More Smoke & Mirrors

[philunderwood]

www.qando.net/?cat=509

“Obama saved the car industry with bailout” narrative begins to form

June 3rd, 2011 | Author: Bruce McQuain

Ron Klain, former Chief of Staff for Joe Biden (and a Bloomberg View columnist) gives you a peek at the plan. Klain has a piece in Bloomberg where he puts the outline of what the administration needs to do to spin the car bailout properly if it hopes to make it a campaign positive. Klain’s suggestions are offered to form the basis of a narrative which will be polished and become a center-piece of the record of Barack Obama. The reason for beginning now is obviously an attempt to condition the public, which was very much against the bailout (and mostly remain so), to the supposed positive aspects of the takeover by government.

Of all the policy challenges I saw Obama tackle in my two years in the White House, none was more complex than turning around the U.S. auto industry. When the president took office, the industry was in free fall. Sales of cars and trucks, which had topped 17 million in 2006, fell to 10.6 million in 2009. Two of America’s three major automakers were insolvent, kept alive by weekly inflows of federal cash. U.S. automakers had an unsustainable cost structure, were badly trailing their foreign competitors in the production of fuel-efficient and electric vehicles, and seemed unable to make the hard choices needed to arrest their downward spiral.

The course the president chose was unexpected and risky. Most Americans remember that the administration decided to "bail out" the car companies — and indeed, the president did extend more loans and support to the industry. But he attached to the aid a series of controversial and painful conditions that ended business as usual in Detroit.
Call it “gutsy call II” if you will, but in reality, it is far from the picture that Klain ends up painting. Both the car companies were headed toward bankruptcy – a financial condition they had earned by their poor practices and sellouts to unions. Obama’s bailouts certainly ended “business as usual” for those two companies but not in a positive way.

One of the consistent memes is that had Obama not acted, GM and Chrysler would have gotten the equivalent of a death sentence by having to go into bankruptcy. By death sentence I mean the administration and its bailout supporters imply millions would have been thrown out of work and those two companies would have forever disappeared.

Uh, no. As Jim Manzi at NRO explains:

First, in the event of a bankruptcy, you don’t burn down the factories, erase all the source code on all the hard disks, make it illegal to use the brand name Chevrolet, and execute all of the employees. Others take ownership of the assets, and the employees go on with their lives. Some of these assets will be put to use generating revenues, profits, and taxes, and some of these former employees will get jobs or start businesses, and generate revenues, profits, and taxes. In order to measure the effect of the bailout over, say, five or ten years, you have to compare the actual taxes collected to what would happened over this same period in the counterfactual case where the bankruptcy was allowed to proceed. What owners would have bought the factories and IP assets, and what would they have done with them? What businesses would the former employees have started? Who would have moved to Arizona and retired? What new industry clusters will evolve in Arizona because of this transfer of people?

And what would have come out of the bankruptcy? Leaner companies better equipped to address the market and turn a profit. What wouldn’t have come out of the bankruptcy are the level of union pensions and benefits the administration preserved. Obama, through his bailout and modified bankruptcy made sure those were weren’t destroyed. Consequently you have pretty much the same conditions that existed prior to the bailout still in existence today with the added twist of more union control.

GM, for instance, just before it announced it had “paid off” its government loans, lost 3.4 billion dollars. Hans Bader, of the Competitive Enterprise Institute destroys the myth of GM’s loan payback with an extensive investigation into the real story. It is a story of known falsehoods being tacitly approved by the White House and the Treasury Department because the administration was desperate for some good news at the time. The Chrysler loan payback, as I noted recently, is of the same stripe. More smoke and mirrors from the “transparent” administration.

But back to the bailouts and the reasons. The defense offered for the bailout is this:

The White House report said the money invested in GM and Chrysler ultimately saved the government tens of billions of dollars in direct and indirect costs, including the cost of unemployment insurance and lost tax receipts that the government would have incurred had the big Detroit auto makers collapsed.

Again, that assumes nothing comes out of any bankruptcy proceedings. Nothing. And, as Jim Manzi of NRO explains above, that’s simply not how it works. It is an assumption without any real world foundation. We’re talking a zero sum assumption by the administration where no assets are bought, no one goes back to work, everyone is unemployed and no one can find a job. That’s just not the way bankruptcies (or the real world) work.

Also:

Second, some of the profit GM makes today would have been made by other companies that picked up some of the slack if the company lost market share after a bankruptcy. They would pay taxes on these profits, and as far as government receipts are concerned, money is money. How would auto industry structure evolve over time given whatever changes happened to the assets currently owned by the legal entity GM, or the employees currently paid by it?

Anybody who tells you they can answer all of these questions reliably is full of it.

Indeed. Again, the White House and its cronies must push the black and white version of this to make it saleable. If they can’t make you believe in their “either/or” scenario, then they can’t sell the lie. They’re banking on a large degree of economic ignorance to sell this. But they know that if they rely on the fact and figures they’re going to end up on the wrong side of the argument. So Klain says, break out the smoke and mirrors once again – sell it on emotion:

First, tell the story with fewer numbers and more emotion; less prose and more poetry. Rescuing the auto industry isn’t just a matter of saving jobs and factories — it means preserving a uniquely American manufacturing tradition. Cars are more American than apple pie or hot dogs (which, unlike the automobile, were both invented in Europe). We couldn’t have won World War II without this "arsenal of democracy"; as Walter Reuther famously said, "England’s battles were won on the playing fields of Eton, but America’s were won on the assembly lines of Detroit." The president needs to jujitsu Republican critics who accuse him of failing to understand American exceptionalism by pointing out his success in saving this exceptionally American industry.

You have to love the fact that even Klain doesn’t believe his own nonsense, but has no problem advising the president to use it. Note too that Klain seems not to remember that one of the reasons that GM and Chrysler were on the ropes had to do with the American public choosing competitive foreign cars over the American cars from those two companies (and with the VOLT, we see GM again in the same condition. But he feels if he wraps it all in emotions and not facts (a variation on “hope an change” that worked so well in 2008), they can fool enough voters into accepting the narrative or at least, not caring about it.

Second, equally emphasize the pain that was imposed as a condition of support, and the hard and unpopular choices the president made. It was a plan of “shared sacrifice,” in which executives were fired, workers lost jobs, benefits and pay were cut, and dealers were shut down. The story of the tough choices the president made along the way must be told to convince the public that this wasn’t a handout.

Of course, this plays into the part of the narrative in which you must believe their “either/or” scenario – that is had the government not acted, millions of jobs would have just vaporized. Of course, what Klain describes above would most likely have been the result of normal bankruptcy proceedings minus the $50 plus billion government money injected into GM. They don’t what that known though. And, naturally, they don’t want any speculation about what would have emerged, how many jobs would that would have entailed, etc.

If you start down that road and use the history of bankruptcies and the emergence of companies from that situation as a basis, you’ll have a very difficult time swallowing the administration’s story. So avoid those facts at all costs and concentrate on “emotion” and “pain”.

Finally – Klain advises the White House to crank up the propaganda:

Third, let the people of the auto communities tell their own stories — encouraging homegrown viral videos and other uses of social and new media. This is a lesson I learned the hard way during the 18 months I was part of the White House team that struggled to explain the benefits of the Recovery Act. We used visits by the president and vice president, videos posted on WhiteHouse.gov, as well as endless statistics and charts and maps and graphics on Recovery.gov — and yet nothing got the job done. Finally, two ice-cream shop owners made an iPhone video that told the story better than we ever had, by showing how a single small business loan rippled across their area to create jobs in countless other businesses.

The White House needs a similar personal narrative to tell the auto rescue story, or it will risk being denied a return to Victory Lane in 2012.

So there is the plan – “emotion, pain and propaganda” – that Klain claims the administration should use to sell something that is about as un-American as the internment of Japanese/American civilians during WWII. The most interesting part, of course, is Klain understands that if they get into the specifics of this “deal” and the facts come out, it ends up looking like a very poor decision. And Klain knows that the opposition, once it finally settles on a candidate and its own narrative, is going to seize on this subject as a part of their attack on the Obama record.

He instinctively knows that any chance of blunting that, or making it a non-issue, requires that the administration’s narrative be out there actively being pushed now and that it has to be spun properly for it to work.

How do you counter this? With facts. And the facts are aplenty. There is no shortage of factual information that can gut these arguments and show them for what they are – emotion and propaganda. The opposition also has to use “American exceptionalism” in its proper way and point to the fact that the administration misusing “exceptionalism” in its version.

And that doesn’t even start to get to the really long-run considerations of what effects this has on rule of law and moral hazard (or if you want to make the case for the bailout, social solidarity and degradation of the working class).

One of the things America prides itself on is “rule of law”. That is a large part of our exceptionalism. We also founded a country that attempts to avoid the moral hazards that abound in this sort of a situation. We are and for the most part always have been a meritocracy. You get what you earn. We don’t buy into exceptions because they’re “too big to fail”. We understand that freedom means the freedom to fail and we don’t bail out –selectively- failures. We don’t throw good money after bad, and we certainly don’t expect our government to interfere in that process.

~McQ

[philunderwood]

online.wsj.com/article/SB10001424052702303745304576361663907855834.html

The Real Cost of the Auto Bailouts
The government's unnecessary disruption of the bankruptcy laws will do long-term damage to the economy..

By DAVID SKEEL

President Obama's visit to a Chrysler plant in Toledo, Ohio, on Friday was the culmination of a campaign to portray the auto bailouts as a brilliant success with no unpleasant side effects. "The industry is back on its feet," the president said, "repaying its debt, gaining ground."

If the government hadn't stepped in and dictated the terms of the restructuring, the story goes, General Motors and Chrysler would have collapsed, and at least a million jobs would have been lost. The bailouts averted disaster, and they did so at remarkably little cost.

The problem with this happy story is that neither of its parts is accurate. Commandeering the bankruptcy process was not, as apologists for the bailouts claim, the only hope for GM and Chrysler. And the long-term costs of the bailouts will be enormous.

In late 2008, then-Treasury Secretary Henry Paulson tapped the $700 billion Troubled Asset Relief Fund to lend more than $17 billion to General Motors and Chrysler. With the fate of the car companies still uncertain at the outset of the Obama administration in 2009, Mr. Obama set up an auto task force headed by "car czar" Steve Rattner.

Under the strategy that was chosen, each of the companies was required to file for bankruptcy as a condition of receiving additional funding. Rather than undergo a restructuring under ordinary bankruptcy rules, however, each corporation pretended to "sell" its assets to a new entity that was set up for the purposes of the sale.

With Chrysler, the new entity paid $2 billion, which went to Chrysler's senior lenders, giving them a small portion of the $6.9 billion they were owed. (Fiat was given a large stake in the new entity, although it did not contribute any money). But the "sale" also ensured that Chrysler's unionized retirees would receive a big recovery on their $10 billion claim—a $4.6 billion promissory note and 55% of Chrysler's stock—even though they were lower priority creditors.

President Obama visited an assembly plant in Toledo, Ohio, that makes Jeep Wranglers, June 3.
.
If other bidders were given a legitimate opportunity to top the $2 billion of government money on offer, this might have been a legitimate transaction. But they weren't. A bid wouldn't count as "qualified" unless it had the same strings as the government bid—a sizeable payment to union retirees and full payment of trade debt. If a bidder wanted to offer $2.5 billion for Chrysler's Jeep division, he was out of luck. With General Motors, senior creditors didn't get trampled in the same way. But the "sale," which left the government with 61% of GM's stock, was even more of a sham.

If the government wanted to "sell" the companies in bankruptcy, it should have held real auctions and invited anyone to bid. But the government decided that there was no need to let pesky rule-of-law considerations interfere with its plan to help out the unions and other favored creditors. Victims of defective GM and Chrysler cars waiting to be paid damages weren't so fortunate—they'll end up getting nothing or next to nothing.

Nor would both companies simply have collapsed if the government hadn't orchestrated the two transactions. General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process. The only serious question was GM's ability to obtain financing for its bankruptcy, given the credit market conditions in 2008. But even if financing were not available—and there's a very good chance it would have been—the government could have provided funds without also usurping the bankruptcy process.

Although Chrysler wasn't nearly so healthy, its best divisions—Jeep in particular—would have survived in a normal bankruptcy, either through restructuring or through a sale to a more viable company. This is very similar to what the government bailout did, given that Chrysler is essentially being turned over to Fiat.


The claim that the bailouts were done at little cost is even more dubious. This side of the story rests on the observation that GM's success in selling a significant amount of stock, reducing the government's stake, and Chrysler's repayment of its loans, show that the direct costs to taxpayers may be lower than many originally feared. But this doesn't mean that taxpayers are off the hook. They are still likely to end up with a multibillion dollar bill—nearly $14 billion, according to current White House estimates.

But the $14 billion figure omits the cost of the previously accumulated tax losses GM can apply against future profits, thanks to a special post-bailout government gift. The ordinary rule is that these losses can only be preserved after bankruptcy if the company is restructured—not if it's sold. By waiving this rule, the government saved GM at least $12 billion to $13 billion in future taxes, a large chunk of which (not all, because taxpayers also own GM stock) came straight out of taxpayers' pockets.

The indirect costs may be the worst problem here. The car bailouts have sent the message that, if a politically important industry is in trouble, the government may step in, rearrange the existing creditors' normal priorities, and dictate the result it wants. Lenders will be very hesitant to extend credit under these conditions.

This will make it much harder, and much more costly, for a company in a politically sensitive industry to borrow money when it is in trouble. As a result, the government will face even more pressure to step in with a bailout in the future. In effect, the government is crowding out the ordinary credit markets.

None of this suggests that we should be unhappy with the recent success of General Motors and Chrysler. Their revival is a very encouraging development. But to claim that the car companies would have collapsed if the government hadn't intervened in the way it did, and to suggest that the intervention came at very little cost, is a dangerous misreading of our recent history.

Mr. Skeel, a professor of law at the University of Pennsylvania, is the author of "The New Financial Deal: Understanding the Dodd-Frank Act and its (Unintended) Consequences" (Wiley, 2010).

[philunderwood]

www.qando.net/?cat=941

Did Obama save us from a second “Great Depression”?

June 21st, 2011 | Author: Bruce McQuain

That’s the spin from the White House and its supporters, or has been for quite some time. The story goes, “if we hadn’t passed the stimulus bill, we’d have seen even worse economic performance than we have and we’d have worse unemployment to boot”.

Investor’s Business Daily (IBD) took a look at the claim and found it … wanting.

For instance:

White House economists forecast in January 2009 that, even without a stimulus, unemployment would top out at just 8.8% — well below the 10.8% peak during the 1981-82 recession, and nowhere near Depression-era unemployment levels.

The same month, the Congressional Budget Office predicted that, absent any stimulus, the recession would end in "the second half of 2009." The recession officially ended in June 2009, suggesting that the stimulus did not have anything to do with it.

Now we can argue the unemployment numbers and whether or not the real number of unemployed is approaching the Depression-era level (it’s not), but what can’t be argued are the forecasts from that time. Obviously, the supporters of the stimulus knew of these forecasts and believed that with the stimulus we could come in well under those numbers.

As it turns out, unemployment shot past 8.8% and the recession ended exactly as forecasts said it would without any stimulus. That makes it a bit difficult to argue the stimulus had a positive effect. In fact, it can be argued that it may have had a negative effect. But, there are also those who claim it would have been “a lot worse” without it, not to mention those who claim it was too small to begin with.

But that’s unsupportable in the face of the economic forecasts.

The argument is often made that the recession turned out to be far worse than anyone knew at the time. But various indicators show that the economy had pretty much hit bottom at the end of 2008 — a month before President Obama took office.

Monthly GDP, for example, stopped free-falling in December 2008, long before the stimulus kicked in, according to the National Bureau of Economic Research. (See nearby chart.) Monthly job losses bottomed out in early 2009 while the Index of Leading Economic Indicators started to rise in April.

So looking back we see all the indicators of an economy trying to begin a recovery. Yet here we are still struggling and we spent a trillion dollars of borrowed money in the meantime on goodness knows what.

One other thing to keep in mind – the establishment of the most hostile climate toward business I’ve ever seen from government in my lifetime began about this time as well.

No, per IBD, it appears if there’s any credit at all for saving the country from depression, it should go to the other guy:

Also often overlooked is that a tremendous amount of stimulus already was in the economy when Obama took office, including President Bush’s $150 billion stimulus, two unemployment benefit extensions and $250 billion spent on "automatic stabilizers."

More importantly, the Bush administration pushed through the controversial $700 billion TARP program (which Obama sustained), while the Fed pursued an aggressive anti-recession campaign by, among other things, effectively lowering its target interest rate to zero.

Now agree with it or not (not – I’m still not convinced it was necessary), and buy into the “saved us from depression” or not (not – we’d have gotten over the pain much more quickly and wouldn’t be at the beginning of a “lost decade”), it appears that economic history is being revised here. The Obama stimulus was a latecomer to the party. Most of the action had already taken place. What Obama and his administration did was create a hostile business climate. The business community reacted by sitting on its hands and its money waiting for a clear signal (one they’ve yet to receive) that they’re not going to be taxed and regulated to death.

But Obama save us from a depression?

Just for the record, It doesn’t appear to be the case.

~McQ

[philunderwood]

www.qando.net/?cat=15

Debt limit talks — DC Math and political theater mask the lack of seriousness concerning out-of-control spending

Published July 27, 2011 | By Bruce McQuain


Speaker of the House Boehner’s plan for deficit and debt reduction was shown to be an exercise in “DC Math”. The CBO scored the proposal and determined that the 1.2 trillion “savings” over 10 years actually cut only $1 billion in actual spending next year.


The first installment of $900 billion is contingent on enacting 10 year caps on annual appropriations which the leadership had hoped would save well over $1 trillion. But CBO late Tuesday came back with a report showing the legislation would reduce deficits by $850 billion when measured against the agency’s most current projections for spending.

Yeah, I think we want significantly deeper cuts in spending than that. And of course, keep in mind most Democrats were even opposed to that.

But at least Boehner actually had a plan CBO could score. From Jim Geraghty’s “Morning Jolt” we learn of this conversation in the White House press room (Weekly Standard):


[Chuck] Todd asked Carney about the White House’s reluctance to release its plan to deal with the national debt and raising the debt ceiling. Carney acknowledged the White House was playing games. "We’re showing a lot of leg," he said. When Todd pressed for details — "Why not just release it?" — Carney seemed surprised. "You need it written down?"

What a difference two years makes. In the spring of 2009, with Republicans in the minority in the House of Representatives, the White House and its Democratic allies were demanding specifics. The House GOP had to produce an alternative budget, the White House demanded, in order to show that they were serious about governing.

Geraghty also points to a wonderful rant by Guy Benson over at Townhall concerning the demand for an actual plan:


Yes, actually, we do need "something printed." Since his unmitigated failure of a budget was unanimously defeated in the Senate, this president has refused to offer a specific plan of his own on virtually anything at all. Instead, he talks about "visions" and "contours" and "frameworks" — and tries to blame his opponents when his poor leadership is exposed. Over the last five days, the president has (a)undermined a bargain with John Boehner by introducing an unacceptable eleventh-hour condition, (b) rejected "out of hand" a bipartisan compromise that he found to be politically unpalatable, and (c) delivered a speech that painted his opponents as the intractable extremists. In light of this behavior, it’s entirely reasonable for Americans to wonder what, precisely, Barack Obama’s proposed solution might be. Today, the White House dismissively waived off that question as a GOP talking point and condescendingly inquired if the journalist who dared to ask it was capable of taking notes.

I’ll close with an unsolicited word of advice, and a friendly reminder from the CBO director. The advice: When you’re already plumbing new depths of unpopularity, dialing up your arrogance isn’t a winning strategy. Even David Brooks finds it unseemly.

By the way, Harry Reid’s plan is purported to show about $2 trillion plus in savings by assuming the wars we’re involved in will cost hundreds of billions a year for 10 years, knowing full well that those wars are wrapping up and wrapping up soon (well except for Libya which seems to have shifted from “weeks not months” to “months not years” at this point).

In other words the usual nonsense from Washington DC. Math tricks which say to anyone who is on to them, “these guys aren’t serious”.

~McQ

[philunderwood]

Obama's ‘Balanced’ Approach

By Thomas Sowell

www.JewishWorldReview.com | Barack Obama's political genius is his ability to say things that will sound good to people who have not followed the issues in any detail — regardless of how obviously fraudulent what he says may be to those who have. Shameless effrontery can be a huge political asset, especially if uninformed voters outnumber those who are informed.

President Obama's big pitch in his Monday night televised talk was that what is needed to deal with the national debt crisis is a "balanced" approach — not just spending cuts but revenue increases as well.

What could sound more reasonable — especially to those who have not been following what Obama has actually been doing and not doing? This is the same Barack Obama who, earlier this year, called for a "clean" increase in the national debt ceiling.

In this context, the soothing word "clean" referred to an increase in the national debt ceiling without any provisos. That is, no spending cuts at all. In other words, a blank check to keep spending. How balanced is that?

Another word that sounds good to people who don't stop and think is "fair." President Obama says that he only wants the wealthiest Americans to pay their "fair share." But he says zilch about just what that fair share is, or even how to determine it.

Is the "fair share" of the top 10 percent of income-earners 20 percent of all taxes? 40 percent? 60 percent? Those who talk about paying a "fair share" of taxes don't want to be pinned down.

This is another blank check that Obama wants. "Fair share" in plain English means "more," regardless of how large a share of all income taxes is already being paid by a fraction of the population, while nearly half pay no income taxes at all.

What President Obama says may not make any sense if you stop and think about it — which he of course assumes that most people will not do. But that does not mean that he is a confused man. He is crystal clear in what he is doing, however confusing his words may be to others.

At the heart of the political games being played in Washington is taking credit and putting blame on the other guy. That is the game that Obama played flawlessly in his speech.

It began by referring to the increased government spending that had been going on for a decade — in other words, before Barack Obama reached the White House. It is true that President George W. Bush had a record amount of deficit spending. But what is also true is that President Obama's deficit spending has broken Bush's record.

While Obama seldom misses an opportunity to blame his problems on the situation he inherited from President Bush, he says nothing about all the hundreds of billions of dollars in stimulus money he inherited from the Bush administration. Incidentally, this "stimulus" money did not do any more stimulating under George W. Bush than under Barack H. Obama.

Nevertheless, Obama is an accomplished master at playing the blame game. Having gotten all the political credit for the money he has showered on his favorites from coast to coast, he now seeks to share the blame for the resulting financial crisis with Republicans, by maneuvering them into a position where they have to help solve the debt crisis that Obama created.

He has done this in great part by simply speaking of spending cuts mostly in the abstract, leaving it to the Republicans to be specific, and thus have them face the wrath from the constituencies who support the programs they want to cut.

However one might criticize President Obama's policies in terms of their effect on the American economy, those policies can turn out to be very successful in the terms that matter most to him — namely, his own re-election.

A Washington Post-ABC poll shows that while 52 percent of the public disapprove of Obama's handling of the economy, 65 percent disapprove of the Republicans' handling of it.

The Republicans lost control of Congress in the 2006 elections. Whether the Republicans' ideas are good, bad or indifferent, they have not been able to pass economic legislation — or any other kind of legislation — for more than four long years.

Yet Obama is still ahead in the blame game.

[philunderwood]

Is the US bankrupt?

Published August 12, 2010 | By Bruce McQuain

A good number of voices are beginning to say that technically, if not in fact, the country is bankrupt.

For instance:


America is a "Mickey Mouse economy" that is technically bankrupt, according to Jochen Wermuth, the Chief Investment Officer (CIO) and managing partner at Wermuth Asset Management.

"America today looks like Russia in 1998. Consumers, companies and the government are all highly indebted. America as a result is a bankrupt Mickey Mouse economy," Wermuth told CNBC.

Wermuth goes on to say that if the same IMF team that managed the 1998 Russian financial crisis in Russia were to walk into the US Treasury today, “they would withdraw support for current US policy”.

And don’t forget Mort Zuckerman who called the present policies our “economic Katrina”.

But as bad as present policies are, they aren’t solely the reason we’re in the awful economic shape we’re in. We have a history of that.

"Even before the (Troubled Asset Relief Program) and the expansion of the Fed’s balance sheet, total US public and private debt as a percentage of GDP in the US stood at 290 percent, that figure is now far higher," Wermuth added.

Laurence Kotlikof explains it in terms of a “fiscal gap”.


The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

The IMF pointed out in its last report that the US must close this fiscal gap to “stabilize the debt to GDP ratio”. The IMF estimates ““closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

So what does that mean in dollars?


To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Note the two words – “immediate” and “permanent”. In order to pay off the huge debt our “betters” in Washington DC have run up over the years, strictly from the revenue side, our taxes would have to see an “immediate” and “permanent” doubling.

Sounds like bankruptcy to me.

Kotlikof also tells us about the shady book keeping Congress has been engaged in for decades and what the books probably really look like:


Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

But of course, “official” or “unofficial” it is still debt. Whether Congress will admit to it doesn’t change the fact that it is future debt that Congress has incurred through its profligate policies.

And what’s going to bring this all crashing down, despite the smooth and reassuring words of politicians without a clue? Promises made with no fiscal ability to keep them because, in reality, they’re Ponzi schemes:


We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

Got that – government promised $4 trillion a year that it doesn’t have and never has had. And, thanks to Congressional Democrats, it just expanded that bill under ObamaCare. The system, much like an engine running at hight RPMs with no oil, is going to stop and stop abruptly:


The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

The result of any of those, of course, would be economically catastrophic. And the results among the citizens of this country would be horrible:


Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

For years and years, politicians have claimed all is well with these programs, that we can afford them and that they’ll always be there for those who need them. None of the above is or has been true since their inception. If any private business operated as these programs have, the CEOs would be under the jail and wouldn’t see daylight until our sun exploded.

For years, the left and Democrats have made war on corporations and businesses all the while it has been government leading us to financial ruin. This debt isn’t debt run up by the private side of the economy. It is purely government’s doing. Now, given the gravity of the situation, we have very few options and the future does not look bright.

Next time you see your Congressional representative or Senator, thank him or her for the mess they’ve had a hand in creating and ask them how they are going to fix it. Don’t be surprised by the blank stare you receive in return. They haven’t a clue.

~McQ

[philunderwood]

neoneocon.com/2011/10/15/dropping-the-class-act-fiction/


October 15th, 2011

Dropping the CLASS Act fiction

Now that it’s not needed any more to help the CBO score Obamacare as reducing the deficit, the CLASS Act portion of the bill is being dropped and revealed as the dysfunctional charade it always was:


“CLASS is a critical backstop, giving working families a tool to protect themselves from being one illness or injury away from poverty,” said Garner, who directs a group called Advance CLASS Inc. “The president promised to implement this program. We expect him to keep that promise.”

The program was a long-cherished goal of Kennedy, whose support helped ensure that it was folded into the larger health-care measure despite resistance from prominent Democrats and even the White House.

Its path to inclusion was also eased by projections that, at least initially, it would boost the federal balance sheet by tens of billions of dollars. This was because the law barred the program from paying out benefits for the first five years. So by adding the program to the health-care legislation, Democrats were able to substantially increase the deficit savings they could claim for the law as a whole.

The goals of the CLASS Act were and still are laudable. Unfortunately, the financial realities are such that it’s unworkable. That didn’t stop it from being included in the original bill, or for the CBO to use it to score half the deficit savings the HCR bill was supposed to accomplish. Now the truth can be told:


Democrats engineered the program known by the acronym Class with front-loaded premiums and back-loaded benefits so that on paper it threw off a lot of revenue early on but then bankrupted itself later. This design made it possible for the Congressional Budget Office to score the program as a money-raiser during its first decade and thus make ObamaCare look like it reduced the deficit. And sure enough, CBO, in its final estimate at passage, said that Class would reduce the deficit by $70 billion through 2019—or more than half the bill’s supposed $124 billion 10-year “savings” to the federal fisc. Well, goodbye to all that…HHS’s own experts were warning Democrats all along that Class was a fiscal time bomb, so including it in the bill was a special act of fiscal corruption.

Love that phrase “a special act of fiscal corruption”—that is, among the more ordinary acts of fiscal corruption that so often are part of Congress’s dealings, and were particularly prevalent in the passage of Obamacare. And the CBO is part of the problem rather than the solution. As I wrote back in December of 2009:


I was thinking today that the CBO (Congressional Budget Office) serves no useful purpose anymore.

It’s not allowed to tell the truth. Instead, it has become the tool of a Congress willing, eager, and all too skilled at tailoring legislation to achieve a certain desired CBO score based on assumptions everyone knows are invalid. The CBO is not allowed to call Congress on its games when it evaluates bills.

So why bother? The CBO has become a way to give the imprimatur of fiscal propriety to bills that are essentially scams, and the CBO is powerless to do anything but be a yes-man to whatever a clever and duplicitous Congress manages to come up with.

So how about some sort of realistic scoring by the CBO? Is that too much to ask?

Apparently.

[philunderwood]

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Does the unsustainability of the CLASS act finally doom ObamaCare?

Published October 18, 2011 | By Bruce McQuain

Don’t forget, the CLASS act was one of the budget gimmicks used to supposedly show that ObamaCare “bent the cost curve downward”. Ezra Klein explains:


“CLASS” stands — or stood — for “Community Living Assistance Services and Supports.” The idea was simple, or seemed to be: a voluntary insurance program that would cover home health-care options for adults who become disabled. It was Sen. Ted Kennedy’s brainchild, but the White House was cool to it in public and hostile in private. “Seems like a recipe for disaster to me,” wrote one aide in a subsequently released e-mail.



The problem with CLASS was well understood. It frontloaded its savings and backloaded its costs. As the Congressional Budget Office wrote (pdf), “the cash flows under the new program would generate budgetary savings (that is, a reduction in net federal outlays) for the 2010-2019 period and for the 10 years following 2019, followed by budgetary costs (an increase in net federal outlays) in subsequent decades.” No mystery there.

Well not exactly. It was never sold as “unsustainable” because had the truth been told when the bill was passed into law, it would have been clear that this was as much a Ponzi scheme as Social Security, because it relied on those currently paying in to the program to pay for those collecting or using benefits and, probably just as serious, it was a voluntary program. Two strikes against sustainability.

Obviously I’m not advocating that it be made mandatory, just explaining why it was destined to fail. And fail it has. The director of the program last week announced that the obvious had finally become obvious even to them. The program was unsustainable and they were closing it down.


The administration announced late Friday it did not see a way to make the long-term care CLASS Act, which was crafted by the late Sen. Edward Kennedy (D-Mass.), pay for itself. But perhaps even more damning is how the White House mishandled the controversy; consumer advocates accused the administration of being disingenuous and gutless.

Republicans are now pushing to have the act repealed and it has reignited the larger hope that repeal of the CLASS act will lead to repeal of ObamaCare in total.


The growing drumbeat for repeal comes after the White House announced that it is against repeal and remains committed to making the program work.

“We do not support repeal,” said White House spokesman Nick Papas. “Repealing the CLASS Act isn’t necessary or productive. What we should be doing is working together to address the long-term care challenges we face in this country.”

Admitting that the CLASS act is unsustainable would naturally open the administration up to questions about the whole of ObamaCare’s sustainability, especially since CLASS was one of its main cost reduction pillars.


CBO had scored the long-term care program for people with disabilities as raising $86 billion, or 40 percent of the health law’s $210 billion in deficit reduction over 10 years.

And it was all a lie. I’m not sure what else you call it. It was a knowing falsehood perpetrated by those who wanted to pass the health care law and were willing to do just about anything and say just about anything to do so.

The failure of the CLASS act calls into question the sustainability of the entire law. So the White House has grimly held the line of the CLASS act while it has become apparent to everyone else that the act has to go. And HHS has announced it is closing down the CLASS office.

On the political side, though, reality and party don’t often meet. But in the case of CLASS some Democrats are seeing the light while others would prefer to keep the all but dead program alive:


Some Democrats on Capitol Hill might vote against repeal because they want to keep CLASS alive and to support the White House. But others who are facing challenging reelection races — including Sens. Claire McCaskill (Mo.), Joe Manchin (W.Va.), Jon Tester (Mont.) and Ben Nelson (Neb.) — might not use political capital to save a costly program that might never be implemented.

Interesting. The question now is does proving that 40% of the cost savings ObamaCare promise was a sham call into question the validity and sustainability of the entire law?

It should.

~McQ

[philunderwood]

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