econscius

Archive for the ‘Obama Administration’ Category

The 1950s 91% Income Tax Rate Virtually No One Paid

In Income Tax Rates, Obama Administration on March 12, 2013 at 12:46 am

Economic commentator Peter Schiff, nicknamed Dr. Doom for his prediction of the 2008 economic crisis [1], wrote in the Wall Street Journal about the so-called 91% tax rate of the 1950’s. The rate applied to very, very few and due to deductions, was paid by nearly no one. [2] The article is linked below and is free, no paywall.

I quote excerpts below:

Liberal pundits point out that in the 1950s, when America’s economic might was at its zenith, the rich faced tax rates as high as 91%. True enough, the top marginal income-tax rate in the 1950s was much higher than today’s top rate of 35%—but the share of income paid by the wealthiest Americans has essentially remained flat since then.

In 1958, the top 3% of taxpayers earned 14.7% of all adjusted gross income and paid 29.2% of all federal income taxes. In 2010, the top 3% earned 27.2% of adjusted gross income and their share of all federal taxes rose proportionally, to 51%.

So if the top marginal tax rate has fallen to 35% from 91%, how in the world has the tax burden on the wealthy remained roughly the same? … Lower- and middle-income workers now bear a significantly lighter burden than in the past. And the confiscatory top marginal rates of the 1950s were essentially symbolic—very few actually paid them.

In 1958, an 81% marginal tax rate applied to incomes above $140,000, and the 91% rate kicked in at $400,000 for couples. These figures are in unadjusted 1958 dollars and correspond today to nominal income levels that are about eight times higher. That year, according to Internal Revenue Service records, about 10,000 of the nation’s 45.6 million tax filers had income that was taxed at 81% or higher.

In 1958, approximately two million filers (4.4% of all taxpayers) earned the $12,000 or more for married couples needed to face marginal rates as high as 30%. These Americans paid about 35% of all income taxes. And now? In 2010, 3.9 million taxpayers (2.75% of all taxpayers) were subjected to rates that were 33% or higher. These Americans—many of whom would hardly call themselves wealthy—reported an adjusted gross income of $209,000 or higher, and they paid 49.7% of all income taxes.

In contrast, the share of taxes paid by the bottom two-thirds of taxpayers has fallen dramatically over the same period. In 1958, these Americans accounted for 41.3% of adjusted gross income and paid 29% of all federal taxes. By 2010, their share of adjusted gross income had fallen to 22.5%. But their share of taxes paid fell far more dramatically—to 6.7%…

In 1958, even the lowest-tier filers, which included everyone making up to $5,000 annually, were subjected to an effective 20% rate. Today, almost half of all tax filers have no income-tax liability whatsoever, and many “taxpayers” actually get a net refund from the government. Those nostalgic for 1950s-era “tax fairness” should bear this in mind.

The tax code of the 1950s allowed upper-income Americans to take exemptions and deductions that are unheard of today. Tax shelters were widespread, and not just for the superrich. The working wealthy—including doctors, lawyers, business owners and executives—were versed in the art of creating losses to lower their tax exposure.

For instance, a doctor who earned $50,000 through his medical practice could reduce his taxable income to zero with $50,000 in paper losses or depreciation from property he owned through a real-estate investment partnership. Huge numbers of professionals signed up for all kinds of money-losing schemes. Today, a corresponding doctor earning $500,000 can deduct a maximum of $3,000 from his taxable income, no matter how large the loss.

When Ronald Reagan finally lowered rates in the 1980s, he did so in exchange for scrapping uneconomical deductions.

It’s hard to determine how much otherwise taxable income disappeared through tax shelters in the 1950s. As a result, direct comparisons between the 1950s and now are difficult. However, it is worth noting that from 1958 to 2010, the taxes paid by the top 3% of earners, as a percentage of total personal income (which can’t be reduced by shelters), increased to 3.96% from 2.72%, while the percentage paid by the bottom two-thirds of filers fell to 0.51% in 2010 from 2.7%. This starker division of relative tax burdens can be explained by the inability of upper-income groups to shelter income.

1950s pictures from Wikipedia Commons.

[1] http://www.webcitation.org/5oz96pIPX (Fortune: “Peter Schiff: Oh, he saw it coming.” Brian O’Keefe, January 23, 2009.

[2] http://online.wsj.com/article/SB10001424127887324705104578151601554982808.html

Advertisements

Colleges and Private Sector Employers Cut Worker Hours, Avoid New Hires to Avoid ObamaCare Fines

In Obama Administration, ObamaCare, Unemployment on January 20, 2013 at 1:48 am
Eddie Bauer store closing, Rockford, IL.  Jan. 20, 2013.  Photo by author.

Eddie Bauer store closing, Rockford, IL. Jan. 20, 2013. Photo by author.

Colleges and private employers are cutting hours to stay under 30 hour per week threshold for paying $2,000 “ObamaCare” annual fines.  Others are using independent contractors rather than hire full-time workers to avoid the 50-employee threshold mandating insurance coverage or fines.

It is fascinating to watch how it plays out.  Any massive law such as “ObamaCare” will have unexpected impacts, many negative.  Middle of the night sessions that create laws cannot possibly anticipate – or control – how everyone will react.  We read how colleges are cutting adjunct hours to keep them under 30 hours, since adjuncts generally are not offered healthcare.  [1] There will be additional effects.  The WSJ article quotes Dan King, executive director of the American Association of University Administrators, saying colleges fear ObamaCare will increase unionization efforts of adjuncts.  Why?  The reason being they will end up with fewer hours, pressuring adjuncts, who earn only a fraction of what full professors earn.

Private sector employers, “particularly restaurant operators, have been moving to cut hours to reduce the number of workers to whom they would be required to offer health insurance.” [1]

A Wall Street Journal article [2] goes into detail about one company that is actually expanding, but doesn’t want to crack the 50 full-time employee ObamaCare threshold.  As a result, the owner will hire independent contractors, who, of course, receive no benefits at all.

During her two-plus years in business, Elizabeth Turley has steadily recruited new employees for her apparel company, Meesh & Mia Corp., to keep pace with its rapid growth. But this year could be different. Instead of increasing her staff, she plans to hire independent contractors for tasks that can be outsourced, such as marketing and product development.

Her reason? Meesh & Mia is on the cusp of having 50 full-time employees. If the company hits that threshold, it will have to provide health coverage that meets government standards or potentially pay a penalty.

Elizabeth Turley, CEO of Meesh & Mia, plans to hire independent contractors this year because of health-insurance changes. Ms. Turley looked at fabric options at a trade show Tuesday.

“We are poised this year to more than double or even triple business,” says the 58-year-old Ms. Turley, whose Idaho-based company makes “spiritwear,” or clothes with licensed college and football-team colors and logos. “And then this happened…. We have to find another way to get there.”

Even though the rule doesn’t go into effect until early 2014, a business could be subject to the so-called employer mandate if, during 2013, it averages 50 or more full-time equivalent employees, according to recently released regulations from the Treasury Department and the Internal Revenue Service.

Employers have the choice to calculate their head counts by averaging the full 12 months of 2013 or a consecutive six-month period during the year.
Many small-business owners haven’t yet realized that the way they structure their firm in 2013 could determine their status under the law in a year’s time.

The government issued the little-noticed regulatory guidance on Dec. 28. Ms. Turley says she wasn’t aware of the rules until a Journal reporter informed her.

….Typically, independent contractors are less expensive for employers, who don’t have to pay taxes on wages or supply benefits, as they would for their employees. Reliance on independent contractors has increased over the years, particularly in the recession, when employers sought less expensive labor.

How far does the hour-cutting and non-hiring go?  No one can tell.  Reduced hours may mean crimped service.  I suspect one impact of the law will be more low-income workers working two part-time jobs of approximately 25 hours each, as employers do everything possible to avoid cracking 29 hours per part-time employee.  Others will work as independent contractors rather than obtain full-time employment.  Either would be examples of unintended consequences of the law.  The article about contractors points out the IRS rules are complex, leading to more disputes and audits.

If anything, [audits] will increase more” in light of the health-care law, says Monique Warren, partner at workplace law firm Jackson Lewis LLP in White Plains, N.Y. “Employers have to be real careful about calling someone an independent contractor.”

Government auditors would determine whether a worker misclassification triggers the health-care law’s employer mandate. That means the stakes are higher for employers, particularly those who have close to 50 full-time employees. They could have to pay back taxes in addition to potential penalties associated with the health-care law, should the revised classification push their employee headcount over the threshold.

“Some businesses may be tempted to classify someone as an independent contractor to avoid the headcount that could subject them to the [employer mandate],” says Edward Lenz, senior counsel at the American Staffing Association, an Alexandria, Va., lobbying group for temporary and contract staffing firms. “If anything, the risks of misclassifications are exacerbated by the [health-care law].”

Adding to the confusion for small firms is that an employer’s view of who is an independent contractor may not align with the government’s. The guidelines defining independent contractors “aren’t black and white,” says Ms. Warren. “To some extent, it is deliberately vague. The IRS can’t… account for every different situation.”

Simply juggling schedules if you’re a part-time worker working 20-25 hours per week at two different employers is a challenge.  In today’s economy, finding one, nevermind two, jobs is tough enough.  More than a few workers will find their hours cut from ObamaCare, reducing their total earnings. 

 

[1] http://online.wsj.com/article/SB10001424127887323635504578213502177768898.html?KEYWORDS=health+law+colleges

[2] http://online.wsj.com/article/SB10001424127887324595704578241510527580352.html?KEYWORDS=cutting+hours+employers+health+law

Store closing picture by author.  IRS Building from Wikipedia Commons.

Solar Panel Companies Investigated for $500 Million Fraud; Fisker Out of Batteries & Money

In Electric Cars, Government Spending, Obama Administration on December 16, 2012 at 9:51 pm

Electric car

Electric car


Direct Federal aid to private, for-profit companies in the energy sector continues to careen off the road. The Washington Post reported the Inspector General is looking at three specific firms.

“Three of the country’s most prolific installers of residential solar panels are under federal investigation to determine if they inflated the cost of their work to increase the payments they would receive from the government, according to government and industry officials familiar with the probe.”

“SolarCity, SunRun and Sungevity have received subpoenas from the Treasury Department’s office of inspector general for financial records to justify more than $500 million in federal grants and tax credits the firms tapped for performing work. The probe seeks to determine whether the companies accurately reported the market value of their costs when applying for federal reimbursement, which was calculated at one-third of the costs.” [1]

This expense is part of the Obama Administration’s $13 billion 1603 Program that provides energy give-aways.

Another recipient of government energy policy largess, Fisker Automotive, who cashed $192 million from the Feds, is in a different sort of trouble. Fisker is the maker of the flop Karma, one you won’t seen on the road since it’s sold fewer than 2,000 cars. The vehicle has the wrong sort of karma, with numerous recalls and quality problems (like catching on fire [3] [4] [5]. Its battery supplier A123 Systems, another government cash recipient, failed [6]and now Fisker needs another battery maker in order to restart Karma production. Money-losing Fisker also lacks cash to complete the engineering on a planned second electric car model, the Atlantic. [2]

[1] http://www.washingtonpost.com/politics/solar-firms-probed-for-misrepresentations-in-getting-public-money/2012/12/13/0ba07656-4496-11e2-8e70-e1993528222d_story.html
[2] http://pevc.dowjones.com/Article?an=DJFVW00020121207e8c7ifi2s&cid=32135016&ctype=ts&pid=32&ReturnUrl=http%3a%2f%2fpevc.dowjones.com%3a80%2fArticle%3fan%3dDJFVW00020121207e8c7ifi2s%26cid%3d32135016%26ctype%3dts%26pid%3d32
[3] http://reviews.cnet.com/8301-13746_7-57543123-48/swamped-fisker-karma-electric-cars-catch-fire/
[4] http://www.autoweek.com/article/20120508/CARNEWS/120509860
[5] http://www.insideline.com/fisker/karma/2012/second-2012-fisker-karma-fire-under-investigation.html
[6] https://econscius.wordpress.com/2012/10/18/249-million-obama-grant-recipient-defective-battery-maker-a123-systems-bankruptcy/

Photo by author.

If Bush Tax Cuts Failed, Why Not Enjoy Riding Over the Fiscal Cliff?

In Income Tax Rates, Obama Administration on December 14, 2012 at 1:25 am

An open question to my liberal friends:

Why do most of the “Bush Tax Cuts” need to be extended?

Almost as perplexing as the hubbub about the 2012 end of the Mayan calendar is the sudden concern of left-leaning folks about the “fiscal cliff”.

For a decade, we’ve been told the broad-based tax cuts enacted in the Bush Presidency “didn’t work”. That economic sage Nancy Pelosi even said the 2008 financial crisis was caused by the full package of Bush-era tax cuts, leading to a “near depression” [1] To think some thought too many subprime mortgages and ultra-low interest rates led to the financial meltdown.

Treasury Secretary Geithner said Bush tax cuts didn’t work. [4] Loony writers like Annie Lowrey of Salon, wrote, “The cuts were a colossal failure.” [5] Some actually argue raising taxes, at least on wealthy, is somehow good for the economy. Call it anti-Keynesianism. If they believe that, they should applaud the fiscal cliff: end those pesky tax cuts once and for all!

But wait, the nonpartisan Congressional Budget Office predicts a return to a recession. [3] Everyone from Obama down to the lowliest Lefty blogger says the Bush tax cuts, at least most of them, better get extended or the world will end. Which is odd, if those same tax cuts were a “colossal failure.”

The Lefties try to parse the cuts, they were great, it turns out, no colossal failure at all, for the bulk of the people earning less than $200,000.

That’s right! The corporate manager who earns $199,000 needs a tax cut, she’s a good human being. A tax cut for her is a positive to the economy. Just don’t give her a pay raise to $201,000; then, she shouldn’t get a tax cut. Crossing the magic $200,000 threshold, she’s become a freeloader now, a bad person not paying her fair share. Increase her taxes and it won’t hurt the economy at all. Understand?

Perhaps the liberals and Obama have, belatedly, figured something out: Eighty-five percent of the cost of extending the Bush tax cut costs in 2010 were for people earning less than $250,000 per year.[2] Meaning many of them have been lying the past decade when they said the Bush tax cuts were “for the rich.”

[1] http://www.cbsnews.com/8301-503544_162-57485549-503544/pelosi-immorality-in-gop-tax-plan/
[2] http://money.cnn.com/2010/12/07/news/economy/tax_cut_deal_obama/index.htm

[3] http://www.stltoday.com/news/opinion/columns/fiscal-cliff-could-erase-the-middle-class/article_b54f2b88-79e4-54d2-9a33-3ffd6a4ff99f.html
[4] http://abcnews.go.com/blogs/headlines/2009/03/geithner-bushs/
[5] http://www.slate.com/articles/business/moneybox/2011/06/happy_10th_birthday_bush_tax_cuts.html

Top Democrat Donor Shut Down Hostess Twinkies

In Obama Administration, Political Rhetoric, Uncategorized on November 22, 2012 at 12:53 am

Box of Twinkies

Richard Trumka of the AFL-CIO had it all wrong in his bizarre attack on the private equity firm that backed Hostess Foods, maker of Twinkies and Ding-Dongs.  He said, “What’s happening with Hostess Brands is a microcosm of what’s wrong with America, as Bain-style Wall Street vultures make themselves rich by making America poor.” [1]

Not only does Bain Capital have nothing to do with Hostess, union overindulgence hurt the competitiveness of the maker of Wonder Bread, which was already strained by market changes.  Even more rich than white Twinkie filling is the fact the actual private equity owner is Ripplewood Holdings.  According to tracker OpenSecrets.org, Ripplewood gave $141,000 to the Democratic National Committee in the 2010 cycle, making it the 10th biggest DNC donor and the largest amongst private equity firms. [2]  Ripplewood was founded by Timothy C. Collins, a major donor to Democrats. [1]

Collins’ family gave a half million dollars to the Obama Super PAC Priorities USA. [3]  That means he personally is responsible for almost all the anti-Bain ads of the 2012 election, because they were almost all run by Priorities USA.  [6] This includes ads rated as wholly false by the Washington Post Factchecker such as the one that claimed a death was caused by Bain. [7] 

Collins gave another “$90,800 to Democratic campaigns and committees during the 2012 election cycle.” [3]  Collins also is on the board of the Hamilton Project, a liberal interest group, where he sat with big Obama Administration names like Timothy Geithner, Peter Orszag, Jason Furman, and Democratic power Robert Rubin. [3]  He leveraged former Democratic House leader Richard Gephardt to aquire Hostess. [1]  Collins met personally with President Obama six times at the White House and another four with Obama advisor Valerie Jarrett. [3]  A search of the Huffington Post’s political donation database shows 85 instances of Collins making donations and they were almost exclusively to Democrats. [4]

Hostess logo with heart.jpg

Did Ripplewood cause the demise of Hostess?  As discussed in many business periodicals, Hostess struggled with evolving American tastes, high costs and antiquated union work rules.  As written by Holman Jenkins in today’s Wall Street Journal

Union-imposed work rules stopped drivers from helping to load their trucks. A separate worker, arriving at the store in a separate vehicle, had to be employed to shift goods from a storage area to a retailer’s shelf. Wonder Bread and Twinkies couldn’t ride on the same truck. [5]

Hostess spent eight of the past 11 years in bankruptcy.  Trunka’s quote is nearly Marxist in its off-base attack on a private equity firm that tried, but failed, to save Hostess.  Ripplewood isn’t “making itself rich.”  Despite taking some amounts out, Ripplewood will lose almost its entire $140 million investment in Hostess.  What put the Hostess workers into the unemployment lines?  Look in the mirror, Mr. Trumka.

Collins and his Ripplewood firm have every right to donate to the same Democratic Party that spent the past year demonizing what they do for a living.   We see they are quite capable of ding-dong decisions.  The First Amendment lets Trumka spout nonsense.  But, he is wrong to attack the Bain firm which was less involved in Hostess than good nutrition was.  Blaming Hostess on Bain while absolving the unions is a case as flimsy as a tower of Ding-Dongs piled as high as a stack of the 140 million dollars Ripplewood lost on its investment.  And to Mr. Collins, now that you are getting blowback from your anti-capitalist “friends” like Richard Trumka, just remember one of Hostess’s own products: when you deal with Devil Dogs…

[1] http://dealbook.nytimes.com/2012/11/19/private-equity-and-hostess-stumbling-together/

[2] http://www.opensecrets.org/parties/contrib.php?cmte=DNC&cycle=2010

[3] http://freebeacon.com/all-in-the-family/

[4] http://fundrace.huffingtonpost.com/neighbors.php?type=name&lname=Collins&fname=Timothy

[5] http://online.wsj.com/article/SB10001424127887324352004578130912150512612.html

[6] http://abcnews.go.com/blogs/politics/2012/07/friends-with-benefits-pro-obama-superpac-running-almost-100-of-all-anti-bain-ads/

[7] http://www.politifact.com/truth-o-meter/statements/2012/aug/09/priorities-usa-action/pro-obama-group-blames-romney-womans-death/

Pictures from Wikipedia Commons.

Rejoice For The Stimulus Project Called Hurricane Sandy!

In Economy, Job Creation, Obama Administration on November 2, 2012 at 8:06 pm

Do you believe in stimulus programs?  Do you believe jobs are created by the government?  Are you Keynesian?  Are you voting for Barack Obama?

If so, rejoice!  Hurricane Sandy is a massive stimulus program.  Set aside the civilian deaths for a moment and focus on the government and private sector spending.

Think of Sandy as a $60 billion dollar injection of stimulus. [1]

In one watery swoop, Sally sept into millions of tight-fisted consumers’ wallets.  A frugal Congress can’t stop government spending via FEMA.  “Fannie Mae and Freddie Mac said they will offer help to borrowers whose homes were damaged or destroyed.” [1] 

Deductibles and out-of-pocket expenses to fix broken windows will rev up the metropolitan New York economy.  Think of all the drywall and generators sold by Home Depot.  Surely, pump makers like Britain’s Andrew Sykes Group are busy.  Ruined cars must be replaced, employing autoworkers in Japan and the USA. 

NYC looters [2] act as stimuli, forcing small businesses to restock.  Retailers who love a few dozen TVs and smartphones in a robbery have to replace their electronic inventory.   This creates jobs, doesn’t it?  Even if the products are made abroad, Americans are employed in the ports, on the railroads and at the trucking firms that bring in the replacement wide-screen plasmas.  The looters might even be 99%’s, taking from 1% retailers.

The rebuilding money comes from the federal government, consumers and insurance companies.  Isn’t it good to raid greedy insurance companies?

But does Mother Nature’s destruction of a 2011 Impala actually help us?  The 2012 Impala replacement comes from a combination of an insurance company’s settlement plus a consumer’s deductible.  Is that money free? 

The illustrious French economist Frederic Bastiat addressed the Lindsay Lohan-like thinking behind the above “Sandy stimulus” in his classic  “That Which Is Seen, and That Which Is Not Seen.” [3]   Bastiat looked at the example of the shopkeeper, whose window is broken by someone.  The Obama-Krugman view is that broken windows are very good.  The shopkeeper spends six francs to purchase a window; someone is paid to install it.  The window seller and the window installer receive those francs which they then spend elsewhere in the economy, say for beer and fishing rods, employing even more.  The broken window bonanza flows through the economy, creating what the Keynesians call a “multiplier effect”.  A single dollar spent fixing a window broken by a vandal might become $5 as it filters through the world economy.

The strange conclusion becomes that the economy really needs more broken windows.  Vandals are heroes.  Bastiat saw through that twisted logic, writing about the unseen effects, namely the things the shopkeeper would have spent the six francs on something else, which would have the same multiplicative effect on the economy.  The difference would be a net increase in the economy.  Instead of ending with a replacement window no different from the previous pane, at a cost of six francs, the shopkeeper would have bought something else.

As our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented. [3]

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs: this is that which is seen.

If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs: this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labor, is affected, whether windows are broken or not.

The Keynesian fallacy rests on an idea of huge amounts of savings, selfishly unspent, that could be employing someone.  In the USA of 2012, most everyone is leveraged.  The US government is $16 Trillion in debt, with no hope of repayment.  Consumers are struggling to make ends meet, many deep in debt.  Tens of millions of homeowners’ mortgages are as underwater as the Queens-Midtown Tunnel.  Insurance money is not free, it comes from somewhere.  Property insurers will liquidate their stock and bond holdings to pay Sandy claims, slicing money from the economic system.  They will replenish those reserves by reducing dividends, which takes money out of the economy, and by raising insurance premiums, which also grabs cash from the economy.

Sandy is not really a Stimulus project for the US economy.  It’s an economic calamity just as it’s a humanitarian crisis.

[1] http://business.time.com/2012/10/31/hurricane-sandy-estimated-to-cost-60-billion/

[2] http://news.yahoo.com/blogs/abc-blogs/looters-arrested-post-superstorm-spree-182401079–abc-news-savings-and-investment.html

[3] http://mises.org/daily/3804/The-Broken-Window

###

Obama Brokered Private Equity Oil Deal & Pressured EPA to Waive Environmental Review

In 2012 Elections, Obama Administration, Political Rhetoric on November 1, 2012 at 9:49 pm

At the exact time Obama ran attack ads against Bain Capital, his Administration brokered a deal to sell a carbon-based fuel processing plant to a politically-connected private equity firm, yes, read that again, a private equity firm.  Ever more amazing, the Administration pushed its own EPA to waive an environmental review of the deal.   The report from Mark Maremont in the Wall Street Journal [1]  is behind a pay-wall, so I paste much of it below:

Since the spring, President Barack Obama’s re-election campaign has repeatedly hit Mitt Romney for his career as a private-equity executive and has aired ads accusing his former firm, Bain Capital, of ruining businesses and sending jobs overseas.

At the same time, the Obama White House played a central role in encouraging another private-equity firm to rescue a Philadelphia oil refinery, whose imminent closure by owner Sunoco threatened to send gasoline prices higher before the election.

Gene Sperling, director of Mr. Obama’s National Economic Council, helped kick-start discussions to sell the refinery to Carlyle Group, a well-connected Washington, D.C., private-equity firm.

Mr. Sperling later talked numerous times to Carlyle executives, government officials and union leaders as part of a bipartisan effort, according to participants in the talks.

Carlyle last month said it would take a two-thirds stake in the refinery and invest at least $200 million, staving off the potential for fuel-price increases and saving 850 unionized jobs in Pennsylvania, a likely battleground state in November.

To help seal the deal, expected to be made final in September, the Obama administration and state regulators agreed to loosen certain environmental restrictions on the refinery.

Pennsylvania’s Republican governor, Tom Corbett, contributed $25 million in state subsidies and other incentives.

The refinery story is an example of how the private-equity industry is a more complicated place than the image kicked up by this year’s presidential election, in which first Mr. Romney’s Republican primary rivals, and then the White House, used Bain as a cudgel….

In September 2011, Sunoco said it planned to quit the refining business and sell refineries in Philadelphia and nearby Marcus Hook, Pa. The company has said its refineries lost $1 billion over three years. Sunoco warned it would close both facilities if it failed to find a buyer.

By the end of last year, it had halted refining at Marcus Hook, and talks with possible buyers for the Philadelphia refinery, including Carlyle, had fizzled.

Closing the Philadelphia refinery, the largest on the East Coast, threatened to disrupt gasoline and heating-oil supplies in the Northeast.

A Feb. 27 report from the federal Energy Information Administration warned of the potential for prices to “spike.” Republicans at that time were criticizing the administration for rising gasoline prices.

The EIA warnings, along with a broader reduction of refinery capacity in the region, set “alarm bells” ringing inside the White House, an administration official said. Aides concluded gas prices could rise 20 cents to 30 cents a gallon in parts of the Northeast.

In late February, Rep. Bob Brady, (D., Pa.), a union-friendly congressman from Philadelphia, met with Sunoco’s incoming chief executive, Brian P. MacDonald.

Mr. Brady said the White House was concerned and asked Mr. MacDonald to think about options “if there was broader help,” according to a timeline later circulated by Carlyle, which Sunoco said was accurate. Mr. MacDonald asked to talk to the White House directly.

A Brady representative said the congressman was traveling and unavailable to comment.

On March 8, the White House’s Mr. Sperling hosted a call with the Sunoco CEO, Mr. Brady and Deputy Energy Secretary Dan Poneman. The White House confirmed the call.

The group discussed the possibility of $5 gasoline prices for the summer, Sunoco’s Mr. MacDonald recalled.

When the officials pressed him on a potential solution, he said Sunoco might be willing to keep a piece of the Philadelphia refinery through a joint venture with a partner that could contribute expertise and cash.

“It would have to be a very capable party,” Mr. MacDonald recalled saying. “Sperling pushed me: ‘Who would a party like that be’?”

Mr. MacDonald said Carlyle fit the bill.

Soon after, Mr. Sperling called Carlyle co-CEO David M. Rubenstein about the refinery, according to Carlyle, and left a message.

Carlyle has shied away from any overt involvement in politics. Mr. Rubenstein worked in the Carter administration, and the firm employs executives who have worked in administrations from both parties. It doesn’t donate to political campaigns.

Mr. Rubenstein passed the message from Mr. Sperling to a Carlyle executive who had worked with Mr. Sperling in the Clinton White House, David Marchick, according to Mr. Marchick.

Mr. Marchick said Mr. Sperling told him the White House was willing to help move the deal along. Mr. Sperling also told him the White House wouldn’t do anything just to help Carlyle and that the same assistance would be available to any potential buyer, Mr. Marchick said.

“They didn’t care who bought it,” he said.

Eventually, Sunoco and Carlyle agreed to explore a joint venture, with Carlyle paying nothing for a majority stake but contributing cash for an upgrade.

On March 19, Mr. Sperling talked to Pennsylvania’s Mr. Corbett to see if the Republican governor was interested in cooperating. Mr. Corbett, whose office was already trying to rescue the refinery, agreed.

The White House “helped with Carlyle, and we helped with state government,” he said.

A key issue Carlyle identified was a 2005 consent decree with the Environmental Protection Agency under which Sunoco agreed to limit emissions at its refineries.

Carlyle wanted to work on the refinery without triggering costly environmental reviews.

The White House referred the issue to the EPA, which along with state and local environmental officials agreed to modify the decree, allowing Carlyle to transfer emissions credits from the Marcus Hook refinery, in effect giving the Philadelphia refinery greater leeway to pollute.

The agreement compressed into a few months what participants said could have taken much longer. Carlyle said it doesn’t plan to use the added credits, and over time will reduce emissions. It said the changes will provide flexibility as it carries out the upgrade.

Carlyle’s plan to turn the refinery profitable includes a partial shift to oil from North Dakota that is cheaper than crude from West Africa it now refines, and switching to newly abundant natural gas to power part of the refinery.

In mid-May, as Carlyle and Sunoco were briefing the White House and other officials on their plan, the Obama campaign launched a broadside against Mr. Romney’s Bain career, which featured a worker saying Bain was a “vampire” in its handling of a steel company.

Later, an independent group supporting the Obama candidacy released an ad implicitly accusing Mr. Romney of contributing to the death of a laid-off worker’s wife.

On a July 2 conference call announcing the refinery deal, Carlyle and Sunoco executives and public officials repeatedly thanked the White House and Mr. Sperling.

This shows Obama’s attack ads were nothing more than nonsensical politics.  Imagine what negative ads the Obama campaign would run if it were President Romney pushing a deal toward a connected private equity firm and then relaxing environmental regulations to seal the deal.

[1] http://online.wsj.com/article/SB10000872396390443713704577603281330597966.html

Oil refinery picture from Wikipedia Commons.

Obama Presidency 2009-2012: Weakest Economic Recovery On Record

In 2012 Elections, Economy, Obama Administration on October 19, 2012 at 7:34 pm

When deciding who to vote for President, the footnoted piece provides a sense of perspective about the exceptionally weak economic recovery of the Obama presidency.   This recovery is just one-third as large as the “Reagan” recovery from the 1980-2 recession.  The recession ended more than three years ago, but people feel it has not ended because the recovery is so tepid.  The Wall Street Journal said:

It’s important to understand how unusual this kind of weak recovery is. Deep recessions like the one from December 2007 to June 2009 are typically followed by stronger recoveries, as there is more lost ground to make up.

The most recent comparable recession occurred in 1981-1982. Yet as the nearby chart shows, the Reagan expansion exploded with a 9.3% quarter and kept up a robust pace for years. By the 12th quarter of expansion, growth popped up to 6.4.%. At this stage of the Reagan expansion, overall GDP was 18.5% higher versus 6.7% for the Obama recovery, according to Congress’s Joint Economic Committee.

Even comparing this recovery with the average since the end of World War II, the Obama growth rate is well below the norm of 15.2%. The U.S. is running about $1.5 trillion of economic output behind where it should be.

This may sound like an abstraction, but it is the difference between a robust job market and lost opportunity for millions of Americans. It is the difference between a small federal budget deficit and more than $1 trillion for four straight years. It is the difference between a rising or falling poverty rate. [1]

[1] http://online.wsj.com/article/SB10000872396390443477104577553211912280818.html

Job fair picture from Wikipedia Commons.

$249 Million Obama Grant Recipient, Defective Battery Maker A123 Systems Bankruptcy

In Electric Cars, Government Spending, Obama Administration on October 18, 2012 at 12:04 am

A123 Systems, Inc. logo.svg

The flailing saga of private firms going bankrupt after massive infusions of public funds continues with A123 Energy.  It defaulted on its debt and is declaring bankruptcy.  It received a $249 million grant in strings-free taxpayer money, using $129 million to build a factory.  [1]  It was a grant of money, not a loan, not equity. 

Like Solyndra and others who received government money, it didn’t live up to its job creation promises (touted by President Obama in 2009 as going to create “more than 3,000 [jobs] by the end of 2012.” [2]  Not quite.  It shipped defective batteries, leading to a $55 million recall and was selling batteries at a ratio of $1.57 cost to $1 revenue. [3]  Not a long-term winning strategy.

A123 is just another example of why governments, regardless of the party in the White House, should never, ever pick and choose winners, or as Mitt Romney pointed out, “pick losers” in private business.  They use scarce tax dollars and, sadly, fail because politicians like Mr. Obama haven’t a clue about what is a good or bad business idea.

Considering President Obama’s dislike of many for-profit corporations, the hand outs to private firms like Solyndra, A123 and Johnson Controls make no sense whatsoever.  Good ideas will get built on their own, they don’t need government hand-outs. 

[1] http://blogs.wsj.com/corporate-intelligence/2012/10/16/187/

[2] http://online.wsj.com/article/SB10000872396390443675404578060882850041910.html?KEYWORDS=electric+car+crash

[3] http://www.technologyreview.com/news/427991/what-happened-to-a123/

Pictures (A123 Systems logo & Solyndra building with “for sale” sign) from Wikipedia Commons.

CFO Magazine Update on Delayed Dodd-Frank Implementation

In Obama Administration, Regulation on August 16, 2012 at 1:03 am

Most don’t read CFO magazine, except perhaps when suffering insomnia.  Suspecting you missed it, I linked a piece on Dodd-Frank implementation below [1] (free, no paywall).  Randy Myers’ article is called Unfinished Business.  While the Obama Administration takes credit for the bill, it is not yet implemented because regulators are far behind schedule writing the rules.  No one knows exactly what the end result will be.

Some highlights are repeated below.

Yet because the legislation was drafted so hurriedly, and because the matters it tackles are so complex, Congress left much of the heavy lifting to regulators, saddling them with nearly 400 rulemaking requirements and calling upon them to complete dozens of studies.

It didn’t happen. By June 1 of this year, understaffed and overwhelmed regulators — at the Securities and Exchange Commission, the Federal Reserve, the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency, and elsewhere — had finalized only 110 of the 398 regulations they were tasked with crafting, according to law firm Davis Polk & Wardwell. They had missed 148 deadlines, including 21 for which they had not even issued any proposed rules.

They faced another 140 future rulemaking deadlines, including 123 where they had no proposed rules on the table, and a clutch of additional rulemaking requirements for which they had been given no deadline. Former SEC commissioner Annette Nazareth, now an attorney with Davis Polk, says it will probably be “at least well into 2013” before rulemaking is completed. In some cases, implementation could stretch beyond that.

With so much rulemaking yet to be done, it is probably unfair to ask if Dodd-Frank has succeeded so far in creating a stronger and more secure financial system in the United States. “I think we’ve got a long way to go before we can judge Dodd-Frank,” says Carol Beaumier, an executive vice president with Protiviti, a consulting and internal audit firm.

 National Bank Oamaru.jpg

Still, skeptics, and outright critics, are abundant…. “I think it [Dodd-Frank] has done little to solve our problems,” says Kevin Williams, CFO of Jack Henry & Associates, a $967 million provider of information-processing solutions to community banks. In the two years since the law’s passage, Williams notes, the nation’s biggest banks have gotten bigger, not smaller, with the six largest holding assets equal to 63% of the country’s gross domestic product. That makes their potential failure an even bigger concern than it would have been in the past, he contends.

An excellent point is made below; regulation is looked at as preventing financial mistakes but that is neither realistic ex ante nor is there a track record of regulation preventing financial blow-ups.  The 2008 American financial crisis started in the heavily regulated mortgage business.

“No law can prevent incompetent management or fraudulent management,” warns Jeffrey Burchill, CFO of insurance company FM Global. “You can penalize people for gross error or gross misconduct, but it’s very difficult to prevent that conduct.”
 
All laws, especially sweeping, complex ones, have unintended side effects and one quite plausibly is increase the compliance costs of smaller banks, leaving fewer large banks.  Large banks, of course, create systematic risks when they fail that smaller community banks cannot.  Smaller, local banks tend to be more responsive to local business lending needs, too.
 

Meanwhile, small community banks are being hurt by the cost of complying with a law written in response to problems created by large banks, says Williams. That charge has been echoed by former FDIC chairman Bill Isaac, now chairman of Fifth Third Bancorp., who has said he wouldn’t be surprised if half of the nation’s community banks go out of business if they don’t get some relief from Dodd-Frank.

“I think Dodd-Frank was a political response to an economic problem, and history tells us that is not always the best solution,” says Isaac.

If Williams proves prescient, Dodd-Frank will have been a large, costly, and ultimately misguided effort to strengthen the financial markets. Yet in light of the ongoing devastation wrought by the 2008 credit crisis — to the financial and housing markets and economies around the world — it is probably unrealistic to expect that policymakers would not have tried.

[1] http://www3.cfo.com/article/2012/8/regulation_dodd-frank-act-progress-report-volcker-rule-swaps-derivatives-regulation

Pictures from Wikipedia Commons.