmental issues with land use as well as social issues from rising food prices.  If you listed a hundred potential legislative initiatives to improve the environment and energy policy, ethanol would likely be in the bottom 10.  But never-the-less, it is consistently the number 1 legislative solution adopted by western democracies, including the supposedly science-based Obama administration.

I used to say that if we could move the first Presidential primary out of Iowa, ethanol might go away, but obviously that understated the appeal of subsidizing the agricultural industry under the thin veneer of environmental policy, as demonstrated by these nutty large subsidies in Europe.  Via Carpe Diem:

Biofuels production in Europe is heavily subsidized. Support has also been increasing in the past years and today stand at approximately EUR4 billion ($5.76B). Another way to look at subsidies is that every litre of ethanol consumed in Europe gets 0.74 EUR (about $4 per gallon) and every litre of biodiesel 0.5 EUR ($2.72 per gallon). The effective rate of assistance to biofuels (taking account of all measures of support) adds up to more than 250% for ethanol (see chart above). Biodiesel, and especially rapeseed crops, have lower effective rates of assistance (up to approximately 60%).

This structure of support and protection is not economically sustainable. It is rather close to economic madness to pursue the sort of self-sufficiency or industrial policy ambitions that have guided EU policy towards biofuels. The total cost of every unit of biofuel becomes far too high, which slows down the readiness to shift away from fossil fuels.

The biofuels policy in the European Union is a classic example of "green protectionism" "“ protectionism that is not motivated for the benefit of the environment, but which uses environmental concerns to pursue non-environmental objectives. The European Union runs an extensive policy for subsidies to biofuel production. Border protection increases the level of subsidy by giving a market support from consumers to producers. Standards are used to favour domestically produced biofuels. It is difficult to escape the picture of a policy driven by industrial ambitions rather than environmental concerns. The intention and/or the effect of Europe's policy is associated with beliefs of self-sufficiency. Obviously, trade is not considered to be an integral part of an environmental ambition to shift from fossil fuels to biofuels.

Being a red state, maybe if AZ fails before CA, it will be less likely that Congress and the Administration will do some sort of bailout to head off local accountability.  It sure seems we might be able to pull off an early failure:

Arizona state government has managed to blow through a $700 million loan from the Bank of America in less than a week, and that wasn't even enough to keep things going.According to Treasurer Dean Martin, his office had to dip into internal sources to come up with the extra $73 million the state needed just to keep the lights on.

"Government spending in Arizona is out of control. We are more than three-quarters of $1 billion in the red for daily operations," Martin says. "As we predicted in our forecasts, just one week after setting up essentially the largest line of credit in state history, the state of Arizona has maxed it out. The governor and Legislature need to [rein] in excessive spending; we can no longer afford to continue spending more than we make."

The state is currently about $1.6 billion in the hole, and the $700 million loan the state spent last week is just the beginning of excessive spending of borrowed money.

I have warned about this before:

In fact, Hollywood's portion of the stimulus package reveals an important factor of the Recovery Act: The money is not going to areas that would more directly stimulate the economy but instead to provide ongoing life support to deficit-ridden federal, state and local agencies.

That is the main impression I have gotten when reading the stimulus jobs data base -- the fake districts and BS accounting did not catch my eye so much as the fact that all the jobs seemed to  be saved jobs in government agencies.  I am pretty sure that had the stimulus been originally sold with its true goals -- to help stave off financial accountability in state and local governments -- it would have had more difficulty passing.

Though some of us saw this even in the bill itself (this blog, Jan 27, 2009)

So do you see my point. The reason so much of this infrastructure bill can be spent in the next two years is that there is no infrastructure in it, at least in the first two years!  42% of the deficit impact in 2009/2010 is tax cuts, another 44% is in transfer payments to individuals and state governments.  1% is defense.  At least 5% seems to be just pumping up a number of budgets with no infrastructure impact (such as at Homeland Security).  And at most 6% is infrastructure and green energy.  I say at most because it is unclear if this stuff is really incremental, and much of this budget may be for planners and government departments rather than actual facilities on the ground.