Coyote Blog

The (flawed) theory of government stimulus plans is that in certain economic under-capacity situations, government spending can have a multiplier effect.

The Anti-planner shows that, as far as government spending on mass-transit is concerned, $9,150 of taxpayer subsides per rider generate about $6,100 in average savings per rider.  Every dollar of public transit spending destroys about 30 cents of value, which I guess makes it the anti-stimulus.

Update:  Yeah, I know, transit supposedly eliminates all those externalities.  But most rail transit plans typically reduce congestion by fractions of a percent, even by their builder's estimates, while energy savings is wildly over-estimated.

The normal process for bureaucratic allocation of, say, highway funds, does not always work that well.  Seriously, you don't have to convince this libertarian of that.  But it is at least intended to try to balance priorities and allocate the funds marginally rationally.   Which points out the problem with earmarks -- they are overrides by Congress of the normal allocation and prioritization process for political ends.  By definition, the projects in earmarks would not have normally been funded by the usual operation of the prioritization process.

Which brings me, oddly enough, to AIG  (and to GM).  When companies can no longer meet all of their obligations, they generally file for chapter 11 bankruptcy. This is an extremely well-worn process, both in the courts and the business community, that attempts to save as much value as possible and to allocate that value, based on law and a set of rules everyone understands in advance, to the various stakeholders.   The folks who are involved in this process are pretty hard-headed folks, less out for revenge and retribution as for maintaining value and capturing as much as possible for whatever group one might represent.

Now Congress and the Administration are getting themselves involved in the bankruptcy process, by trying to avert actual chapter 11 filings by AIG and GM.  By doing so, they are effectively overriding the bankruptcy process.  Just as with earmarking, they claim this override is for some good of the country.  But, just as with earmarking, you can assume it is to benefit some politically-favored group.  At GM, the feds are saying that we don't want employees or the equity holders to take a haircut, as they would in Chapter 11, so we will transfer the loss to taxpayers, and perhaps bondholders (could there be any politically less favored group than taxpayers?).  Same at AIG.   Is it any surprise that the number one beneficiary of the Pauslon bailout of AIG was Goldman Sachs?  The Left thought they smelled a rat when the administrations contracted with ex-Cheney-run Haliburton in Iraq, but no one is going to bat an eye when the Treasury department, populated with ex-Wall Street types, is bailing out all its employees' old firms?

On the subject de jour, the AIG executive bonuses, many of these were just as guaranteed, contractually, as were payments on AIG policies and bond guarantees.  I don't know how such obligations are treated in chapter 11 (are they treated as more or less senior than other obligations?) but I do know the decision to keep them or ditch them would be made against a goal of maintaining long-term value, and not public witch-hunting.

This is the real problem, even beyond the taxpayer cost, of this new form of Congressional or Administration-led pseudo-bankruptcy:  Winners and losers are determined by political power and perceptions of short-term political gain, rather than against a goal of maintaining value and following well understood and predictable rule.  This process throws all the old predictable rules and traditions out the window.  Investors and folks with contracts used to know just how senior their obligations were in a corporate failure.  Now, they have no idea, as their position in the bankruptcy may in the future depend more on how much they donated in the last presidential election, or how good their PR agent is.

A reader wrote me and asked why, given my dislike for Sheriff Joe Arpaio, I had not blogged on the request by a number of members of the US Congress to investigate Arpaio, particularly regarding his crime sweeps of neighborhoods that seem to result in the arrest of mainly those of Mexican ethnicity.  Heck, he has pulled more Hispanics out of some tony suburbs than I thought could even exist in the area, much less have probable cause for arrest.

I guess I haven't blogged on it because I am busy, and besides I am not sure a political stunt by some Congressmen will really amount to much of an investigation.

But I do have a reaction to the blog post that the reader sent me.  The blog is called MaxRedline and comments thus on the investigation:

This is interesting; it's unclear exactly where in the Founding documents of our nation that illegal aliens are granted civil rights.

This is a mistake I think many conservatives make.  Because, in fact, immigrants, no matter what licenses and permissions they have or don't have from the US government, have the same rights as everyone else.  Because rights don't flow from the government, they flow from the fact of being human.  Government is not the source of rights, it is their protector.  I can bring the founding fathers into the matter as well:

Like the founders of this country, I believe that our individual rights exist by the very fact of our existence as thinking human beings, and that these rights are not the gift of kings or congressmen.  Rights do not flow to us from government, but in fact governments are formed by men as an artificial construct to help us protect those rights, and well-constructed governments, like ours, are carefully limited in their powers to avoid stifling the rights we have inherently as human beings.

Do you see where this is going?  The individual rights we hold dear are our rights as human beings, NOT as citizens.  They flow from our very existence, not from our government. As human beings, we have the right to assemble with whomever we want and to speak our minds.  We have the right to live free of force or physical coercion from other men.  We have the right to make mutually beneficial arrangements with other men, arrangements that might involve exchanging goods, purchasing shelter, or paying another man an agreed upon rate for his work.  We have these rights and more in nature, and have therefore chosen to form governments not to be the source of these rights (for they already existed in advance of governments) but to provide protection of these rights against other men who might try to violate these rights through force or fraud....

These rights of speech and assembly and commerce and property shouldn't, therefore, be contingent on "citizenship".

For the same reasons, we owe the same due process to the civilian we snatched off the streets of Kabul and dumped into Guantanamo as to the housewife from Peoria.   The exception to this is things like voting and running for office, but these are just process issues associated with the artificial construct called government.  And welfare and the New Deal screws a lot of this up, but that is discussed at my post linked above.

Interestingly, most Conservatives would say that they agree with this proposition, that rights flow from our humanity and not from the government.  They would also generally oppose government licensing of all sorts of activities.  But here we have a case where conservatives are arguing that not only some limited commerce rights, but the full package of civil rights, are lost without a certain piece of paper from the government.

Many more immigration posts here.

It has become an increasingly common practice for companies that are making calls, say from a customer service center or the accounts receivables department, to use a computer auto-dialer.  If the customer picks up, they give the customer a recorded message to hold for a real person with an important message.  Sometimes the holds can last a while.  The idea is that the company is not paying people to waste time waiting for people to pick up, or worse, not to pick up.

I despise this practice.  The implicit assumption is that the time of the folks in their call center is more valuable than mine, such that it is better that I hold rather than their employees waste one second of time.  Well, all you companies who do this (Do you hear me Frito-Lay?  Coca-Cola?) are never going to get me, because I hang up the microsecond I get a recorded message.  I would do this even if I was sure it was a real business call, because I find the implicit assumptions insulting, but I am even faster to hang up now that telemarketers have latched onto this practice.

from the AZ Republic:

A Yale University student is suing US Airways for $1 million because of the loss of a video game system he claims was taken from his luggage.

Ohio resident Jesse Maiman, 21, claims his Xbox 360 console was taken from his bag during a December flight from New Haven, Conn. to Cincinnati.

He is suing for $1,700 for the video game system and for the maximum damages allowable by law, or $1 million.

You can read the article all day and you will not find any extenuating circumstances to justify this arbitrarily absurd number.   Even $1,700 for the game system itself is absurd.  One hour of legal time on this would be worth more than the machine.

Immigration Explorer at the NY Times.  Dynamic map of US immigration and sources of immigration over the last 120 years.

Via Jim Kingsdale:

Since PHEV's [plugin hybrid electric vehicles] can have so much impact on both the energy investment outlook and national security, I follow with some interest the news about their likely availability.  Recently a picture is starting to emerge.  It is not positive for American car companies, of which G.M.'s Volt is the poster child.  This is not totally surprising given G.M.'s proven history of incompetence.

We know that the Volt's battery is so expensive that G.M. proposes to sell the car for $40,000 - a price that would eliminate most buyers.  And even with such a high price G.M. promises they would lose money on every vehicle.  So, as I've previously written, the Volt may well be more of a political strategy for G.M. than a likely transportation solution.   Now a new study by Carnegie Mellon University says the design of the Volt's propulsion system is inherently sub-optimal and uneconomical - "not cost effective in any scenario" in the words of the study.

The reason is quite obvious once you think about it.  G.M. designed the Volt battery to go 40 miles on a charge because, they "reasoned", some 90% of all drivers go no more than 40 miles in a day.  What Carnegie Mellon points out is that the average driver goes less than 20 miles in a day.  Therefore the Volt's battery is twice as large as necessary for some 50% of drivers .  Since battery weight and cost are the prime determinants of a PHEV's cost-effectiveness, the Volt battery is about twice as large as is economically practical for most drivers.

Here's how the report put it: "The Carnegie Mellon study, conducted by engineers from three different departments, constructed computer simulation models to determine the impact of additional batteries on fuel consumption and cost and greenhouse gas emissions over a range of charging frequencies.  It found that small-capacity plug-ins that get less than 20 miles per charge are more efficient than conventional hybrids. And it said that large capacity hybrids like the Volt that go 40 miles or further on a charge are never cost-effective, because the batteries cost and weigh too much.  A car with the Volt's range, according to the study, would also be extremely uneconomical traveling fewer miles as it hauls around battery capacity it doesn't need."

So much for the Volt.  Ciao - and lets hope the U.S. govt. is smart enough not to fall for the Volt's fools-gold as an excuse to keep G.M., a chronically mismanaged company, from enjoying the cleansing benefits of bankruptcy.  Among which benefits might be new management.

Thomas Sowell, via Carpe Diem:

The current political stampede to stop mortgage foreclosures proceeds as if foreclosures are just something that strikes people like a bolt of lightning from the blue-- and as if the people facing foreclosures are the only people that matter.
What if the foreclosures are not stopped? Will millions of homes just sit empty? Or will new people move into those homes, now selling for lower prices-- prices perhaps more within the means of the new occupants?

The same politicians who have been talking about a need for "affordable housing" for years are now suddenly alarmed that home prices are falling. How can housing become more affordable unless prices fall?

The political meaning of "affordable housing" is housing that is made more affordable by politicians intervening to create government subsidies, rent control or other gimmicks for which politicians can take credit. Affordable housing produced by market forces provides no benefit to politicians and has no attraction for them.

In the wake of the housing debacle in California, more people are buying less expensive homes, making bigger down payments, and staying away from "creative" and risky financing (see chart above). It is amazing how fast people learn when they are not insulated from the consequences of their decisions.

Tigerhawk asks:

If the CEOs of banks that take federal money, including those who took federal money only after Hank Paulsen essentially ordered them, have their salary capped at $500,000, under what principle do we allow universities that request federal funding to pay their own presidents much more money? Is there a rational basis for the distinction, or is it simply that the Democrats do not want to go after one of their most important constituents?

Forget about the university presidents, what about the football coaches?  One Hundred Billion dollar banks can't pay their CEO's or deal-makers more than $500,000, but state-run football programs can pay their coaches $ 4 million dollars?

I have been taking a series of courses on reformation-era Europe. Having just completed a general course on the Reformation, I am now completing a course on the Tudors and Stuarts in England, a period of time whose history is highly colored by the Reformation.

One of the issues that Protestants had with the Catholic Church (and later with the Anglican Church) was the church hierarchy. Of course, the Pope always came in for criticism (this probably being too mild a word for burning in effigy) by English protestants, but bishops and other elements of church hierarchy also came in for attack. In fact, the Presbyterians, probably the largest non-Anglican Protestant sect in 17th century England, took their name from the presbyters, who were essentially a council of laymen or elders who ran the church (as an alternative to Popes and bishops and such).

One of the difficult issues for the modern American mind to wrap around is the state involvement with religion on these times. Taking just this one issue of church organization and hierarchy, we see a dizzying back and forth in the Anglican Church as a result of swings in religious affiliation and outlook of the monarch and the Parliament. Bishops get tossed from the Anglican Church, then Bishops are reinstated, then they get tossed, and then they get reinstated.   All this punctuated by the occasional execution or locking in the Tower of the odd bishop.  It was deadly serious at the time, but seems a silly pursuit for government today.

Except, I guess, in Connecticut, where the spirit of Oliver Cromwell and the Roundheads is alive and well. Because, apparently, the state legislature has introduced a bill to remove priests and bishops from the management of Catholic Church corporations and insist on a council of laymen instead. Weird how history repeats itself, even when you thought it was most unlikely to do so.

Disclosure: I am not Catholic, nor Presbyterian, nor particularly religious.

They get sold here.

Also, don't miss the chance to own your own 727 jet for just $45,000.

Why?  Because we don't have daylight savings time.  I have argued for years that DST may have made sense when electricity demand was driven by lighting, but air conditioning actually reverses the equation, putting people at home during more of the cooling hours.   The Liberty Papers links to a study with similar results:

Our main finding is that"”contrary to the policy's intent"”DST increases residential electricity demand. Estimates of the overall increase are approximately 1 percent, but we find that the effect is not constant throughout the DST period. DST causes the greatest increase in electricity consumption in the fall, when estimates range between 2 and 4 percent. These findings are consistent with simulation results that point to a tradeoff between reducing demand for lighting and increasing demand for heating and cooling. We estimate a cost of increased electricity bills to Indiana households of $9 million per year. We also estimate social costs of increased pollution emissions that range from $1.7 to $5.5 million per year. Finally, we argue that the effect is likely to be even stronger in other regions of the United States.

I am not an economist, so anyone who invests any money on my prognostications is insane.   But here is my prediction, just for fun.

I think that if you fly down below the hysteria, there is good reason to believe that somewhere in February or early March we passed the bottom, in terms of the rate of job losses and output reductions.  Job losses will continue for several months, but at a declining pace, with the low point in employment occurring sometime in the late 2nd or early third quarter.  I am about 50/50 as to whether the unemployment rate will peak in the high eights or low nines.  We will see real recovery beginning in the third quarter.

I am a tad less confident in this only because we have dragged out a number of reckonings (e.g. GM, some banks, some mortgages, etc) which should have occurred last year, which may delay the recovery somewhat vs. if we had just taken our medicine sooner.  The big wild card, of course, is what effect massive government borrowing and tax increases will have on the speed of the recovery, and, now that I have seen this chart, on inflation.

Just to show I am putting my money where my mouth is, I moved much of my savings to equities last Thursday.

It is a well-known fact that women, on average, make less than men in the US work force.  Whether that appalls you depends a bit on your political motivation, as well as your facility and honesty with data analysis.  The raw numbers tend to show a large gap, while numbers corrected for things like years in the work force, education, and industry selection tend to show a smaller gap.

A big driver of gender wage disparities is the industry in which males and females tend to work.  Male preference industries like construction and heavy manufacturing tend to pay more than female preference industries like health care and education  (yes, I know we could argue all day as to whether these industries are truly a preference or the result of some implicit cultural direction, but I am not going to touch that today).

But one thing I have never thought about, or heard discussed, is the issue of risk.  When we discuss securities and investments, we often talk about income in the context of risk -- the more risk one takes on, the higher the average returns one typically gets.  It may be, though, that we should talk about employment income in the context of risk as well.  After all, if one were looking at two fairly similar jobs, except the chance of layoff or job loss were much higher in one than the other, then one would expect the job with more job loss risk to pay more.

In this context, recent job loss numbers by gender are interesting  (a story, by the way, Mark Perry has been on for months but the MSM is only just now waddling in to notice).

This graph of the US monetary supply is un-freaking-believeable.  Someone please tell me that this is a data error or something.  I guess this is one way to bail out borrowers -- if you create enough inflation, then the real value of principle owed drops.  Sure looks like it is time to borrow long at fixed rates.  Are real interest rates about to go negative?

Via Phil Miller

By the way, this really gives the lie to the whole government stimulus effort.  They may be moving large amounts of money around, but they can't create value, and in the absence of real value creation all they are doing is inflating the currency.

Via Reason:

Obama has promised that no family earning less than $250,000 per year will pay one dime in higher taxes. But the companies that have to pay for permits will pass that cost on to consumers in the form of higher prices for electricity and other products. So these families will pay $645 billion, only some of which will be returned in the form of lower income taxes, for a system that is terribly inefficient.

The solution, of course, would be a straight-forward tax on carbon, the proceeds to be refunded through the payroll tax system. But unlike the hidden tax of cap-and-trade, a carbon tax is out there for the voters to see. And given the choice between a stealthy tax and a visible tax, politicians will pick the former every time.

I found out today, the hard way, that Arizona has a law specifying exactly how a pool contract is to be paid for a pool construction or renovation job.  Yes, we sure would not want to leave it to individual choice and negotiation to determine contract terms.  The craziest part is that I am required, by law, to pay 100% of the cost of the job to the pool contractor before the gunite or finish coat of the pool is shot.  In other words, I must pay all of the contracted price before the job is complete with no hold back.

This is absolutely crazy.  I have never in my life not had a hold-back in a construction contract.  Three times  (all with my company) I have had contractors go bankrupt or disappear before the job is complete, in at least two cases leaving so much work unfinished that even the hold-back was not enough to cover the loss.   Typically, contractors bolt before the punch list is complete, and only the hold-back keeps them focused at all on finishing the job to my satisfaction.  I am not happy, particularly since Phoenix pool contractors are going bankrupt right and left in this economy.

This is yet another example where "regulation" in fact means "in the tank for favored industries that make campaign contributions."

From a post at the Mises blog on inauguration ticket distribution:

Senator Dianne Feinstein passed legislation through the Senate that criminalized the sale of inaugural tickets. In addition, Feinstein secured voluntary agreements from online auction websites such as eBay to ban ticket resale.

"These tickets are supposed to be free for the people," said Feinstein. "Nobody should have to pay for their tickets."

However, many did pay for a ticket, but the payment was to the government. The Presidential Inaugural Committee (PIC), of which Feinstein is a member, distributed tickets in exchange for up to $50,000 in inaugural contributions.

Senator Feinstein's double standard is clever if you're a politician. If free people were able to sell their inaugural tickets, then they might not go to the politically appropriate authority, as deemed by Feinstein and her political cohorts.

I am sure it will come to a shock to all my readers that thousands of tickets meant to be distributed gratis to average citizens in fact were routed by Congresspersons to large donors, lobbyists, and political wheels.

Which of these spent more political contribution and lobbying money in the last election cycle:

• Two largest defense contractors
• Four largest oil companies
• Two largest teachers unions

Yes, it was the teachers.  I am sure it was for the kids, though.  This actually understates the teacher's efforts.  The corporate donations of the oil and defense companies are spread pretty evenly between both parties.  They are simply trying to buy access.  The teachers gave their money almost entirely to the Democrats.

Somthing that all-too-seldom gets attention -- when it comes to water pollution, most of the worst private offenders were brought in line decades ago  (at least for point sources, like a particular factory;  agriculture and runoff are still issues in some areas).  Many or even most of the worst water pollution offenders in the US are actually municipal authorities, who dump raw sewage into open waters.  I remember that when I lived in Boston, there was this digusting spot in the bay where the sewer pipe ended.  They sort of fixed the problem ..  by making the pipe longer to dump further out into the bay.

Even in the Bay Area in these environmentally sensitized times, some egregious environmental practices remain in place, with little public scrutiny.

It's bad enough that there are cancer-causing chemicals in the bay. And Marin recently had a 500,000-gallon sewage leak into the body of water. But did you know that when it rains, the area's sewage treatment plants are designed to overflow into the bay?

The leaky pipes in drainage systems take in more than the system can handle. In last week's storms, Richmond loosed 890,000 gallons of untreated water into the Bay, about 10 percent of which"”or 8,900 gallons"”was pure, unadulterated sewage.

You mean government exempts itself from its own rules?  No way!

The other day I was having a discussion with a smart, well-informed woman who tends to be a bell-weather for Democratic talking points.  When asked about the recession, I said something like this:

The story for banks, corporations, and people are all the same -- everyone has too much debt, everyone took on too much in expectation of things going up and up.  With flat or even down expectations, everyone is now trying to clean up their balance sheet.  They are spending less, building equity and reducing debt.  And the economy is going to slow as a result, no way around it.   I went on to say that I was not only opposed to the stimulus bill in particular, but I was offended that the government would try to interrupt this deleveraging process.  The government had essentially made the decision that if individuals won't spend, then the government will take their money in the form of taxes and spend for them.  And if no one wanted to have debt, the government would go about and take debt on in the name of everyone.

She responded that she thought it was ironic that after the government had worked so hard for so many years to tell people to save more, and that they are only doing it now when it was counter-productive.

Forget for now the whole Keynsian "saving is counter-productive" argument, and focus for a minute on the government communication effort around individual debt.  There is no doubt that to the extent that the government has verbally communicated on individual debt, is has generally been to encourage savings and not take on expensive consumer debt.

But verbal communications are generally the least effective form of communication in the economy (Ralph Nader and his theory that we are all zombies to corporate marketing notwithstanding).  In fact, markets don't communicate via words.  They commucate with price.  Prices are the giant semaphores of the free market, and they are extraordinarily powerful communication tools.  Do people drive less or turn down their thermostats after Jimmy Carter gives a fireside chat about energy conservation in his little cardigan sweater?  No.  People conserve more when prices go up.   When gas prices go up, prices are telling consumers that gas is now scarcer vis a vis demand, and it may be time to conserve.  The same goes for every other thing we buy.  In fact, the only things we actually run out of  (water in a drought, electricity during summer brownouts, gasoline in the early 1970s) are all commodities where the government interfered with and/or severely restricted the ability of retail prices to move with demand.  In these cases, the government tends to substitute public exhortations for pricing signals  (for example, you can't escape water use guilt ads in California).  But these never work as well.

It is the same with personal savings.  The government in its verbal communications may have been saying to save, but what were its actions saying?  The Federal Reserve followed a long-term policy over the last decade of keeping interst rates artificially low.  Low interest rates send a clear and powerful dual message -- save less (because the returns are low) and borrow more (because borrowing is relatively cheap).  Federal tax breaks from mortgage debt and  Federal programs to provide looser credit with lower down payments to less qualified buyers made debt even more attractive vs. savings.  And numerous federal programs helped encourage home buying, while local government zoning and anti-growth ordinances helped keep home prices going up and up.  Every action the government took said "save less, take on more debt."  Is it any wonder their actual verbal communication was ignored?

Why is this concept so hard to get across - averages do not reflect individuals.  Individuals move up and down through the averages all the time, such that the "rich" and "poor" today are often circumstantially different people than they were 10 or 20 years ago.  But Kevin Drum and the left will never get it

Over the past three decades, these families have seen their incomes double and triple while the rest of the country stagnated.

Repeat after me -- the families in the 1986 rich are NOT the same families in the 2006 rich.  Some overlap, of course, but many do not.

Even if all the averages were stagnant, it could be very possible for every individual in the average to be doing better year over year but have the averages stagnate.  For one, individuals typically gain income as they age and gain experience.  The reason the averages don't move with them is that new workers, both teenagers and poor immigrants, move onto the list from outside, often at the bottom.  If you look at the same group of people today and ten years ago  (therefore leaving out new entrants into the work force over that period and what they do to the averages) you will find them doing much better.

And I thought this was funny:

by getting the centrist optics right, Obama has been able to move more boldly than he otherwise could have.  Republicans who paint him as the second coming of Karl Marx just look like idiots these days.

Note that he is not arguing Obama is not acting like Karl Marx, just that he is successfully avoiding being percieved as such.  Boy, that sure must be a real communications achievement for a man who gets so much tough scrutiny and skepticism from the media ;=)

By the way, does anyone else find it weird that the Democrats have decided to do battle with Ruch Limbaugh, rather than any actual, real Republic elected official.  Is this a Democratic strategy, to find someone they can safely demonize without political power to strike back, or a Republican strategy to use Limbaugh as a stalking horse to save them from taking tough opposition positions?

Once upon a time, most entrepreneurs organized their business as what is called a C-Corporation.  Most of the publicly traded corporations you can think of, from Avon to Zenith, are essentially C-Corporations.   Such corporations had any number of advantages, but they had (and still have) one big, big disadvantage.  C-Corporations paid federal income taxes at the corporate tax rates.  And then, if after-tax profits were dividended to owners, those dividends would be taxed again.  This double taxation of earnings is something Congress talks about all the time, but never does much about.  And the implicit government tax subsidy for debt over equity does a lot to explain various waves of merger and LBO activity we have seen since the 1980's.

Now, entrepreneurs were not stupid.  No one wants their hard-earned income taxed twice.   So, entrepreneurs who owned C-corps would do one of two things.  One approach was to have the owner pay himself a large salary, thus reducing corporate income and converting the dividends to more tax-advantaged wages.  The other approach was to have the company issue the owner loans rather than dividends.  I have seen many closely-held C-corps with huge accumulated corporate loans to their owners, which may only be unwound years or decades later when the company is sold or liquidated and profits can be taken out a lower capital gains rates.

Over the last 20 years or so, a new corporate vehicle called the sub-chapter S or S-corp has become popular.  With a few limitations, the S-corp offers all the same liability protections as a C-corp, with a big tax advantage:  S-corps are not subject to corporate taxes -- corporate profits of the owners flow straight through the corporation to the owners' 1040 personal returns, eliminating any double taxation  (Limited Liability Corps or LLC's operate roughly the same, but with slightly different rules).  For this reason they are also sometimes called pass-through entities.

It is interesting to note something I never hear mentioned when discussing aggregate personal income data, which is that the switch over time from entrepreneurs using the C-corp to the S-corp creates something of a discontinuity in the income data.  Thirty years ago, much of the annual corporate earnings, and all of the retained earnings, of business owners would not show up in the IRS personal income data  -- it shows up as corporate income, but not personal income.  Today, nearly all of that corporate income of small business owners shows up as regular income on personal tax returns.  Absent any other changes in income trends, business owners as a group will appear to have large increases in taxable income, when in fact economically nothing may have changed save the corporate structures of their businesses.

But the real point I want to make is that all of the retained income and potential investment capital of a small business using S-corps or LLCs (which is nearly everyone nowadays)  shows up on the owner's personal income tax returns.  Let's hypothesize an entrepreneur whose S-corp earns $250,000 in profits after-tax.  Let's say he typically puts $150,000 of that to savings and living expenses, and the other $100,000 is reinvested in the growth and/or productivity of the business.  Now let's look at proposed increases in upper income tax brackets.  With these higher proposed rates, the business owner will have less than $250,000 in after tax income.  Let's say it goes down to $220,000.  Odds are that the owner will retain his lifestyle (he will as a minimum still have the same size mortgage and school and other payments).  The slack, then, comes out of the retained earnings.  Essentially, higher taxes result in less investment capital.  In fact, we can see an increased tax rate on wealthier entrepreneurs and business owners could easily result in a dollar for dollar reduction in business investment among small businesses, acknowledged to be the place where most all new jobs are created.

I think readers know that I don't fully accept the Obama administration's analysis of this recession.  However, let's take them at face value for a moment.  They are concerned that savings of average people won't currently translate into more business investment, as they fear the credit crisis causes banks to hold the savings rather than re-lend it.  If this were the case, then it would mean that as a policy, we would want to preferentially route tax savings to entrepreneurs and business owners who invest their own money directly, because their is no intermediary of a bank to interfere with the process.  But in fact, this is exactly opposite of what the Obama administration is doing through tax policy, instead taking away the investment capital and retained earnings of entrepreneurs through higher taxes.

This is the European-style corporate state in a nutshell.  In Europe, entrepreneurship is made extraordinarily difficult.  This is part of the deal that the political elite have with the largest companies in their countries -- we will protect you from potential new competitors, we will bail you out when times get tough, and you in turn will support us politicians.  One only has to look at the turnover of the top 30 companies in the US since 1970 vs. the top 30 in Germany or France to see this at work.  Political turnover is even slower, as an elite group of ministers run the country, almost no matter the party voted in office.  The economy as a whole suffers, but for the top 1000 or so men in power, the system works to protect their position, be it in government or in the largest industries.

And now we bring this system to the US.  Small business owners and entrepreneurs are punished with higher taxes in order to bail out politically powerful but failing companies like GM or Citicorp.  Welcome to America, the new corporate state.

Postscript: A lot of folks erroneously associate corporate states with right-wing governments, and certainly that was the case in Mussolini's Italy.  But the closest brush the US has ever had with such a system (prior to today) was implemented by leftish FDR via the National Industrial Recovery Act, and governments of both left and right have supported the corporate state approach of France and Germany.  In Britain, it was the left that built the corporate state and the right, under Thatcher, who tore it down.

I demonstrated a while back from the CBO report that less than 7% of the 2009-2010 spending was infrastructure in the stimulus bill.  In fact, this percentage barely increases past 2010.  Below is a piece of a Washington Post graphic (whole chart here).  I have colored orange the areas that include infrastructure.

I have generously included all of the highway, transportation, interior, energy, water, Corps of Engineers, school renovation and parks spending, though my bet is that a bunch of that never turns into steel and concrete.  I have also included some of the rural and urban development money.  I have excluded facilities that are by bureaucrats for bureaucrats, such as improvements in federal office buildings.  I have tried to keep things proportional, but note, as always, actual spending does not match the rhetoric.  For example, you might think that the school spending, from Obama's speeches, was all infrastructure, but in fact only $20 out of over $90 billion is for school renovation.  The rest is for  ... something or other.