Revised bailout plan: OK, now I’m not just skeptical, I’m angry and disgusted

Lynne Kiesling

Before I read the Senate version of the revised bailout plan, I generally agreed with Tyler Cowen: “The modified Paulson plan was better than nothing — especially after the market had been scared — but far from my first choice.” I also generally agree with his conclusions (1) on the importance of transparency of derivative instruments, (2) the value of implementing rules that focus on information revelation, and (3) that various financial market deregulations are incorrectly blamed for the severity of this credit crunch. My natural skepticism about both the morality and the efficacy of regulation are what moved me to sign the economist’s letter that John Cochrane spearheaded last week.

But now that I’ve actually read the text of the bill, I’m angry. No, I’m beyond angry, I’m freakin’ pissed off. It’s completely and utterly disgusting that the “sweeteners” added to the bill to generate more support are all vile examples of mutual back-scratching pork that have nothing, nothing to do with back-stopping credit markets so that parties in those markets can find mutually beneficial transactions again. I agree with John Cochrane’s comment on the Newshour this evening that it’s a “pinata full of ridiculousness” (MP3) [note that Ken Rogoff also speaks persuasively about the flaws of this bailout, although he’s kinder to it than I would be.].

I submit into evidence one portion of the bill: Division B: Energy Improvement and Extension Act of 2008. This division has 4 titles and assorted subtitles. For example:

TITLE I–ENERGY PRODUCTION INCENTIVES

Subtitle A–Renewable Energy Incentives
Sec. 101. Renewable energy credit.
Sec. 102. Production credit for electricity produced from marine renewables.
Sec. 103. Energy credit.
Sec. 104. Energy credit for small wind property.
Sec. 105. Energy credit for geothermal heat pump systems.
Sec. 106. Credit for residential energy efficient property.
Sec. 107. New clean renewable energy bonds.
Sec. 108. Credit for steel industry fuel.
Sec. 109. Special rule to implement FERC and State electric restructuring policy.

Subtitle B–Carbon Mitigation and Coal Provisions
Sec. 111. Expansion and modification of advanced coal project investment credit.
Sec. 112. Expansion and modification of coal gasification investment credit.
Sec. 113. Temporary increase in coal excise tax; funding of Black Lung Disability
Trust Fund.
Sec. 114. Special rules for refund of the coal excise tax to certain coal producers
and exporters.
Sec. 115. Tax credit for carbon dioxide sequestration.
Sec. 116. Certain income and gains relating to industrial source carbon dioxide treated as qualifying income for publicly traded partnerships.
Sec. 117. Carbon audit of the tax code.

Many of these provisions extend existing tax or investment credits for several more years. None of these provisions is directly relevant to confidence in credit markets. Why are they here?

One of the provisions of Title III of Divison B is something that I support:

Sec. 306. Accelerated recovery period for depreciation of smart meters and
smart grid systems.

This provision is not directly relevant to confidence in credit markets. Why is it here?

This one wins the “Too Absurd To Believe” prize:

Division C, SEC. 503. EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN.

Do our elected so-called “representatives” require all of these expensive and tangential bribes to induce them to support an expensive bailout, which is likely to be a large wealth transfer to the people who made the incorrect risky decisions, by making the plan that much more expensive?

Moreover, the rhetoric blaming this credit crunch on “deregulation” is disturbingly factually incorrect, as Steve Horwitz explained. Decades of government policy have contributed to this credit crunch, and that fact should not be overlooked. Furthermore, as Steve points out, companies will not hesitate to use political processes to increase their profits if given the opportunity, and sadly I fear that the lobbying for this bailout plan shows the extent to which we have to save capitalism from the so-called capitalists.

This massive wealth transfer and money waste of a bailout bill is likely to pass, if the amount of lobbying for it is any indication:

According to the Center for Responsive Politics, a campaign finance watchdog group, the U.S. Chamber of Commerce alone has spent $28 million on lobbying this year. The group’s top lobbyist, Bruce Josten, says it’s now in “full-court press mode” to get the bailout bill passed immediately. The National Association of Realtors has spent nearly $7 million lobbying this year. The political action committee for the American Bankers Association spent $2.1 million influencing politicians from 2007 to 2008, the center says.

Sadly, as a financially responsible homeowner with investments primarily in indexed mutual funds, I have little opportunity to belly up to the trough that the Congressional “pinata full of ridiculousness” creates. But I feel my taxes going up, and I feel the desperate urge to go take a shower.

In addition to the comments from Tyler and Steve linked above, I also recommend Arnold Kling here and here; Arnold has extensive expertise in this area.

Geoff Style on price gouging and gasoline lines

Michael Giberson

Writing with a calmness and patience not typically seen when economists write about price gouging, here is Geoff Styles, at Energy Outlook, Gas Lines and Bank Runs:

…[W]ith a significant shortfall in deliveries along these pipelines, and US gasoline inventories that were already extremely low going into the storms, local prices should have risen dramatically, in order to balance supply and demand. Yet although an internet search revealed many stations in the Atlanta, GA and Charlotte, NC metro areas pricing above $4.00 per gallon for unleaded regular, the region only averaged 15 cents per gallon above the national average in this Monday’s DOE price report. …. Following the hurricanes, the Georgia and North Carolina state governments triggered their anti-gouging laws, subjecting retailers to strict penalties for increasing their margins over the cost charged by their suppliers.

There are two problems with this well-intended approach. First, it impedes the price signal to consumers that would otherwise alert them to sharply-reduced availability and promote conservation. We’ve learned a lot about the price elasticity of demand for gasoline in the last couple of years. It took an increase of approximately $1 per gallon to reduce average US demand by 5%, and the storm-related disruptions cut supplies to the Southeast by a much larger fraction than that. No one knows how high gas prices would have had to go to constrain demand without gas lines, transaction limits, or other non-price controls, but it is reasonable to conclude that the necessary level would be a lot higher than that allowed by law in these states. By imposing price limits, government makes an explicit choice in favor of gas lines, in order to keep the price of whatever gas is available within reach of lower-income consumers. That may be a popular decision, but it is hardly a market failure.

The other drawback of these “soft” price controls is that they encourage a feedback loop that fosters panic and amplifies scarcity. High prices discourage hoarding, while artificially-low prices amid vanishing availability egg consumers on to get theirs, before it’s all gone. … Moreover, uncertainty about how price gouging laws will be interpreted leaves retailers perceiving an unpleasant choice between running out and being fined or imprisoned. That’s a lot of extra grief for a business that usually only clears a few cents per gallon, after expenses.

[Emphasis added, links are from the original.]