Browsing the blog archives for September, 2011.

The Ford anti-bailout commercial


I really like Ford’s ad campaign featuring average buyers as celebrities at a news conference. It’s really effective from a marketing standpoint. But the ad featuring “Chris” really caught my attention:

Chris praised his F-150 in the ad and commended Ford for not taking bailout money. The fact that Chris turns out to be an average guy with a real story—not just an actor—makes it even better. U.S. carmakers typically take aim at other manufacturers, not each other. The ad apparently struck a chord with lots of viewers, and a nerve in the Obama administration.

According to Detroit News reporter Daniel Howes, a few calls from the White House prompted Ford to pull the ad. This is officially denied by both parties, but apparently acknowledged privately by several executives at Ford.

Ford claims the ad is simply being removed from the rotation like other ads, but this explanation is a little weak considering the positive attention it has brought to the company. Besides, Ford initially pulled the ad from youtube as well and then reloaded it, suggesting that there’s more to the story than their public statement suggests. Chris has even released his own video on youtube:

If you didn’t think the White House would stop at nothing to run the U.S. auto industry for union benefit, you haven’t been paying close attention. Whether it’s cash for clunkers, CAFE standard changes, Chevy Volt subsidies, tax deals for GM’s alternative energy R&D, or the DOT’s Ray LaHood persecuting Toyota at taxpayer expense, this administration is committed to GM’s “success” at all cost. Ford’s success without bailout money has become a black eye to the administration; Ford must be brought in line.

Now it’s time for Ford to negotiate the next UAW deal. It’s not surprising that the GM contract is the starting point for negotiations. But the GM contract would have never even existed without a bailout. Its wages and benefits have been artificially inflated at taxpayer expense. Under the threat of a strike, Ford is being pressured to top GM’s contract without government support. This places Ford at a taxpayer-subsidized economic disadvantage.

The contract deal will be interesting to say the least because Ford must negotiate directly with the UAW and indirectly with the White House. Saving GM from its self-inflicted demise was not good enough. Sooner or later, Toyota, Ford and every other competitor must be cut down to size as well.


Overhauling the tax code


I’ve long been a proponent of a overhauling the individual tax code and now might be the perfect time to promote the issue.

President Obama’s TAX THE RICH jobs proposal officially launched his 2012 reelection campaign. His plan lacks economic substance, but the class envy card has been played successfully in past elections. The ball is now in the Republicans’ court. Just saying no to Obama isn’t good enough.

The bipartisan argument for tax reform is simple. The system has become a tool for income redistribution with one-half of Americans paying no income tax at all. Meanwhile, the wealthy face punitive tax brackets and must game the system of tax incentives and credits to keep their taxes at a reasonable level.

But the best argument for major tax reform is one that is rarely articulated: Every tax deduction at the individual or business level represents costly social engineering that requires a higher tax rate to offset the negative effect on revenue. For example, the corn ethanol subsidy has diverted corn stock from consumption to fuel production, thereby raising the price of corn, poultry, and other commodities, all in the name of a green economy. Even the popular mortgage interest deduction encourages each of us to purchase more expensive homes that we should and pass along part of the cost to our neighbors, while they do the same to us. This was a contributing factor to the mortgage meltdown and has left the U.S. with an overstock of homes, thereby lowering prices.

Some of those who constantly seek government meddling via the tax code may have good intentions, but they never seem to account for the unintended consequences of their action. Removing most of the government intervention from the personal tax code is a winning proposition (I’d prefer all instead of most but this might be politically unfeasible at the moment). While most of us benefit from one or more “tax breaks,” we are paying for countless others in the form of higher rates, as all of this is a drag on the economy.

I won’t go deep into specifics here in the interest of space. Suffice to say that I prefer a national sales tax (not a VAT) as a replacement of the income tax system, but a relatively flat income tax system might be a necessary first step to get there. A single rate is best, but two rates might be needed for political reasons. Just brainstorming, Americans at income levels under the poverty line might pay nothing, but wealth redistribution schemes such as EITC would be eliminated; nobody gets a “tax refund” in excess of what was withheld in the firs place. All income above the poverty line could be taxed at a single rate with only a few deductions such as charitable contributions. Americans with income above the 90th percentile could pay an additional 10% on that portion of income. I’d prefer something even flatter than this package, but some compromise will be inevitable.

Of course, a tax overhaul is no substitute for spending cuts. A more effective and efficient system is a definite plus for the economy, but it won’t magically produce the additional revenue needed to finance the current state of leviathan. But serious spending cuts don’t stand a chance with Obama in office and will have to wait until 2013 pending election results. Many Democrats are open to the idea of tax reform, so now is the time to put an aggressive proposal on the table.


Obama’s “jobs bill”


Obama’s latest stimulus (AKA “jobs bill”) is more of the same. Raise taxes on the rich to finance popular government hiring—teachers, firefighters, police officers, and construction workers. Unfortunately this stimulus package is fraught with the same four problems as his previous proposals.

First, Obama’s proposal is a classic false choice. If his spending package is so important, then why couldn’t it be financed with cuts in welfare? In reality, his plan is more about reelection than job creation. Support his proposal and you side with education, public safety, and highways. Oppose it and you side with the fat cats. This is class warfare at its finest.

Second, in most instances government spending is less efficient than what comes from the private sector. As we saw with the previous stimulus, Washington’s cash transfer to the states wasn’t always used as it was originally intended. As Obama put it, some of the jobs weren’t as shovel-ready as we thought. There’s no reason to believe that Washington can “create” more jobs by confiscating and spending funds that would otherwise be allocated in the private sector.

Finally, it’s not the responsibility of the federal government to tax residents of one state or community to pay for police officers, firefighters, or teachers in another locale. The same holds true for building bridges and paving roads. States are free to raise their own taxes. Of course, they’d prefer that Washington print more money or incur debt instead. This type of federal-to-state transfer is unconstitutional in my view, but common sense alone should tell us that it’s not the best approach anyway.

Hopefully most Americans will see through Obama’s old wine in new wineskins. We can’t afford any more delusion.


Privatizing the Post Office


According to Postmaster General Patrick Donahoe, the U.S. Postal Service is on the brink of insolvency and will default—probably in 2012—on a mandated $5.5 billion payment to the Treasury unless Congress intervenes this month. Calls to save the post office are already coming from the likes of Susan Collins and Joe Lieberman.

Interestingly, Donahoe is not directly asking for federal funds, but he is requesting permission to make certain changes, including:

  1. the elimination of Saturday delivery,
  2. the closure of 3700 offices,
  3. workforce cuts by up to 220,000, and
  4. setting up a retirement system just for USPS employees.

But one of Donahoe’s ideas represents a huge red flag. He is requesting that the USPS not be required to make advance payments to cover its future retiree medical benefits. Sound accounting requires that retirement (including medical) expenses for an employee be incurred while he or she is working. Not doing so kicks the proverbial can down the road, eventually forcing an organization to pay benefits to previous workers out of current revenues. Our social security system went down Ponzi’s road and we all know how that worked out.

Ultimately, Congress must decide if the USPS should be saved as a federal agency and if so, what strings it should attach to the billions of taxpayer dollars that will be allocated to the task. We will inevitably be told that partial or complete privatization is extreme, but many other nations—Germany, Japan, Sweden, Denmark, Finland, and the UK, among others—have already moved in this direction. There is no rational reason for Congress to play micromanager in an attempt to revive the USPS. The only irrational reason is to placate the union. The USPS has about 574,000 employees.

In my view, this is not very complicated. Advances in technology—namely the Internet and cheap telephone service—have taken a big bite out of demand for traditional mail delivery. The lack of competition in this segment has led to the long lines, mediocre service, and endless bureaucracy that the USPS has become famous for. Privatizing and allowing competition is the only logical solution. Taxpayers should not be asked to subsidize a service that is already being performed more efficiently by UPS, FedEx and your Internet service provider. How Boehner and Republicans respond will tell us a lot about their potential for real reform.