Coyote Blog

In my younger, more naive days, I would have drawn the following lesson from this story:  "Never create a business plan predicated on subsidy checks from the government.  They may stop at any time."  I still think this is mostly true, as FirstSolar is finding out.  But my sense is that a range of folks from GE to Kleiner Perkins still get their checks.  So one may cynically rewrite the rule: "Never create a business plan predicated on subsidy checks from the government unless you are confident you have the political connections to guarantee and expedite the payments."

It seems like local solar company perfect power tried to feed at the government trough without actually having sufficient clout in the corporate state.  Bad idea

About 100 Arizona homeowners who paid $4,500 up front for solar-power systems fear they may never get their rooftop panels after being left waiting for months by the installation company.

Angry homeowners are demanding their systems or refunds. The company, Perfect Power Solar, is blaming the delays on federal government red tape.

Perfect Power owner Lynn Paige said the company has cash-flow problems because energy grants that were supposed to provide substantial funding of the solar systems aren't being approved quickly enough. She pledged to deliver the systems or refund all customers by the end of the year.

Treasury officials would not comment on the situation. Government e-mails sent to Paige suggest Perfect Power's grant applications were incomplete. In them, officials point to problems with submissions and warn of potential denials.

Industry experts and owners of other solar companies in Arizona said that the grant program is fraught with risks for solar companies and that some built business models based on future payments from the government without the financial reserves to cope with delays. They describe the situation as a high-tech gamble that some companies lost.

Residential solar-power systems cost $15,000 to $40,000. The Section 1603 grant program, part of the American Recovery and Reinvestment Act, offered developers cash to offset 30 percent of the costs. Although the program was not available to homeowners, some companies tapped the grants to sell residential solar systems as leases. A company would install and own the system, then lease it to a homeowner.

Program rules required developers to complete installations before they could apply for reimbursement. But funding was not guaranteed, and even after systems were built, the government delayed approval of some applications and denied others.

If this was one of Kliener Perkins' companies, for example, Ray Lane would just call the White House and get his money released. If your solvency depends on continued flow of taxpayer cash, you better have the clout to keep the money flowing or you are likely to get hosed.  Bureaucracies tend to have default answers of "wait" and "no".  Those are the answers average people without pull are going to get.  The "yes" goes to those who cut through the red tape from the top.  These yeses, like the ones to Solyndra, only make it more likely everyone else get the "no" answer, as the agencies need to show they are being particularly diligent to offset the impression of sloppiness they get from the Solyndra-type cases.

Retroactively, the company's leadership has figured this out, that to survived at the government trough, they have to go political

Paige has asked customers not to file complaints or talk to the media about problems the company is facing.

"It has been very unhelpful ... that a few customers have chosen to write very negative letters to the BBB," she wrote in a May e-mail to customers.

Instead of filing complaints, Paige said, customers should write to Arizona U.S. Sens. John McCain and Jon Kyl to request their help in freeing up the government grant money and to pressure the Treasury Department....

That month, the BBB revoked Perfect Power's accreditation and gave the company an F rating. The company had 16 complaints filed against it the past year. The registrar shows four open complaints against Perfect Power; a fifth complaint was listed as settled or withdrawn.

Forget about the customers.  Let's just focus our attention on our two Senators.

From the TaxProf:

President Obama today issued a presidential memorandum directing the Office of Management and Budget, the Treasury Department, and other federal agencies to block contractors who are delinquent on their taxes from receiving new government contracts. The memorandum also directs the IRS to review the accuracy of companies' tax delinquency claims and asks Congress to enact enforecement tools.

This administration continues to follow the consistent principle that taxes should be applied ruthlessly to out-of-favor and unsympathetic groups, and forgiven or exempted for friends of the Administration.  Does anyone else find it odd that our first black President is doing so much to undermine the equal protection clause of the 14th Amendment?

Ken Lewis gets his payoff for knuckling under to Paulson and Bernanke on the Merrill Lynch acquisition

Kenneth Lewis, outgoing chief executive of Bank of America Corp., will get no salary or bonus for 2009, according to people familiar with the matter, the biggest Wall Street name thus far to come under the thumb of the government's pay czar.In fact, Mr. Lewis will have to repay the North Carolina-based bank more than $1 million in salary he has already earned.

The move was demanded by Kenneth Feinberg, the U.S. Treasury Department's special master for compensation, and was agreed to by Mr. Lewis and the bank.

After forcing Lewis to deal fraudulently with his shareholders, they cut his pay to zero. Nice. Lewis will do fine, he has a nice fat retirement, but it is still a pretty scary development for those of us who still care about contracts and individual liberty.  Just ask yourself - what objective standard did Feinberg apply?  Can't come up with one, can you?

A lot of the lefty sites are gearing up the "poor aren't sharing in the benefits" bandwagon again.  This is usually brought out of the garage whenever someone wants to put a really progressive soak-the-successful tax plan on the table.  So get ready.

The key to parsing their argument is to understand the following distinction:  Do you care about quintiles, or individuals?  Because if you care about quintiles, then there is no doubt that the real median income of the lowest income quintile has not advanced much over the last 15-20 years.  But quintiles are not individuals, and the evidence is that individuals are still doing well, whatever bracket they begin in.  Because you see, while the average for the bottom quintile may not be much higher than the average for that bracket a decade ago, the fact is that the people in that bracket have changed.   As Mark Perry writes:

A common misperception is that the top or bottom income quintiles, or the top or bottom X% by income, are static, closed, private clubs with very little turnover - once you get into a top or bottom quintile, or a certain income percent, you stay there for life, making it difficult for people to move to a different group. But reality is very different - people move up and down the income quintiles and percentage groups throughout their careers and lives. The top or bottom 1/5/10%, just like the top or bottom quintiles, are never the same people from year to year, there is constant turnover as we move up and down the quintiles.

He quotes some stats from Jeffrey Jones and Daniel Heil:

How much income mobility exists in America? Research consistently affirms that there is substantial upward income mobility in the United States, with the lowest income earners typically showing the strongest results. A Treasury Department study of the 1996"“2005 period used IRS income tax data to discern considerable mobility: more than 55% of taxpayers moved to a different income quintile. More than half the people in the lowest fifth of earners moved to a higher quintile over this period (29% to the second, 14% to the third, 10% to the fourth, and 5% to the highest).

Moreover, there is a great deal of movement in and out of the top income groups. The Treasury data show that 57% "of households in the top 1% in 2005 were not there nine years earlier." The rich sometimes get richer, but they get poorer as well. The study also reveals that income mobility has increased, not decreased, during the past twenty years. For example, 47.3% of those in the lowest income quintile in 1987 saw their incomes increase by at least 100% by 1996. That number jumped to 53.5% from 1996 to 2005.

The Pew Economic Mobility Project tried to track actual people, and not brackets, from tax returns.  This is an imperfect science, but the only real way to look at income mobility.  They found that 90% of white children and 73% of black children whose parents were in the lowest income quartile in the base period were later to be found in higher income quartiles.  But this chart, from the same study, is really telling:

(click to enlarge)

That is a pretty amazing picture, marred only by something apparently bad occurring with the kids of middle class African Americans.

So how can there be so much income gain everywhere without the averages for the lower quintile increasing.  I would offer at least two explanations:

1. Immigration. As people gain skills and seniority, they progress to higher income brackets and out of the lower quintile.  However, there is a constant stream of low-skill immigrants moving to this country to fill in the bottom quintile.  It we were to do a quintile analysis apples to apples leaving out new immigrants in the period, I guarantee you would see the median income for the lower quintile increase.  As I wrote before:
   

   Frequent readers will know that I am a strong supporter of open immigration....However, I am tempted to become a close-the-border proponent if the left continue to use numbers skewed by immigration to justify expansions of taxation and the welfare state.  Whether they are illegal or not, whether they should be allowed to stay or not, the fact is that tens of millions of generally poor and unskilled immigrants have entered this country over the last several decades.  These folks dominate the lower quintile of wage earners in this country, and skew all of our traditional economic indicators downwards.  Median wages appear to be stagnating?  Of course the metric looks this way "” as wages have risen, 10 million new folks have been inserted at the bottom.  If you really want to know what the current median wage is on an apples to apples basis back to 1970, take the current reported median wage and count up about 10 million spots, and that should be the number "” and it will be much higher.

   By the way, even for these immigrants, their position in the lower quintile represents upward mobility for them.  Being in the middle of the lower quintile probably is a huge improvement over where they were in their home country - almost by definition, or they would not be working so hard to get here.

2. Safety Net. Some large portion of the bottom quintile are supported by the US government's safety net.  And there are pretty good fiscal reasons why the typical real incomes generated by that safety net have not increased over the last 20 years.  And even beyond the fiscal issues, there are incentives issues as well -- at some point, increasing how lucrative the safety net is can reduce the incentive to get off the safety net and find a job.  Just ask the Swedes.  There is a delicate balance between humanity and sustaining folks vs. killing their motivation.In some ways the left's use of the lack of lower quintile progress as an indictment of American capitalism is wildly ironic.  Basically what they are saying is that the 80% of people who support themselves through capitalist endeavor are doing progressively better but the 20% of the people supported by the government are stagnating -- and therefore we need to increase the role of government.

Much has been made of the bailout legislation provision that the administration would be immune to any scrutiny of any sort for any decision made vis a vis the $700 billion in bailout funds and the resulting spending decisions.  But I thought this was equally telling of the over-broad power grab that is going on at Treasury:

The SHR [senior House Republican] calls this an insurance program and the original Paulson plan a
purchase program. He says Treasury Department people have told him that
they considered an insurance program but decided that a purchase
program would be better. But he also added that in the draft
legislation Paulson has advanced, the Treasury would have the authority
to set up such an insurance plan without congressional authorization.
From what he said, it struck me that both courses could be followed.
After all, neither purchases nor insurance is contemplated to take
place unless and until a financial institution comes forward and
requests one or the other.

Jeez, how much latitude are they asking for?  Is the bill really so broad that the secretary of the treasury could set up an entirely new government insurance program for financial assets without further Congressional approval?

While I think Cantor is being overly-optimistic about the near-term cash flow of his insurance proposal, it does seem to be at least an incremental improvement over Paulson's plan.

From Mark Perry  (a new favorite of mine)

In related news, comes this from the WSJ via Evan Coyne Malloney

New data from the IRS will be out in a few weeks on who pays how much
in taxes. My contacts at the Treasury Department tell me that for the
first time in decades, and perhaps ever, the richest 1% of tax filers
will have paid more than 40% of the income tax burden. The top 50% will
account for 97% of all federal income taxes, while the bottom 50% will
have paid just 3%.

Here is the same data from 2005:

This is really a huge threat to the Republic and the minority protections built into the Constitution.  Our government was most explicitly not meant to be a tyranny of the majority, where 51%+ of the people can legally abuse the rest with impunity, but this tax picture sure seems to be stepping over this line.  A particularly worrisome subset of this problem is the increasing legislative predilection for funding  projects with millionaire's taxes, as discussed here and here.  I discussed more about the implications of 52.6% voting for the other 47.4% to support them here.