August 30, 2010

Background

There is substantial evidence that proves government policies created to address a problem often have negative unintended consequences.  More than two years into the worst recession in decades, many of the nation’s job producers are pleading with Democrats to relent from their agenda of excessive taxing, spending, and regulating, which is proving to do more harm than good.  On June 23, 2010, the Wall Street Journal reported, “Verizon Communications Inc. Chief Executive Ivan Seidenberg, current head of one of the nation's most influential business groups, slammed the Obama administration for decisions he said ‘create an increasingly hostile environment for investment and job creation…’”  Mr. Seidenberg heads the Business Roundtable, a group made up of the chief executives of the nation's largest companies, employing over 12 million people.

The American people expect and deserve from their political leaders economic policies that enable free-market prosperity, resting on the bedrock of individual liberty and limited government.  Instead, President Obama and Congressional Democrats have expanded government’s role in the economy by subsidizing bad management decisions through taxpayer funded bailout programs, government takeovers of industries, and increasing regulations that raise the costs of doing business.  The results are record deficits, an unsustainable national debt, and stubbornly high unemployment—all factors that will lower the standard of living for future generations. 

Issues of Concern

Strengthening the Financial System?—The largest part of the $700 billion Troubled Asset Relief Program (TARP) bailout was the Treasury Department’s plan to inject liquidity into the banking sector via preferred equity purchases.  Dubbed the Capital Purchase Program (CPP), Treasury ultimately spent more than $200 billion of taxpayer money in an attempt to ensure that banks continued lending following the 2008 financial crisis. 

A July 2010 report from the Congressional Oversight Panel (COP) was critical of CPP’s long-term effects due to the “one-size-fits-all approach” to the participation of large and small banks.  In June 2010 testimony before the Panel, Treasury Secretary Geithner asserted that large and small banks were given the same bailout terms under the goal of “fairness.”  The report criticizes this approach due to the differing nature and capital structure of large and small banks on their ability to repay taxpayer money in a timely manner.  With $24.9 billion of TARP funds still outstanding in community and regional banks, many of these institutions are now struggling to meet Treasury’s repayment terms.  The COP noted that as these small banks encounter losses due to economic conditions and are unable to repay taxpayers, “one of the most lasting and troubling effects of the CPP may be to increase concentration in the banking sector.”  That means the moral hazard of the too-big-to-fail guarantee may actually be exacerbated as a result of TARP. 

However, in an attempt to make two wrongs equal a right, Democrats are now pushing to establish the Small Business Lending Fund (aka TARP 3.0) with $30 billion of taxpayer money.  This move blindly ignores the May 2010 COP report which stated, “The SBLF also raises questions about whether, in light of the CPP’s poor performance in improving credit access, any capital infusion program can successfully jump-start small business lending.  Supply-side solutions that rely on bank balance sheets, such as the CPP and the SBLF, may not increase lending.”  The report included data from a survey of small business owners conducted by the National Federation of Independent Business (NFIB).  That organization’s survey concluded, “Small business owners make it clear that the Administration and Congress never understood and still do not understand Main Street’s problem.  The problem is sales and to a lesser extent uncertainty.”  Unfortunately, Democrats have ignored the COP and small business owners.

Saving Struggling Homeowners?—Much weakness remains in the housing market, the epicenter of the nation’s financial turmoil, yet the Democrats continue to pursue ineffective and expensive programs in efforts to alleviate the distress of homeowners facing foreclosure.  It is now clear that the Treasury Department’s Home Affordable Modification Program (HAMP) is a dismal failure, reaching only a fraction of the millions of homeowners President Obama said the program would help.  A recent article on TheStreet.com noted, “Roughly 24% of all borrowers eligible for the mortgage modifications have received mortgage modification; by comparison, in 1912, almost 32% of the passengers aboard the Titanic when it struck an iceberg were saved. There must be a metaphor in there somewhere.”

But Democrats continue to double down on bad policy, introducing nearly a dozen foreclosure mitigation programs as six million homeowners have received foreclosure filings since February 2009.  With increasing incentives of taxpayer money and government guarantees for borrowers, lenders, and servicers, the COP stated in an April 2010 report:

[Treasury’s] pattern of providing ever more generous incentives might backfire, as lenders and servicers might opt to delay modifications in hopes of eventually receiving a better deal.  In addition loan servicers have expressed confusion about the constant flux of new programs, new standards, and new requirements that make implementation more complex.

The result has been a sluggish housing market with one-quarter of mortgages underwater.  Despite Congressional testimony from Professor Alan M. White, an expert in housing policy, demonstrating the net gain to an investor of approximately $80,000 per loan from a non-subsidized mortgage modification versus foreclosing on the property, Democrats, ignorant of the cost-benefit incentives that exist in the private market, continue to advocate using taxpayer funds to “fix” the housing sector.  Eighteen months after President Obama announced his expansive “Making Home Affordable” initiative, the housing market shows more signs of weakness than strength.

Fighting Unemployment?—Democrats have stifled any potential of job growth and made more Americans dependent on the government.  President Obama’s chief economist, Lawrence Summers, authored a paper many years ago on the economics of unemployment.  In the paper, Summers asserted, “[G]overnment assistance programs contribute to long-term unemployment by providing an incentive, and the means, not to work.”  Summers went on to conclude, “Unemployment insurance and other social assistance programs increase [the minimum wage a person insists on getting before accepting a job] , causing an unemployed person to remain unemployed longer.”  Summers’s analysis did not factor into Democrats’ thinking on what constitutes economic stimulus.  Speaker Pelosi stated during a July 1, 2010 news conference, “Let me say that unemployment insurance… is one of the biggest stimuluses (sic) to our economy…It creates jobs faster than almost any other initiative you can name.”  The American people are right to question the conflicting logic of the Democrats’ plans to spend more taxpayer money while the unemployment rate sits stubbornly near 10 percent.

Spurring Small Business?—Despite the fact that over half of Americans are employed by small businesses, Democrat policies are conspicuously void of an understanding of factors affecting business decision making.  The senior levels of the Obama administration lack any influence from individuals with proven successes in building and running a business.  The most pernicious effect of this ignorance is a climate in which business owners and entrepreneurs conserve rather than grow.

A recent Wall Street Journal op-ed titled “Why I’m Not Hiring” deconstructed the analysis that a manager undertakes today in deciding whether to hire a new employee.  Demonstrating that his business must spend $74,000 to pay an employee a nominal salary of $59,000 plus benefits, the business owner explains that his obligations to the government for the hire amounts to a 33 percent surtax each year.  One of the largest considerations in employment decisions, as any businessperson knows, is the effect of taxes on the costs of labor.  Small business managers around the country are certain that Democrats intend for taxes to go in one direction: up.  Moreover, Obamacare is already hurting businesses around the country as insurance providers are forced to raise premiums in anticipation of expanded entitlements.  Those costs are passed on to the consumers, (i.e., employers).  The op-ed concluded: “As much as I might want to hire new salespeople, engineers and marketing staff in an effort to grow, I would be increasing my company's vulnerability to government decisions to raise taxes, to policies that make health insurance more expensive, and to the difficulties of this economic environment…From where I sit, the government's message is unmistakable: Creating a new job carries a punishing price.”

Congressional Democrats and the Obama administration have relentlessly pursued an agenda of more spending, more regulation, higher debt, and higher taxes.  All of these attempts to rebuild the economy in the midst of one of the sharpest recessions in memory have yet to produce a glimmer of hope for average Americans.  Taxpayers can only hope that Democrats will halt this meddlesome expansion of government into economic life.  Only then might the creativity and resilience of the American people change our economic course.

 For more information or questions please contact Jon Hiler at 3-4847.