No, You Are The Special Interest!

Who of good conscience doesn't find the $4 Billion tax break for the oil industry, $3 Billion tax break for corporate jets and $126 Million tax break for the horse racing industry obscene examples of corporate welfare? However, since they only account for 8% of the tax breaks, from the point of deficit reduction, they are largely meaningless. A great article in The Washington Post demonstrated that by far the most costly  tax credits are directed towards households, which in 2011 had a negative fiscal impact of over $1 Trillion. For example, the cost of the exclusion of employer contributions for medical insurance premiums grew to $173.7 Billion, mortgage interest write-offs amounted to $88.8 billion and the 401K provision was worth $62.9 Billion. The author correctly points out what many (so called) fiscal conservatives like Grover Norquist fail to see: indirect government spending via tax credits holds the same negative fiscal impact as direct expenditures. The only real difference is that politically "stealth spending" is always easier, because it allows politicians to take credit for expanding government benefits, while also reducing taxes; a temptation that few Democrats or Republicans can resist. But, if we are too tackle our spiraling national debt and avoid the development of hazardous market distortions (housing bubble, college debt bubble, etc.) we must begin to wind down the regiment of tax credits to corporations and households alike. We can no longer afford a system in one man or group is expected to pay for another's special interest.

Ever-increasing tax breaks for U.S. families eclipse benefits for special interests

List of 10 most costly tax breaks in 2011. 




By Lori Montgomery, Published: September 17

As President Obama and congressional Republicans argue over how to rewrite the U.S. tax code, the debate has revolved around “loopholes” for corporate jets and ending “carve-outs” for well-heeled special interests. But if the goal is debt reduction, that’s not where the money is. Broad tax breaks granted to millions of families at all income levels dwarf the corporate giveaways. Over the past two years, largely because of these popular benefits in the federal income tax code, the government has reached a rare milestone in tax collection — it has given away nearly as much as it takes in.

The number of tax breaks has nearly doubled since the last major tax overhaul 25 years ago, with lawmakers adding new benefits for children, college tuition, retirement savings and investment. At the same time, some long-standing breaks have exploded in value, such as the deduction for mortgage interest and the tax-free treatment of health-insurance premiums paid by employers.

All told, federal taxpayers last year received $1.08 trillion in credits, deductions and other perks while paying $1.09 trillion in income taxes, according to government estimates.

Only about 8 percent of those benefits went to corporations. (The write-off for corporate jets equals about .03 percent of the total.) The bulk went to private households, primarily upper-middle-class families that Obama has vowed to protect from new taxes.

“The big money is in the middle-class subsidies,” said Syracuse University economist Leonard Burman, former director of the nonpartisan Tax Policy Center. “You’re not going to balance the budget by eliminating ethanol credits. You have to go after things that really matter to a lot of people.”

These tax breaks weave an invisible web of government benefits that now costs nearly as much as the Pentagon and all other federal agencies combined. But “tax expenditures,” as they are known in Washington, get no routine oversight. Congress and the Treasury Department both track them but use different rules to count them and estimate their value. The congressional Joint Committee on Taxationlists more than 300 breaks, while Treasury tallies 172.

No one regularly assesses whether tax expenditures accomplish the goals they were created to serve. Yet, with the rise of an ideology within the Republican Party that shuns big government and vilifies taxes, they have become virtually untouchable.

For those reasons, the tax code is a popular venue for both parties to pursue costly policy goals.

Edward Kleinbard, a University of Southern California law professor who served until recently as chief of staff to the Joint Committee on Taxation, says tax breaks are now the dominant instrument for creating new spending programs. Policymakers can give taxpayers a government benefit and get credit for lowering their tax bills — a combination lawmakers find “irresistible,” Kleinbard said, because they can portray themselves as tax cutters rather than big spenders.

Every president since Ronald Reagan has learned that lesson. In 1997, after a Republican Congress refused to increase spending for federal student loans, President Bill Clinton turned to the tax code to create a slew of higher-education credits. Initially worth around $10 billion a year to the nation’s college students, those benefits have been expanded to more than $20 billion annually.

Similarly, when President George W. Bush wanted to help victims of the Sept. 11, 2001, attacks, he turned to the tax code. He backed the Victims of Terrorism Tax Relief Act, which wiped out two years of tax liability for survivors and created a continuing exemption for annuities paid to families of public-safety officers killed in the line of duty. Estimated 10-year price tag: $360 million.

In 2009, when Obama wanted to boost the flagging economy, he offered a massive new tax break as the centerpiece of his stimulus package. The Making Work Pay credit put about $60 billion a year in people’s pockets in 2009 and 2010, including $18 billion in “refundable” payments to low-income families whose tax bills were so small that the government had to write them checks to make sure they received the full value.

This week, Obama is expected to offer an outline for revising the tax code to weed out special tax breaks. At the same time, he is pressing Congress to create several more.His $447 billion jobs package includes a $4,000 credit for hiring people who have been out of work more than six months and a $5,000 credit for hiring returning war veterans.

Administration officials say targeted tax cuts are an easy way to quickly put money in people’s pockets. But they also acknowledged the political reality that lawmakers are more inclined to support a plan that cuts taxes than one that increases spending.

Once a tax break is ensconced in the code, it is hard to dislodge. Beneficiaries become fierce defenders, as do anti-tax conservatives, who view the end of a tax break as an impermissible hike in overall tax collections. About 95 percent of Republicans in Congress, and a few Democrats, have signed a pledge circulated by GOP strategist Grover Norquist vowing to “oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.”

The pledge, which Norquist has been circulating for 25 years, promotes “a nonsensical debate that says we’re not going to talk about spending in the tax code like we talk about other spending said Eugene Steuerle, an architect of the 1986 tax overhaul while working in the Reagan Treasury Department and now a senior fellow at the Urban Institute. “Spending in the tax code is granted a superior status, and if you get rid of it, it’s called a tax increase.”

Simply limiting the cost of a tax break can be politically perilous. Norquist’s group, Americans for Tax Reform, recently issued what it called a “comprehensive list of Obama tax hikes.” Among the items: The reversal of a 2003 Internal Revenue Serviceruling that allowed people to use pretax health spending accounts to pay for over-the-counter drugs. The group has dubbed the change the “medicine cabinet tax.”

Even temporary tax breaks have proved remarkably resilient. Congress routinely passes a “tax extender” bill that renews a host of expiring provisions worth about $30 billion a year. One of the most expensive: a break for residents of states that levy no income tax, including Texas and Florida. Congress has agreed to let them deduct sales taxes instead, at an annual cost to the Treasury of about $1.8 billion.

Congress generally renews the breaks for a year or two, preserving the illusion that they are temporary. But of dozens of breaks created since 1986, lawmakers have permitted just 18 major ones to expire, according to a recent Joint Committee report. Half were stimulus measures enacted by Bush and Obama during the recent recession.

Making Work Pay is among the fallen. But before it expired in December, Congress replaced it with a more generous provision that reduced payroll taxes by two percentage points this year. The payroll tax holiday will put an estimated $80 billion in workers’ pockets — a perk that comes on top of the breaks that reduce their income tax bills.

Combined with traditional rate cuts in 2001, proliferating tax breaks have left people at all income levels paying a shrinking share of their earnings in income taxes, the primary federal revenue source. Nearly half of all households no longer pay any income tax. Meanwhile, a middle-income family of four paid just 4.7 percent of its income, on average, to the IRS last year, according to the Center on Budget and Policy Priorities — the third-lowest percentage in 50 years.

If policymakers hope to raise enough cash from tax loopholes to help tame the nation’s debt, tax experts say individual taxpayers will have to pay more.

Even the Bush tax cuts of 2001 and 2003, while infamous for providing disproportionate benefits to the rich, showered far more money in absolute terms on the middle class. The legislation doubled Clinton’s child credit, wiped out the marriage penalty for joint filers and expanded refundable credits. Of the approximately $4 trillion that would be lost if the Bush cuts stayed in place through the next decade, only about $800 billion would go to the wealthiest households making more than $250,000 a year, according to government estimates.

Georgetown University law professor John Buckley recently estimated that 95 percent of the revenue lost to tax expenditures is concentrated in 10 categories that aid families and advance popular policy goals. The “special-interest stuff,” he said, such as write-offs for corporate jets, is minuscule by comparison — “unless we’re all special,” he said.

In the mid-1980s, Reagan administration officials and a Democratic Congress also confronted a tax code eroded by multiplying tax breaks. They concluded that costly breaks, such as a credit that encouraged people to shelter income in unprofitable investments, were keeping tax rates artificially high for everyone.

The resulting overhaul was the most extensive in U.S. history. It repealed or modified dozens of tax expenditures, trimming their overall cost by nearly 40 percent. The resulting savings were not directed to deficit reduction, but used to lower rates across the board, pushing the top rate down from 50 percent to 28 percent.

Huge breaks survived, however. People could still get health insurance from their employers without being taxed, a benefit that originated with wage controls during World War II. And while taxpayers could no longer deduct interest on credit cards, they kept the break for mortgage interest. Policymakers did not want to hurt the real estate and construction industries, and they theorized that the break would continue to encourage people to buy homes.

Burman, then a junior staffer at the Treasury Department, said he warned that it would also encourage people to shoulder ever-larger mortgages. When the housing bubble burst in 2006, he said, “instead of getting into trouble with Visa and MasterCard, people lost their homes.”

The breaks for health insurance and mortgage interest are the most valuable tax expenditures on the books, worth a combined $260 billion this year. They have soared in value, helped along by the increasing size of mortgages and the cost of health insurance.

But a recent effort to cap the value of the health-care exclusion was abandoned amid complaints from labor union officials, who have for years traded wage increases for richer health benefits. Democrats instead enacted a tax on insurers that sell high-cost policies, a provision some lobbyists predict will be further watered down before it is scheduled to take effect in 2013.

Meanwhile, top tax aides said the new debt-reduction “supercommittee” on Capitol Hill could look at capping the mortgage deduction or disallowing it for second homes. Neither is likely, however, and no one has expressed interest in ending the deduction for the vast majority of homeowners.

Caps on spending

After 1986, the tax code emerged leaner and more efficient. But as Norquist began circulating his anti-tax pledge to protect the changes, Congress decided to tackle rising budget deficits by imposing strict caps on spending.

With no place else to go, lawmakers — particularly Democrats — latched onto the tax code as a vehicle for new initiatives.

Buckley, who served until last year as chief Democratic tax counsel on the House Ways and Means Committee, said it started in 1986 with the low-income housing credit for developers and investors. As Reagan’s budget cutters were slashing direct spending on housing, Rep. Charles B. Rangel (D-N.Y.) won bipartisan support for the credit, which quickly became a primary source of financing for housing construction and rehabilitation.

The trend accelerated under Clinton, who found Republican lawmakers far more willing to finance his priorities in the form of tax cuts than as new spending. While Clinton ended traditional welfare programs, he shifted chunks of the social safety net to the tax code, creating an array of benefits for families, including a new credit for every child younger than 17.

“Politically, it was easier to get tax cuts dedicated to a purpose than to get spending dedicated to the same purpose,” said former Obama economic adviser Lawrence H. Summers, who also served as Clinton’s Treasury secretary.

The child credit and the Earned Income Tax Credit, a break for the working poor enacted in 1975, are now two of the federal government’s biggest anti-poverty measures, far larger than the modern welfare program, or even food stamps.

For Clinton, the Taxpayer Relief Act of 1997 had another advantage. It let him make good on a pledge to cut taxes for the middle class without enacting a more expensive rate reduction, said Eric Toder, who served in Clinton’s Treasury Department and is now co-director of the Tax Policy Center. Other Democrats took note.

“If you look at the [Al] Gore campaign or the Obama proposals, just about all their tax cuts are increased tax expenditures,” Toder said. “They really viewed this as the way to give tax cuts to the middle class.”

Rather than tackling these breaks one by one, experts such as Kleinbard and Harvard economist Martin Feldstein, a senior Reagan White House adviser, last week counseled Congress to eliminate or cap all tax breaks for everyone.

Obama has advanced a similar idea that would limit itemized deductions for families earning more than $250,000 a year. But lawmakers have repeatedly rejected it, fearful of antagonizing the industries and charities that benefit, as well as taxpayers themselves.

Kleinbard calls tax expenditures “the sacred tax cows.” But to tame the debt, he said, at least some of them must be led to slaughter. “There’s just no other way to make the numbers work.”

The Source of Corporate Welfare or Why Governor Quinn Stinks!

Pictured Above: Governor Quinn consulting with his economic advisor.

When Governor Quinn made Illinois even less attractive to businesses, by substantially raising taxes, predictably more employers started moving out. Rather than address this issue by making across the board tax and regulatory reform, that equally apply to all employers, Quinn offered $100 million in selective subsidies (i.e. corporate welfare) to Motorola and will presumably do so when other major firms threaten to leave. Even companies that do not intend on relocating will be able to leverage the state. Fundamentally, this means that the tax burden will be shifted towards companies and individuals who are not politically connected. Truly Governor Quinn you stink!

$100 million keeps Motorola Mobility in Illinois

Illinois boosts tax incentives in 10-year deal to keep smartphone company in Libertyville

May 06, 2011

By Kathy Bergen and Wailin Wong, Tribune reporters

Gov. Pat Quinn put up more than $100 million in financial incentives to persuade smartphone company Motorola Mobility to keep its corporate headquarters in Libertyville — the largest package he has offered a company to date and a signal of how badly the state wants to hold on to high-tech jobs

To persuade the maker of mobile devices and cable TV set-top boxes to stay, rather than move to California or Texas, state lawmakers sweetened terms of its tax-credit incentive program as it has for automakers, including Mitsubishi, and truck- and engine-manufacturers, including Navistar International Corp.

Navistar landed a $64.7 million package last year to keep its headquarters in Illinois, the second-largest deal during Quinn's tenure.

The Illinois packages are among a rash of retention deals cropping up nationwide as the economic malaise keeps unemployment at painful levels.

Motorola Mobility's tax-credit package comes in at $10 million annually over the next 10 years, assuming it meets job retention and investment goals. The company also will receive $1.25 million in job-training funds and a $3 million large-business development grant to assist with capital expenses.

The deal, announced Friday, breaks down to about $34,750 for each of the 3,000 jobs Motorola Mobility has agreed to retain, considerably more than the $15,000 to $20,000 per job that is more typical when the state awards tax credits to keep or attract businesses.

"These are higher skilled, higher paying jobs than most projects," said a spokeswoman for the state's Department of Commerce and Economic Opportunity.

Motorola Mobility, one of two companies that previously formed Motorola Inc., pledged to spend more than $500 million on research and development over the next three years, essentially what the company already had planned to spend.

But there is potential to grow that amount, some of which might have gone elsewhere if Motorola Mobility had relocated, Chief Executive Sanjay Jha said.
The company's decision was announced amid much fanfare at Motorola Mobility Holdings Inc.'s Libertyville offices. Employees and senior executives wore red T-shirts emblazoned with "Motorola Mobility Illinois" and packed an auditorium to see Quinn sign the legislation enhancing its tax-credit package.

"We don't want folks to leave," Quinn said. "We want them to stay and grow with great companies like Motorola."

The legislation Quinn signed also applies to some companies in the cable TV, wireless telecommunications and computing fields, as well as to makers of inner tubes and tires. The latter could indicate other deals may be in the works.

Laurence Msall, president of the Civic Federation, a tax policy group, called the deal a prudent investment for the fiscally struggling state. "The best way for the state to stabilize its finances is to grow its economic strength," he said.

As to the richness of the deal, economic development expert George Ranney said, "Yeah, it's a concern, but these are pretty good jobs." Ranney is president of Metropolis Strategies, a business-backed policy organization.

Other economic development experts took issue with the package.
Typically, the Economic Development for a Growing Economy, or EDGE, tax-credit program allows companies to use the credits against their state corporate income tax liability. But many companies pay no such taxes, partly due to difficult economic times and partly because an earlier revision in the tax structure slashed bills for multinational corporations.

Motorola Mobility's federal and state income tax liability represented less than 1 percent of its revenue in 2010, and it had no liability in 2009, according to estimates in company filings.

Under the legislation signed by Quinn on Friday, the company now has the option to use the credits against withheld employee income tax liability. In essence, the company can retain state employee income tax withholdings, said Warren Ribley, director of the Illinois Department of Commerce and Economic Opportunity.

Greg LeRoy, executive director of Good Jobs First, a nonprofit that researches economic development subsidies, called the diversion of personal income tax revenue "an insidious recent development." About a dozen states have some form of it, and a couple more are debating the issue, he said.It is "like companies grabbing into employees' pockets," said LeRoy, adding that it also represents a new encroachment into state revenue streams.

"Shame on Motorola and other companies for asking for such big subsidies when they know governments are strapped," he said.
wawong@tribune.com

Product of Incest

Supporters of the GM Bailout are celebrating the supposed payback of the funds to the government (will be discussed in a later post). But, a closer look at the deal reveals unsettling details, like a tax break that may go as high as $45 billion. When the federal government and politically connected corporations form "strategic public-private partnerships," their inbred progeny are usually quite costly to American Tax Payers.

NOVEMBER 3, 2010.

GM Could Be Free of Taxes for Years


General Motors Co. will drive away from its U.S.-government-financed restructuring with a final gift in its trunk: a tax break that could be worth as much as $45 billion.

.GM, which plans to begin promoting its relisting on the stock exchange to investors this week, wiped out billions of dollars in debt, laid off thousands of employees and jettisoned money-losing brands during its U.S.-funded reorganization last year.

Now it turns out, according to documents filed with federal regulators, the revamping left the car maker with another boost as it prepares to return to the stock market. It won't have to pay $45.4 billion in taxes on future profits.

The tax benefit stems from so-called tax-loss carry-forwards and other provisions, which allow companies to use losses in prior years and costs related to pensions and other expenses to shield profits from U.S. taxes for up to 20 years. In GM's case, the losses stem from years prior to when GM entered bankruptcy.
Usually, companies that undergo a significant change in ownership risk having major restrictions put on their tax benefits. The U.S. bailout of GM, in which the Treasury took a 61% stake in the company, ordinarily would have resulted in GM having such limits put on its tax benefits, according to tax experts.
But the federal government, in a little-noticed ruling last year, decided that companies that received U.S. bailout money under the Troubled Asset Relief Program won't fall under that rule.
Neal Boudette discusses GM's IPO plans, which will raise up to $10 billion and cut the government's stake to below 50%.

."The Internal Revenue Service has decided that the government's involvement with these companies, both its acquisitions plus its disposals of their stock, means they should be exempt" from the rule, said Robert Willens, a New York tax consultant who advises investment banks and hedge funds.
The government's rationale, said people familiar with the situation, is that the profit-shielding tax credit makes the bailed-out companies more attractive to investors, and that the value of the benefit is greater than the lost tax payments, especially since the tax payments would not exist if the companies fail.
GM declined to comment.

The $45.4 billion in future tax savings consist of $18.9 billion in carry-forwards based on past losses, according to GM's pre-IPO public disclosure. The other tax savings are related to costs such as pensions and other post-retirement benefits, and property, plants and equipment.
GM may avoid paying up to $45 billion in taxes for up to 20 years, according to people familiar with the situation. Above,GM's Cadillac logo is displayed on the grill of a Cadillac SRX.

.The losses were incurred by "Old GM," the company that remained in bankruptcy after the current "New GM" resulted from the reorganization last June.

.Investors typically view tax-loss carry-forwards losses as important assets in bolstering a company's balance sheet.

GM's chief domestic rival, Ford Motor Co., last year adopted a plan to preserve deferred "tax assets" which stood at $17 billion at the end of 2009. Ford can use the tax attributes in certain circumstances to reduce its federal tax liability. Ford declined to comment on the GM tax ruling.
Write to Randall Smith at randall.smith@wsj.com and Sharon Terlep at sharon.terlep@wsj.com

http://online.wsj.com/article/SB10001424052748704462704575590642149103202.html

Big Business and Big Government

Far too many conservatives and progressives have adopted the narrative of large, uber capitalist corporations that opposed big government and regulation, when quite often the truth is more complex. A careful look at history and current events shows that many larger corporations are avid supporters of the interventionist state, because they seek to use subsidies and even regulations as means of limiting competition and maintaining their market monopolies. And not surprisingly, as the state has increased its influence in the workings of big business, big business has increased its influence in the state.

July 21, 2006

Big Business and Big Government
by Timothy P. Carney

Big business has too much power in Washington, according to 90 percent of Americans in a December 2005 poll.

Every week, headlines reveal some scandal involving politicians, lobbyists, corporate cash, and allegations of bribes. CEOs get face time with senators, cabinet secretaries, and presidents. Lawmakers and bureaucrats take laps through the revolving door between government and corporate lobbying. Whatever goes on behind closed doors between the CEOs and the senators can't be good or the doors would not be closed.

Just what is big business doing with all this influence? There are many assumptions about big business's agenda in Washington. In 2003 one author asserted, "When corporations lobby governments, their usual goal is to avoid regulation."

That statement reflects the conventional wisdom that government action protects ordinary people by restraining big business, which, in turn, wants to be left alone. Historian Arthur Schlesinger articulated a similar point: "Liberalism in America [the progression of the welfare state and government intervention in the economy] has been ordinarily the movement on the part of the other sections of society to restrain the power of the business community." The facts point in an entirely different direction:

Enron was a tireless advocate of strict global energy regulations supported by environmentalists. Enron also used its influence in Washington to keep laissez-faire bureaucrats off the federal commissions that regulate the energy industry.

Philip Morris has aggressively supported heightened federal regulation of tobacco and tobacco advertising. Meanwhile, the state governments that sued Big Tobacco are now working to protect those same large cigarette companies from competition and lawsuits.

A recent tax increase in Virginia passed because of the tireless support of the state's business leaders, and big business has a long history of supporting tax hikes.
General Motors provided critical support for new stricter clean air rules that boosted the company's bottom line.

The Big Myth

The myth is widespread and deeply rooted that big business and big government are rivals—that big business wants small government.

A 1935 Chicago Daily Tribune column argued that voting against Franklin D. Roosevelt was voting for big business. "Led by the President," the columnist wrote, "New Dealers have accepted the challenge, confident the people will repudiate organized business and give the Roosevelt program a new lease on life." However, three days earlier, the president of the Chamber of Commerce and a group of other business leaders met with FDR to support expanding the New Deal.

Almost 70 years later New York Times columnist Paul Krugman assailed the George W. Bush administration: "The new guys in town are knee-jerk conservatives; they view too much government as the root of all evil, believe that what's good for big business is always good for America and think that the answer to every problem is to cut taxes and allow more pollution." At the same time, "big business" just across the river in Virginia was ramping up its campaign for a tax increase, and Enron was lobbying Bush's closest advisers to support the Kyoto Protocol on climate change.

Months later, when Enron collapsed, writers attributed the company's corruption and obscene profits to "anarchic capitalism" and asserted that "the Enron scandal makes it clear that the unfettered free market does not work." In fact, Enron thrived in a world of complex regulations and begged for government handouts at every turn.

When commentators do notice business looking for more federal regulation, they mark it up as an aberration.

When a Washington Post reporter noted in 1987 that airlines were asking Congress for help, she commented, "Last month, when the airline industry found itself pursued by state regulators seeking to police airline advertising, it looked for help in an unlikely place—Washington." In truth, airline executives had been behind federal regulation of their industry for decades and had aggressively opposed deregulation.

In fact, for the past century and more big business has often relied on big government for support.

The History of Big Business Is the History of Big Government

As the federal government has progressively become larger over the decades, every significant introduction of government regulation, taxation, and spending has been to the benefit of some big business. Start with perhaps the most misunderstood period of government intervention, the Progressive Era from the late 19th century until the beginning of World War I.

President Theodore Roosevelt is usually depicted as the hero of this episode in American history, and his "trust busting" as the central action of the plot. The history books teach that Teddy empowered the federal government and the White House in a crusade to curb the big business excesses of the "Gilded Age."

A close study of Roosevelt's legacy and that of Progressive legislation and regulation, however, yields a far different understanding and shows that the experience with meat—big business calling in big government for protection—was a recurring theme. Roosevelt expanded Washington's power often with the aim and the effect of helping the fattest of the fat cats.

Today's history books credit muckraking novelist Upton Sinclair with the reforms in meatpacking. Sinclair, however, deflected the praise. "The Federal inspection of meat was, historically, established at the packers' request," he wrote in a 1906 magazine article. "It is maintained and paid for by the people of the United States for the benefit of the packers."

Gabriel Kolko, historian of the era, concurs. "The reality of the matter, of course, is that the big packers were warm friends of regulation, especially when it primarily affected their innumerable small competitors." Sure enough, Thomas E. Wilson, speaking for the same big packers Sinclair had targeted, testified to a congressional committee that summer, "We are now and have always been in favor of the extension of the inspection, also of the adoption of the sanitary regulations that will insure the very best possible conditions." Small packers, it turned out, would feel the regulatory burden more than large packers would.

Consider the story of one of the most famous "trusts" in American folklore: U.S. Steel.

In the 1880s and 1890s, rapid steel mergers created the mammoth U.S. Steel out of what had been 138 steel companies. In the early years of the new century, however, U.S. Steel saw its profits falling. That insecurity brought about a momentous meeting.

On November 21, 1907, in New York's posh Waldorf-Astoria, 49 chiefs of the leading steel companies met for dinner. The host was U.S. Steel chairman Judge Elbert Gary. The gathering, the first of the "Gary Dinners," hoped to yield "gentlemen's agreements" against cutting steel prices. At the second meeting, a few weeks later, "every manufacturer present gave the opinion that no necessity or reason exists for the reduction of prices at the present time," Gary reported.

The big guys were meeting openly— with Teddy Roosevelt's Justice Department officials present, in fact—to set prices.

But it did not work. "By May, 1908," Kolko writes, "breaks again began appearing in the united steel front." Some manufacturers were undercutting the agreement by dropping prices. "After June, 1908, the Gary agreement was nominal rather than real. Smaller steel companies began cutting prices." U.S. Steel lost market share during this time, which Kolko blames on "its technological conservatism and its lack of flexible leadership." In fact, according to Kolko, "U.S. Steel never had any particular technological advantage, as was often true of the largest firm in other industries."

In this way, the free market acts as an equalizer. While economies of scale allow corporate giants more flexible financing and can drive down costs, massive size usually also creates inertia and inflexibility. U.S. Steel saw itself as a vulnerable giant threatened by the boisterous free market, and Gary's failed efforts at rationalizing the industry left only one line of defense. "Having failed in the realm of economics," Kolko writes, "the efforts of the United States Steel group were to be shifted to politics."

Sure enough, on February 15, 1909, steel magnate Andrew Carnegie wrote a letter to the New York Times favoring "government control" of the steel industry. Two years later, Gary echoed this sentiment before a congressional committee: "I believe we must come to enforced publicity and governmental control . . . even as to prices."

When it came to railroad regulation by the Interstate Commerce Commission, the railroads themselves were among the leading advocates. The editors of the Wall Street Journal wondered at this development and editorialized on December 28, 1904:


Nothing is more noteworthy than the fact that President Roosevelt's recommendation recommendation in favor of government regulation of railroad rates and[Corporation] Commissioner [James R.] Garfield's recommendation in favor of federal control of interstate companies have met with so much favor among managers of railroad and industrial companies.

Once again, big business favored government curbs on business, and once again, journalists were surprised.

To cast it in the analogy of Baptists and Bootleggers, the muckrakers such as Sinclair were the "Baptists," holding up altruistic moral reasons for government control, and the big meatpackers, railroads, and steel companies were the "Bootleggers," trying to get rich from government restrictions on their business. Roosevelt was allied to the "bootleggers," the big meatpackers in this case. To get federal regulation, he found Sinclair a handy temporary ally. Roosevelt had little good to say about Sinclair and his ilk; he called Sinclair a "crackpot."

This preponderance of evidence drove Kolko, no knee-jerk opponent of government intervention, to conclude, "The dominant fact of American political life at the beginning of [the 20th] century was that big business led the struggle for the federal regulation of the economy." With World War I around the corner, this "dominant fact" was not about to change.

The men who gathered at the Department of War on December 6, 1916, struck a startling contrast. Labor leader Samuel Gompers sat at the table with President Woodrow Wilson and five members of his cabinet.

Joining Gompers and those Democratic politicians were Daniel Willard, president of the Baltimore and Ohio Railroad; Howard Coffin, president of Hudson Motor Corporation; Wall Street financier Bernard Baruch; Julius Rosenwald, president of Sears, Roebuck; and a few others. This extraordinary gathering was the first meeting of the Council of National Defense, formed by Congress and President Wilson as a means for organizing "the whole industrial mechanism . . . in the most effective way."

The businessmen at this 1916 meeting had dreams for the CND that went far beyond America's imminent involvement in the Great War, both in breadth and in duration. "It is our hope," Coffin had written in a letter to the DuPonts days before the meeting, "that we may lay the foundation for that closely knit structure, industrial, civil, and military, which every thinking American has come to realize is vital to the future life of this country, in peace and in commerce, no less than in possible war."

The CND, after beginning the project of government control over industry, handed much of its responsibility to the new War Industries Board (WIB) by July of 1917. That coalition of industry and government leaders increasingly took control of all aspects of the economy. War Industries Board member and historian Grosvenor Clarkson stated that the WIB strived for "concentration of commerce, industry, and all the powers of government." Clarkson exulted that "the War Industries Board extended its antennae into the innermost recesses of industry. . . . Never was there such an approach to omniscience in the business affairs of a continent."

Business's aims in the WIB were much higher than government contracts, and certainly business did not lobby for laissez faire. As Clarkson puts it, "Business willed its own domination, forged its bonds, and policed its own subjection." Business, in effect, shouted to Washington, "Regulate me!" Business called on government to control workers' hours and wages as well as the details of production.

A decade later Herbert Hoover practiced more of the same. Hoover's record was one not of leaving big business alone but of making government an active member of the team. As commerce secretary in the 1920s, he helped form cartels in many U.S. industries, including coffee and rubber. In the name of conservation, Hoover "worked in collaboration with a growing majority of the oil industry in behalf of restrictions on oil production," according to economic historian Murray Rothbard.

In the White House (where history books portray him as a callous and clueless practitioner of laissez faire), Hoover reacted to the onset of the Great Depression by pressuring big business to lead the way on a wage freeze, preventing the drop in pay that earlier depressions had brought about. Henry Ford, Pierre DuPont, Julius Rosenwald, General Motors president Alfred Sloan, Standard Oil president Walter Teagle, and General Electric president Owen D. Young all embraced the policy of keeping wages high as the economy went south.

Hoover praised their cooperation as an "advance in the whole conception of the relationship of business to public welfare . . . a far cry from the arbitrary and dog-eat-dog attitude of . . . the business world of some thirty or forty years ago."

Before FDR, Hoover got the ball rolling for the New Deal with his Reconstruction Finance Corporation. The RFC extended government loans to banks and railroads. The RFC's chairman was Eugene Meyer, also chairman of the Federal Reserve. Meyer's brother-in-law was George Blumenthal, an officer of J.P. Morgan & Co., which had heavy railroad holdings.

The New Deal and Beyond

After the groundwork laid by the Progressives, Wilson, and Hoover, the alliance of big business and big government continued throughout the 20th century.


Franklin D. Roosevelt implemented the same sort of government controls on the economy during World War II that Wilson had put in place during World War I, complete with rationing and price controls. Big business profited from the controlled economy in much the same ways that it had under Wilson.
President Harry Truman wanted his secretary of state's June 5, 1947, speech to Harvard's commencement to be a quiet one about the rebuilding of Europe. He didn't get his wish. The New York Times and the Washington Post both reported the story on the front pages. Within a day, the whole world knew about the Marshall Plan. But very few knew that a clique of mostly business leaders, called "The President's Committee on Foreign Aid," drafted the idea. Secretary of Commerce W. Averell Harriman, son of railroad magnate E. H. Harriman and former chairman of both Union Pacific Railroad and Illinois Central Railroad, ran the committee. Nine other businessmen joined him. "Throughout, business members—particularly Harriman— set the agenda and the tone for the group's work," historian Kim McQuaid writes. "Without the corporate politicians, Truman's effort would have failed. Men like [cotton baron Will] Clayton and Harriman arrayed foreign aid in procapitalist, anticommunist attire."
On Sunday night, August 15, 1971, millions of Americans watched President Richard Nixon lay out his New Economic Policy. Nixon had a reputation as a staunch conservative, but his New Economic Policy (a phrase borrowed, bizarrely, from Vladimir Lenin) showed Nixon to be a changed man. The federal government would prohibit any increase in wages, prices, or rents for 90 days. After that a "wage and price council" would dictate to businesses when and how much they could increase wages, salaries, and prices. The next day W. P. Gullander, president of the National Association of Manufacturers, declared that "the bold move taken by the President to strengthen the American economy deserves the support and cooperation of all groups." That reaction was typical among big businesspeople. The New York Times reported on August 17, 1971, "Business leaders applauded yesterday, with varying degrees of enthusiasm, the sweeping proposals announced by President Nixon Sunday night."
George W. Bush, in the name of "compassionate conservatism," has handed big business big favors in the form of a prescription drug benefit from Medicare, an energy bill full of brand new special tax credits and subsidies to energy companies, and a record loan guarantee to facilitate business with known nuclear proliferators in China. A report by the directors of the Health Reform Program at Boston University's School of Public Health found, "An estimated 61.1 percent of the Medicare dollars that will be spent to buy more prescriptions will remain in the hands of drug makers as added profits. This windfall means an estimated $139 billion in increased profits over eight years for the world's most profitable industry."

"The greatest trick the devil ever pulled," said Kaiser Soze in the film The Usual Suspects, "was convincing the world he didn't exist." In a similar way, big business and big government prosper from the perception that they are rivals instead of partners (in plunder). The history of big business is one of cooperation with big government. Most noteworthy expansions of government power are to the liking of, and at the request of, big business.

If this sounds like an attack on big business, it is not intended to be. It is an attack on certain practices of big business. When business plays by the crooked rules of politics, average citizens get ripped off. The blame lies with those who wrote the rules. In the parlance of hip-hop, "don't hate the player, hate the game."

This article originally appeared in the July/August 2006 edition of Cato Policy Report

http://www.cato.org/research/articles/cpr28n4-1.html

Ahhh, In The Good Old Days...

Ahhh, the Good Old Days...when GW Bush doled out billions of dollars in tax cuts and subsidies to connected corporations, "progressives" cried of "corporate welfare". Now, most of them remain silent as Obama funnels billions of dollars in public funds to private interests. I guess its only "corporate welfare" when the other guys do it.

Treasury to dole out $3.8 billion to GMAC, raise stake

WASHINGTON (Reuters) – The U.S. is injecting another $3.8 billion into GMAC Financial Services to help cover mortgage losses, in a bailout that makes the government the majority owner of the auto and home finance company.

GMAC said after the capital infusion it does not expect to record more major losses from its mortgage lending unit, which should help stabilize results.

The company is one of the largest car loan makers in the United States, and earning profit will give it more capacity to make loans and eventually pay back the government.

Many analysts see GMAC's mortgage assets, which make up about a third of the company's $178.2 billion balance sheet, as the main obstacle to the lender reaching profitability.

Those assets have already forced GMAC to seek new funds. Before Wednesday's capital infusion, GMAC had already received $12.5 billion of aid from the United States.

A government test of the company's capital in May, known as the stress test, found that GMAC needed $11.5 billion of equity. About $9.1 billion of that equity had to be new capital, while the rest could come from converting existing capital into new instruments such as common equity.

GMAC has raised about $7.3 billion of that $9.1 billion of new capital from the United States. The government decided that the company has raised enough because the bankruptcy of General Motors , which once owned all of GMAC, had less of an impact on the finance company than previously expected.

NOT OUT OF THE WOODS YET

Questions still remain for GMAC, though. The extent of future losses from its mortgage assets is not yet clear, a bondholder said.

He added that the best route for GMAC to follow now would be to sell off GMAC's mortgage servicing business, which collects payments from borrowers and is worth more than $3 billion on the company's books.

The bondholder, who requested anonymity because he is not authorized to speak to the media, said the company could continue to make new home loans through its Ally Bank unit.
GMAC's remaining mortgage loans could be used to pay off coming debt obligations linked to its Residential Capital unit, the investor added. If the assets don't perform well enough, that unit could go into bankruptcy, he added.

GMAC said in its statement that its board of directors reviewed Residential Capital's options and decided unanimously to take the steps announced on Wednesday.

GM sold a 51 percent stake in GMAC to private equity firm Cerberus in 2006, but held onto 49 percent of the company. Over time, GM's stake has been whittled down to 16.6 percent, including a trust managed for GM's benefit. Cerberus' stake is now 14.9 percent. The U.S. now holds 56.3 percent, with the rest of the company being held by Cerberus investors.

The government previously held about 35 percent of the company's common stock.
GMAC's mortgage business lost nearly $600 million in the third quarter, but its auto finance operations were profitable, earning about $164 million after taxes.

In November, GMAC Chief Executive Al de Molina resigned and was replaced by Michael Carpenter, a board member and former Citigroup executive.

On news reports of the planned capital infusion, the cost to insure GMAC's debt against default in the credit derivatives market fell to around 4.4 percentage points, or $440,000 a year for five years, from 4.66 percentage points at Tuesday's close, according to market data company Markit.

(Additional reporting by Corbett B. Daly and Tim Ahmann in Washington, and Dan Wilchins and Karen Brettell in New York; Editing by Derek Caney, Dave Zimmerman and Steve Orlofsky)

http://news.yahoo.com/s/nm/20091230/bs_nm/us_gmac_aid

It Stinks!

Robert Reich asks the important question of why will Goldman Sachs receive $1 billion dollars in the event that the CIT Group goes bankrupt while tax payers lose $2.3 billion? It all boils down to 3 simple principle:

1. Politicians and bureaucrats face little or no consequences for mismanaging the public's money.

2. Subsidies and bailouts are determined less by economic logic and more by political connections, accordingly they flow towards large corporate interests.

3. As more of the public becomes net recipients of tax funds, the less vigilant the public shall be towards government waste, corruption and fiscal irresponsibility.

All excellent reasons for limiting the size and scope of the state.

CIT saga is just business as usual

If business lender CIT Group falls into bankruptcy, taxpayers will end up losing $2.3 billion, which is what the firm got from the bailout last year. But commentator Robert Reich says CIT stands to gain about $1 billion from taxpayers' loss.

Kai Ryssdal: Small business owners will be relieved to hear that CIT is still alive. At least as of right now. This country's biggest lender to small and medium-sized businesses is smack up against a Chapter 11 filing, even after a federal bailout. Commentator Robert Reich says the CIT saga is just the latest example of business as usual on Wall Street and in Washington

ROBERT REICH: CIT Group, one of the nation's biggest small-business lenders is on the brink. If its bondholders reject CIT's last-ditch plan, which seems increasingly likely, the company will become the fifth-largest bankruptcy in U.S. history.

And when CIT goes under it will also take taxpayers with it, to the tune of $2.3 billion, which is what the firm got from the Treasury's Wall Street bailout program last December.

But here's an interesting thing. When CIT goes down, Goldman Sachs reportedly will receive a billion dollars from CIT under a 2008 rescue agreement between the two firms.

Now, why will Goldman get a billion, while taxpayers lose more than twice that? Because the Treasury failed to protect taxpayer interests nearly as well as Goldman protected Goldman's interests. And why was that? Incompetence at Treasury? Close ties between Treasury and Goldman Sachs? Just bad luck?

You can rule out bad luck because almost the same thing happened last fall after the Treasury bailed out AIG, which owed Goldman $13 billion. AIG still hasn't paid us taxpayers and probably never will. But when we bailed out AIG, Goldman got repaid its money.

Goldman has announced record earnings for the first six months of this year, and set aside $11.4 billion for a bonus pool for its executives and traders, which comes to a few billion dollars less than we taxpayers have indirectly channeled to Goldman since last fall.

I don't want to pick on Goldman. All top five Wall Street banks have profited nicely from the bailout, all have increased their market shares, all their executives and traders are now making bundles, and all continue to have close ties to Washington.

Now, some in Congress want to set limits on Wall Street pay. This is one of several measures being considered for financial reform. The Treasury doesn't like the idea, but it sounds reasonable to me. As long as we taxpayers continue to bail out the Street, which seems likely to continue for some time, our tax dollars will inevitably find their way to these giant banks and their executives and traders.

Just follow the money, and watch what happens with CIT.
RYSSDAL: Robert Reich is a professor of public policy at the University of California Berkeley.

http://marketplace.publicradio.org/display/web/2009/10/07/pm-reich/

Distribution of Wealth (part II)

The competitiveness of a nation's firms effects the wages, welfare and distribution of wealth that its citizens face. For example, after the second world war, American automakers held a near monopoly on car sales and accordingly were immensely profitable. The productivity of workers and companies alike allowed for an impressive growth in wages and benefits that allowed automobile workers to attain a comfortable middle class lifestyle. A strong industrial sector with high paying jobs naturally contributed to a more equitable distribution of wealth.

But an increase in competition from car makers from Japan, Germany, Korea and a host of other companies, led to a decline in the market share and profitability of American auto makers. Even with automation and outsourcing, operating expenses outstripped income, culminating in the much publicized bankruptcy of GM and several other firms. Clearly under these circumstances, it became impossible to sustain the level of workers compensation, as well as the number of autoworkers. Unfortunately this pattern of industrial decline was repeated across multiple industries, leading to industrial decline, substantial job losses and a decline in wages and benefits. All but the most radical analysts acknowledge that the welfare of workers is fundamentally connected to the health, competitiveness and profitability of companies and industries.

The decline in manufacturing was accompanied by growth in two sectors:

-retail and service industries that required low skill, low wage workers.

-high tech industries (like bio-tech) and high end services (like financial consulting) which required highly educated and highly compensated workers.

The end result was a job market that increasingly rewarded skilled, educated workers and offered diminishing returns for low skilled, uneducated workers. Needless to say this further skewed the distribution of wealth.

The only questions that remain are - what government policies contributed to the industrial decline and what can be done (if anything) to reverse it? There is a great deal of debate on this topic, but some key factors worth considering are:

1. The persistent failure of large segments of the country to consider the competitive costs imposed on American firms by numerous political mandates. For example, any company that south to set up a factory in Chicago would face costly permits, regulations, hiring mandates, taxes and outright corruption. And let's not forget the constant liability they would face with the constant threat of frivolous and fraudulent lawsuits. To protect itself, the hypothetical company would spend enormously on legal and insurance services, which greatly adds to the cost of their operating expenses.

This is not to say that we do not need health and environmental regulation and that citizens should not be able to sue corporations, rather we must carefully weigh the costs and benefits of each policies And we must always be aware that we are in a highly competitive global market in which capital and production are increasingly mobile.

2. The many sub-par public schools that do little to prepare American students for an increasingly competitive labor market that requires skilled, adaptive workers.

Why these schools perform so poorly is a topic that merits a long and separate debate.

3. A tax system that provides net disincentives for industrial investments and other productive enterprises.

4. A political system in which government intervention in the private sector and corporate influence of government policies has pathologically grown. As seen through the very selective distribution of bailouts, subsidies and selective regulation to connected financial and automotive firms, favor with the federal government is playing a dangerously large role in the success or failure of corporations. Clearly ever subsidy offered to a politically connected firm increases the tax burden on non-connected firms. Needless to say, this creates an environment that discourages private investment and innovation and encourages rent seeking.

http://en.wikipedia.org/wiki/Rent_seeking

Rejoice - We Are Saved!

Pictured Above: GM's new line of fuel efficient
cars, designed by Obama himself.

Obama chose Brian Deese, a 31 year old with no experience in the auto industry or running a any business, to restructure GM, one of the largest corporations in the world...rejoice - we are saved!

Obama Chooses 31-Year-Old Graduate for GM Repair
(WiredPRNews.com - Business, News)

Yale graduate Brian Deese has been put in role to help fix General Motors.

Wired PR News – President Barack Obama has put a 31 year-old recent graduate of Yale Law School in a significant auto industry restructuring role. As reported by The New York Times, Brian Deese has been chosen to head the dismantling of the financially struggling auto giant General Motors.

Deese is quoted by the New York Times as stating of his role as special assistant to the president for economic policy, “There was a time between Nov. 4 and mid-February when I was the only full-time member of the auto task force… It was a little scary.”

Lawrence H. Summers, National Economic Council head, is quoted in the report as stating of Deese in his position, “Brian grasps both the economics and the politics about as quickly as I’ve seen anyone do this… And there he was in the Roosevelt Room, speaking up vigorously to make the point that the costs we were going to incur giving Fiat a chance were no greater than some of the hidden costs of liquidation.”

Corporate Welfare Dude...

Pictured Above: A Supporter of Corporate Welfare.

All it takes is populist rhetoric and scare tactics to make "progressives" support corporate welfare. The left rightly criticized Bush for the subsidies that he offered allied corporations, but is strangely silent when our lord and savior Barack Hussein Obama undertakes the same behavior.

Dr. Paul is on the Ball!

Scroll down to check out this interview with Dr. Paul - once again he is on the ball!

There's nothing inherently wrong with a big business as long as they arrived at and maintain their size by providing goods and services that the public desires. Look at the Fortune 500 from today and from 30 years ago and you will see a long list of "corporate monopolies" that are no longer on the list or no longer even exist, because newer, more innovative companies provided better, more cost effective goods and services.

A big business is only problematic when it:

1. Arrived at or maintains it size and market dominance through government subsidies, preferential treatment, i.e. "corporate welfare" and anti-competitive regulations that limit the entry of new players into the market.

2. It has a truly dangerous product that the market or the government has failed to regulate. In the age of the instantaneous global communication, vigilant safety advocacy groups and an increasingly educated public, the market is usually quick to punish companies that produce truly dangerous products. China's loss of hundreds of millions of dollars because of the lead scare improved the safety of its products to a degree and at a speed far greater than any corrupt regulatory body could hope to do. And those that provided lead free products from the beginning gained a competitive advantage, profited and grew.

http://www.youtube.com/watch?v=nODyj8H68TA

A Progressive Argument Against Big Government...

"Progressives" frequently lament "corporate welfare," or in more economical terms they oppose subsidies and tax exemptions granted to politically connected corporations. Amazingly, I am 100% in agreement with them.

In theory a strategic, temporary subsidy based on sound economic logic could yield a net benefit. The problem is that rarely, if ever the redistribution of tax payers money is based on sound economic logic.

In Washington DC there are over 30,000 lobbyists that disburse several billion dollars a year to a multitude of politicians. The pharmaceutical industry along disbursed over $900,000,000 between 1998 - 2005. Of course this had nothing to do with the Bush administration's passage of Bush's 2003 prescription drug plan...

The size and scope of lobbying indicates that without a doubt that the redistribution of tax payer money is based not on economic or social logic, but on political connections engendered by large campaign contributions. And we can be certain that the connected corporations receive a massive return on their political investment. In fact, the Carmen Group, a mid-sized lobbying firm claims that for every $1,000,000 that its clients spend on its services, it delivers over $100,000,000 in government benefits!

So, I find it absolutely puzzling how "progressives" can support big government when tax payer funds are redistributed not according to sound economic or social logic, but to the corporations and interests that are most politically connected. In other words money will inevitably flow towards the most wealthy and connected interests. And even "noble programs" like the prescription drug plan are inevitably organized to maximize the gain of large corporate interests, as seen by clauses that allow pharmaceutical firms to greatly increase the cost of their products.

"Progressives" should not view "corporate welfare" as an aberration, but as the inevitable outcome of a redistributive state. Until the magical day in which government is clean and organized for the benefit of the public, "progressives" should be extremely cautious about expanding the size and scope of the state.

http://www.washingtonpost.com/wp-dyn/content/article/2006/09/08/AR2006090801610.html