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Could Romney Give Us Tax Reform Without Even Getting Nominated?

The President's own National Commission on Fiscal Responsibility and Reform recommended a much flatter tax structure and elimination of most tax deductions and credits in their draft report. The President – and almost everyone else – ignored their recommendation. Ex-candidate Herman Cain made a 9-9-9 flat tax almost famous before he sunk from view. Ron Paul advocates a very flat income tax – zero . The other Republican candidates have advocated flatter taxes without much fervor. But Mitt Romney's incredible political miscalculation in attempting to withhold the fact that he pays only 15% of his income in taxes may have actually given us a leg up on tax reform.

The fact is that we do have a somewhat progressive federal income tax. The 40% of families with the lowest incomes don't pay any income tax at all as a group. The rich AS A WHOLE pay a higher rate than the rest of us. But the statistics obscure huge individual variances in taxes paid because of a tax system riddled with loopholes and special exceptions – like the so-called carried interest deduction and concessionary rate for capital gains, which probably are the reasons why Romney paid such a low rate (see a great post by my friend Fred Wilson who benefits from these concessions but argues they should be eliminated).

These exceptions are not only unfair – they also corrupt government. Politicians get campaign contributions (at least) from those who benefit from the loopholes. Working to add loopholes or defending the ones that are already there attracts lobbyists with full purses like… chose your simile. Individual loopholes don't attract much opposition since the pain of giving a few people a break is spread over the rest of us taxpayers.

Often loopholes are justified as tipping the economic scales in favor of some perceived common good. Unless you're a renter or take the standard deduction, you probably like the deduction for your home mortgage – realtors certainly do. But how do you feel about the tax credit for corny ethanol production, which was just allowed to expire this year? It managed to simultaneously drive up the price of energy and food, while probably doing some environmental damage along the way. Besides leading to bad government by providing congresspeople with a bottomless pit of favors to give out or protect in return for campaign support, loopholes are bad economic policy.

Here are some numbers from the Congressional Budget Office for 2007 (latest available, unfortunately, since some of this must have changed in the recession):











top 10%

top 1%

Individual Income










Social Insurance































Almost all income including interest on tax free bonds for the well-to-do and cash benefits for the not-well-to-do is counted. Note that, on the average, families in the lower two quintiles (low income 40% ) actually paid negative income tax – as groups they received more in earned income, child care, and other tax credits than they paid in income tax. However, people in these two quintiles DID pay a healthy share of their small incomes for social insurance including social security and Medicare (the table properly attributes the payments made by employers to the employees). The wealthy paid a somewhat higher share of their income in income tax; the top 20% paid more than twice the rate of INCOME tax that the 20% immediately below them paid; the top 1% pay 19%, more than the top 10% as a whole who pay only 16.2% (had enough percentages yet?). For those concerned with tax equality (not what this post is about), the top 1% had 19.4% of all pretax income in 2007, just as the occupiers suspect, but, on the other hand, paid 39.5% of all individual income tax.

Takeaway, statistically, we have a somewhat progressive tax system. But loopholes make it unfair.

Let's assume, for this post, that the current actual progressivity is fair. We should then collect these rates from various income groups with a straightforward tax on all income WITHOUT LOOPHOLES. The nominal tax rates would be lower, of course, but the money collected from each group would be the same.

The benefits to the country of a tax system without loopholes would be huge.

  1. Fairness, fair, fairness. People with the same incomes would pay the same taxes.
  2. Actual visibility into how much people are paying according to level of income.
  3. A huge decrease in the cost of complexity – (not great for some accountants and lawyers).
  4. A huge increase in efficiency when investments are made because of anticipated profit rather than anticipated tax benefit.
  5. Eliminating the opportunity for congresspeople to sell tax breaks in return for contributions.
  6. Lower rates make the special treatments unnecessary. If the top rate is 20%, it's hard to argue that capital gains or dividends need a special 15% rate. That argument is more compelling (although I still don't believe it) when marginal rates are north of 30%.

Maybe Romney's embarrassment will force him to advocate closing all loopholes for everyone. Maybe Gingrich will demonstrate his economic independence by doing the same. Maybe President Obama will listen to his own advisory commission and introduce a bill for tax simplification. Won't it be a great campaign if candidates are outdoing each other in closing loopholes and lowering the nominal tax rates? Unlike most government programs – certainly unlike tax breaks – tax simplification really will create jobs by making work more rewarding (less taxed because "unearned" income is taxed more than it is now) and making economic decisions more rational.

Related posts:

The Deficit Reduction Draft Proposal is the Stimulus Program We Need!

Good News for the New Year

The End of the Age of Incentives

Decline in Banking and Government Sectors Good for the Economy

We need government and we need banks; but we don't need government to be as big as it's grown and we don't need banks which are too big to fail. When sectors like government or banking grow out of proportion to the benefits they bring, the economy as a whole suffers from a misallocation of resources.

So headlines like these from The Wall Street Journal this morning are good news:

BofA Ponders Retreat

Bank of America has told U.S. regulators that it is willing to retreat from some parts of the country if its financial problems deepen.

Banks Overhaul for Leaner Era

The investment-banking industry, notoriously prone to cyclical hiring and firing during booms and busts, is in the midst of a retrenchment that may be more far-reaching.

RBS Bids to Shrink to Glory

The needed contraction in the financial industry would have happened sooner if there hadn't been the bipartisan bailout known as TARP; it would also have been more abrupt. IMHO the economy would've recovered quicker if we hadn't cushioned the way down for investment bankers; others argue that that an abrupt banking contraction would have tanked the economy worse. We'll never know who is right.

The fight now is to make sure that banks don't get further bailouts and that too-big-to-fail banks get smaller. The prognosis is not great. The European Central Bank is continuing to print money to "lend" to its member banks at concessionary rates (1%) in hopes that these banks will turn around and lend some of it to their feckless governments, thereby keeping the governments afloat and earning high profits for the banks so that they can repair their damaged balanced sheets. Note that this is a scheme which protects employment in BOTH the banking and the government sectors.

Here in the US the government sector shrinks slowly from one employment report to the next. Meanwhile the private sector creates more jobs than are lost in government although not enough to bring the unemployment rate down as fast as we'd all like to see. Particularly good news is that manufacturing employment here is growing.

Government employment also would have contracted much more abruptly without the local government bailout contained in the Stimulus Bill. One can make a better argument, again IMHO, for cushioning the downsizing of government during a time when the need for government services increased than for bailing out banks. But the states and local governments by and large didn't take advantage of the reprieve to make the structural changes that were needed or even to get control over the cost of public sector retirement benefits.

Those who benefit from megagovernment – including those in the private sector serving government or exploiting grants, preferences and mandates – will fight to regrow government. As tax revenues recover along with the economy, the temptation to let government grow again will grow. That'd be a mistake. Just like bailing out banks.

Related posts:

Jon Hunstman: Wall Street's Big Banks Are the Real Threat to Our Economy

The Inconvenient Recovery

Another Day, Another Bank Bailout

Confessions of a Stimulator


The Inconvenient Recovery

The US economy is improving. This improvement is inconvenient for both major political parties so it isn't getting much attention or credit. The improvement is slow – but might be faster if it got the recognition it deserves since improvement depends on consumer and business confidence.

The facts are that unemployment is coming down at an accelerating rate despite continued reduction in the government sector. The significant four week average for new unemployment claims is down. Consumer sales are up over last year. Inventories are still lean. Personal balance sheets are much more balanced than they were before the recession. Housing prices may finally have stabilized with the needle pointing right at affordable – especially with prevailing very low interest rates. The balance sheets of large corporations are stuffed with investable cash. The price of oil – always important to the American economy - has slid way off its highs and may have further to fall. Meanwhile abundant American natural gas is keeping a lid on electricity prices and creating jobs in both extractive and energy-dependent manufacturing businesses; some jobs are even coming back from China. Farmers are making scads of money. The rest of the world has apparently decided that the US is the best of a bad lot and is parking its money here, keeping our interest rates down and potentially making more capital available to invest.

So how come this isn't good news?

Well, if you're a partisan Republican it means that the Obama Administration hasn't completely wrecked the economy and he might even be able to run for reelection in an upturn – perish the thought; he'll certainly take credit for it if it happens. Moreover, how can you say you won't close tax loopholes for the very rich in this "struggling economy" if the economy isn't struggling?

If you're a partisan Democrat how do you argue that even more stimulus and government spending is needed when the economy inconveniently began to recover once Stimulus had run its course? How do you argue against tighter restrictions on collecting unemployment insurance if jobs are again available (I know that they're not readily available for everyone at every skill level everywhere)? How do you argue that we can't cut public sector jobs when the private sector is doing such a good job of taking up the job-creation slack?

If you're at the Federal Reserve, what is your excuse for continuing to manufacture profits for too-big-to-fail banks when a recovery is happening despite the facts that these banks are also too big to lend to small businesses and that large business have plenty of liquidity of their own.

It must be that I imbibed too much holiday cheer. How dare there be a recovery now?

Related posts:

"Too Big to Fail" Assures Bigness – and Failure

The Inconvenient Good News in the Employment Report

Jobs Coming Back from China



Another Day, Another Bank Bailout

The US Federal Reserve along with other central banks is making it easier – i.e. cheaper – for European banks to borrow US dollars. In other words we're giving the banks a gift of the half percent discount in interest rates the fed is financing. The action is cloaked in the usual rhetoric about encouraging banks to lend etc. etc.; but it has no purpose unless it's to make the banks stronger by letting them pocket the extra margin on loans made possible by giving them a break on their borrowing costs and deliberately ignoring the fact that they themselves are not credit-worthy since they hold scads of nearly worthless sovereign debt that isn't ever going to be repaid. As the Wall Street Journal, which apparently approves of this actions, says: "The coordinated action doesn't directly address Europe's government-debt and budget woes. Instead, it is aimed at alleviating the impact of those troubles on global markets." For "global markets", read "banks".

Don't worry though, we're not doing this generous deed for the sake of European money center banks; we're doing it to protect US banks. Again from the WSJ article: "Michael Feroli, an economist with J.P. Morgan, said Wall Street traders took the move as a sign that 'the Fed and central banks are there to support things' and that 'these guys have our back.' Yup. Make all the bad loans you want; pay your executives huge bonuses based on the short-term interest on loans whose principal we'll never be repaid; and we've "got your back." It's almost enough to make you camp out in Zuccotti Park – or, even better, watch who you vote for.

But, you ask, don't we want to "strengthen the banks". NO! We want to weaken and dismember any organization which is too big to fail. We want institutions which we can afford to let fail (given FDIC insurance) to compete for both our savings dollars and our banking business. We want institutions which can't afford to flood Washington and other world capitols with lobbyists and have to do business the old fashioned way on Main Street.

Governments and central banks share the blame for the predicament the "banking system" is in. In the US regulators as well as rating agencies let banks pretend that subprime mortgages were a rock-solid asset and that housing prices never could decline. For those who claim that the TARP money was paid back, consider that rescuing Fannie Mae and Freddie Mac has SO FAR cost us taxpayers $151 billion. This money goes to hold banks harmless from bad loans they made. If these had indeed been private insurers, they would've gone broke and the banks would be holding the bag. This is bank bailout money; it won't be repaid.

In Europe regulators doing stress tests on banks assumed that sovereign debt would be repaid even though they knew that the governments behind the debt were broke. The banks got to charge high interest rates on these loans to feckless governments because of risk which, according to the regulators, didn't exist. Good business if you can get it. Problem is that the banks aren't going to get repaid in full for loans to Greece and perhaps other countries. They don't really have the assets regulators encouraged them to report.

But regulators and central banks don't like to think of the plight of these poor bankers – especially because these very same regulators and central banks were complicit in creating the crisis of mis-priced assets and too-big-to-fail institutions. So we're back shoveling money into the bailout trough and being told that our future depends on more bank bailouts.

Which gets me back to voting.

According to an Economix blog on the New York Times site by former International Monetary Fund chief economist Simon Johnson:

"…More bailouts and the reinforcement of moral hazard — protecting bankers and other creditors against the downside of their mistakes — is the last thing that the world's financial system needs…

"Is there really no alternative to pouring good money after bad?

"In a policy statement released this week, Jon Huntsman, the former governor of Utah who is seeking the Republican presidential nomination, articulates a coherent alternative approach to the financial sector, which begins with a diagnosis of our current problem: too-big-to-fail banks:

" 'To protect taxpayers from future bailouts and stabilize America's economic foundation, Jon Huntsman will end too-big-to-fail. Today we can already begin to see the outlines of the next financial crisis and bailouts. More than three years after the crisis and the accompanying bailouts, the six largest U.S. financial institutions are significantly bigger than they were before the crisis, having been encouraged by regulators to snap up Bear Stearns and other competitors at bargain prices.'…

"The goal is simple, as Mr. Huntsman said in his recent Wall Street Journal opinion piece: make the banks small enough and simple enough to fail. 'Hedge funds and private equity funds go out of business all the time when they make big mistakes, to the notice of few, because they are not too big to fail,' he wrote. 'There is no reason why banks cannot live with the same reality.'"

I'm making a contribution to the Huntsman campaign. Ron Paul is for abolishing he Fed altogether; I'm not sure I'm there yet and I disagree too strongly with him on other issues to suppory him. Mitt Romney has says he thinks that TARP and the bailouts by the Feds were needed as does Herman Cain. Newt Gingrich did too much lobbying for Freddie Mac and ais been an unrepentant supporter of corny ethanol. And Barack Obama appointed Timothy "Tarp" Geithner as Treasury Secretary and reappointed "Bailout" Ben Bernanke as Fed Chairman.

Simon Johnson concludes his Economix piece:

"Only Theodore Roosevelt could take on the industrial and railroad monopolies in 1901, only Richard Nixon could go to China in 1972, and only Jon Huntsman seems prepared to face down the too-big-to-fail banks today."

Hope he's right that someone is prepared to do this. Hope we can elect politicians who will end the occupation of Wall Street by government-backed too-big-to-fail institutions.

Related posts:

"Too Big to Fail" Assures Bigness – and Failure

Preparing for the Next Banking Crisis

When Regulation Is Justified

The Occupiers and Tea Partiers Are Both Right

“Too Big to Fail” Assures Bigness – and Failure

Reader Bobsv57 asks:

"Tom, a question for you. I am under the impression that most, if not all, of the money used to bail out banks has been paid back with interest and it is actually the money used to bail out GM that hasn't been returned. Am I correct in this observation? and if I am, then why to you make the statement calling for no more bank bailouts? (Not that I particularly support them in any case) It would seem that the bail out was a money maker for the Fed, wasn't the interest they charged the banks for TARP funds greater than the interest the Fed pays on it's national debt?"

Bob is right that the banks paid back their loans with interest. But the eventual cost of the bailout is likely to be the failure of our banking system and massively increased public debt. Meanwhile, middle America is starved for credit while the "too big to fail" banks are getting bigger at the expense of their better managed smaller and safer brethren.

An article in the Wall Street Journal explains one way that corporations are positioning themselves for the next credit crisis:

"One strategy treasurers use is to let the government, in essence, pick your counterparties. Stock-photo company Getty Images limits its foreign-exchange business to banks that would be likely to get a bailout if trouble hit.

"'The banks on our list, every single one of them is too big to fail; that's been pretty well advertised,' said Treasurer Tim Murphy…"

How does a bank win business post-bailouts? By being too big to fail! It's hard to think of worse public policy. This guarantees that the "too big" banks will get bigger. Since the giant banks compete with each other and since their huge executive compensation is still based on short term results, these banks have an incentive to take excessive risk. Why shouldn't they. Heads, they win; tails they get bailed out as this quote from a French regulator in the New York Times makes frighteningly clear:

"Yet the French government recognizes that the risk of contagion 'is always there,' and is ready to backstop any of its large banks in the event that conditions deteriorate, said a French regulator who is directly involved in monitoring the national banking system.

"'The French government would never let any major banks fail, so of course we have money available to backstop them', the regulator said."

"Would never let any major banks fail"? Can you imagine a better prescription for irresponsibility? Don't be under any illusion that regulation will stop recklessness given the promise of bailouts. The New York Fed didn't notice the incipient instability of the money center banks before suddenly realizing the need to bail them out. The US government didn't even notice that its creations Fannie Mae and Freddie Mac were disasters on the way to happening; they are now fully government wards. MFS Global still hasn't accounted for $600 million of customer money that turned up missing; in months past its politically well-connected now-ex-CEO, Jon Corzine, convinced nervous regulators not to take any action.

Iceland promised to protect its banks; the country itself then had to be bailed out. Ditto Ireland which didn't run big deficits and had a healthy real economy – until the government decided to back its banks with the country's credit. The French government used to be able to sell bonds with interest rates almost as low as German bonds; now there is the highest spread between interest rates on French and German government bonds since the establishment of the Eurozone. Traders are not at all sure France can afford to bailout its banks – and they know there is no one to bailout France.

So back in the USA our previous bailout of banks has created an expectation that we'll do the same thing again whenever needed and has encouraged customers to make the biggest banks even bigger and more dangerous to the economy. Risky behavior and ludicrous executive compensation are still the rule. Attempts at regulation, like the appropriately named Dodd-Frank Bill, the law the foxes wrote to govern the hen houses, have become captive to the putative regulated institutions; the regulations are more of a burden to the smaller banks which don't pose systemic risk. The big US banks are already beginning to say they may need help with their exposure to their European counterparts. Treasury Secretary Tim "TARP" Geithner anxiously shuttles back and forth to Europe trying to get the Europeans deeper into the morass of bailing out their banks (and ours). He cites his "successful" effort to "save" our banks.

Yes, we got the bailout dollars back for the moment at a low interest rate; think what the banks would've charged for such risky loans if they made them instead of received them! But they are sure to be demanded again. The price of the last bailout was a dysfunctional banking system which is steadily growing riskier.

We must reverse the expectation that irresponsible behavior will be rewarded. We must make it possible for responsible smaller banks to compete, banks which can be allowed to fail if they screw up. Some Presidential candidate should promise to break up all "too big to fail" banks within his/her first year in office. If a big bank fails before we can afford to let it go, it should be dismembered and distributed to its smaller, safer rivals – not merged with another giant as we did during TARP. Being hostage to the investment banks, who've effectively occupied Congress, is not an acceptable status quo.

Related posts:

Preparing for the Next Banking Crisis

When Regulation Is Justified

The Occupiers and Tea Partiers Are Both Right

When Regulation Is Justified

My last post recommended draconian regulation for bailed-out banks and some regulation of all banks which accept federally insured deposits. Reader Lupus Nomen pointed out an apparent inconsistency in a comment on Vermont Tiger.

"Tom, All of these suggestions make a lot of sense. But they also sound a lot like "big government" regulation, which I thought, according to Vermont Tiger at least, was nothing more than a python strangling the "productive sector" to death."

The different people who write for Tiger have different opinions on almost any subject so I can only speak for myself. However I do think that over-regulation is a "python" strangling not only the private but also the public sector. So what am I doing suggesting all these regulations for banks?

First, second, and third – once a company gets get bailed out with public money, it is no longer regulated by competition. Failure is how the marketplace punishes stupid and reckless behavior. Fear of failure discourages such behavior. The behavior of big investment banks post bailout but pre any meaningful regulation has made absolutely clear how quickly this arrogance can grow and how damaging it is. Institutions which government has insulated from market failure MUST be regulated by government. We not only have a right to regulate them, we have a responsibility to do so.

So do we want a regulated banking system forever?

No. Government should not be making investment decisions. Government shouldn't be deciding who gets loans. That's why the first regulation needs to be break up the banks that are "too big to fail". No institution which is subject to market discipline and shareholder votes – neither of which is perfect, BTW – needs to have the government deciding how much its CEO gets paid or the details of how it conducts its business within the broad bounds of the law including antitrust and liability for bad behavior.

But there's one more exception as far as banks are concerned: federal deposit insurance. If we the people are providing insurance for bank deposits, we have to have a way to make sure that the institutions holding the deposits don't take advantage of being insured by us in order to make inappropriately risky investments with the depositors' money and we need to make sure that the institutions have sufficient capital to make claims against the insurance pool unlikely. A private insurer would do the same thing.

A purist would say we shouldn't have federal deposit insurance for just this reason. I disagree (with some discomfort) on pragmatic grounds. Federal deposit insurance has ended the scourge of bank runs which left small savers either putting their money unproductively in a mattress or holding the bag for bank mistakes or misdeeds. But insurance requires supervision by the insurer.

I may rethink my opinion on this if banks don't start paying more interest than mattresses do.

Related posts

Preparing for the Next Banking Crisis

The Free Market Needs Government to Function    

Bankers and Oak Trees    

The World is Overbanked

Preparing for the Next Banking Crisis

Since we bailed out the investment banks, we've done almost everything possible to assure that we have another banking crisis and another bailout opportunity.

  1. The banks that were too big to fail before have gotten even bigger as weak banks were merged into their less weak brethren. TARP money was used to finance the consolidation.
  2. Nothing effective has been done to limit the speculation banks can do with federally insured deposits. The Barney-Frank bill is as ineffectual as you would expect it would be, since it was written by the foxes who guard the henhouse.
  3. Even the compensation of bailed-out bankers is still rising beyond the stratosphere. This isn't the reason why the Occupiers have to repay their student loans; but it is outrageous. During the bubble bank presidents were supposedly being compensated – like football players – for success; apparently failure demands an even higher reward. We wouldn't want to damage their self-esteem.
  4. The real estate price plummet has been prolonged by regulatory forbearance. Banks have not been forced to write their mortgage portfolios down to their true declining values on the assumption that home owners, unlike Donald Trump or almost any other holder of a commercial loan, will keep paying instead of just walking away even though their mortgages are underwater. That makes the banks reluctant – to say the least – to agree to reduce principal amounts on residential mortgages as they would have done rather than have a commercial loan fail. Reducing the principal forces the bank to recognize its loss. It now looks more and more like the "correct" price for real estate is closer to what it sells for today than it what it could command during the bubble. So there are more foreclosures than there would have been had banks had an incentive to be reasonable, and there are still significant unrealized losses in bank portfolios.
  5. The euro-contagion is sure to spread here. Our banks lend to and invest in European banks. These banks will have a hard time raising capital to compensate for the 50% haircut they've agreed to take on Greek debt. They have not marked their Italian or Spanish debt down to its real value. The willingness and capacity of Germans to bailout other country's banks is limited.


How did we get in this dilemma? Tom Friedman describes a big part of the problem:


"Our Congress today is a forum for legalized bribery. One consumer group using information from Opensecrets.org calculates that the financial services industry, including real estate, spent $2.3 billion on federal campaign contributions from 1990 to 2010, which was more than the health care, energy, defense, agriculture and transportation industries combined. Why are there 61 members on the House Committee on Financial Services? So many congressmen want to be in a position to sell votes to Wall Street."

Protecting the financial services industry is almost the only bipartisan action that's been taken lately.

Friedman has some good suggestions for avoiding the next crisis:

"1) If a bank is too big to fail, it is too big and needs to be broken up. We can't risk another trillion-dollar bailout. 2) If your bank's deposits are federally insured by U.S. taxpayers, you can't do any proprietary trading with those deposits — period. 3) Derivatives have to be traded on transparent exchanges where we can see if another A.I.G. is building up enormous risk. 4) Finally, an idea from the blogosphere: U.S. congressmen should have to dress like Nascar drivers and wear the logos of all the banks, investment banks, insurance companies and real estate firms that they're taking money from. The public needs to know."

I don't know if #3 is needed if we have #2 but I sure like #4. Probably should apply to Presidential candidates as well.

In some ways we are better prepared to play hardball with the investment banks now than we were a few years ago, if we (and our congresspeople) are ready to do so. Consumers have reduced their appetite for debt; large corporations have stopped playing the financial markets with their working capital and have plenty of cash on hand to pay expenses without new bank loans; small business is getting very little from the money center banks. We're not earning any interest to speak of on our savings. Innovative new services like PayPal or cellphone payments can be done without traditional banks.

If we are not going to break the biggest banks ups now (my first choice) then the best way to avoid another bailout crisis is to make the bailout rules clear now:

  1. No executive of a bailed-out bank will be paid more than the President of the US.
  2. Bailout is a form of bankruptcy and invalidates all promises of future payments to employees as well as recovery of payments made in contemplation of bail out.
  3. Bailed-out banks will promptly be broken up and their deposits distributed among much smaller competitors.

Once they know the rules, the banks may figure out how to avoid another crisis. Right now they have no incentive to do so. None of this'll happen, though, unless we implement some form of Friedman's rule 4 "U.S. congressmen should have to dress like Nascar drivers and wear the logos of all the banks, investment banks, insurance companies and real estate firms that they're taking money from".

Related posts:

The World is Overbanked

The Occupiers and Tea Partiers Are Both Right

We've Been T*RPed

Election Analysis: It Was TARP that Boiled the Tea

Google Finds Nothing is Shovel Ready, Not Even for Free Fiber Build

"Regulation can get in the way of innovation. Regulations tied to physical infrastructure sometimes defer the investment altogether." – Kevin Lo, head of access at Google, as quoted in Total Telecom.

Google is deploying fiber at its own expense in Kansas City, Kansas and Kansas City, Missouri to demonstrate the value of one gigabit (a gigabit is a billion bits – a lot) per second residential Internet connections and perhaps to show at&t and Verizon and the cable companies how the search giant might fight back if its growth is restricted by their restrictions or limitations. Thousands of communities competed for this bonanza including the whole State of Vermont (see the video here). Kansas City, KS won and Kansas City, MO was added later. Among the selection criteria was the ability of the community, if chosen, to move at Google speed.

Whoops. Google just learned the same lesson that President Obama learned in Stimulus 1: nothing in America is shovel ready. Even when a rich company is willing to spend its own money on a project which almost everyone agrees is of huge economic benefit (spelled J-O-B-S), red tape and entrenched interests get in the way.

Google's Lo says that local governments should be given more power to decide where they enforce zoning regulations. The implication is that Google's deployment ran afoul of zoning ordinances and that variances were not easy to come by, perhaps even in cases where the impact is de minimis. Usually all it takes is one person objecting and the hearings can go on almost forever.

Google is also having trouble getting pole attachment rights quickly. The article doesn't say whom the poles belong to, but it's highly likely that either the phone company or electric utility (or both together) owns them. Usually, since poles tend to be in the right of way and are owned by regulated utilities, there are laws which do require allowing qualified use of them. However, poles do have to be inspected before additional load can be put on them; some poles will always need to be replaced. Electric utilities may not give high priority to Google's project; the local telco may not be in any hurry to see such a fearsome broadband competitor deployed. So actually getting the pole attachments can take a long time.

And Google says that it cannot easily acquire rights of way.

These are local issues; when federal dollars are spent or federal regulation of some kind invoked, the gates a project has to go through are even more onerous and time-consuming. That's why almost no stimulus dollars were spent for construction except for repaving. That's why another stimulus will NOT result in the kind of infrastructure investment America needs; we might have to spend dollars repaving the same roads we did last time.

But many American companies – not just Google – are cash rich. Many American companies have projects ready to go but are waiting for permitting and the inevitable endless appeals. We can have a private construction boom without spending a borrowed dollar of government money if we can reform permitting so that it takes a reasonable and predictable amount of time and if we can circumscribe the ability of appellants to hold virtually any project up for an indefinite period at no cost or risk to themselves.

One sour grape: Here in Vermont we have enlightened pole attachment rules which assure speedy deployment and we have given local authorities the ability to waive hearings for some telecom projects with de minimis impact. I'm sure we would've moved at Google speed; wish we'd been put to the test.

Related posts:

Irene Lesson #2: Nothing in America is Shovel Ready – Until It Has to Be

Jobs Rx: Make America Shovel Ready

America’s Industrial Revival

This Labor Day America stands on the brink of an industrial revival. During the next decade millions of Americans will be re-employed in manufacturing. Tens of millions more will be newly employed in jobs supporting manufacturing and serving the needs of manufacturing employees. The financial sector will shrink and the industrial sector will grow. Balance of payments problems will disappear; tax revenues will increase while tax rates go down.

Why? you ask. How?

Six reasons for the successful reindustrialization of America:

  1. Energy. We are energy rich; most of the world is energy poor. As the relative labor content of manufacturing goes down, the cost of the non-human energy used is more and more important. Robots needs their watts or they won't work. With new techniques for extracting it, we are rich in natural gas. We are very rich in coal – rich enough to sequester the CO2 created when it is burned if that is needed. We have massive reserves of oil and can extract it safely. We are just south of huge untapped hydro resources in Canada. And we can build a new fleet of nuclear plants (although not in time to help this decade). At some point solar technology will improve so that electricity generated in our deserts reduces rather than increases our overall energy cost. It's hopeful that the Obama administration recognized the importance of energy cost and supply to job creation with two actions this week: State Department approval of a pipeline from Canada and suspension of overly-strict rules ozone rules promulgated by the EPA.
  2. Improving standards of living in the third world. Japan used to have huge cost advantage over the US in manufacturing costs because their labor was cheap. As Japanese laborers moved into the middleclass – just as our workers had already done, that advantage disappeared. Those jobs moved to China and Taiwan and Thailand. But workers in all those places are leaving poverty, joining the middleclass, and demanding better wages and safer working conditions. They are also consuming more themselves. There will no longer be an imbalance between what countries like China produce and what they consume. As wealth and aspirations equalize around the world, we will no longer be at a disadvantage when we pay a decent wage and provide decent working conditions (so long as we are efficient and have cheap energy).
  3. Rare earths. China tipped its hand too early when it began restricting export of rare earths needed for many of today's products to force manufacturers to locate factories in China in order to get needed supplies. Those same rare earths are found in America – mainly in shut-in mines. The mines are being reopened. Once we move to effective and speedy environmental review, we'll lead the world in production of those needed materials. We'll export some; factories will also be built here to take advantage of needed supplies.
  4. We're a huge country. That means we have a supply of almost anything somewhere. It also means that, when one part of the country suffers a disaster (as we are in Vermont right now), the rest of the country is likely to be unaffected by that particular event and can lend a crucial helping hand. Like climbers tied together by a rope, we're all safer and stronger for the connections. We will become shovel ready once again and improve the various kinds of infrastructure which link us together.
  5. The government is running out of money for pursuing an "industrial" policy. Government money targeted at favored people and industries has the effect of suppressing much more diverse private investment. It's not that government bureaucrats are always wrong or private investors always right; but private investors cut the losers and support the winners. Government focuses on just a few areas and then supports its investment decisions with more subsidies, mandates, or bans on competition. In corny ethanol, for example, we are not only incented to turn food crops inefficiently into fuel; competing imports are banned; and refiners are required to blend ethanol into their gasoline. Removing tax breaks and direct subsidies will "stimulate" more jobs than leaving them in place.
  6. Cheaper housing. Many people have been hurt by plummeting house prices. But these prices were artificially high driven there by cheap (and unwise) credit. In many ways the housing market was a Ponzi scheme run by financial institutions (and government). Sure, those who got out early made a lot of money; the rest of us just got caught when the music stopped. As the price of homes outstripped incomes, a bigger and bigger part of all of our budgets went to pay interest on bigger and bigger loans and the financial industry mushroomed as it transferred the capital (minus lots of overhead) from "investors" buying strange mortgage instruments to the sellers of houses. With housing much more affordable now, the next generation of workers won't need to borrow as much to own a home and more capital will be available for reindustrialization. With luck, the financial sector will shrink when it loses the lucrative task of financing housing inflation.

Could we screw up this opportunity to reindustrialize? Sure. We could let Luddites trap us into energy poverty and block the mining of rare earths. We could make our employment costs unrealistically high. We can refuse to build or permit the infrastructure we need to take advantage of our great size and diversity of resources. We could continue a crazy quilt of subsidies and tax breaks even though we can't afford them. And we can continue to bail out the banks while pretending to help homeowners.

But we won't. We will flourish.

Related posts:

Jobs Rx: Make America Shovel Ready

Energy for Jobs – Vermont Version

What Government CAN do to Create Jobs

Election Analysis: It Was TARP that Boiled the Tea

The End of the Age of Incentives

Natural Gas Disrupts the Energy Industry

What Government CAN do to Create Jobs

"It's time to go big or be sent home," says Andy Kessler writing in The Wall Street Journal. He continues with six big ideas, none of which involve throwing money at the problem or hiring more government workers. If you have an online subscription to the WSJ, you ought to read Five Ideas to Kick-Start Job Creation: "Entrepreneurs don't want government money. They want the chance to invest their sweat equity" now. The ideas are summarized below along with some comments from me and one additional idea.

Free spectrum: Andy means the radio spectrum, lack of which is hindering even more development of wireless apps and perhaps a whole new generation of innovative services. Look at what WiFi and Bluetooth have made possible not to mention smartphones. He'd free up spectrum by allowing current licensees to sell what they have, instituting a "use it or lose it" rule, allowing multiple users of the same spectrum (aka whitespaces) and/or repurposing spectrum government has reserved for its own use. Remember, tech companies are sitting on piles of capital; they need to see opportunity to use it. Great idea, IMHO; jobs created won't only be in high tech since communication is an enabler.

Disease diagnostics: "Have the Department of Health and Human Services declare that Medicare will pay for any diagnostic test or device that can be proven to save money over five years…" Although I agree that invention and deployment of early diagnosis technology is a huge opportunity, I'm skeptical of running this through the HHS bureaucracy. Perhaps better to streamline the approval process for new technology (get government somewhat out of the way) and reform the dumb implementation of privacy requirements which make it very difficult to use medical information well.

End the mail monopoly: Andy says this will speed alternatives of automatic bill payment and innovation by USPS and FedEx.

Frack this: This is probably the biggest of all Andy's big ideas. Cheap energy can and will create manufacturing jobs in the US even without a supply of ultra-cheap labor. His method: "Declare all hydraulic fracturing legal with the caveat that drillers put up a bond equal to the potential cleanup cost of environmental damage." Andy is rightly concerned that, even though – thanks to hydraulic fracturing – shale gas has grown from 1% to 25% of our natural gas supply in the last decade and natural gas prices have been falling while other energy prices rise, "environmentalists are pushing to close down this booming industry."

Government platform: "All government agencies should be required to publish their own APIs by the end of the year. What will happen next is a sea of programmers will emerge to write iPhone apps and other code to integrate government functions into our everyday lives." Good idea but ain't gonna happen anytime soon. What Andy doesn't know because he hasn't worked inside government is that many of these apps are still running on mainframes from 80s and 90s. Even more are batch COBOL monstrosities with no prospect for supporting realtime apps. First got to get government applications off legacy platforms and into the cloud where they belong.

Rental society: Andy is suggesting creation of a six-month foreclosure amnesty during which you can initiate foreclosure proceedings on your own underwater mortgage and not have the foreclosure affect your credit rating. He is certainly correct that this would result in "exactly the price discovery that the finance sector both dreads and needs to move forward." He predicts an immediate boom in web-based rental and auction sites. Rather than suppress credit records, I'd prefer ending the policies which allow banks to avoid full write downs on underwater but not foreclosed mortgages and the series of bailouts which have allowed banks to avoid banks moving to either rapid reduction in principal amounts or foreclosure.

Bonus idea – Make America shovel ready: (this one from me and not from Andy). Stimulus demonstrated conclusively that nothing in America is shovel-ready. Government can't get out of its own way when it comes to major infrastructure projects. Endless appeals delay not only government but private sector projects indefinitely making financing impossible to line up and greatly increasing cost. The private sector is sitting on hordes of cash. Much of it would flood into construction costs and finance needed infrastructure IFF projects could get final approval (or disapproval) quickly and predictably. My proposal: 1) set a two-year schedule for all government permitting; 2) require anyone appealing a permit which has already been granted to post a bond equal to the anticipated cost of delay, such bond to be forfeit if the appeal fails.

Related posts:

Go White Space, Young Person, Go White Space

Confessions of a Stimulator

Natural Gas Disrupts the Energy Industry

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