29 January 2010

High Speed Rail Winners

The graphic in today's Denver Post suggests that federal high speed rail dollars will advance:
* a Seattle to Portland, Oregon line;
* a San Francisco to San Diego line;
* a Cincinnati to Cleveland via Columbus line;
* an Orlando to Tampa line;
* a few small Acela extensions in the Northeast;
* a stub line from Milwaukee that doesn't make much sense to me; and
* a Chicago to Peoria line that cuts a diagonal across Illinois that don't make much sense to me.

I also wonder how either California or Illinois, both of which have virtually bankrupt state governments, are going to come up with local match money for these projects (usually 20% of the total for new infrastructure which will cost billions of dollars). Florida's economy is also in the tank, although its proposed high speed rail line is small enough that this may not be as big of a concern.

Mostly, however, these routes do make sense in terms of length, population density and needs for transportation between the cities linked.

Colorado gets only chump changes for more studies.

Sympatric Speciation

Biologists are very comfortable with the idea that new species can be formed when geographic barriers put members of the same species in places with different selective pressures. This is called allopatry.

The December 18, 2009 issue of Science explores a different route to forming a new species that may be more common than originally believed. In sympatric speciation, members of the same species become adapted to different ecological niches of a geographically overlapping environment and mate assortively.

This is likely to happen where there is more than one survival strategy that works in the environment, but both are "extreme" approaches, while middle ground is selected against. This can be particularly powerful when fitness at one of the extremes is distinguished by "ornaments" that a member of a species can use to distinguish well adapted members of the opposite sex.

The analysis is highly relevant in marine environments, where there are many species but few truly isolated locations.

The even greater teaser is that the analysis could be relevant to continuing human evolution of socially, but not geographically isolated populations in an era where almost no one is geographically isolated in our new small world. Many studies, for example, have looked at the impact of millenia of Jewish community isolation and differential treatment relative to the general populations into which the Jewish diaspora spread on Jewish community population genetics.

No one is suggesting that there is more than one hominin species in existence at the moment on Earth. But, this kind of analysis is another context where anthropology is developing multiple different kinds of links to genetics. In particular, there is interest in whether neurodiversity may arise from, or be sustained by, this kind of sympatric population separation. In other words, perhaps human societies have different "ecological niches" for different neurological traits that are selected for with assortive marriage in some way, which may be interdependent with each other.

Valproic Acid For Trauma Treatment

The theory isn't that complicated when reduced to its essentials. When you have major blood loss, you go into shock. For a short time, this increases your chances of survival by increasing your blood pressure and adjusting other parts of your body chemistry. But, it you stay in shock too long it starts the process of ushering you into your traumatic death in an irreversible way.

An epilepsy drug called valproic acid tricks your body into thinking it doesn't need to go into shock. In the modern world, where there are other ways to deal with blood loss and medical tools to revive people once they reach a hospital, this trick is a good thing. A person whose body doesn't think they are in shock is more likely to avoid lasting harm from the incident if a hospital can be reached in time.

This isn't the sort of drug that it makes sense to have in the drug cabinet at home, but it is the sort of treatment that could become a standard part of an emergency medical technician's arsenal.

At this point, there is a theoretical basis for the treatment, there are some successful rodent trials, and there is progress towards the "safe" part of the Food and Drug Administration's "safe and effective" requirement for new drugs that is established because the drug is already used to treat epilepsy. But, developers are initially looking at using the drug in a battlefield setting, and if it works, it could make a significant difference in emergency trauma care survival rates.

Even slight differences in treatment approaches make a huge difference in survival rates. For example, a delay of just five or ten minutes in the time it takes to reach a hospital in certain kinds of serious accidents doubles the likelihood that a patient will die. Some of that time sensitivity may come from the way the shock reaction works, which a quick valproic acid injection could change.

Denver Jail Population Down

Denver City Councilman At Large Doug Linkhart has worked steadily and quietly behind the scenes to reduce the City's reliance on incarceration. His efforts have paid off.

Voters approved $378 million in 2005 to build a new courthouse, downtown jail and to build a new facility at what is known as the county jail on Smith Road. . . .

Five years ago, Denver's jails were so crowded that officials had to erect a tent to house prisoners. Now, thanks to reductions in the time it takes to get inmates before judges and the creation of a drug court and early-release programs, the average daily number of inmates at the jails has declined by about 300. On Wednesday, Denver housed 2,008 inmates.

The city will open a new downtown, 1,500-bed jail later this year. Another 1,634 beds exist at the Smith Road facility, and the city plans in June to start spending $25 million in bond money to build another 256-bed facility at Smith Road and tear down antiquated buildings there that house 500 of the inmates.

Linkhart has floated the idea of not building the new 256 bed facility at Smith Road and using the money allocated for it elsewhere (or not spending the money earmarked for it at all). Thus, rather than reducing the capacity of the Smith Road facility by 246 beds, its capacity would be reduced by 500 beds after the new downtown jail opens. Corrections officials, obviously, don't support the idea, because they prefer to have less crowded jails, which are easier to manage.

There is also the concern that the reduction in the number of inmates held may not be permanent. Another reason that the jail is not as crowded now is that crime has fallen significantly in Denver over the last five years. But, it may be decades until funds are available for another jail expansion and Denver's population hasn't stopped growing.

I doubt that Denver will change its plans for the Smith Road facility. But, the fact that this is even a choice for Denver is a good sign.

28 January 2010

Law School Affirmative Action Close To Gone

[L]aw schools added about 3,000 seats for first-year students from 1993 to 2008, [but] both the percentage and the number of black and Mexican-American law students declined in that period . . . in that same period, both groups improved their college grade-point averages and their scores on the Law School Admission Test . . . . "[the] scores and grades [of African-Americans and Mexican-Americans] are improving, and are very close to those of white applicants[.]”

Conrad Johnson "who oversees the Lawyering in the Digital Age Clinic at Columbia . . . collaborated with the Society of American Law Teachers to examine minority enrollment rates at American law schools."

From here. Study details here.

The study itself notes that 34% of white applicants, 46% of Mexican-American applicants and 61% of African-American applicants are "shut out" (i.e. not able to get into any of the law schools to which they applied).

Recent studies on race and the LSATs by the company that designs and administers the test can be found here.

In the 2005-2006 academic year, the mean LSAT scores by ethnicity were:

African-American 142.31 SD 8.39
Mexican-American 147.65 SD 8.68
Caucasion 152.71 SD 9.03

LSAT scores have, by design, a nearly perfect bell curve.

The quote from the study author above suggests that this gap has narrowed since this academic year.

Economic Tidbits

* A news story within the last week reported that General Motors, after scuttling a deal to sell its Saab division and preparing to shut down the brand, has found a new buyer with financial backing from the Swedish government.

* Ford not only managed to avoid a government bailout and bankruptcy, it earned a $2.7 billion profit in 2009:

It was the automaker's first annual profit in four years. Ford's full-year revenue of $118.3 billion fell 14 percent from 2008, but the Dearborn-based automaker benefited from $5.1 billion in cuts to manufacturing, engineering and advertising and a $1.3 billion profit at Ford Credit. It gained market share in North and South America and Europe despite the worst U.S. sales climate in 30 years. Share in Asia was flat. . . . It lost a record $14.6 billion . . . in 2008. . . . The automaker finished the year with $34.3 billion in debt, up $7.4 billion from Sept. 30. The company took on $7 billion in debt it owes a retiree health care trust fund run by the United Auto Workers union. It puts Ford at a disadvantage to GM and Chrysler Group, which were able to shed debt in bankruptcy court.

[Ford had a] U.S. market share of 15.3 percent, which was up 1.1 percentage points. It was Ford's first U.S. market share increase since 1995.

In round numbers, Ford is making a profit of about $120 per vehicle sold from its core automotive business, with the remainder of its profits, just under half, coming from its financing arm. This isn't a huge profit, but the fact that Ford was able to do this in an extremely bad year for car sales during a serious recession, without the crutch of having tens of billions of dollars of debt forgiven or receiving tens of billions of dollars of government loans, is encouraging.

The fact that Ford is able to make a profit in these circumstances also makes one very concerned if GM and Chrysler are not able to make profits in the very near future despite having shed their debts, shut down their unprofitable brands, and in the case of Chrysler, having secured a successful foreign partner.

* A tentative deal has been reach between metro area Albertson's workers through their union, and management. Employees will vote on the deal over the next week. As I noted earlier, while Safeway employees rejected a deal from management proposed at the same time as a similar deal with King Soopers workers, a new deal was reached this past month and is also awaiting approval. If the Albertson's and Safeway workers approve the new deals, all three major unionized grocery store chains in metropolitan Denver will have labor contracts in place.

* The consequences of the housing bubble collapse have not yet run their course. Defaults on single family home mortgages guaranteed by Fannie Mae continue to soar:

Fannie Mae reported today that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 5.29% in November, up from 4.98% in October - and up from 2.13%in November 2008.

"Includes seriously delinquent conventional single-family loans as a percent of the total number of conventional single-family loans."

* One month Treasury bills now have negative effective interest rates. Investors are willing to pay slightly more than a dollar now in exchange for a risk free promise of a dollar a month from now. The effective interest rate is negative one hundredth of a percent. Previously, on March 26, interest rates on one month T-Bills had fallen as low as negative one point five hundredths of a percent.

This means, basically, that there are more people out there who don't want to take any risk at all by investing in something other than Treasury bills over the next month (even non-FDIC insured bank deposits or gold or foreign currencies, for example) than there are Treasury bills available to buy.

The good news is that this helps brings the cost of paying interest on the national debt (which is spread amongst a variety of maturity dates) to a near record low, easing one pressure on the federal budget.

* The U.S. Senate has voted to let Ben Bernanke keep his job as chair of the Federal Reserve, despite considerable controversy over the vote. The vote was 70-30, and could have been blocked by a filibuster if another ten Senators had opposed his nomination. "I[t] was still the most negative votes [to reconfirm a Federal Reserve chairman] since the 16 nay votes for Volcker in his reconfirmation vote in 1983. . . . The Chair of the Fed serves a four year term and, unlike the 14 year term for Federal Reserve Board members, the Chair can be reappointed."

In fact, the "70 to 30 vote was the thinnest approval ever extended to a chairman in the central bank’s 96-year history. . . . the Senate first voted 77 to 23 to end debate, well over the threshold of 60 needed to overcome the threat of a filibuster. On a second vote, to confirm, the 30 dissents came from 18 Republicans, 11 Democrats and one independent, Bernard Sanders of Vermont."

Either party could have mobilized to defeat the reconfirmation, which was decidedly not partisan. Both of Colorado's Senators voted to reconfirm Bernanke.

Why was this appointment controversial? Because, " given his stated intensions, a Bernanke reappointment implies larger bailouts in the future – thus compromising our budget further with contingent liabilities, i.e., huge payments that we’ll have to make next time there is a crisis."

* Finally, here is a quick recap of President Obama's State of the Union Address Tax Proposals (apparently guest cross-posted from here):

[A]n accelerated depreciation provision amounting to a 10% tax cut for businesses and costing $38 billion . . . . preferences for capital gains (exempting them from taxes when the money is invested in small businesses) . . . a tax credit for new workers . . . .

Adjusting the way the federal government supports loans for college students . . . The current program represents a subsidy for banks that has grown through the years to provide fees to banks even though universities do most of the same administration work that they did under the direct loan programs. . . . It's time to eliminate the giveaway and provide the money to students instead of to the banks.

Ending tax breaks for Big Oil, ending the carried interest preferential taxation of compensation for investment fund managers, and not extending the lower rates for the super-rich . . . .

[T]axing financial institutions to pay for the costs of the federal guarantee that has been necessary to move them out of crisis through use of the TARP funding. . . . based on the degree of leverage other than ordinary deposits.

I am not a fan of the accelerated depreciation provision or the capital gain tax preference proposed, nor am I a fan of the "Cadillac plan" excise tax in the Senate health care reform bill which is the point from which any deal on health care reform adopted this year will start (not included in the listing above). The other proposals seem reasonably sensible given the circumstances.

Denver Blog Watch

The Denver Infill blog is midway through a nice top ten list of the most important land use/transportation decisions that have been made in the past decade.

I recently discovered the blog of Julien Riel-Salvatore, an anthropology professor at the University of Colorado at Denver: A Very Remote Period Indeed. The quality of its posts on are a par with other top anthropology blogs on the net, and it also offer a steady beat of local happenings pertinent to the field so that you can personally connect to the global community of people who are studying our prehistory.

Vestal Vespa is inching towards coming out of hiberation, with three posts in the last two months after a long hiatus of only sporadic posting.

27 January 2010

You Might Be A Professor If . . .

your resume is 71 pages long.

Another Citizens United Shoe To Drop

An en banc oral argument in a campaign finance case in the D.C. Circuit involving contribution restrictions argued for by the FEC for 527 organizations revealed deep skepticism of the constitutional validity of campaign finance regulations far beyond those expressly considered by the U.S. Supreme Court in its landmark Citizens United decision of last week. Last week's decision invalidated limits on independent campaign expenditures by corporations while upholding disclosure requirements.

The appellate judges had great difficulty seeing how the FEC regulations could be valid in light of the narrow conception of permissible anti-corruption justifications for campaign finance laws articulated by Justice Kennedy's opinion in the Citizens United case.

Media Trust Highly Partisan

One of the reasons it is hard to have a civil discourse in the political sphere is that the American public is nowhere close to having a shared trust in those providing the facts that inform that discussion.

Conservatives deeply distrust all mainstream media news sources other than the Fox network. Two-thirds distrust them, and one in five to one in seven of them trust them (depending on the particular network). Three-quarters of conservatives, however, trust Fox News.

At least half of liberals trust all TV networks other than Fox, while only a quarter trust Fox News.

Moderates trust non-Fox News outlets more often than the distrust them, and distrust Fox News more than they trust it.

Cognitive dissonance is alive and well!

Conservative Trust Of Media Outlets (Yes/No)--PPP Poll 1/26/10

FOX NEWS: 75/13
CNN: 22/60
ABC NEWS: 16/67
NBC NEWS: 15/66
CBS NEWS: 14/68 . . .

Liberal Trust of Media Outlets (Yes/No)--PPP Poll 1/26/10

NBC NEWS: 64/22
CNN: 63/21
CBS NEWS: 56/29
ABC NEWS: 50/31
FOX NEWS: 26/66 . . .

Moderate Trust of Media Outlets (Yes/No)--PPP Poll 1/26/10

CNN: 47/31
NBC NEWS: 44/33
CBS NEWS: 41/33
ABC NEWS: 39/34
FOX NEWS: 33/48

CNN is as close to any of the networks to middle ground. It has the most support from moderates and is tied for highest trust less distrust numbers among liberal, while coming in second place among five major TV news networks among conservatives.

This is rather frightening as CNN's news coverage is really dismal and has gone far downhill from its early hay day. I don't expect any network other than Fox News to lie to me, but trust CNN less than any of the old big three networks.

Then again, who I am to say anything. I simply don't watch TV news outside airports, at least not if I can help it. I get my news from newspapers, radio (mostly public radio), magazines and the Internet. I trust the Associated Press, Reuters, the New York Times, the Washington Post, the Denver Post, National Public Radio, the BBC, the Economist, the Financial Times, Science News, and a great many other sources more than I do television news for most things I want to know.

Almost all TV news is generally too vapid for my taste, and their timing is inconvenient. TV News is under too much time pressure, and too much pressure to simplify issues for their audiences to tell enough of the story for me to be comfortable that I know what I should know. Every once in a while, for example, in the wake of Haiti's recent earthquake, it would be nice to have the on the scene visuals and sound that TV news done right can provide. But, usually, it simply isn't worth the trouble.

Alas, this still matters. A lot of people, and a significant share of voters, get all their news from television and often get all of their news from a single news network.

I believe in a politics built around shared purpose where there is wide agreement (even if not total agreement) that flows from a common understanding of the situation, whenever possible. My instinct is to look for common ground and constructive solutions that may not be in the spotlight, rather than looking for intense fights around hot button issues.

But, it is hard to see how we get to a politics that takes that approach until we can break down the perception gap that divides us politically. I'm not sure how that can be managed. It probably won't be with rational analysis. Trust is fundamentally an emotional and social issue.

Yet, I don't believe that it has to be this way. I never believe that deconstructionist theorists who argue that this is no such thing as neutrality or truth. Our nation has had more of a common perception of reality in the past, and it can do so again. Not every nation is divided over these basics as we seem to be in the United States. And, if we find some common ground we can help our nation to make more positive progress.

Oregon Voters Ratify New Taxes

In Oregon:

Two ballot measures that would raise taxes on businesses and higher-income residents in Oregon appeared headed for approval late Tuesday. The tax increases, which would raise about $727 million largely for public education and social services, were approved last year by the Legislature, but later put to a public referendum after opponents gathered signatures in a petition campaign.
The Legislature, controlled by Democrats, has already put the $727 million into the current budget. So if the ballot items, known as Measures 66 and 67, had been rejected, lawmakers would have been forced to hold a special session to find other ways to reduce spending or raise revenue.

This is a bellwether for both Congress, as its considers its budget choices, and state legislatures, and defies conventional wisdom that voters aren't willing to choose revenue increases over government service cuts in hard economic times if those revenue increases are well crafted.

Charge It Against My Fifteen Minutes

A New York Times article has quoted me on the subject of Dungeons and Dragons in prison.

The issue arose out of a decision by the U.S. Court of Appeals for the 7th Circuit upholding a prison regulation at a maximum security prison in Wisconsin that banned Dungeons and Dragons on the theory that it would promote gang activity. The legal standard at issue is the "rational basis" test of constitutional review of free speech right claims.

I can certainly imagine rational basis reasons for the ban. For example, "prison shouldn't be fun, and the only reason to allow Dungeons and Dragons in prison is to allow inmates to have fun," or "dice and other Dungeons and Dragons materials could be used to conceal contraband," or "Dungeons and Dragons materials could be used as a cover for gambling which is banned in prison." But, the notion that Dungeons and Dragons could conceivably promote dangerous gang activity in prison is absurd, and the testimony of the supposed "gang expert" whose opinion was the basis of the prison's defense of its policy was embarassing to the state and the expert witness involved viewed by anyone with a remote familiarity with the game.

Moreover, from a public policy view, there is evidence that Dungeons and Dragons is likely to improve, rather than harm, the maintenance of good order in prisons. For example, a study of mildly mentally retarded individuals (close to the average in maximum security prisons where more than a third of inmates are typically high school dropouts) showed that playing Dungeons and Dragons helped improve self-control, reading and math abilities.

Full disclosure: Yes, I did play dungeons and dragons and other role playing games actively for most of my junior high school and high school years. The word the Japanese would use to describe someone with my level of interest in the game is Otaku.

The best quote of the VC thread that received notice from the NYT:

Upton Updike says:

Gays can play D&D and not get married.

Inmates can get married but can’t play D&D.

I suppose we’re even...

January 26, 2010, 8:25 pm

26 January 2010

More Denver Post Bankruptcy Details

More details about the Denver Post's holding company's bankruptcy are available at the 5280 blog:

The Seattle Times notes that the Bank of America, among other lenders, will enjoy an 88 percent stake in dozens of U.S. newspapers . . . [Dean] Singleton will receive a $634,000 salary and an annual bonus of up to $500,000 as [succesor publisher] Affiliated’s chief executive. He will also receive $360,000 annually under a separate agreement with The Denver Post Corp.

Those are pretty hefty salaries for a pair of apparently part-time jobs.

The Seattle Times goes on to (fairly and appropriately) berate the group of newspapers for its consolidation strategy, which homogenized newspapers making them less interesting. Of course, the investors who financed this strategy were ultimately empty handed as a result of the reorganization.

The 88% figure cited by the Seattle Times is a bit puzzling, however. Earlier accounts had appeared to state that Singleton and one of his senior executives will together have a 20% stake in the successor entity. Given the factual weaknesses of the Seattle Times' other criticism of the deal, I'm inclined not to give this figure much credit.

The Seattle Times also faults Affiliated for being bank controlled, arguing that this biases the papers the chain owns in favor of it bank owners and depriving it of independence. This analysis that doesn't really ring true. The reorganization leaves the banks without voting control of the resulting company, leaves them with less leverage as a result of their debt ownership since the burden this places on the publisher's cash flow is more manageable, and fails to recognize that most of these lenders will be required to unload their investments within five years.

As a result of the reorganization, Singleton has a free hand to manage his newspaper empire as he sees fit without input from outsider owners or creditors. If anything, the influence that banks have over the chain's editorial decision making is greatly reduced now that it does not have to engage in high stakes negotiations with them over the survival of the company. Now that he has their money, and his company has been forgiven the lion's share of the debts it owes to its lenders, the only reason he has to make a profit for them is his own substantial stake in the company which gives him an incentive to make the company profitable (to the extent that he can't divert those profits with tools like generous compensation for his services for himself).

Where's The AIG Beef?

The Prelude To The AIG Bailout

The financial crisis was mostly the result of a lot of bad credit decisions.

At the bottom were mortgage loans made to people whose ability to pay was dubious. The worked for a while because the housing bubble made it possible for lenders to get paid if the loans weren't paid as agreed by foreclosing, even if the borrower couldn't pay.

Then, these loans were bundled and repackaged into investments of varying levels of risk bought by people who overestimated their value. But, these bad decisions were made, in part, because huge, reputable financial companies, like major investment bankers and AIG were willing to promise that the losses wouldn't be to big with a form of guarantee called a credit default swap. Often lower tier financial companies made the initial guarantees and then limited their own liability by reinsuring their risk with larger companies.

When iffy borrowers started to stop paying their loans, and housing prices started to fall leaving insufficient collateral to cover the entire loans, bad debt losses from these loans started to mount and the investments based on these loans quickly became "toxic assets."

AIG was at the top of the pyramid. A tiny division of the company guaranteed or reguaranted mortgage based investments far beyond what it had any reasonable ability to make good on if the underlying loans went bad. And those loans did go bad.

What Did We Do And Why?

Testimony before Congress about AIG, leaked to an accounting profession blog, will establish that regulators knew that AIG was about to collapse and go bankrupt because its obligation to make good on these guarantees far exceeded its ability to pay them.

So far, so good. Some bad economic, regulatory and tax policies surely contributed to this situation, and almost everyone agrees that at least some reforms in these policies are necessary to prevent that from happening again. But, by the time that Federal government officials and Wall Street was on the verge of really understanding what a mess it was in as a result, what was done was done. The subprime industry was imploding, losses from mortgage backed investments were mounting, and the guarantees that had been made of these investments were in place and about to be called due.

To prevent AIG from collapsing and defaulting on its guarantees to lots of huge financial companies and banks, the Federal government stepped in, took over AIG, and made good on a lot of the promises that AIG had made which AIG wouldn't have been able to make good on by itself.

One of the most powerful questions Congress is considering, which our nation is considering in hindsight, having had the key information concealed from it at the time this was happening, is whether the Federal government did the right thing in dealing with this crisis.

Information leaked already strong suggests that our sitting Treasury Secretary, then heading the Federal Reserve Bank in New York, successfully urge AIG to engage in securities fraud to hid that fact that it was on the verge of collapse.

Thomas C. Baxter, general counsel of the Federal Reserve Bank of New York plans to tell Congress that:

a bankruptcy by the insurer “would have had catastrophic consequences for our financial system and our economy.” He called the decision to rescue A.I.G. “a difficult one,” but one that the Fed’s policymakers felt compelled to make.

Mr. Baxter explained that the New York Fed felt compelled to pay out A.I.G.’s counterparties in full to unwind derivative contracts because “there was little time, and substantial execution risk and attendant harm of not getting the deal done by the deadline of Nov. 10,” when A.I.G. was scheduled to report its earning and could face downgrades from credit ratings agencies. That would have led to more collateral calls and even greater liquidity problems for A.I.G., Mr. Baxter said.

He added, “Even in a best-case scenario, we did not expect that the counterparties would offer anything more than a modest discount to par.” Under the circumstance, he said, “the Federal Reserve had little or no bargaining power.”

In the event, the Federal government did invervene and take over AIG, making the government its principal owner. With bailout money, AIG made good on its obligations. Worse yet, the culpable senior managers at AIG still got huge bonuses despite the takeover.

In Hindsight, Were Bailouts A Good Decision?

Was the government right to intervene and take over AIG, or should have let the market and bankruptcy law run its course? Bankrutpcy law, after all, had been specifically amended to address the prospect of defaults on derivative contracts by major players in that part of the financial industry in 2005.

While Baxter and supporters of bailouts in this financial crisis and many past financial crisises have argued that they are necessary for the greater good, it is not at all clear from Main Street that these Chicken Littles were accurate in telling the public that the sky was falling.

Certainly, a great many big financial companies would have lost much more money, and at least some companies that survived would have been forced into bankruptcy (although not necessarily liquidation). Certainly, the money wouldn't have been there to pay the executives of the companies the eye popping bonuses that many of them received. Certainly, a great many investors, most of them wealthy, would have been far worse off than they are today. But, would this really have been a catastrophe for our financial system and economy?

The case that this is true simply has not been made convincingly.

Bailouts create a moral hazard. They encourage people to take risks because they know that if their luck is bad that they will not bear the full consequences of their bad decisions.

To some extent, government intervention simply postpones the inevitable, which may be one reason why the recession we are starting to emerge from has been longer than any other since the Great Depression. Markets generally act more quickly than government agencies or courts in metting out judgments on its economic decisions. But, I'm not aware of research that shows that short deep recessions are more harmful to the economy than long, more shallow recessions.

Bailouts also transfer wealth from the public to the people who would have taken deeper losses otherwise, and even public sector supporters of bailouts see this as an unfortunate consequence of a bailout, rather than an intended result.

Also, crucially, the financial industry's phobia of bankruptcy seems misplaced. It is not at all obvious allowing Lehman Brothers, a major investment bank, to go bankrupt, did any more harm to the economy than the approach taken with AIG and Bear Sterns, which was to intervene with a government bailout that the government had no legal obligation to provide. GM and Chrysler (neither financial firms, but both iconic U.S. companies deeply impacted by the financial crisis) likewise both had relatively quick, painless bankruptcies.

In both approaches, ordinary operationally profitable day to day businesses of the firms that had made bets that went bad in the financial crisis were segregated from the parts of those firms involved in the financial crisis and continued to do business with little distruption to ordinary customers. The decisions made in the Lehman Brothers bankruptcy that salvaged what could be salvaged from the enterprise were made quickly.

Once the economically functional parts of these financial giants are separated economically from their profligate divisions, inside or outside of bankruptcy, a lot of the horrors that their collapse allegedly would lead to seem much less frightening.

The financial crisis utterly wiped out the subprime and alt-A mortgage lending industry from top to bottom. Almost all the mortgage lenders that participated seriously in this business ceases to exist, and new investments in these loans ceased to be available. Yet, I have yet to see anyone seriously complain that our economy is worse off without this industry.

Perhaps, if the credit default swap defaults of AIG and the financial institutions downstream from it had been allowed to run its course, the broker to broker credit default swamp market, and perhaps even the proprietary trading arms of all of the major investment banks, would have disappeared as subparts of the financial industry as well. Would this really have been a bad thing for the American economy? Or would it simply have achieved what financial regulatory proposals from the Obama administration and Congress are likely to do anyway, but quicker and with less government involvement?

Intervening to bail out major financial institutions didn't prevent the worst recession since the Great Depression. It certainly isn't manifestly obvious that we would have been worse off if the Federal government hadn't poured hundreds of billions of dollars (maybe trillions) into these bailouts. And, the bailouts themselves were the moral equivalent of the federal government urging everyone in the economy (at at least the financial industry) to panic, which they dutifully did. The harm done by this symbolic message may have outweighed on substantive economic benefit of the bailouts.

One of the remarkable things we learned over the quarter century of only briefly interrupted prosperity before the financial crisis was that the stock market has decoupled itself to a great extent from the "real economy." Huge stock market crashes do not necessarily imply harm to the larger economy. Wall Street believes itself to be the very heart of the American economy. But, it is equally plausible that the collapse of the housing bubble in places like California, Nevada, Arizona and Florida, which caused the financial industry to experience such vast dislocations, rather the the secondary disclocations suffered in the financial industry itself, are mostly to blame for our current sour economy. The country has lost far more construction jobs than it has finacial sector jobs.

What More Do We Need To Know?

Of course, the final tally isn't in. The bailouts didn't come without a price. The government has now displaced private investors who were largely wiped out as the principal owner of AIG, Fannie Mae, Freddie Mac, General Motors, Chrysler, and a few other notable firms. Bailout loans that were made to major commercial banks are well on their way to being repaid. While AIG took a major loss in the financial crisis that a Federal bailout financed, it is a profitable business on an operating basis. Most of these institutions were close to having liabilities equal to their assets, on the books at least, as of the last financial reporting period before the federal government intervened, even though they had dire liquidity problems, in part due to a common investment banking business model that financed long term investments with short term loans.

The true cost of the bailouts made during the financial crisis is not the amount of money that the federal government has provided, but the amount of amount that the federal government does not get back in the end. It appears that the losses the government takes on its bailout financing moves will not be worst case scenario disasters. If the government comes close to breaking even on the AIG bailout, the decision to take that step doesn't look nearly so craven.

Also, while the investor class was clearly spared greater harm than it would otherwise have suffered as a result of government intervention, it has still taken a huge hit. In most of the firms that the government bailed out, the equity owners of those firms had already been all but wiped out by the markets before the government stepped in. Investors still lost the vast majority of their pre-crisis investment at AIG and Bear Sterns and Fannie Mae and Freddie Mac, and are left with no certainty that their residual equity will regain much value. Likewise, owners of banks that the FDIC has intervened to shut down, like Washington Mutual and IndyMac, have been wiped out. Generous financial sector executive compensation packages have come under intense scrutiny and we are likely to seem at least some reforms that damp those pay packages.

Fundamentally, the question I keep asking when I hear senior financial sector executive argue that the bailouts were necessary for our own good is "where's the beef?"

What harms would we have resulted if AIG or Bear Sterns had been allowed to go bankrupt? What did ad hoc government intervention make possible that could not have been provided in bankruptcy? Who won? Who lost? What difference would it have made to the average American?

Until those questions are answered with real specificity, the steps the government took to bailout private companies in the financial crisis remain deeply suspect. We, the American people, have yet to receive any real solid evidence that these massive bailouts, which AIG exemplifies, have done anything other than cushion the blow for the reckless rich.

Bruce Behind "Bankrupt Colorado" Initiatives

TABOR mastermind Doug Bruce tried to hide the fact that he was involved with three citizens initiatives headed for the ballot that would leave Colorado bankrupt by depriving it of revenues (previous coverage of the measures is found, e.g., at this post). But, it has come out that eight of the petition circulators were living at his house while they did their work. It is safe to infer from this that his involvement in these anti-tax measures was more than arm's length.

25 January 2010

Meaningless Elections

[David] Schleicher is an assistant professor at George Mason Law School and a rising star in the field of election law. Both pieces explore what he calls the “mismatch” problem—what happens when we ask voters to perform a constitutional role without the tools they need to do so. The first piece explains why local elections in the U.S. don’t do much to hold local officials accountable. The second piece explains why the European Parliament lacks “any semblance of democratic control” despite regular elections.

How is it possible to have elections without accountability? Schleicher isn’t making any of the by-now-familiar arguments about incumbents’ use of gerrymandering, campaign finance, and other election devices to keep their seats. Instead, he makes a far more provocative claim: election laws interact with the voters’ own shortcomings to produce elections that are, in Schleicher’s view, meaningless. . . .

[In local elections:] The problem is that we don’t have enough media or campaign spending in local elections to make local party brands meaningful.

From here.

I don't always agree with Schleicher's conclusions, but the problems he investigates are near and dear to my heart. I particularly agree with his analysis that a lack of information, rather than excessive campaigning, is a critical problem in many elections.

Who is closest to the people?

In particular, I am deeply skeptical of the conventional wisdom that local officials are more representative than top of the ticket officials because they are closer to the people. In general, in American politics, the conserve is true. More senior elected officials are closer to the people because more people participate in their elections and that participation is more informed, furthermore, they are more competent on average than more local officials.

At a given level of local government, there is a U curve. The largest political entities are closer to the people than smaller ones, because the media covers those races better. The very smallest political entities, low population towns, for example, tend to be closer to the people than those a little larger, because voters have personal knowledge of the candidates.

Partisanship in local elections

I mostly agree with him that it is appropriate to debunk the idea that "local elections are noncompetitive in the U.S. because local issues are non-ideological and thus can’t give rise to party politics." General purpose local governments routinely make ideological decisions, or at least, decisions that would be ideological if framed in that manner, like zoning decisions.

But, while local issues do raise ideological issues that could give rise to party politics, a significant share of local issues aren't partisan. For example, the budget issues faces by county commissioners, or the law enforcement discretion that a sheriff has do have the potential to raise partisan issues. But, by and large, the issues faces by a county surveyor, a coroner, or a county treasurer are ministerial, technocratic or otherwise inherently non-partisan. In these offices, competence, rather that ideology, is what matters.

In races where competence rather than ideology matters most, partisan affiliation is a poor filter for voters to use to make good decisions. Voters aren't great at making competence decisions prospectively, but aren't bad at throwing out grossly incompetent people, given a choice in a non-partisan election, something that partisan affiliations can confound. Manifestly corrupt candidate Tracy Baker's election as clerk and recorder in Arapahoe County on the Republican ticket in an overwhelmingly Republican area is a perfect example of how that can happen.

Schleicher also argues that one secret to better local government is to have different local parties than there are at the national level (a la Glendale, Colorado's Tea Party or the emerging trend in Colorado of school board elections with a pro-teacher's union and anti-teacher's union division), because local issues are different than state or federal issues.

In my view, this is one of the weaker parts of his analysis. It fails to adequately explain why many European local governments, organized on a partisan basis, manage to stay in step with national political parties to present a coherent multi-level political organization in a way that seems to be beyond the capacity of American local governments.

Instead, in my view, the disconnect between local government partisanship and national partisanship comes to a great extent from American electoral laws, mostly from the progressive era, that deliberately neutered political parties. He also doesn't adequately account for the fact that governmental entities themselves in the American context, where they are less partisan, are deliberately neutered in order to make them less ideological than they could be, in theory.

Finally, there is virtue in having elections even when they don't provide much ideological direction to the government's whom they purport to direct. Few elections are truly meaningless.

Elections have symbolic value, even when they are uncontested.

Elections also provide an arbiter of political contests, which is a function that has merit, even when the choice is effectively random. As a result, elected officials are able to act independently of each other, until most appointees who owe, at least symbolically, some loyalty to the person who appoints that official. This is one of the bigger virtues of non-partisan government in places where one party is dominant. Independent voices are more important than ideological guidance when everyone involved in politics believes the same things at the resolution of party identification. For example, in Denver, there are only one or two elected officials who aren't affiliated with the Democratic party, but allow elected officials to escape coordination with each other through a county Democratic party chairperson, so these elected officials instead speak with independent voices. Most local governments have populations that aren't very ideologically diverse. Indeed, this would hold true even if political parties were local rather than national brands.

And, elections have the potential to lead to political change, even when they usually don't, and that potential can change how elected officials act.

Too Big For Blog2Print

One of the new applications attached to the blogger platform I use for Wash Park Prophet is one that will turn your blog into a book (it isn't cheap at 35 cents a page put a $15 up front fee).

I was curious what it would cost for me and learned, after selecting the entire blog that:

The posts in blog 'washparkprophet.blogspot.com' from your selected dates contain 4554 photos. Currently, Blog2Print can place up to 1000 photos in your Blog Book. If you like, try creating two or more volumes of your Blog Book by selecting smaller date ranges so that you will import less than 1000 photos into each volume.

But, this blog is too big and would be a multi-volume matter. Also, this would really need some copy editing and more complete tagging (to allow a decent index, at least) before it went to print.

Washington Post Notices Webcomics

The Washington Post has nominated twenty-two webcomics for a best of the decade recognition (only a few of which would have made my nomination lists). One of the recognized comic authors astutely recognizes the irony of having a print media outlet recognize excellence in one of the non-print media that may ultimately lead to its demise in print.

In the same vein, I mourn the demise at the end of 2009, of the Washington Post Weekly Edition, which highlighted feature articles of more than breaking headline depth, which I had read for years. This end surprised me because the marginal cost of collecting articles that have already been written for the daily into a weekly edition have to be low, because the non-daily periodical market had been healthier than the daily newspaper market (I thought), and because dead tree paper related production costs also have to be pretty low (since only a tiny fraction of the total content in the newspaper is printed and mailed). But, someone decided that the weekly edition wasn't profitable and it was killed.

The temporary replacement for those who have subscriptions that have not run out, Newsweek magazine, is considerably worse as a periodical than it was twenty years or so ago when I read it regularly. It has almost descended to the vapidity of weekly Sunday newspaper magazine supplements like Parade magazine, when it had previously been on a rough par with daily newspaper associated press news articles. It is really a pity to see a high quality product die, while mediocre one somehow hangs on.

Core Inflation v Interest Rates

The core consumer price index (an inflation measure that excludes food and energy prices in an effort to segregate buying power from international commodity market fluxuations) has stayed steady between 1% and 4% for the past twenty years, and is currently about 1.8% on an annual basis, right in the midpoint of the range.

But, interest rates appear to have tracked the overall consumer price index, which has varied much more and deviated a great deal more from core consumer prices than in prior time periods, including the energy crisis of the last 1970s and early 1980s where one would have expected core CPI to differ a great deal from overall CPI since an oil embargo was such a central piece of the stagflation experienced in that time period.

This could be because this is what the Fed, which is a key player in setting interest rates, cares about.

Adjusted against core inflation, interest rates right now are really low. Yet, the economic message that low interest rates are supposed to send (borrow more, save less), clearly do not appear to be trickling through to the economy which is doing precisely the opposite. Why?

What Do Tenants Deserve When Landlords Fail?

In greater Los Angeles, office space vacancies are at 18.5%. This suggests all kinds of questions.

Why aren't commercial landlords there lowering rents in order to fill vacancies? Do they believe that rents will bounce back? Are they unwilling to offer rents so low that they are guaranteed to lose their properties, since the downside of a foreclosure to a landlord is so serious? Are banks that have made loans to commercial landlords unwilling to negotiate reasonably in a way that minimizes their long term losses for bureacratic/legal reasons? Is Chapter 11 of the bankruptcy code, which is supposed to prevent this kind of irrational behavior by lenders and landlords not up to the job?

It also brings to mind deeper and more general legal issues. Landlords all over are failing. The reasons are pretty clear, because property rentals have a quite simple business model. Rents can't support mortgage payments. When this happens, banks take possession of the properties. This gives the banks the power to void existing leases, even if the tenants aren't in default.

This is, of course, unjust for the tenant, who may lose a home or business location critical to that business for no fault of his own. Avianos coffee in Denver is one of many examples of this on the business side.

Does this make economic sense?

The formalist theory behind allowing banks this right is that tenant title derives from the landlord and that if the landlord loses title, that the tenant title dependent upon it is necessarily forfeit.

The economic theory behind allowing banks this right is that in ordinary times, landlord defaults on mortgages result from the landlord cutting too lenient deals with tenants, or being insufficiently aggressive in enforcing rent obligations, to cover the mortgage. Otherwise, a tenant and distressed landlord could collude to enter into a too low rent lease and deprive the bank of the full fair market value of its collateral.

But, what if the real problem behind a landlord failure is that the value of the property has declined, making it impossible for anyone acting as a landlord to collect enough rent to pay the mortgage? It still makes sense to wipe out the landlord's interest, to "punish" the landlord for having made a bad bet on the future value of the real estate purchased. But, in those cases, existing leases are likely to be at or above fair market value rents in light of the declining value of the properties, and tenants who are not in default on their leases are not themselves the source of the economic distress that causes the landlord to fail.

Of course, bank could simply reaffirm the old leases, and sometimes they do. But, the tenants, once they have settled into their properties, often have a vested interest in staying where they are, so it may be in their interests, after a foreclosure, to pay a greater than fair market value rent which they would not have agreed to prior to moving in and being locked into their location for business reasons. The foreclosed upon landlord prior to foreclosure, wouldn't have had a right to increase the rent, however, until the lease was over.

Why, economically, should a foreclosing bank be able to deny a tenant the benefit of an already better than fair market value bargain? After all, ordinarily, landlord solvency isn't a major concern of a tenant, and ordinarily, a lease is not so long that making a foreclosing bank wait until the end of the lease for a renegotiation of the rent term. In this situation, the bank is basically trying to shift the burden of its bad bet on the value of the property it took as collateral onto a an innocent third party.

Allowing tenants of foreclosed landlords to keep their existing leases in force for a considerable length of time (perhaps something on the order of a year to three years, or until the end of their leases, whichever comes first), could mitigate the unfair bargaining advantage of the bank.

Will We Care About Affairs In 2011?

It is harder to cover up an affair when the press no longer has a monopoly on the widespread distribution of information. One of the consequences of that is that a lot of high profile affairs are being revealed. Will these revelations reach a point where affairs become acceptable?

My inclination is that this wouldn't be a bad thing. There are real virtues to a frank society, as opposed to one where people have to contort themselves to keep secrets about relatively ordinary behavior. This encourages less destructive ways to deal with those situations when they are known.

As a University of Michigan scholar noted a few years ago (I don't have the citation easily at hand), it was the historical norm, until quite recently, for the rich and powerful to have multiple partners. It is also notable that this development comes a generation after the decriminalization of adultery and rise of no-fault divorce.

The Downside Of Eco-Friendly

Motion detectors in public bathrooms are great ways to save electricity. But, they can be a bit inconvenient when you are in a bathroom stall outside the range of the sensor and no one else is coming in and out to active them.

22 January 2010

What Are The Tax Implications of Citizens United?

Citizens United allows corporations to make independent political expenditures in political campaigns, this comes with a tax price that remains steep. But, tax law still strongly favors charitable donations or bona fide commercial advertising that may simultaneously further a political cause without being considered political campaign spending over actual spending in a political campaign.

The option of direct corporate spending on political campaigns is cheaper for the control group of large publicly held companies than the previously common practice of giving bonuses to senior employees with the understanding that some of the funds would be used for campaign contributions, but the tax savings is modest (a direct contribution requires about 3.3% less untaxed earnings to product the same amount of funding as one financed through a bonus to an employee).

Citizens United has essentially no tax impact on a well counseled S corporation.

Constitutional Tax Implications

The unconstitutionality of a ban on independent corporate campaign spending also raises serious doubts about the constitutionality of Internal Revenue Code Section 162(e), which in its current form is a broad based denial of a tax deduction for spending in connection with political campaigns and lobbying.

All of the activities denied a deduction, other than direct contributions to a candidate in connection with a political campaign, involve speech that is protected by the First Amendment under Citizens United v. FEC. Prior to Citizens United, the fact that Congress was believed to have the power to prohibit corporate political speech, at least in the context of partisan elections, made the related tax treatment based on content based distinctions about speech seem a fortiori also constitutional.

But, in the wake of Citizens United can it be constitutional to tax an expenditure for a television spot asking people to buy widgets or give to the United Way different than a television spot identical in every way except its content, and likewise prepared without any coordination or communication with a candidate, that urges views to Vote For John Doe?

As shown below, for a large profitable publicly held corporation, that is now free to buy such political advertisement as a result of the Citizens United case, there is still a roughly 65% tax on the political television spot relative to a television spot with a commercial or charitable purpose.

There are a handful of cases that provide precedent for the principle that taxes that make content based distinctions on constitutionally protected speech are unconstitutional under the First Amendment. The corruption justification used in Citizens United to refrain at that time from rendering an opinion so sweeping that it would invalidate the ban on direct contributions to candidates by corporations and unions might very well be extended to IRC 162(e)(1)(D) (direct lobbying of public officials), but it is easy to imagine that at least some of IRC 162(e) could be invalidated on the basis of Citizens United and the First Amendment tax cases.

A court choosing to invalidate IRC 162(e) in the near future, at least as applied to independent campaign expenditures, can also do so knowing that the revenue impact on the United States will be almost nil, because prior to Citizens United, corporations, including all public held companies, were legally prohibited from making such expenditures and few closely held for profit businesses that were not corporations, in fact, made such expenditures.

Tax Analysis

While Citizens United make it legal for a for profit corporations to engage in campaign spending through independent expenditures (something that about 2000 corporations do indirectly now, via political action committees), contributions from the corporate treasury don't qualify for a tax deduction the way that charitable contributions and almost everything else that a corporation spends money upon does. So under current law, campaign contributions are still taxed much more heavily than expenses like advertising and charitable contributions that serve similar purposes for a corporation in establishing its reputation.

We may see a new flurry of tax disputes over whether mixed purpose ads that promote a product and favor a political candidate still qualify for a tax deduction as a business advertising expense. If corporate spending is classified as a political expense, than the corporation cannot deduct that spending pursuant to Section 162(e) of the Internal Revenue Code:

IRC Section 162(e)
(e) Denial of deduction for certain lobbying and political expenditures
(1) In general
No deduction shall be allowed under subsection (a) for any amount paid or incurred in connection with -
(A) influencing legislation,
(B) participation in, or intervention in, any political campaign on behalf of (or in opposition to) any candidate for public office,
(C) any attempt to influence the general public, or segments thereof, with respect to elections, legislative matters, or referendums, or
(D) any direct communication with a covered executive branch official in an attempt to influence the official actions or positions of such official.

Impact In C Corporations

In a C corporation, this means that political spending is effectively taxed at the applicable corporate income tax rate (15% to 35% with a 38% marginal bubble rate, plus state taxes), but is not subject to the employee or shareholder tax rates that would apply if the funds were instead distributed as employee compensation (varies greatly) or as dividends or redeemed shares (usually 15%, plus the applicable state tax rate, for upper middle income and wealthy taxpayers). So, there is still a tax benefit to making contributions directly from the corporation, rather than having employees or shareholders make the contributions with distributed corporate funds in C corporations.

In big business organized as C corporations, the corporation's marginal tax rate is generally 35% federal (plus additional state taxes), and owners face a 15% federal tax (plus additional state taxes) when taking money out of the company. For $100,000 of campaign spending, having the corporation pay directly, rather than distributing the funds and having shareholders do the campaign spending leads to $15,000 less in federal taxes for the transaction as a whole (a bit more than $19,600 in taxes for a big business with a Colorado based owner).

While this is a big tax savings, it isn't much of a deal compared to a charitable contribution. A charitable contribution of $100,000 reduces corporate level federal income taxes by %35,000, and by an additional amount (about $4,600) in state income taxes.

To show how the complex tax code works in this kinds of situations, the aggregate tax in ten different scenarios involving Colorado C corporations in the top marginal income tax bracket that make $100,000 contributions directly to the beneficiary, or by distributing funds to shareholders as diviends or to employees as bonuses who turn around and make an after tax contribution of $100,000 to the beneficiary are set forth below. All shareholders and employees are assumed to pay federal tax at a 15% marginal rate on qualified dividends and capital gains and to be residents of Colorado subject to its flat 4.63% income tax rate. Rates below are top marginal tax rates on ordinary income.

The income tax incurred by an S corporation from spending $100,000 on advertising that is not related to a political campaign is zero.

Charitable contrib. directly from C corp: $0
Charitable contrib. by shareholder of C corp (SH has 35% fed tax rate): $44,744.65
Charitable contrib. by shareholder of C corp (SH has 15% fed tax rate): $64,744.65
Charitable contrib. by employer of C corp (Employee has 35% fed tax rate and is over FICA limit): $2,900
Charitable contrib. by employee of C corp (Employee has 15% fed tax rate and is not over FICA limit): $15,000 (also, charitable deduction may have to be spread over multiple years).

Thus, direct charitable contributions from highly profitable C corporations have a tax benefit over any other alternative, a providing employees with funds to make charitable contributions via employee bonuses is much preferred to providing shareholders with funds to make charitable contributions with dividend distributions form a tax perspective.

Campaign spending directly by C corp: $64,744.65
Campaign spending (SH has 35% fed tax rate): $104,906.27
Campaign spending (SH has 15% fed tax rate): $104,906.27
Campaign spending (Employee has 35% fed tax rate and is over FICA limit): $70,448.90
Campaign spending by employee of C corp (Employee has 15% fed tax rate and is not over FICA limit): $43,088.22

* In practice, an employee receiving a bonus large enough to make a $100,000 of campaign spending with the after tax proceeds of the bonus would probably not be able to stay in this tax bracket, so this really reflects a distribution of bonuses to multiple employees in this tax bracket in after tax amounts that sum up to $100,000 and are subsequently used for campaign spending.

Thus, it takes about 3.3% less before tax earnings in a profitable C corporation to finding campaign spending directly, rather than distributing a bonus to a high income employee who uses the funds for campaign spending.

Corporate level campaign spending by profitable C corporations is considerably less expensive from a tax persepctive than distributing dividends to shareholders who use the funds for campaign spending, and in a publicly held corporation (which makes up a large share of all corporations that owe net corporte income taxes in any signficiant amount despite making up a small share of all corporations), it is for all practical purposes impossible to coordinate shareholder action towards a common campaign spending goal once a corporation issues a dividend.

Corporate level campaign spending involves a higher tax cost than paying bonuses in an identical aggregate amount to lower income employees who use these bonsues to engage in campaign spending.

Campaign spending is still much more expensive for C corporations either directly, or through their shareholders or employees, than charitable contributions, despite the fact that each kind of spending can have a similar reputational effect for the C corporation.

Put another way, Citizens United makes campaign spending much less expensive for owners of companies who control closely held profitable C corporations and slightly less expensive for senior employees of profitable C corporations who control those companies, but not for anyone else.

But, as the analysis below will show, even after Citizens United, it is still more costly to use funds from profitable C corporations for the ultimate purpose of campaign spending than it is for people who control S corporations and closely held businesses which are not corporations (including their owners) to do so.

Impact In S corporations

In an S corporation, the non-deductibility of campaign spending means that political spending is effectively paid for out of the after tax profits of the company, with shareholders each paying their own marginal tax rate on their respective shares of the funds used to make the contributions.

The income tax incurred by an S corporation from spending $100,000 on advertising that is not related to a political campaign is zero.

If the contribution otherwise would have been made by a single taxpayer in an S corporation with multiple shareholders, the contributors contribution is being subsidize by his fellow shareholders from the after tax value of their entitlement to distributions. Empirically, S corporation shareholders are usually few in number, half of S corporations have owners from only one family, and the vast majority have fewer than ten owners.

Charitable contrib. directly from S corp (SH has 35% fed tax rate): $0
Charitable contrib. directly from S corp (SH has 15% fed tax rate): $0
Charitable contrib. by shareholder of S corp (SH has 35% fed tax rate): $0
Charitable contrib. by shareholder of S corp (SH has 15% fed tax rate): $0
Charitable contrib. by employer of S corp (Employee has 35% fed tax rate and is over FICA limit): $2,900
Charitable contrib. by employee of S corp (Employee has 15% fed tax rate and is not over FICA limit): $15,000 (also, charitable deduction may have to be spread over multiple years).

Thus, direct charitable contributions from highly profitable C corporations or shareholders have a slight tax benefit charitable contributions made through employees from bonus money.

Campaign spending directly by S corp (SH has 35% fed tax rate): $64,744.65
Campaign spending directly by S corp (SH has 15% fed tx rate): $24,424.54
Campaign spending by SH of S corp (SH has 35% fed tax rate): $64,744.65
Campaign spending by SH of S corp (SH has 15% fed tax rate): $24,424.54
Campaign spending (Employee has 35% fed tax rate and is over FICA limit): $70,448.90
Campaign spending by employee of C corp (Employee has 15% fed tax rate and is not over FICA limit): $43,088.22

Thus, in an S corporation, there is substantial benefit to paying for campaign spending out of the corporation, or with distributions of profits to shareholders, rather than using employee bonsues to provide employees with the means to engage in campaign spending.

Citizens United does not change the after tax cost of campaign spending for owners of S corportions who control those corporations. But, Citizens United does make it logistically easier for one owner of an S corporation to obtain assistance from fellow shareholders to spend funds for campaigning, but reducing the transactional steps involved and allowing for action on behalf of all shareholders by majority rule.

The impact on S corporations after Citizens United, was the status quo in entities taxed as partnership or as sole proprietorships prior to Citizens United.

TSA Still Sucks

The latest TSA gaffe is merely mildly irritating. A checkpoint employee played a gag on a random passenger, duping her into thining that she had been unknowningly tricked into being a drug mule or carrying something dangerous for a terrorist. There was no enduring harm. When the story hit the papers, the rogue employee was canned, even though the issue wasn't taken seriously by supervisors at the time.

Air America Leaves Radio, Goes Bankrupt

Talk radio is a radio genre dominated by urber-conservatives. The most notable exception, by far, was Air America, a liberal slanted talk show. It failed. The company is going bankrupt and the show is being pulled from radio air waves. A non-live podcast site may persist on the web, but the world of commercial talk radio has been ceded back to conservatives.

Honestly, I hate the talk radio format with a passion, and squirm even when forced to listen to extended DQ chatter on commercial radio stations. I hate call in shows, and dislike National Public Radio's call in shows, "Talk of the Nation" and "Car Talk" which are the only other significant non-conservative talk radio programs on the airwaves. Talk forums on television are almost equally baneful to watch.

Conservative talk radio is even worse, because it features hate and whoppers of untruths as part of its genre's very DNA.

I've actually been a recurring talk radio guest for a local financial oriented talk show, and spent longer than that working in a radio news department and as a substitute DJ in college. An old yellowed DJ's license from the FCC still sits in a box somewhere in my basement. I've also taught classes that include question and answer periods or discussion formats, taken far more, and run countless meetings that involve discussion of somewhat similar issues. And, of course, I am an avid participant in the liberal answer to talk radio, which is blogging.

But, I prefer my radio and television to be scripted, and can't stand witnessing the extent to which callers make fools of themselves or spread ignorance. Audience questions belong in classrooms, caucuses, small meetings and private information hotlines, not on the air for everyone to see or hear. Sometimes audience questions are a necessary evil so that everyone present can learn what they need to know. But, that process does not benefit from being opened up to the general public.

Just about the only think I dislike more than talk radio is professional wrestling, although it's a closs call. There are plenty of people, a whole demographic really, who like both. And, while I can dimly understand the appeal intellectually, emotionally, I am baffled at what in a person can draw them to this stuff.

21 January 2010

Negligent Parenting Should Not Be Murder One

Criminally negligent parenting causing the death of a child is bad. It should probably be a felony. It shouldn't, however, be first degree murder, which is what it is in Colorado.

Bad parents are not irredeemable criminals who are a never ending menace to our society that can only be addressed through the death penalty or life in prison without possibility of parole. But, those are the only punishments allowed for a conviction of first degree murder.

Leaving a five-month baby boy alone at home for up to seven hours while you go drinking is criminally stupid and has catastrophic consequences. But, this doesn't mean that you should be counted in the same ranks as serial killers, murderous terrorists, and people who gun down tellers while robbing banks. Yet, in Colorado, child abuse causing death, with "abuse" defined rather broadly, is first degree murder.

Colorado's law in this area is disproportionate and also exceedingly expensive to the state while providing no compensurate protection for the public. It may be appropriate to put someone who does this in prison for a few years and have their parental rights to their other children terminated. Is justice really better served by putting a bad dad in jail for five years instead of fifty (at a cost of $1.5 million of public funds, give or take). But, locking away a twenty-three year old for life is gross overkill, and this disproportionately high penalty also heavily burdens the right of defendants in often ambiguous cases to tell their side of the story to a jury at trial.

If Colorado simply make the effort to make most of the excessive sentences in the criminal code more proportionate to the crimes involved, it could spend less on criminal justice without creating the kind of public risk that purely budget driven early releases of inmates would cause.

Obama: End Proprietary Trading, Big Banks

Under the proposed rule, commercial banks would be prohibited from owning, investing in or advising hedge funds or private equity firms. Bank regulators would not be simply given the discretion to enforce such rules. They would be required to do so.
Administration officials said they also want to toughen an existing cap on bank market share. Since 1994, no bank can have more than 10% of the nation's insured deposits. The Obama administration wants that cap to include non-insured deposits and other assets.

From here.

I like the prohibition on commercial banks making equity investments on their own account, although the devil is in the details (for example, exceptions might be made for holdings that are tiny relative to bank assets and for assets acquired through the debt collection progress).

The biggest lesson that the financial press has largely failed to learn from the financial crisis is that FDIC regulation of excessive risk taking worked. Commercial banking has had an unprofitable few years, and bank failure rates have been above average, but on the whole, FDIC insured institutions and credit unions came out of the financial crisis relatively unscathed. Depositors haven't lost money. Bank runs in progress have been promptly stopped. Risky loans were mostly made by financial players outside the commercial banking industry. Bailout money loaned to commercial banks is well on its way to having been paid back. The amount that the FDIC has been forced to pay out to resolve failed institutions is small enough that the pre-existing FDIC premium charged on insured deposits will pay it back in a reasonable time without directly taxing anyone outside the industry.

In contrast, I'm deeply skeptical of the market share rule. I agree that excessive concentration isn't good from a systemic risk perspective, but the history of this part of anti-trust law in other industries is not very promising. It would be better to rules that take away the incentives that drive market concentration than to impose an arbitrary ten percent rule.

The argument that banks need to be global to serve the cash management needs of a global customer base doesn't cut it. This part of the business is a payment system and could be segregated from the banking fundamentals, just as the Mastercard/Visa system segregates the payment system element of credit cards from the credit granting part. Mastercard/Visa honestly is too big to fail, but because it takes on very little risk itself and is a producer cooperative owned by the banks (i.e. a mutual company), this isn't a big deal.

A more plausible argument is that large banks can make big loans to large enterprises with fewer transaction costs and better credit risk analysis than the alternatives, which are private equity funding by a small consortium of high asset investors, and public offerings of bonds by investment banks market to lower asset investors by a consortium of investment banks.

But, is that really true? I don't know. Certainly, lots of the lending that banks do: credit cards, car loans, mortgages and small business loans don't require a bank to be particularly large. But, perhaps big multi-national companies need bigger loans.

Still, even if that is true, maybe the extra transaction costs that an unavailability of bank lending imposes in the rarefied world of very large loans to very large businesses is worth it.

If a megaloan from a megabank goes bad, the whole megabank may collapse with systemic risk consequences (the old maxim is: if you owe the bank a million dollars, the bank owns you; if you owe the bank a billion dollars, you own the bank). But, if a big business defaults on its very large bond offering, the impact of the default is likely to be diversified and the losses are more likely to be experienced directly by wealthy investors without taking down financial institutions that serve other useful purposes in our economy with them.

Moreover, the bigger the loan, the weaker arguments about the importance of transaction costs get. You can afford to pay a lot of lawyers, accountants and investigators a lot of money to do due diligence on a deal worth tens or hundreds of billions of dollars. There are bond sale commissions, of course, but those aren't that much different from the point of view of a borrower than the surcharge that homeowners pay for jumbo mortgages.

We had very large business loans (in the form of bond offerings) long before we had very large banks, and somehow the economy managed anyway. In any case, if a very big deal will crater just because it has to pay a sales commission to investment bankers to sell bonds to finance the deal, maybe it isn't a good idea for society as a whole to be taking such a risky gamble. When big investments fail, innocent people are inevitably hurt in a way that the people at fault can't be held accountable for because the money is gone. Systemically insisting on slightly higher anticipated rates of return to allow investments like these to be made isn't necessarily a bad thing for our nation's macroeconomic health.

Even if it is much more efficient to have institutions that are in the business of making very large loans to very large businesses, it isn't at all obvious that this business has that many synergies with other elements of commercial banking. Small institutions specializing in large loans with money those institutions borrow themselves, basically a new generation of investment banks, should pose less risk to our economy than trying this business to commercial banking, particularly if they can't be financed with loans from commercial banks that are unsecured or are secured by financial assets.

The Obama administration's proposed tax on the assets of big banks, for example, set appropriately high, for example, might be a better way to discourage banking concentration than an outright arbitrary market share limitation, by reducing the competitive advantage that big banks might otherwise have over the bond market in this particular high systemic risk part of our economy.

Interesting Public Finance Coincidence

The anticipated cost and anticipated tax revenues available for the Denver RTD Fastracks transit expansion is very similar to the estimated liablities and estimated funding of San Diego's pension system.

Scott Brown's Election Considered

U.S. Senator-Elect Scott Brown from Massachusetts is a loss to the Democratic party caucus, which previously had tireless liberal Ted Kennedy to advance its cause from that seat.

A quick review of his record on issues like abortion, civil liberties, the Obama health care plan, and taxes on the rich, gleaned from Wikipedia (linked above), suggests that he does indeed belong in the Republican party, rather than the Democratic party. But, it is also clear that he politics are more in line with the moderate Republicans who have represented the Northeast in Congress in the past couple of decades, rather than the hard core socially liberal, starve the beast conservatives that have become the norm as the Republican Party has made itself into something of a Southern regional party.

Brown appears to be more moderate than either Jane Norton, who is seeking the U.S. Senate seat from Colorado in 2010, or Scott McInnis, who is seeking to be Colorado's next Governor on the Republican ticket. His political ideology appears to be similar to U.S. Supreme Court Justice Kennedy, who holds the swing vote on that body, which is notable, because Brown will be the effective swing vote in most cases where sixty voters are required to overcome a filibuster now.

Brown's relatively narrow victory, in a non-Presidential year where lower turnout favors the party not in power, also provides reason to believe that Brown will have to make a name for himself as a liberal leaning maverick for his party if he is to have a prayer of being re-elected in 2012, by a Democrat who will have more time to plan a counterattack.

Honestly, Brown seems only a little bit to the right of the Blue Dog Democrats that make the effective majority for liberals in Congress much smaller than it appears despite large Democratic party majorities in both houses, and Brown may quite possibly be to the left of Joe Lieberman whose connection to the Democratic party in which he caucuses as an independent is increasingly attenuated. Brown will find easy company with fellow New England Republican Senators Susan Collins and Olympia Snowe from Maine.

The bottom line is that while this weeks upset victory for Republicans in the U.S. Senate race in Massachusetts was a defeat, that this defeat was not catastrophic. It will be harder to pass highly partisan issues where there is a Republican consensus in opposition, but Brown may seek middle grown if the tone and character of proposed legislation can be adjusted to fit his concerns.

For example, while one of Brown's key issues in the brief race for U.S. Senate was opposition to the current proposal for health care reform, he has said that he supports that arguably more radical reform adopted in Massachusetts, so he does not, like many of his colleagues in his caucus, have an ideological opposition to any kind of health care reform.

Equally important, the points were Brown is conservative are not necessarily the same points where Blue Dog Democrats tend to part ways with their caucus colleagues in conservative direction. So, in some cases, he and the handful of other moderate Republicans may make up for defections of conservative Democrats from their party.

Brown will also likely figure greatly in discussions within the Republican Party over its future. Many within the GOP believe that the secret to saving their party is for Republicans to be more true to their conservative principles. Brown provides a leaving breathing example of progress through moderation and comparative reasonableness, rather than through extremism.

The GOP has lost too many moderates to the ranks of unaffiliated and Democratic voters for one election like this one to completely change the debate. But, Brown does confound those activists within the party who argue that their conservative purification approach is the one and only path for a return to power.

Citizens United's Colorado Impact

The Citizen's United case decided today, by its terms, appears equally applicable to federal and state regulation of campaign finance, although it was directed at a federal case. Colorado voters adopted comprehensive campaign finance reform in 2002 through Amendment 27. The limitations on electioneering spending in Amendment 27 which is parallel to the federal limitations at issue in Citizens United is found at Section 6 of the Amendment, which imposed a disclosure requirement on all electioneering communications, and a prohibition on electioneering communications by corporations and unions that do not do so through certain political committees.



It appears to me that the impact of Citizen's United on this part of Colorado's constitution is simply to strike subsection 2 of Section 6. Thus electioneering communications by any person, including a corporation or a union, must be disclosed if they exceed $1,000 per calendar years, and contributions to someone to make electioneering communications must be disclosed if they exceed $250 per year (in each case with respective inflation adjustments). These electioneering communications have no dollar limitations.

Citizen's United does not change the Colorado ban on direct contributions Section 3 on Contributions to candidates by corporations or unions, of Amendment 27, which read as follows:


Citizen's United follows prior U.S. Supreme Court precedent that holds that restrictions on direct contributions to candidate committees (but allowing contributions to candidates to be made via specifically authorized political committees) are valid because they serve the legitimate governmental purpose of preventing an appearance of corruptions.

However, the part of Section 3 prohibiting a corporation or union from making expenditures expressly advocating the election or defeat of a candidate appears to be invalid.

It isn't entirely clear, at a first read, whether the ban on corporate and union contributions to political parties, created by Section 3 of Amendment 27, is still valid after Citizen's United.

On one hand, a contribution to a political party, which is itself a private association of politically minded people, does not necessarily care the risks of an appearance of corruption that a contribution directly to a candidate might.

On the other hand, there is a good argument that contributions to political parties may lawfully be conclusively presumed to be coordinated with the candidates of that political party, and hence amount to contributions to a candidate that can never be mere independent expenditures.

One can imagine that an "as applied" challenge to the ban on contributions to a political party that is not running any candidates in the current election cycle might prevail under Citizen's United, but in general, the ban on contributions to political parties does not necessarily fall under this ruling.

Practical Impact

Corporations and unions already routinely spend large amounts on non-candidate races over ballot measures, by jumping through the hoops that in place now. They also make substantial donations to political committees, which in turn, usually make contributions to candidates.

Under the new law, there is likely to be one or more "independent committees to support Joe Candidate" for every candidate. These committees will forbidden from coordinating with the candidate or that candidate's political party, but will be able to take unlimited individual, corporate and union contributions, and to spend them as they wish to expressly support or oppose a candidate.

Large donors will probably give as much as they can, either directly, or through a political committee, to the candidate himself, and perhaps to his political party, and then give the balance to these independent committees supporting the same candidate.

This is likely to dramatically increase spending in high profile races, where many donors make maximum contributions and look for any opportunity to give more, while having a trivial impact in low profile races where few donors give the maximum amount (and would give more if they could).

This will reduce the amount of control that candidates, particular in high profile races, have over their campaigns.

For example, Andrew Romanoff's campaign for U.S. Senate has forsworn certain kind of corporate source contributions. This as been a point of pride for Romanoff supporters, and a key argument for his primary opponent, Michael Bennet, that Romanoff can not raise enough funds to be competitive. But, after Citizen's United, nothing prevents "Corporations and Unions For Romanoff" from being formed and receiving unlimited contributions from corporations and unions to spend as they see fit without any input from and control by Andrew Romanoff. This takes considerable bite out of Romanoff's promise not to take corporate source contributions and leaves Romanoff with less control over his campaign, but also brings to bear potentially much more money advocating his election.

Corporate and union Romanoff supporters, meanwhile, because independent committees are still subject to disclosure requirements, can be assured that there will be a public record that they spent money to support Romanoff which they can hope will be an asset in currying his favor if he is elected.

Time To Rethink Campaign Finance

By rendering campaign contribution limitations toothless, Citizen's United presents an urgent case of a rethink of the entire campaign finance system.

Now that the dollar limits on contributions have the sole effect of reducing the amount of money raised that candidates and their political parties can control, rather than the total amount of money raised for each side in a campaign, their intellectual power is gone. There is no strong political theory argument for giving non-candidates more of an ability to control a campaign than a non-wealthy candidate him or herself.

One could have a disclosure only regime, which, once the election law loopholes are fully navigated, is what we have in the way of Citizen's United. Gift bans also aren't effected. But, limits on donations to candidate committees and political parties seem seriously anachronistic under this new regime.

Taxes on contributions to political campaigns have been proposed, but given the fact that such a tax would be a non-content neutral regulations of political speech, I doubt that it would be found constitutional.

Public funding of campaigns, in whole or in part, is a largely untested alternative that has been knocking around in progressive circles for decades. Now may be the time to launch it, although current tight state and federal budgets place serious barriers in the way of this approach. There are states that are considering going without Congressional representation for a few months to save the money involved in calling a special election, let alone spending more money to finance a political campaign for particular candidates.

Allowing political parties to accept unlimited donations and to then use those funds to help candidates would be a helpful partial solution. Candidates often have a very short time horizon to raise money, and donors are often reluctant to give when a partisan primary is underway, narrowing the fund raising window further. Well heeled political parties could get their candidates off to good starts with funds accumulated year after year, rather than only in the heat of a political campaign.

At any rate, while the loophole filled campaign finance regulatory world has been heading there for a long time, this decision comes early enough in the 2010 election campaign, that there will be time to see its implications play out in a whole host of new political fundraising strategies.

Historically, this would have been a pure boon for Republicans. But, since corporate money has always had a strong bias towards incumbents, and incumbents are disproportionately Democrats right now, it isn't clear on a partisan basis, which party gains more from this SCOTUS ruling.

Instead, the big winners may by the business friendly wings of each of the two major political parties, at the expense of the populist wings of those parties.

UPDATE: Rick Hasen, author of the Election Law Blog guest blogging at HuffPo, goes through essentially the same list of reform options that would be constitutional that I do. Importantly, he adds that the Arizona Supreme Court recently held unconstitutional a form of public financing based upon how much is being spent by your opponent, arguing that the law's effort to equalize the result of neutral rules as they play out in a particular race is constitutionally improper.