Chrysler decided to declare bankruptcy last week but the Obama Administration decided that would not be allowed so they intervened.  In doing so they decided that they would give over half the company to the United Autoworkers Union, keep a chunk for the U.S. Government, give a sliver to the Canadian Government, and sell the rest to Fiat, an Italian auto-manufacturer.  In the process, the Obama Administration has told Chrysler’s bond-holders that they will be forced to write down 2/3 of the value of the debt they hold and will not have the opportunity to sell off Chrysler’s assets, as would be not only customary but the legal steps in a bankruptcy.

The most serious problem with this is the blatant disregard for contract law and the general rule of law that has been exhibited by our Government.

However, just a little anecdotal piece is how ironically absurd it is that the Obama Administration has been trying to save the American auto industry while attempting to convince Americans to “buy American” only to then sell a large chunk of a large American auto-manufacturer to an Italian company!

Once again, I have underestimated the absurdities that the people of this nation will allow from their Government.

The Obama Administrations 2010 budget includes in its header on every page the phrase, “A NEW ERA OF RESPONSIBILITY.”  What they consider responsible is clearly up for much debate.  I won’t go through each line of the budget, but there were a few lines that stood out to me that should be discussed.

On the last page of the budget summary (found here on the Whitehouse website) is a line item titled “Debt issued by Treasury.”  This line item includes the cumulative debt outstanding that has been issued by the Treasury.  That is, when the United States Government needs to borrow money it issues bonds via the Treasury.  Anybody can buy these bonds and by doing so are lending the United States money.  In 2008 this figure stood at just below $10 trillion.  This amount grows to over $14 trillion in 2010 and over $19 trillion in 2015.  The debt officially doubles the 2008 figure in 2016 with a figure of just under $20 trillion.  By 2019 the Obama Administration estimates that the United States debt will be above $23 trillion.  What is scary is that the Administration has an incentive to underestimate these figures, so these may be on the light side.  To give you an idea of just how much this is, the United States GDP for 2008 was just above $14 trillion and total tax revenues for the federal government were under $3 trillion.  This means that the United States Government is incredibly leveraged (has a high amount of debt relative to its revenues).  What is scarier is that the United States Government itself expects that debt to grow at an outrageous rate.  From 2009 to 2014 (a five year period), the Obama Administration is anticipating that the outstanding debt will grow by an average annual rate of 7.33% and a median annual rate of 6.04%.  To pay off this debt the government will either have to raise taxes or print more money.

In an effort to pay for all of this spending the Obama Administration has enacted many new taxes, not just increased income taxes.  Those new taxes, as shown on the Obama 2010 Budget, include reinstating Superfund taxes, taxing carried interest as ordinary income, repealing the LIFO accounting practice, requiring information reporting for rent payments, implementing international enforcement, reform deferral, and other tax reform policies.  For those of you that have knowledge of accounting and finance these may have some importance to you, as well they should.

One set of new taxes that I found particularly interesting are the numerous new taxes and removal of tax credits for oil and gas companies.  In aggregate, the Obama Administration plans to tax oil and gas companies an additional $353 billion from 2010 to 2019.  This after Obama stated on the campaign trail, “I will set a clear goal as president: in ten years we will finally end our dependence on oil in the Middle East,” (source).  He plans to end our dependence on oil from the Middle East within ten years by taxing domestic oil producers an extra $31 billion.

Another line item that stood out to me was the $15 billion in tax revenue that the government will bring in as a result of changes that are “dedicated to climate policy.”  For those of you that wonder why the government tells us every week that we are all in danger of certain death by global warming now you know one of the many reasons.  The debate on global warming is for another time, but I did find it interesting that the Obama Administrations plans on bringing in that amount of money annually.

One item that I found humorous in a dark sort of way is the line item titled, “Disaster costs.”  The Obama Administration believes that disaster costs (earth quakes, hurricanes, etc.) will increase from $4 billion in 2009 to $30 billion in 2019.  So, in their eyes there will be 7.5 times the number of “disasters” in 2019 than in 2009.  Bunker down, everyone.

Perhaps the most outlandish part of all of this is the Administration’s estimates of how the United States economy will perform.  In order to justify their absurd levels of spending (I didn’t go into this much because it would take up volumes), the Administration has set some ridiculous GDP goals.  Between 2009 and 2014 the Administration suggests that the United States economy will grow, yes grow, at an average annual rate of 5.25% (remember that our debt grew at 7.33% per year over that time period).  For comparison’s sake, as comparison is very necessary here, the United States economy has grown at an average annual rate of 3.47% since 1929.  Don’t want to include the Great Depression?  Since World War II, the United States economy has grown at an average annual rate of 3.06%.  To keep beating a dead horse, 2.78% average annual growth rate over the last twenty years, 2.55% over the last ten years, and 2.50% over the last five years.  In fact, over the past twenty years the United States economy has NEVER grown at an annual rate above 4.50%.  To find the last year that the economy did grow at the rate the Obama Administration is suggesting it will you have to go back to 1984 under President Reagan.  The Obama Administration, however, is telling us that the economy will grow at an average annual rate of 5.25% over the next five years, then 4.45% ever year after that.  So, for those of you that are worried about losing your job, don’t worry any longer – we are about to experience the biggest economic boom in recent history!

“America was indebted to immigration for her settlement and prosperity. That part of America which had encouraged them most had advanced most rapidly in population, agriculture and the arts.”
James Madison

One thing I’ve noticed, particularly among members of the Republican Party, is an immense dislike for illegal immigrants.  They view such immigrants as coming to this nation and soaking up all of its finest resources.  The illegal immigrants take advantage of subsidized health care, welfare, social security, and a number of other social programs that our federal and state governments have set up.  The people of the Republican Party generally believe that the illegal immigrants that are here now should be deported back to their naturalized nation and that fences and increased border security should keep out future illegal immigration.

On the other hand we have the democrats that believe that people should be allowed to stay in this nation that are here, we should just put a best effort forth to secure the borders.  They seem to be the “defenders” of illegal immigrants by showing their kind-heartedness.  Democrats generally do not wish to strip illegal immigrants of access to subsidized health care or any other form of social welfare.

As with most political agendas, both views create unintended consequences that end up doing more harm than good.

To understand the issue of immigration only requires the understanding why the term as “illegal immigrant” even exists.  Until the last century, immigration was particularly easy.  So long as you were healthy and able to work, you were allowed in.  The first laws that restricted immigration into the United States arose in the 1790s. Still, anybody and everybody was allowed into the nation to work and be free to pursue happiness, only citizenship was restricted.  The final version, adopted in 1798, did nothing to actually restrict immigration, it simply set up the guideline that people must reside in the United States for fourteen years before becoming a citizen.  From 1798 to 1882 the only laws that were passed in the United States were those that made it easier to become a citizen, still nothing was done to restrict immigration.  In 1882 Congress passed its first laws limiting immigration.  The law limited the number of Chinese nationals that could migrate to the United States in any given year and also banned the entry of “lunatics” and carriers of infectious diseases.  The limit on Chinese nationals was eventually repealed in 1943.  Immigration did not see its first serious hit until 1920 when Congress passed the Emergency Quota Act, which limited the overall number of people that could immigrate into the United States, broken down by nationality.  This Act was replaced by the Immigration Act of 1924, then the Immigration and Nationality Act of 1952.  Both replacements simply updated and complicated the quotas.  The Immigration and Nationality Act Amendments of 1965 served to eliminate quotas by nationality and simply limited quotas by hemisphere.  In 1986 the Immigration Reform and Control Act was passed, which, for the first time, levied fines upon businesses that knowingly hired illegal immigrants.  There were more small Acts put into place which intended to hinder illegal immigration and there was of course the Secure Fence Act of 2006, which called for the construction of a 700 mile fence along the U.S./Mexican border.  As you can see, the United States slowly progressed from having very open and free borders to attempting to shut them down completely.  The United States was not the first nation to attempt to do this; in fact it has been one of the last.

So we finally get to the point, why is immigration illegal?  The only reason, the only incentive for immigration to be made to be illegal is social welfare (some may argue that illegal immigrants take jobs away from citizens, but this argument is very flawed and will not be addressed in this article).  When you and I pay taxes, a large portion of those taxes go toward paying the hospital bills and welfare checks of many illegal immigrants.  This is infuriating to say the least.  Especially when we consider, as we always hear many politicians tell us, that illegal immigrants don’t pay income taxes, and yet they can benefit from all the social welfare.

So what can be done to stop all of this?  Well, most people would say, “Get rid of illegal aliens.”  Let’s consider an example where the United States was able to effectively keep all immigrants from illegally entering the country.  First, our goal would be accomplished, there would not be any more social welfare going to illegal immigrants.  However, this gain comes with devastating costs.  There is the obvious expense of Homeland Security and building a fence.  We already spend billions upon billions on that and would likely have to spend more to make it perfect.  Next we have the expense to business owners that employ illegal immigrants.  Often times there are jobs that most American citizens would not find satisfactory and are unwilling to perform at the wage that those jobs command.  Illegal immigrants, however, are happy to perform those tasks because these are the only jobs available to them given their typical disadvantages in speaking English and education.  If these workers vanished then business owners would have to spend far more on wages to hire American citizens.  These higher wages would bankrupt a number of companies and American citizens that once had high paying jobs would lose their jobs so that other American citizens could have low paying jobs.  Tax revenues would not increase, they would actually decrease because it is no longer the income-tax-paying business owners that are making money, they would have either gone bankrupt or at the very least would be making less and paying less in taxes.  You would have an effect where American workers making very little would replace American workers that were previously making good salaries.  In essence, many Americans with jobs would have to take pay cuts or lose their jobs so that less qualified Americans could have low-paying jobs once held by illegal immigrants.  Compounding on this conundrum is the fact that illegal immigrants spend money, and have specific sets of needs that the market has reacted to meet.  The companies and employees that meet the demands of illegal immigrants would be thrown into a tailspin, further reducing employment and aggregate wages.

We are presented with a serious predicament between keeping illegal immigrants, thus paying some of their bills and expelling those immigrants and facing bankruptcy and lower wages for Americans.  There is, however, a simple solution.  Few people complain about the hard work that illegal immigrants perform without contempt.  Even fewer complain that illegal immigrants gladly work in the blazing sun while Americans work in air-conditioned offices.  What most every anti-illegal-immigration activist complains about is the social welfare that these illegal immigrants are taking advantage of.  Hence, our simple solution: end social welfare.

Just one of the numerous benefits of a society without overwhelming social welfare is that illegal immigration will be of great benefit to that society instead of draining its resources.  Once again people will be singing the praises of immigration, much like James Madison did.  Most importantly, people will once again be able to choose where and how to spend their money without the government deciding for them.

Illegal immigrants do not utilize social welfare because they are bad people who are trying to steal from Americans.  They utilize it for the same reasons that Americans utilize it – if something is given away for free it will almost certainly be abused.  So, next time you hear a story about an illegal alien using social welfare without paying taxes, consider the root of the problem, not its product.

Over the weekend the Obama Administration effectively fired the CEO of GM, Rick Wagoner, and much of the GM board.  This would not be much to report had the common stockholders of GM voted to replace members of the board and those new members then voted to terminate Mr. Wagoner; it would actually be almost expected and applauded by most.  However, this story becomes very newsworthy as it is the first time that the United States Government, namely the Obama Administration, has effectively fired a member of the private sector.

Due to TARP, the United States Government owns a large share of a number of major U.S. corporations, a gigantic leap in the direction of Socialism.  However, until recently the Government has led us (the citizens) to believe that it would not meddle in the affairs of these private organizations, but rather it would simply be a silent investor in them in some horrible attempt to calm the economic volatility.  The Government’s stance as a silent investor, however, has rapidly eroded and developed into the role of an activist investor that even Carl Icahn would envy.  The United States Government has capped executive income ($500k per annum), capped executive bonuses (1/3 of annual salary or $167k), is attempting to tax any bonus paid to a family earning more than $250k per annum at a 90% rate, restricted the marketing practices of a number of companies (most notably not allowing Bank of America to sponsor the new Yankees Stadium), and now deciding who should is worthy or unworthy to be a CEO or board member of private companies.

The members of Congress and the Obama Administration seem to believe that they are more fit to run private companies than anyone else in this nation.  A few months ago we were led to believe that we must bailout the domestic automobile manufacturers in order for them to avoid bankruptcy (see my article on this topic).  The Government, in all its wisdom, has now decided that the only way out for these very companies to restructure and survive is to go the route of bankruptcy — this only after handing them billions upon billions of dollars in tax payer cash!

We are on a collision course with socialism at an incredible rate.  I’d usually offer a relatively simple solution here, but given the above absurdities offered to us by our Government, I think that the solution is more than apparent.

Update:

It should be noted that President Obama has explicitly given GM sixty days to completely restructure and Chrysler thirty days or both firms will be forced into bankruptcy by the United States Government.  Obama has demanded, as an activist investor/chairman of the board might, that Chrysler merge with European automobile manufacturer, Fiat, within the next thirty days.  In addition, the Obama Administration is now insisting that members of the United Auto Workers Union give bigger concessions than they had previously been willing to give and that holders of GM debt agree to take a steep discount on that debt and could be required to convert it to GM stock.

Again, this would be fine and well if a private equity group purchased a good chunk of one of these companies then demanded changes be made – it is the legal way of doing things in this nation.  However, in this circumstance we have the Federal Government not only intervening in the private markets, but completely controlling them.  President Obama commandeered complete control of General Motors and Chrysler and that should not sit well with the American people.  What happened to our guarantee of Life, Liberty, and the Pursuit of Happiness?

Sources: WSJ1, WSJ2, Reuters

Recently the House of Representatives passed a bill that would require a tax of 90% on any bonus received by an employee whose household earns more than $250k per year.  This tax applies to any employee of any company that received at least $5 billion in federal aid via TARP.  This includes twelve of the largest companies in the United States and hundreds of thousands of employees.

The bill was in response to AIG giving retention bonuses that had been contractually agreed upon AFTER the United States provided “bailout” money to the insurer.  In fact, language in the bill explicitly allowed AIG to provide such retention bonuses to their employees.  The bonuses were given in an attempt to keep the company’s best employees on board while AIG tried to restructure to become a going concern.  The United States government believed that these bonuses were absolutely egregious, even though the United States government owned most of AIG when these bonuses were agreed upon between the company and the employees.

There are very serious problems associated with the United States essentially disregarding contract law and property rights by taxing these bonuses at a 90% rate, but there is another serious problem that is not as easily seen.  This new bill, should it pass the Senate, which it likely will with the help of President Obama, would make it so that no employee of these twelve gigantic, struggling corporations can ever receive a bonus that puts his/her household income over $250k.  As such, if a Citi secretary who is married to a successful surgeon makes $35,000 per year and is bonused $5,000 at the end of that year, she will have to pay a 90% tax on her $5,000 bonus.  This means that an overwhelming number of employees at these struggling corporations are likely to leave their posts for an occupation where they are entitled to more than 10% of their hard earned bonuses.  Those employees that stick around at these companies will likely be the people that will never have a chance of having a household income of over $250,000.  In other words, the employees with the most talent and capability of turning around these companies will leave said companies.

The United States government entered this “crisis” by stating that we, as tax-paying Americans, were to bailout out these giant corporations to “save” them because they were “too big to fail.”  True to form, our representatives have taken it upon themselves to wreck any chance of recovery for these companies by forcing any employee capable of “saving” these companies to leave.  This would be the equivalent of a baseball team telling its fans that it must increase ticket prices to improve the team, but they refuse to pay any player anything over $250k, and if that player’s wife makes an income then that income will be deducted from what the player will be paid.  The odds of such a baseball team improving are extremely limited — essentially zero.  This is the same ludicrous situation that our politicians have presented to us today.  They want to charge us money to save companies by effectively refusing to hire any capable employee.

Bravo, United States government, you have done it again.

Imagine an America where contracts were only valid so long as the political winds out of the District of Columbia blew in the right direction: a world where the government could circumvent any contract that attracted the ire of politicians, or that politicians could use to redirect attention from their own failings. In such an uncertain world, who among us would put any faith in contracts, and who among us would be willing to put our livelihoods at risk on the basis that the government would protect our interests?

As uncertain as free markets may seem, certainty is one of the bedrocks of a free market system. A free market can only thrive in a moral society (note: “moral” here not necessarily in the sense of a religious morality), governed by a legal framework which establishes certainty in economic transactions. Certainty is then derived from the laws being enforced by a governing body with the authority to use force in order to enforce the rule of law, which ideally is a direct reflection of agreed upon social mores. As long as outcomes within the rule of law are known, a free market economy can then function, and market participants are able to speculate about the unknown, with known legal outcomes upon the outcome of the unknown.

We speculate every day. One such speculation that we all experience in our lives is the speculation about our worth in the workplace. As employees, we believe that our services have value, and we demand to be paid for the value of our services. We know that we will do our best and that we will provide value to the company, but the prospective employer can’t possibly know what type of employee we will turn out to be. When we agree to work for a company, we take on some amount of risk: what if the person offering us a job has lied to us about how much we will be paid? What if our job will be different than described during the interview process? On the flip side, the employer also has risks: What if the employee doesn’t work the full time for which he is paid? What if the employee is dishonest and steals from the company?

To solve these issues and to help mitigate risks associated with employment, the employer and employee enter into a contract. The employer specifies salary and job requirements, and the employee agrees to perform services in a manner as defined by the employer. Both sides gain some amount of certainty from having agreed to a contract.

Employment, like all contracts, can only exist in a moral society with a well-defined rule of law, and here is why: If no social mores exist by which the majority of people function, neither party will trust that the other party will perform on the contract, yielding the contract ineffective on its face. A rule of law cannot compensate for a lack of social mores, because adjudicating contracts is not costless – someone must pay for attorneys, judges, court clerks, courthouses, officers of the court to enforce judgments, etc. At the margins, people will not enter into contracts if they believe they will have to resort to the legal system to resolve a dispute, because they cannot afford the very real costs of having an issue adjudicated. Without morality, the odds of reliance on the legal system increase. However, in a moral society, the rule of law ensures that the few who do not abide by social mores will be forced to comply, and, thus, odds are that contracts will be honored sans adjudication. Both morality and rule of law are necessary, but individually insufficient conditions to ensure a proper framework for contracts to exist.

Recently, there has been much ado about the bonuses given to AIG executives: bonuses that were contractually agreed upon by both AIG and the individuals who were given bonuses. These were not, by all accounts, discretionary bonuses that AIG lavished upon these executives, but contractually owed bonuses of a specified amount, which AIG could not legally alter. To be sure, AIG didn’t pay these executives in excess of what surely was a guaranteed minimum bonus. Most likely, AIG had discretion to pay these executives more than the minimum, but, given the performance of the company, AIG did not pay in excess of the bare minimum.

For the past few days, the news media has not been able to stop covering these bonuses. In fact, the news media continues to beat the war drum against these “greedy” executives, all but demanding that something be done about these “outrageous” bonuses. Fox News’ Greta Van Susteren, who is… ahem … a lawyer, vows to “get to the bottom” of how we let these bonuses be paid. I guess the fact that these are contractually owed bonuses eludes this lawyer.

It is our own greed and envy that outrages us about these bonuses. What’s worse is that, because we, as taxpayers, have taken 80% ownership in AIG, we feel that we have the right to control the company and demand that these bonuses not be paid. We feel a certain amount, and rightfully so, of righteous indignation that our tax dollars are going to pay the bonuses of people who were involved in running AIG into the ground, but our greed and envy are distracting our attention from the people who are truly deserving of our ire. In fact, one might think that politicians are intentionally calling our attention to these trivial bonuses, which account for less than one-tenth of one percent of the money allotted to AIG, so that we will not focus on the fact that the government is busily spending us into debt and circumventing laws that were established to keep us all safe from the government intervening in our lives.

We should be angry at the politicians who bailed out a company so wrought with mismanagement, not at the company or at the executives who received these bonuses. The free market allows for failure: in fact, failure is like a disease that causes illness but eventually is fought off by the body, which then has antibodies to fight the disease in the future. When the government intervenes, it causes the same problems caused by the over-prescription of antibiotics, which causes the disease to mutate such that fighting it off in the future becomes ever more difficult. Our anger should be focused on the very politicians who are distracting us by pointing to some trivial amount of money given out as bonuses.

We should be even more angry at politicians who speak of finding “legal avenues” to circumvent the rule of law. If even one private contract is circumvented by the government, then all contracts are at risk of being impaired by the government. Our greed and envy may lead us to believe that it’s right to punish these few individuals who received more money than most Americans will see in a lifetime as a bonus for a single year’s work, especially when that work resulted in laying the groundwork for the company’s failure, but we must remember that the rule of law is essential to a properly functioning economy, and that we wouldn’t want the government interfering in our contracts.

What if, for example, the government decided that non-hybrid vehicles are not being sold at a price that politicians feel accounts for the social costs of those cars and increases the amount you, as a non-hybrid car owner, owe for the car? “Absurd!” you say “The government can’t do that!”

Oh, but they can. What if anyone who owns a non-hybrid car suddenly becomes subject to a new tax for non-hybrid car ownership – even if you purchased the car 10 years ago? You might think this was unfair; that had you known this when you were purchasing a car, you might not have purchased the car. You’d probably think it was unfair that the government passed this law after you purchased the car.

You’d be right to be upset, because this is exactly what the Constitution attempts to avoid in Article I, Section 9 where it states, “No bill of attainder or ex post facto Law shall be passed.” Such a tax would, de facto, be an ex post facto law. Such laws are unconstitutional.

Well, what of the solution that Congress is discussing to “rectify” the AIG situation? Senate Banking Committee Chairman Chris Dodd (D-Conn.) has recommended levying a draconian and confiscatory tax aimed at only AIG executives who received this bonus. Such a tax, so directed at these specific individuals for the sole purpose of circumventing a legally valid and binding contract is, de facto, and ex post facto law. We, as Americans, no matter how disgusted we are by the fact that we are bailing out AIG, cannot stand for the government violating the Constitution to enforce some notion of cosmic justice, because it undermines the very principles upon which the country was founded, and which allow our free market economy to function.

We are moving toward living in an ex post facto world: a world where we address symptoms rather than illnesses; a world where the rule of law changes on a daily basis based on how we feel about outcomes rather than a world where we enforce a rule of law established to make sure everyone plays by the same rules. Such a world is not only an ex post facto world, but an ad hoc world, malleable by the political process, changing daily, and wholly unstable to support a free market economy.

We are being persuaded, both by our politicians and the media, to focus on outcomes, which are mere symptoms of the underlying illnesses causing them. Too often the conversation about “equality” focuses on equality of outcomes, rather than equality of opportunity. We look at those things we see that make us feel wronged, and try to right them, instead of understanding what caused them in the first place. In AIG’s case, it was government intervention that allowed these bonuses to be made. Had the government allowed the rule of law – the system that ensures we all play by the same rules – to solve AIG’s financial woes, AIG would have entered into bankruptcy, ruled by bankruptcy law, and a judge could have legally invalidated the contracts for guaranteed bonuses, in favor of paying AIG’s debt holders and shareholders. Problem solved.

It is precisely government intervention in the free market that has caused this problem. Allowing the government to fix the problem by circumventing private contracts and directly violating the Constitution only creates systemic problems that will certainly cause more problems in the future, because it will create an ex post facto world, and an ex post facto economy.