Economics 101

The Congressional Budget Office, in its role as the God of Economic & Budget Estimates in Washington, DC, has done the unthinkable- it has concluded that putting a tax on the big banks that accepted government money would “invariably be borne to varying degrees by an institution’s customers, employees, and investors.” In non-Beltway speak: Duh.

As a conservative, I am very much against governments playing favorites through subsidies, bailouts etc. However, we must accept the reality that TARP passed. As such, I would note the following: the big banks have paid back a large portion of their borrowed funds. It is the government-owned companies (General Motors, Chrysler, Fannie Mae and Freddie Mac) which are failing to pay back what they owe.

I managed to find the CBO letter, which was sent to Senator Charles Grassley (R-IA) yesterday. According to the letter (Emphasis mine):

What is the overlap between firms that would pay the proposed fee and firms that generated losses for the TARP? For the most part, the firms paying the fee would not be those that are directly responsible for losses realized by the TARP. Some firms subject to the fee are expected to generate such losses, including the American International Group, GMAC Financial Services, and CIT Group (which filed for bankruptcy protection on November 1, 2009). However, the fee would not apply to firms in the automotive industry, which account for $47 billion of the program’s estimated total cost of $99 billion. Other firms that would be subject to the fee have either paid back all of the funds received from the TARP or are current on their repayment schedule and unlikely to generate losses from their participation in the program. However, all of the institutions that might be covered by the fee benefited to varying degrees from the program’s contribution toward stabilizing the nation’s financial system and overall economy.

In defending the tax, Think Progress- which had the link to the letter- made some excellent points rebutting conservative arguments cheering the CBO’s conclusions. They include, but are not limited to, the fact that the letter states smaller banks would have a leg up on their larger competitors because the tax does not go after them, and that the tax’s cost could be offset by lower employee compensation. (Read: executives could be paid less.) Additionally, something I noticed was that CBO said the economic impact would be minimal.

Think Progress and other liberal people and organizations will pounce upon the points noted above, and others, but when it comes down to it, the tax will not hurt the business’ executives, the “if we had to be honest” target of the tax-supporting Democrats. They will hurt, as the CBO said, consumers, investors and employees. It’s economics 101. Unfortunately, Democrats fail to understand this.

Ed Morrissey was kind enough to extrapolate this basic concept to other government policy proposals Democrats sometimes don’t understand- I’ll let him explain them:

Let’s make sure we extrapolate this for everyone onto other public policies, while we’re at it:

• Increasing the minimum wage forces businesses to pay more for labor.  Either they hire fewer people or they raise prices — which undermines the buying power of those who make the least amount of money.
• A carbon tax or cap-and-trade bill will force energy producers to either raise prices to its customers or scale back power production, which will force businesses to either raise prices or cut back production, which will mean more cost or more scarcity for consumers — both of which are inflationary.
• Higher fees on insurers, medical-device manufacturers, and other goods and services in the health-care industry mean higher prices for consumers in the form of increased premiums or in greater scarcity as suppliers fail to come to market.

Imposing higher costs on business means higher costs for consumers.  It means fewer jobs, less consumer choice, less innovation, and economic decline.  I’d be surprised if the CBO analysis itself doesn’t end with the word duh in the last sentence.

To summarize this post:

What Democrats should be saying after this letter was publicized:

What Republicans (and the CBO) are saying to Democrats about their intent regarding the tax after the CBO letter:

GMAC “Needs” More Taxpayer Help

American taxpayers, who have already bailed out GMAC (a consumer finance company partially owned by General Motors) twice, may be hocking over more money very soon. The company is in talks with the government to get the money without letting the government have too much control of the company. According to The Wall Street Journal, at least $2.8 billion is likely to be injected. GMAC is formerly the financial holdings arm of General Motors, and is currently a bank holding company.

As a libertarian-leaning conservative, I’m all for government not having control of much. However, this stance by GMAC is going too far. If they wants another bailout, the executives will have to eat some humble pie and stop pretending they have a leg to stand on with negotiations. Despite what Michigan Democratic Senator Debbie Stabenow said last year, the $25 billion that slipped under the radar during the TARP debate wasn’t small, nor was the bailout GMAC received last December from the Bush adminstration. GMAC should have two choices: government control or bankruptcy.

I say this for two reasons; first, the board members and executive leaders of the company would be in serious danger of losing their jobs if the government took over. Thus, they would be hesitant to let the government step in. Additionally, since the government has (hopefully) learned its lesson about specifying payments in contracts with companies being bailed out, after the AIG bonus debacle this past spring, their pay cuts and bonus cuts would be absolutely substantial IF they were allowed to stay on. As George Will said in a speech I saw last year, executives should sign a contract stating they make no more money than the President of The United States during the time they are using American taxpayer money.

The second reason only two choices should be offered is that if the executives and board members cannot push their egos down enough to accept full government takeover and readjustment, bankruptcy would allow specialization of resources to kick in. At that point, Toyota, Honda, Ford and the other auto companies (and their respective loan organizations) that have actually done a market-satisfactory job of making vehicles would immediately receive the market share opened by a GMAC bankruptcy, given the influence the company has on the automobile industry. This would decrease the amount of resources- including taxpayer money- used to make cars in this country substantially, and allow greater economic growth to take place as the unused resources are used elsewhere. In what is being called “The Great Recession,” this could be a great boon to hard-working Americans as well as Americans who want to be hard-working but can’t due to the recessionary times.

Personally, I prefer bankruptcy for businesses that can’t succeed. Let’s put the pressure on our legislators to do the same.