That is why it was all the more bewildering to have Sen. Dodd come to the gymnasium of the Cornwall Consolidated School on a beautiful spring afternoon for two hours and somehow manage not to utter a single word about the controversies surrounding his role as chairman of the Senate Banking Committee.
These are not exactly state secrets. There was the widely reported sweetheart or VIP mortgage loan from Countrywide Financial to the senator as well as the six-figure campaign contributions from the American Insurance Group whose executives, according to language Sen. Dodd wrote into a bailout bill, were entitled to large bonuses paid for with our tax dollars.
The organizer and moderator of Saturday’s forum, Harriet Dorsen, a member of the local Democratic Party committee, told the Lakeville Journal newspaper last week, “I think there are going to be a lot of tough questions.”
There weren’t. They were all softballs. Instead of the usual give and take, with citizens speaking their minds, all the questions had to be written out in advance on index cards and then submitted to the moderators. A contingent from the Lakeville Journal (including my wife, Cynthia, who is the newspaper’s executive editor) was on hand, armed with probing questions.
Category: Politics
What I Learned in My 16 Years on the Tax BeatWhat I Learned in My 16 Years on the Tax Beat
Nearly 40 years ago, as a recent college graduate, I made a painful discovery: I couldn’t figure out how to do my own federal income-tax return.
That was embarrassing, and it made me wonder what other Americans do. So I wrote my first major tax story: I asked five different tax-preparation services in the Atlanta area to prepare returns for a family of four with fairly typical finances. The results: At one extreme, a tax expert said the family was entitled to a federal income-tax refund of $652.04. But another said the family owed $141 — a difference of $793.04.
That experience made me feel somewhat less dumb, but the article didn’t have much impact: Since then, our tax system has evolved from a mess to a nightmare. The pace of change has accelerated in recent decades as lawmakers increasingly have tried to use tax laws to reward or punish conduct. The number of pages in the CCH Standard Federal Tax Reporter, which records tax law, regulations and related material, has soared to 70,320 from 26,300 in 1984.
More than 60% of all individual returns are signed by professional preparers, up from 46% in the mid-1980s. Joel Slemrod, an economics professor at the University of Michigan, estimates that the time and money individuals spend on tax compliance now comes to about $90 billion a year.
McCain in Hong Kong & Vietnam
His performance in Vietnam was particularly intriguing. He knows the country well and is treated almost as a celebrity – a reflection of both the quirks of history, and his moral and political courage, qualities that helped propel his White House run.
Senator McCain spent five years as a prisoner of war in Hanoi at the height of the Vietnam conflict, having been shot down and crashing his jet fighter into a lake on the edge of the capital. His vivid descriptions of being tortured – he refused offers of early release as the son of a leading admiral – did not stop his efforts years later. He not only returned to enemy territory but, as a prominent and hawkish Republican, played a key role through the late 1980s and 1990s in America’s long delayed reconciliation and normalisation with its victorious opponent.
In his political twilight, Senator McCain could be forgiven for resting easy during his first return to the Vietnamese capital in five years. Despite political and social differences, the two countries are open to trade and investment, and have taken the first steps to a military relationship – a pipe dream just a decade ago.
He remains restless, however. In a speech to the country’s diplomatic academy, he passionately urged both nations to get even closer. “Today, the hardest work of normalisation is behind us. The time has come, I believe, for us to move from the normalisation of our ties commensurate with Vietnam’s rising status in the region and the world. We should not simply rest on our laurels and allow the relationship to plateau. It is time to take the next step.”
Pirates and the CIA: What would Thomas Jefferson have done?
“It was the sixth such attack this week and one of 66 this year by Somali pirates, a collection of shrewd businessmen and daring opportunists who have pulled off a series of spectacular seizures using high- and low-tech gear, from satellite phones and rocket-propelled grenades to battered wooden skiffs and rickety ladders,” the Washington Post reported today about the attack on a U.S.-operated container ship. “In the past year, their booty has included the MV Faina, a Ukrainian ship loaded with tanks and antiaircraft guns, and the MV Sirius Star, a 300,000-ton, 1,000-foot-long Saudi oil tanker that is the largest ship to be seized in history.”
For months, a former senior CIA officer has been telling me that pirate activity off Somalia was a problem that needed to be aggressively dealt with. By chance, I had a meeting with him yesterday as the Maersk Alabama hijacking was unfolding. Here’s what he had to say (he updated his remarks today):
The American response to date has been incredibly naïve and woefully ineffective. Now, predictably, you have an American taken hostage. All of which should have been prevented. You’ve got a failed state in Somalia and pirates operating in an area of ocean that is larger than the state of Texas but we’ve been trying to deal with this from the ocean side, by sending the navy and with a limited application of technology, such as satellites and drones. We can’t afford to patrol that big a piece of the ocean; it’s too expensive to leave a naval task force out there.
How Bailouts Can Butcher Capitlism
One unhappy hallmark of the Great Recession is a dramatic spike in financial distress. Moody’s predicts that the default rate on corporate debt–which helps foretell bankruptcies–will be three times higher this year than in 2008. Home foreclosures are already at record highs, and going higher. Defaults on credit cards and other consumer debt will crest right behind mortgages.
The Obama administration is on the case, bailing out banks and homeowners and aiding dozens of industries either directly, through a financial-rescue scheme that could top $2 trillion, or indirectly, through the $787 billion stimulus bill. Automakers, furniture companies, real estate developers, and even porn magnates have their hands out.
[See a tally of the bailout efforts so far.]
Those efforts ought to help soften a sharp recession. But the unprecedented aid to the private sector may also unleash new problems, the way antibiotics have generated stronger strains of bacteria. “There’s something fundamental about the need for failure,” says Syd Finkelstein, a professor at Dartmouth’s Tuck School of Business and author of Think Again: Why Good Leaders Make Bad Decisions and How to Keep It From Happening to You. “We’re tinkering with the genetic DNA of a capitalist society.”
The Quiet Coup
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
Fed & Treasury: Putting off Hard Choices with Easy Money (and Probable Chaos)
Brief remark – from early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 7% of the purchase price, with the TARP matching that amount – the remainder being “non-recourse” financing from the Fed and FDIC. This essentially implies that the government would grant bidders a put option against 86% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats.
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Last week, the Federal Reserve announced its intention to purchase a trillion dollars worth of Treasury debt by creating the little pieces of paper in your pocket that have “Federal Reserve Note” inscribed at the top. In effect, the Fed intends to monetize the Treasury debt in an amount that exceeds the entire pre-2008 monetary base of the United States.
Apparently, the Fed believes that absorbing part of the massively expanding government debt and maybe lowering long-term rates by a fraction of a percentage point will increase the capacity and incentive of the markets to purchase risky and toxic debt. Bernanke evidently believes that the choice between a default-free investment and one that is entirely open to principal loss comes down to a few basis points in interest. Even now, the expansion of federal spending as a fraction of GDP has clear inflationary implications looking a few years out, so any expectation that long-term Treasury yields will fall in response to the Fed’s buying must be coupled with the belief that investors will ignore those inflation risks.
The Political Class & Taxes, More
Oh-oh, looks like more tax troubles for another Democrat in Washington.
California’s Rep. Pete Stark, a senior House Democrat who helps write the nation’s tax laws, has been claiming a $1.7 million Maryland home as his principal residence in recent years, although he represents the Golden State’s 13th District on the east side of San Francisco Bay.
The 77-year-old Stark has saved himself nearly $3,900 in state and county taxes by claiming the six-acre waterfront estate as his principal residence, according to an investigation by Bloomberg News.
Maryland law allows the tax break only to those residences used “for the legal purposes of voting, obtaining a driver’s license, and filing income tax returns.”
Notified of the discovery, a state official said an investigation would be launched.
How Rich Countries Die
This is a book report on The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, by Mancur Olson. There isn’t a whole lot about how nations pulled themselves out of their medieval stagnation (see A Farewell to Alms for that), so a better title for this still-in-print book from 1982 would be “How Rich Countries Die.”
Table 1.1 shows annual rates of growth in per-capita GDP for each of three decades, the 1950s, 60s, and 70s, in a range of rich countries. Contrary to our perception of the U.S. as a growth dynamo and the Europeans as sclerotic, France and Germany tremendously outperformed the U.S., as did most of the other countries. If we have grown larger it is because our population has expanded much faster than the European countries.
Chapter 2 summarizes Olson’s groundbreaking work on how interest groups work to reduce a society’s efficiency and GDP. Some of this work seems obvious in retrospect and indeed Adam Smith noted that businessmen rarely met without conspiring against the public interest. There are a handful of automobile producers and millions of automobile consumers. It makes sense for an automobile company, acting individually, to lobby Congress for tariffs. The company will reap 20-40 percent of the benefits of the tariff. It doesn’t make sense for an individual consumer, however, to lobby Congress. It will cost him millions of dollars to lobby against Congress and preventing the tariff will save him only a few thousand dollars on his next car purchase. The economy suffers because some resources that would have been put to productive use are instead hanging around Washington and because cars are more expensive than they should be.
Slaughtering sacred cows: it’s the turn of the unsecured creditors now
Why are the unsecured creditors of banks and quasi-banks like AIG deemed too precious to take a hit or a haircut since Lehman Brothers went down? From the point of view of fairness they ought to have their heads on the block. It was they who funded the excessive leverage and risk-taking of banks and shadow banks. From the point of view of minimizing moral hazard – incentives for future excessive risk taking – it is essential that they pay the price for their past bad lending and investment decisions. We are playing a repeated game. Reputation matters.
Three arguments for saving the unworthy hides of the unsecured creditors are commonly presented: