Fannie/Freddie What They Knew and When

• DECEMBER 22, 2011

What Fannie and Freddie Knew

The SEC shows how the toxic twins turbocharged the housing bubble.

Democrats have spent years arguing that private lenders created the housing boom and bust, and that Fannie Mae and Freddie Mac merely came along for the ride. This was always a politically convenient fiction, and now thanks to the unlikely source of the Securities and Exchange Commission we have a trail of evidence showing how the failed mortgage giants turbocharged the crisis.
That's the story revealed Friday by the SEC's civil lawsuits against six former Fannie and Freddie executives, including a pair of CEOs. The SEC says the companies defrauded investors because they "knew and approved of misleading statements" about Fan and Fred's exposure to subprime loans, and it chronicles their push to expand the business.

The SEC also shows how Fannie led private lenders into the subprime market. In July 1999, Fannie and Angelo Mozilo's Countrywide Home Loans entered "an alliance agreement" that included "a reduced documentation loan program called the 'internet loan,'" later called the "Fast and Easy" loan. As the SEC notes, "by the mid-2000s, other mortgage lenders developed similar reduced documentation loan programs, such as Mortgage Express and PaperSaver—many of which Fannie Mae acquired in ever-increasing volumes." Mr. Mozilo and Fannie essentially were business partners in the subprime business. Countrywide found the customers, while Fannie provided the taxpayer-backed capital. And the rest of the industry followed.

As Fannie expanded its subprime loan purchases and guarantees, the SEC alleges that executives hid the risk from investors. Consider Fannie's Expanded Approval/Timely Payment Rewards (EA) loans, which the company described to regulators as its "most significant initiative to serve credit-impaired borrowers."

By December 31, 2006, Fannie owned or securitized some $43.3 billion of these loans, which, according to the SEC, had "higher average serious delinquency rates, higher credit losses, and lower average credit scores" than Fannie's disclosed subprime loans. By June 30, 2008, Fannie had $60 billion in EA loans and $41.7 billion in another risky program called "My Community Mortgage," but it only publicly reported an $8 billion exposure.

The SEC says Fannie executives also failed to disclose the company's total exposure to risky "Alt-A" loans, sometimes called "liar loans," which required less documentation than traditional subprime loans. Fannie created a special category called "Lender Selected" loans and it gave lenders "coding designations" to separate these Alt-A loans from those Fannie had publicly disclosed. By June 30, 2008, Fannie said its Alt-A exposure was 11% of its portfolio, when it was closer to 23%—a $341 billion difference.

All the while, Fannie executives worked to calm growing fears about subprime while receiving internal reports about the company's risk exposure. In February 2007, Chief Risk Officer Enrico Dallavecchia told investors that Fannie's subprime exposure was "immaterial." At a March 2007 Congressional hearing, CEO Daniel Mudd testified that "we see it as part of our mission and our charter to make safe mortgages available to people who don't have perfect credit," adding that Fannie's subprime exposure was "relatively minimal." The Freddie record is similarly incriminating.

***

The SEC's case should embarrass Congress's Financial Crisis Inquiry Commission, which spent 18 months looking at the evidence and issued a report in January 2011 that whitewashed Fan and Fred's role. Speaker Nancy Pelosi created the commission to prosecute the Beltway theory of the crisis that private bankers caused it all, and Chairman Phil Angelides delivered what she wanted.

Far from being peripheral to the housing crisis, the SEC lawsuit shows that Fan and Fred were at the very heart of it. Private lenders made many mistakes, but they could never have done as much harm if Fan and Fred weren't providing tens of billions in taxpayer-subsidized liquidity to lend on easy terms to borrowers who couldn't pay it back.

Congress created the two mortgage giants as well as their "affordable housing" mandates, and neither the financial system nor taxpayers will be safe until Congress shrinks the toxic twins and ultimately puts them out of business.

Irag: US Out - Iran In (BMB)

Baghdad explosions kill at least 63 in first major violence since U.S. departure

By Dan Morse and Aziz Alwan, Updated: Thursday, December 22, 6:19 AM

BAGHDAD — More than a dozen explosions in Baghdad over a two-hour period Thursday morning killed at least 63 people--the first major violence in Iraq since the U.S. completed its troop pullout last week and a political crisis broke out.

At least 185 people were reported injured in the bombings, said officials at the Ministry of Interior, who were speaking on the condition of anonymity because they were not authorized to speak publicly.

The coordinated wave of attacks began around 6:30 a.m. local time (10:30 p.m. Wednesday in Washington). Witnesses said that all main roads and many government offices in the Iraqi capital remained closed for hours after.

Babil province, about 80 miles south of the capital, imposed a curfew after receiving intelligence information that explosive-laden cars had entered the area, according to a report on government-run Iraqia TV.

But by 2 p.m., traffic was clogging main roads in central Baghdad, and life returned at least partially to normal. Street vendors sold food. Women boarded buses. Pedestrians, including men in suits and carrying briefcases, walked down sidewalks.

The Baghdad blasts included at least five booby-trapped cars, two operated by suicide drivers. Police were able to diffuse or safely detonate an additional three booby-trapped cars, officials said. Additionally, a Katyusha rocket was fired into a western Baghdad neighborhood, killing one person and injuring another.

Qassim Atta, a spokesman for the Baghdad Operations Command, told the Iraqia station that the explosions targeted civilians randomly, and not specific establishments.

In response to the attacks, speaker of parliament Ussama Alnujafi called on leaders of the government’s political blocs to gather Friday to discuss security concerns, said Tami Ahmed Ma’aruf, a spokesman for the speaker.

Iraq’s political leadership has been in turmoil since Monday, when officials from the Shiite-backed central government announced an arrest warrant had been issued for vice president Tariq al-Hashimi, a leading Sunni politician. The warrant alleged that Hashimi he enlisted personal body guards to run a hit squad.

Hashimi has fled to Iraq’s semiautonomous region of Kurdistan. The country’s top government official, Shiite Prime Minister Nouri al-Maliki, is demanding that Kurdish officials return him to Baghdad to face the charges.

In a news conference on Wednesday, Maliki also said that he would release what he described as incriminating information about government officials unless they work to stop killings and to rebuild the country. Iraq’s constitution, he said, gives him broad authority and latitude to run the country as he sees fit.

Fannie / Freddie

Fannie, Freddie At Heart Of Financial Crisis, Fraud Charges Show

Posted 12/16/2011 06:54 PM ET

Financial Crisis: The SEC is suing top officers at Fannie Mae and Freddie Mac for not disclosing their true exposure to subprime loans.

Maybe now the left's tired canard that Fannie and Freddie were blameless can be laid to rest.

The left's preferred narrative of the financial meltdown goes something like this: Greedy banks, encouraged by reckless Bush-era deregulation and lusting after ever-higher profits regardless of the risk, caused the financial crisis.

Fannie Mae and Freddie Mac, the two government-sponsored mortgage companies, were mere victims.

Well, the left has it exactly backward: It is a well-documented fact that government regulators twisted the arms of private banks to make subprime and other risky loans to people who couldn't pay them back.

And it imposed "goals" on Fannie and Freddie — with an implicit guarantee of taxpayer backing — to buy huge blocks of those loans and, ultimately, to resell them to gullible investors as mortgage-backed securities.
When the market fell apart, the banks were left with rotten loan portfolios, and Fannie and Freddie stuck the taxpayers with billions of dollars in losses.

To date, taxpayers have spent $169 billion on Fannie and Freddie's mistakes. But some analysts believe the losses could ultimately reach as much as $1 trillion.

Even so, the left refuses to face reality.



As recently as 2008, New York Times columnist Paul Krugman stated: "Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income."

Now, the government's own market watchdog, the Securities and Exchange Commission, says that's false. They're going after former Fannie CEO Daniel Mudd and former Freddie CEO Richard Syron to prove it.
"Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," was how Robert Khuzami, director of SEC enforcement, described it Friday.

But that's an understatement.
From 2007 to 2008, according to SEC documents, executives at Freddie and Fannie together estimated their total exposure to subprime loans at about $10 billion.

The real amount? Nearly $300 billion total.
In short, Fannie and Freddie are frauds. They systematically hid their exposure to potential losses from investors, taxpayers and regulators.
Nor was this their first financial shenanigans.

In the early 2000s, both companies grossly overstated their earnings — which led to fat bonuses that enriched a long line of cronies of President Clinton and President Obama who used Fannie and Freddie to get rich at the public's expense.

Unfortunately, the SEC's actions on Friday don't go nearly far enough. Because while it will sue top executives, it also signed "nonprosecution agreements" with Fannie and Freddie. So no matter how guilty their executives turn out to be, they won't be punished.
Let it be said that the government covering up for these criminal enterprises at the heart of our financial crisis is getting a bit old. It's time we closed them down or privatized them, before they create another crisis.

VDH - "O" The Legend (Myth)

‘When the Legend Becomes Fact, Print the Legend’

Posted By Victor Davis Hanson On December 16, 2011 @ 12:17 pm In Uncategorized | 240 Comments

Obama Mythologos

Barack Obama is a myth, our modern version of Pecos Bill or Paul Bunyan. What we were told is true, never had much basis in fact — a fact now increasingly clear as hype gives way to reality.


“Brilliant”

Presidential historian Michael Beschloss, on no evidence, once proclaimed Obama “probably the smartest guy ever to become president.” When he thus summed up liberal consensus, was he perhaps referring to academic achievement? Soaring SAT scores? Seminal publications? IQ scores known only to a small Ivy League cloister? Political wizardry?

Who was this Churchillian president so much smarter than the Renaissance man Thomas Jefferson, more astute than a John Adams or James Madison, with more insight than a Lincoln, brighter still than the polymath Teddy Roosevelt, more studious than the bookish Woodrow Wilson, better read than the autodidact Harry Truman?

Consider. Did Obama achieve a B+ average at Columbia? Who knows? (Who will ever know?) But even today’s inflated version of yesteryear’s gentleman Cs would not normally warrant admission to Harvard Law. And once there, did the Law Review editor publish at least one seminal article? Why not?

I ask not because I particularly care about the GPAs or certificates of the president, but only because I am searching for a shred of evidence to substantiate this image of singular intellectual power and known erudition. For now, I don’t see any difference between Bush’s Yale/Harvard MBA record and Obama’s Columbia/Harvard Law record — except Bush, in self-deprecation, laughed at his quite public C+/B- accomplishments that he implied were in line with his occasional gaffes, while Obama has quarantined his transcripts and relied on the media to assert that his own versions of “nucular” moments were not moments of embarrassment at all.

At Chicago, did lecturer Obama write a path-breaking legal article or a book on jurisprudence that warranted the rare tenure offer to a part-time lecturer? (Has that offer ever been extended to others of like stature?) In the Illinois legislature or U.S. Senate, was Obama known as a deeply learned man of the Patrick Moynihan variety? Whether as an undergraduate, law student, lawyer, professor, legislator or senator, Obama was given numerous opportunities to reveal his intellectual weight. Did he ever really? On what basis did Harvard Law Dean Elena Kagan regret that Obama could not be lured to a top billet at Harvard?

That his brilliance is a myth was not just revealed by the weekly lapses (whether phonetic [corpse-man], or cultural [Austria/Germany, the United Kingdom/England, Memorial Day/Veterans Day] or inane [57 states]), but in matters of common sense and basic history. The error-ridden Cairo speech was foolish; the serial appeasement of Iran revealed an ignorance of human nature; a two-minute glance at an etiquette book would have nixed the bowing or the cheap gifts to the UK.

In short, the myth of Obama’s brilliance was based on his teleprompted eloquence, the sort of fable that says we should listen to a clueless Sean Penn or Matt Damon on politics because they can sometimes act well. Read Plato’s Ion on the difference between gifted rhapsody and wisdom — and Socrates’ warning about easily conflating the two. It need not have been so. At any point in a long career, Obama the rhapsode could have shunned the easy way, stuck his head in a book, and earned rather than charmed those (for whom he had contempt) for his rewards. Clinton was a browser with a near photographic memory who had pretensions of deeply-read wonkery; but he nonetheless browsed. Obama seems never to have done that. He liked the vague idea of Obamacare, outsourced the details to the Democratic

Congress, applied his Chicago protocols to getting it passed, and worried little what was actually in the bill. We were to think that the obsessions with the NBA, the NCAA final four, the golfing tics, etc., were all respites from exhausting labors of the mind rather than in fact the presidency respites from all the former.


“Healer”

Take away all the”‘no more red state/no more blue state,” “this is our moment” mish-mash and what is left to us? “Reaching across the aisle” sounded bipartisan, but it came from the most consistently partisan member of the U.S. Senate. Most of the 2008 campaign was a frantic effort on the part of the media to explain away Bill Ayers, ACORN, the SEIU, Rev. Wright, Father Pfleger, the clingers speech, “get in their face,” and the revealing put downs of Hillary Clinton. But those were windows into a soul that soon opened even wider — with everything from limb-lopping doctors and polluting Republicans to stupidly acting police and “punish our enemies” nativists. The Special Olympics “joke,” the pig reference to Sarah Palin, the middle finger nose rub to Hillary — all that was a scratch of the thin shiny veneer into the hard plywood beneath.

The binding up our wounds myth had no basis in reality, but was constructed on the notion (to channel the racially condescending Harry Reid and Joe Biden) that a charismatic and young postracial rhetorician seemed so non-threatening. The logic was that Obama took a train from Springfield to DC; so did Lincoln; presto, both were like healers. The truth? The Obamites — Jarrett, Axelrod, Emanuel, etc. — were hard-core partisan dividers, who had a history of demonizing enemies, suing to eliminate opponents, and leaking divorce records, in addition to the usual Chicago campaign protocols.

If one were to collate the Obama record on race (from Eric Holder’s “my people” and “cowards” to Sotomayor’s “wise Latina” and Van Jones’s racist rants), it is the most polarizing in a generation. The Obama way is and always was to create horrific straw men: opponents of health care reform are greedy doctors who want to rip out your tonsils; opponents of tax increases jet off to Vegas to blow their children’s tuition money; skeptics of Solyndra-like disasters want to dirty the air; those against open borders wish to put alligators and moats in the Rio Grande as they round up children at ice cream parlors. There were ways of opposing Republicans without the demonization, but the demonization was useful when followed by the soaring, one-eyed Jack rhetoric about reaching out, working together, and avoiding the old politics of acrimony.


“Reformer”

The notion that there was anything in Obama’s past or present temperament to suggest a political reformer was mythological to the core. Almost all his prior elections relied on a paradigm of attacking his opponents rather than defending his own record, from the races for the legislature to the U.S. Senate. He shook down Wall Street as no one had before or since — and well after the September 2008 meltdown.
He was the logical expression of the Chicago/Illinois system of Tony Rezko, Blago, and the Daleys, not its aberration — from the mundane of expanding his yard to melting down opponents by leaking sealed divorce records.

The more Obama badmouthed BP and Goldman Sachs, the more we knew he received record amounts of cash from both (were the bad “millionaires and billionaires” snickering that this was just part of the game?). He renounced liberal public financing of campaigns of over three decades duration, as only a liberal reformer might, and got away with it. Obama raised far more money than any candidate in history, and will go back to the same trough this time around. On a Monday the president will vilify Wall Street, on Tuesday host a $40,000-a-head dinner for those who apparently did not get his earlier message that at some point they had already made enough money and this was now surely not the time to profit — or did they get it all too well? Wait, you say, “They all do this!” Well, perhaps most at any rate; but most also spare us the messianic rhetoric and so do not win the additional charge of hypocrisy. Reforming the system is hard; reforming the reformers of the system impossible.

So when Obama speaks loudly about Wall Street criminality, we now snooze — only to awaken knowing Corzine’s missing $1 billion, or George Soros’s felony conviction in France, or Jeffrey Immelt’s no-tax gymnastics were not just never raised, but are exempted through the purchase of liberal penance, in the manner that John Kerry never really docked his gargantuan yacht in a less taxed state, or Timothy

Geithner never really pocketed his FICA allowances.

As far as the vaunted promises to end the revolving door, lobbyists, and earmarks and usher in a new transparency, well, blah, blah, blah. Obama did not merely violate his proposed reforms, but excelled in the old politics as few others had. The career of a Peter Orszag or the crony machinations of the Solyndra executives attest well enough.

As far as medical transparency, I care only that my president seems healthy enough to get up in the morning for his grueling ordeal and can be spared the how part; but I do recognize that we have a history of disguising maladies (cf. Wilson’s incapacity, FDR’s last year, or JFK’s numerous prescription drugs), and that, in recent times at least, we have demanded a new transparency. Was that why the media harped on McCain’s melanoma, his age, and his injuries? So I thought we would get the now mandatory 24-look at 500 pages of thirty years of Obama’s doctors visits, medications, vital signs, diseases, all the treatments that the watchdog media goes ape over — whether

Tom Eagleton’s shock treatments or Mike Dukakis’s use of Advil or the Bush thyroid problem.
Instead, we got a tiny paragraph from Obama’s doctor assuring us that he’s healthy, and this from the most “transparent” president in history, in an age when the press is frenzied over a presidential Ambien prescription. To this day, I have no idea whether our president smokes, or ever did, or for how long and how much, or if he ever took a prescription drug, or if his blood pressure is perfect or under treatment. Again, I care only that he gets up in the morning — and that the de facto rules of disclosure that have applied to others apply to him.

We will never know much about Fast and Furious, and even less about Greengate. Obama — and this was clever rather than brilliant — gauged rightly that not only would liberals’ hysteria about ethics cease when he brought them to power, but in a strange way they would grin that one of their own had out-hustled the supposed right-wing hustlers. Or was it a sort of paleo-Marxist idea of using the corrupt system to end the supposedly corrupt system? Those who vacation at Vail, Martha’s Vineyard, or Costa del Sol are supposedly insidiously undermining the system that allows only the millionaire and billionaire few to do so?


“Magnanimous”

This was the strangest chapter of the myth, the idea that Obama the Olympian was above the fray. He lobbied the Germans for an address at the Brandenburg Gate, settled for the Prussian Victory Column, and, as thanks, then skipped out as president on the 20th anniversary of the fall of the Berlin Wall — but managed to jet to Copenhagen to lobby for the Chicago Olympics.

There was never a peep that Obama’s present anti-terrorism protocols — Guantanamo, renditions, tribunals, Predators, the Patriot Act, preventative detention — came from George Bush. Much less did we hear that had Bush for a nanosecond ever listened to the demagoguery of then state legislator and later senator Obama, none of these tools would presently exist. How did what was superfluous, unconstitutional, and possibly illegal in 2008 become vital in 2011?

Ditto the Iraq War. We went in a blink from the surge that failed and made things worse and all troops must be out by March 2008 to Iraq was a shining example of American idealism and commitment. It was as if the touch-and-go, life-and-death gamble between February 2007 and January 2009 in Iraq never had existed. Bombing Libya was not warlike, and those who sued Bush on Iraq and Guantanamo now filed briefs to prove that we were not at war killing Libyan thugs. We hear only of reset; never that Obama has now simply abandoned all his “Bush-did-it” policies and is quietly going back to the Bush consensus on Russia, Iran, Syria, and the Middle East in general. We will not only never see Guantanamo closed or KSM tried in a civilian court, but never hear why not. Are we to applaud the hypocrisy as at least better than continued ignorance?

On the domestic front, we are forever frozen on September 15, 2008. There is never an Obama sentence that the Freddie/Fannie machinations (both agencies were routinely plundered for bonuses by ex-Clinton flunkies) gave a green light to Wall Street greed — much less that both empowered public recklessness either to flip houses or to buy a house without credit worthiness or any history of thrift. Did we ever hear that between the meltdown and the inauguration, there were four months of frantic stabilization that, by the time of Obama’s ascendancy, had ensured that the panic had largely passed? Instead, blowing $5 trillion in three years is to be forever the response to the ongoing and now multiyear Bush crash, all to justify a “never waste a crisis” reordering of society.

I could go on, but we know only that we know very little about Barack Obama, and what we do know is quite different from what is alleged. All presidents have mythographies, but they also have a record and auditors that can collate facts with fiction. In Obama’s case, we were never given all the facts and there were few in the press interested in finding them.

To quote Maxwell Scott in The Man Who Shot Liberty Valance, “When the legend becomes fact, print the legend.”

VDH -

The President Who Never Was

Posted By Victor Davis Hanson On December 8, 2011 @ 10:44 am In Uncategorized | 182 Comments

A Teen-age President in Search of an Adult Identity
Barack Obama keeps looking for a presidential identity not his own ^[1]. In 2008, he wished to be JFK — whom he often referenced as a youthful and charismatic figure supposedly similar to himself. So we heard references to Obama’s father’s arrival to the U.S. during the golden Kennedy Camelot years. Caroline Kennedy herself ^[2] came out of seclusion to assure us that Obama had the same Kennedy zest, and she flirted with a Senate run to help restore the lost age of grandeur. And at the Brandenburg Gate, Obama would have liked to electrify Europeans with another Ich Bin Ein Berliner speech. But even the left-leaning Germans sorta balked at that, and relegated the new Galahad to the Victory Column — a nice enough gesture that earned them a snub when a later President Obama chose not to go to Berlin for the commemoration of the twenty year anniversary of the fall of the Berlin Wall. (But flying ad hoc to Copenhagen to lobby for the Chicago Olympics is a horse of a different color.)

The New Gipper
Next candidate Obama channeled his inner Ronald Reagan. He reminded us that that he too had a sense of a new “trajectory.” His supporters swore that he had the same sunny disposition and eloquence. Obama liked that new persona. Soon he was talking about being the same “transformative” president, as long as we understood that Obama was going to be Reaganesque solely in the way he campaigned and soared with “hope and change” rhetoric — a sort of ironic payback to the Reagan Revolution as Obama mimicked the Gipper’s personal talents to undue his legacy ^[3].

Young Mr. Lincoln
That did not last long. When he won the election, Obama now referenced the Civil War, slavery, and the civil rights struggle as he became the Great Emancipator to finally bind up the nation’s wounds. So he was for a bit Barack Lincoln. I mean this literally and to such a degree that he chartered a slow train ^[4] from Springfield to DC in December 2008, to remind us that it had been 148 years since a similar messiah had trained from Illinois to Washington to save the Union. Aides got copies of Team of Rivals, since Obama had long seen himself as a saintly Lincoln in magnanimous fashion bringing in former political opponents who perhaps were more experienced but surely less talented than himself. A Biden or Hillary as Seward or Stanton?

Hyde Park Redux
But when he assumed office, there being no Civil War, Obama of Chicago Hyde Park now channeled FDR ^[5] of New York Hyde Park to meet the same crisis of yet another Great Depression induced by Bush/Hoover. The “100 Days” of 1933 were upon us again. Those were the glory moments, as the White House let it be known, when a new FDR would bookend Social Security with Obamacare. That did not last too long —given the fury over the health care machinations, the Tea Party, 9% plus unemployment, the horrendous new debt, and the greatest mid-term setback since Roosevelt’s own in 1938.

Axelrod as Morris?
In this search for another persona after the 2010 disaster, Obama flirted briefly with a Bill Clinton identity. He gave signals that he would be another triangulator of the Dick-Morris brand, who saved his presidency after the 1994 “shellacking” by moving to the middle. So in December 2010, a subdued Obama announced that these recessionary times were not the right moment to raise taxes on anyone. There was no more talk of “punish our enemies.” Remember Rahm Emanuel had wisely resigned right before the midterm wipeout, and Chicago fixer Bill Daley took his place as proof of the new pragmatism. The Left howled and soon even the New York Times was printing op-eds that Obama was more or less a fraud.

Missouri Obama
But given that Obama had, by his own advisors’ admission, already lost the clingers’ vote, triangulation passed. Obama had not Clinton’s political savvy or flexibility. So he dug in, searching for yet another identity — only to find it in Harry Truman circa 1948 ^[6]. “Give ‘em Hell” Barry now crisscrossed the country in campaign mode, damning another do-nothing Republican-controlled Congress that had tried to stall the fair deal. The premise was that if over $4 trillion in borrowed money had not jump-started the economy, someone should be blamed for not borrowing an additional half-trillion that surely would have.

Obama Versus the Trusts
And what mask now? Apparently it is to be Obama as Teddy Roosevelt ^[7], crusading against the modern equivalent of trusts, monopolies, and John D. Rockefeller zillionaires — and this from the largest recipient of campaign cash in presidential history, and the first candidate to renounce the public financing of presidential campaigns.
Note that Obama’s TR trust-busting does not include mention of tax-avoidance by a Timothy Geithner or John Kerry. Ill-gotten gains and unfairness do not include the many annual millions of Bill Gates or Warren Buffett, much less a Leonardo DiCaprio or Johnny Depp, still much less those who pony up $38,000 a head to meet with Obama. We are not to hear much about Jon Corzine’s missing $600 million ^[8]. Nor is there reference to Bill Clinton’s firm’s charging $50,000 a month ^[9] to a broke MF Global.
The evil “they” are not the liberal elite whose children are at Harvard, but the lesser, more uncouth folk who hustle to run three muffler shops, or operate barges, or own a timber company, lacking the grace that comes with government sinecure or inherited wealth and with no guilt over their success, and no desire to purchase psychological exemption from Obama.


A Better Mask
How odd that Obama has tried on every mask except one that naturally fits him, that of Jimmy Carter ^[10]. Carter, remember, railed about luxury boats and three-martini lunches, as if that kind of indulgence had sent the economy into 8% unemployment, 12% inflation, and 15% interest rates. Our problem was always Nixon of old, never Carter of the present. Beneath the utopian Christian caring was the mean streak and petulance; Carter, you see, loved humanity but not humans.
Currently we also see a return of Carter’s foreign policy disasters. Do we remember them — the reach out to leftist enemies, the suspicion of Israel, and the drift away from Europe?
What happened with Obama’s natural resonance, as he promised in his Al Arabiya interview, with Muslim countries such as Pakistan and Egypt? Now reset is also over with Russia. The pressure is heating up with Iran, which not long ago we dared not slight when a million were on the streets trying to topple the regime.
Finally, there is furor rising against Syria. All this schizophrenic heat is also reminiscent of Jimmy Carter circa 1979-80. After three years of proclamations about having no inordinate fear of communism, of loudly elevating human rights in sanctimonious fashion as the adjudicator of foreign policy, of lecturing allies and reaching out to enemies, of blasting Kissinger realpolitik, the charade ended with the Soviet invasion of Afghanistan, the communist expansion in Central America, the end of the Shah and the seizure of power by Khomeini, the hostage taking in Teheran and rise of radical Islam, general chaos abroad as China invaded Vietnam, and so on.
Carter, then, got angry that lesser folks had betrayed his trust, and suddenly we had defense increases, a new angry Carter Doctrine, and saber-rattling talk. That is natural, as we see too with Obama: those abroad did not appreciate his godhead, and now he too is furious that enemies are, well, even more enemies, and friends are less friendly. If they cannot see that he is not Bush, well then screw them.

As the Curtain Falls
What are we left with in the end? Empty soaring rhetoric of the day, as the president without an identity desperately searches for one about every three months. In the old days the masks were a Bill Ayers for revolutionary fervor, or a Rev. Wright for black fides. Now they are dead presidents.
Where does this lead? Nowhere. Obama’s TR persona is based on an untruth. The “rich” are not ruining his economy; indeed they pay an inordinate percentage of the income tax burden, and give us everything from iPhones to fracking. All their net worth, if confiscated, is not enough to match the trillions Obama himself has run up. For every extra $20,000 Jerry Brown can squeeze out in taxes from an about-to-leave California employer, three more deserving are waiting to gobble that up in all sorts of entitlements as their “fair share.”

Them
It is true that Wall Street greed in 2008 helped crash the financial markets. But mold to appear needs moisture. And Goldman Sachs and Lehman Brothers were well watered by a corrupt Congress that empowered both Freddie and Fannie. Chris Dodd was the poster boy, taking Wall Street perks and covering them with liberal concern about housing the poor. These Fannie/Freddie troughs, in turn, were fed at by hungry ex-administration insiders and retired gadflies — a Jamie Gorelick, Franklin Raines, Jim Johnson, and, yes, for a bit, Rahm Emanuel and even Newt Gingrich. Even those were not the only guilty. “They” were also “us” — the millions who jumped into a hot real estate market to flip houses and make thousands with little labor in an endless round of musical chairs with the music supposedly never stopping, the chairs never one short. And there were the millions more — with lousy credit ratings, and no history of discipline or thrift.

But they “deserved” “home ownership” ^[11] and so bought a house that neither their income nor savings, such as they were, warranted. They walked away. They were innocent “victims.” And they let others pick up the tab ^[12] as others “should.”

And?
The next year will be nothing but more teenage petulance. The world has disappointed Barack Obama. Like any adolescent, he will keep reinventing himself, endlessly trying on new presidential masks and blasting “them” who were not so charmed. What else can a man without an identity do, a president who never really was?

O's Kansas Speech

Obama's Godfather Speech

The president sounds more like a Corleone than a Roosevelt.

• By DANIEL HENNINGER

Most press accounts of Barack Obama's speech in Osawatomie, Kansas, Tuesday described it as delivered by the "president of the United States." And indeed the person delivering it analogized himself to Presidents Teddy Roosevelt, Franklin Roosevelt, Dwight Eisenhower and Bill Clinton. In fact, the Osawatomie speech was not given by the President of the United States. It was given by the leader of the Democratic Party.

Most of the time, this distinction isn't a problem in the United States because historically people have tended to think that the office of the presidency represents "all the people." This doesn't mean everyone expects to benefit from a president's policies. What it means is that in some informal way no one has to worry that the presidential motorcade, so to speak, will drive off the road so that it can plow into you.

That is no longer the case in the U.S.

 

The Osawatomie speech sounded like what you'd expect to hear in Caracas or Buenos Aires. As in: "The free market has never been a license to take whatever you can from whomever you can." (Applause.) And: "Their philosophy is simple. We are better off when everybody is left to fend for themselves and play by their own rules."

Some will say hearing crude Chavista populism in the Obama speech is an overreaction. That once it's understood the Kansas speech was the work of the party leader, not the president of the United States, it becomes easier to think about it without overreacting to its intense and vivid rhetoric: "Millions of working families in this country . . . are now forced to take their children to food banks for a decent meal."
Mr. Obama, the bloodless political analysis of the speech runs, was just rallying his base. He needs to. Last month, in an election for state offices in Virginia, which Mr. Obama carried in 2008, Democrats turned out poorly, and Republicans won at every level of government, even in "independent" northern Virginia.

Democrats are depressed about the awful economy we've had the past three years. In Mr. Obama's view, this is a coincidence; the bad economy happened during his term because of mistakes someone else made in 2001 and 2003. Lest the base confuse his policies with someone else's, Mr. Obama needs to transform Democratic depression into some form of Democratic energy. This week, and apparently in the election next year, he has chosen a strategy based on fear and loathing of an opposition he identifies simply as, "They." "They argue, even if prosperity doesn't trickle down, well, that's the price of liberty."

About two-thirds through Mr. Obama's Kansas speech, I started to think of "The Godfather." After slapping around the "wealthy" for about a half hour, Mr. Obama said, "This isn't about class warfare." Maybe that's true. In "The Godfather," when awful things are about to be done to people, Michael Corleone or Tom Hagen reassure those about to get hit, "It's not personal; it's strictly business."

But I could be wrong about that.

There is that defining moment when Michael Corleone says to Fredo, his brother, "You're nothing to me now." When even as party leader, a president of the United States gives a major speech in which people get singled out repeatedly as basically enemies of "the middle class," one has to wonder if they are nothing to him.

You then have to wonder about the tenor of another Obama term in office. If in fact there are categories of Americans he simply doesn't like, a second Obama term, like the last half of "Godfather II," could be a clinical exercise in hammering the people he singled out in this speech. Metaphorically speaking.

The Kansas speech was built around one concrete policy idea: that the rich and millionaires (officially still defined as families with before-tax income above $250,000) should send him more money so he can "invest" it. This single policy, if we heard correctly, will end high unemployment, raise middle-class incomes, put children through college, make America fair and defeat countries that pollute.

But will it?

Mr. Obama says everyone has to play by his new rules: "Unless you're a financial institution whose business model is built on breaking the law, cheating consumers and making risky bets that could damage the entire economy, you should have nothing to fear from these new rules." Really? Citigroup on Thursday said it will eliminate 4,500 jobs. In the third quarter alone, 2,500 U.S. banks cut 20,332 jobs. Let 'em go. In the coming Obama economy, they can "make wind turbines and . . . high-powered batteries."

What the Democratic base would get out of an Obama re-election is political power, which counts for something. It lets you tell other people what to do. But nothing in that Kansas speech, especially the wealth taxes, will produce real growth in the dry economy America has had for three years. Strong growth is the only solution to the Osawatomie catalog of horrors. If he wins, five years from now, the president's base will be about where it and nearly everyone else is today, trying to stay afloat in Barack Obama's still waters.

 

ClosYou then have to wonder about the tenor of another Obama term in office. If in fact there are categories of Americans he simply doesn't like, a second Obama term, like the last half of "Godfather II," could be a clinical exercise in hammering the people he singled out in this speech. Metaphorically speakiThe Kansas speech was built around one concrete policy idea: that the rich and millionaires (officially still defined as families with before-tax income above $250,000) should send him more money so he can "invest" it. This single policy, if we heard correctly, will end high unemployment, raise middle-class incomes, put children through college, make America fair and defeat countries that polluteBut will it?Mr. Obama says everyone has to play by his new rules: "Unless you're a financial institution whose business model is built on breaking the law, cheating consumers and making risky bets that could damage the entire economy, you should have nothing to fear from these new rules." Really? Citigroup on Thursday said it will eliminate 4,500 jobs. In the third quarter alone, 2,500 U.S. banks cut 20,332 jobs. Let 'em go. In the coming Obama economy, they can "make wind turbines and . . . high-powered batteries."What the Democratic base would get out of an Obama re-election is political power, which counts for something. It lets you tell other people what to do. But nothing in that Kansas speech, especially the wealth taxes, will produce real growth in the dry economy America has had for three years. Strong growth is the only solution to the Osawatomie catalog of horrors. If he wins, five years from now, the president's base will be about where it and nearly everyone else is today, trying to stay afloat in Barack Obama's still waters.

Write to henninger@wsj.com

why Stimulus I failed

Video: Why Obama’s stimulus failed

posted at 2:30 pm on December 11, 2011 by Tina Korbe

As a former resident of Silver Spring, Md., I was particularly interested to watch this video from Reason.tv, which makes my one-time hometown a case study for Obama’s stimulus failure. The vid is long, but well worth watching from start to finish because it reflects the reality of the stimulus rather than the theory behind it — a theory that liberals still invoke even in the face of astonishing evidence of the failure of the stimulus. Sure, it sounds as though it would be effective to inject money into areas of the economy in need of a jolt — but, unfortunately, the government can rarely be trusted to spend taxpayer money in a manner that actually would create jobs.
Theoretically, for the stimulus to have worked, the government would have had to target idle resources. Instead, the government funneled money into already-existing government contracts. Similarly, for the stimulus to have worked, state leaders would have had to spend stimulus money on top of what they were already spending. All too often, they used stimulus dollars to cover general expenses rather than to increase overall spending. And on and on …
As economist Veronique de Rugy says at the end of the video, “The main lesson of the stimulus is creating jobs is a very complex process and, certainly, it can’t be directed by a top-down institution that pretty much fails at everything it does.” Bingo.

http://www.youtube.com/watch?feature=player_embedded&v=MKCFj_JYb9c#!

12-11-2011 Obama's Revisionist History

Obama’s strange, revisionist history on ‘60 Minutes’

By James Pethokoukis

December 12, 2011, 10:06 am 

President Barack Obama, last night on “60 Minutes”:

I didn’t overpromise. And I didn’t underestimate how tough this was gonna be. I always believed that this was a long-term project; this wasn’t a short-term project.

Actually, Obama did overpromise—and underdeliver—on dealing with the U.S. economy. Back in August 2009, the Obama White House put out its updated economic forecast. Now, this was after the $800 billion stimulus had passed and, technically, after the Great Recession had ended. Here is where the White House thought the economy was headed over the next few years:



Talk about overpromising.

According to the 2009 Obama forecast, 2011 was supposed to start a five-year mini-boom where GDP growth averaged 4 percent, taking the unemployment rate down below 6 percent by 2014. But few outside economists are so rosy today. The latest Wall Street Journal survey of economists predicts the unemployment rate will still be above 7 percent through 2014 with GDP growth averaging a subpar 2.5 percent.
The White House explanation is that no one knew back in 2009 how bad the Great Recession really was. Indeed, instead of contracting by 2.8 percent in 2009, as indicated in the above chart, GDP actually contracted by 3.5 percent. Yet even after 2009, the White House continued to be strangely bullish. In 2010, it predicted “Recovery Summer,” expecting a big drop in unemployment. And in its most recent economic forecast, from last summer, the Obama White House was still predicting 3.7 percent average GDP growth from 2012-2016. No wonder Obama has been so blasé about the impact of raising taxes on wealthier Americans and small business. He thinks a powerful recovery can more or less shake off the tax hikes just like it did in the 1990s. Or at least such rosy forecasts help him make that argument for political reasons.
In the end, Obama overestimated the impact of his stimulus plan and underestimated the severity of the Great Recession. Indeed, his economic team was dismissive of the idea that the aftermath of the financial crisis posed any special problems for the recovery, despite much research to the contrary. This allowed Team Obama to shift gears to healthcare and financial reform and ignore key longer-run measures to boost economic growth such as pro-growth tax reform. Maybe Obama is finally realizing it now and will push such policies if he wins a second term

CK - Obama's 2012 Campaign - Class Warfare

December 9, 2011 12:00 A.M.

Obama’s Campaign for Class Resentment
 
The president has nothing to run on but crude populism.

In the first month of his presidency, Barack Obama averred that if in three years he hadn’t alleviated the nation’s economic pain, he’d be a “one-term proposition.”

When three-quarters of Americans think the country is on the “wrong track” and even Bill Clinton calls the economy “lousy,” how then to run for a second term? Traveling Tuesday to Osawatomie, Kan., site of a famous 1910 Teddy Roosevelt speech, Obama laid out the case.

It seems that he and his policies have nothing to do with the current state of things. Sure, presidents are ordinarily held accountable for economic growth, unemployment, national indebtedness (see Obama, above). But not this time. Responsibility, you see, lies with the rich.
Or, as the philosophers of Zuccotti Park call them, the 1 percent. For Obama, these rich are the ones holding back the 99 percent. The “breathtaking greed of a few” is crushing the middle class. If only the rich paid their “fair share,” the middle class would have a chance.

Otherwise, government won’t have enough funds to “invest” in education and innovation, the golden path to the sunny uplands of economic growth and opportunity.

Where to begin? A country spending twice as much per capita on education as it did in 1970 with zero effect on test scores is not underinvesting in education. It’s mis-investing. As for federally directed spending on innovation — like Solyndra? Ethanol? The preposterously subsidized, flammable Chevy Volt?

Our current economic distress is attributable to myriad causes: globalization, expensive high-tech medicine, a huge debt burden, a burst housing bubble largely driven by precisely the egalitarian impulse that Obama is promoting (government aggressively pushing “affordable housing” that turned out to be disastrously unaffordable), an aging population straining the social safety net. Yes, growing inequality is a problem throughout the Western world. But Obama’s pretense that it is the root cause of this sick economy is ridiculous.

As is his solution, that old perennial: selective abolition of the Bush tax cuts. As if all that ails us, all that keeps the economy from humming and the middle class from advancing, is a 4.6-point hike in marginal tax rates for the rich.

This, in a country $15 trillion in debt with out-of-control entitlements systematically starving every other national need. This obsession with a sock-it-to-the-rich tax hike that, at most, would have reduced this year’s deficit from $1.30 trillion to $1.22 trillion is the classic reflex of reactionary liberalism — anything to avoid addressing the underlying structural problems, which would require modernizing the totemic programs of the New Deal and Great Society.

As for those structural problems, Obama has spent three years on signature policies that either ignore or aggravate them:

A massive stimulus, a gigantic payoff to Democratic interest groups (such as teachers and public-sector unions) that will add nearly $1 trillion to the national debt.

A sweeping federally run reorganization of health care that (a) cost Congress a year, (b) created an entirely new entitlement in a nation hemorrhaging from unsustainable entitlements, (c) introduced new levels of uncertainty into an already stagnant economy.

High-handed regulation, best exemplified by Obama’s failed cap-and-trade legislation, promptly followed by an EPA trying to impose the same conventional-energy-killing agenda by administrative means.

Moreover, on the one issue that already enjoys a bipartisan consensus — the need for fundamental reform of a corrosive, corrupted tax code that misdirects capital and promotes unfairness — Obama did nothing, ignoring the recommendations of several bipartisan commissions, including his own.

In Kansas, Obama lamented that millions “are now forced to take their children to food banks.” You have to admire the audacity. That’s the kind of damning observation the opposition brings up when you’ve been in office three years. Yet Obama summoned it to make the case for his reelection!

Why? Because, you see, he bears no responsibility for the current economic distress. It’s the rich. And, like Horatius at the bridge, Obama stands with the American masses against the soulless plutocrats.

This is populism so crude that it channels not Teddy Roosevelt so much as Hugo Chávez. But with high unemployment, economic stagnation, and unprecedented deficits, what else can Obama say?

He can’t run on stewardship. He can’t run on policy. His signature initiatives — the stimulus, Obamacare, and the failed cap-and-trade — will go unmentioned in his campaign ads. Indeed, they will be the stuff of Republican ads.

What’s left? Class resentment. 

Got a better idea?

Obama / T Rex Truth meter

Fact-checking the Kansas Declaration

posted at 1:30 pm on December 8, 2011 by Ed Morrissey

Barack Obama declared in Kansas this week that his re-election bid would constitute a fight against income inequality.  According to a fact check by the Washington Post’s Glenn Kessler, it’s also going to be a fight against hard facts and inconvenient truths.  Obama lashed out at Republicans and George Bush for economic outcomes that have mainly come during his own stewardship of the economy:

Obama’s claim of the “slowest job growth,” in fact, includes the loss of jobs under his administration. The White House provided as evidence a report on a New York Times blog  that was based on gross domestic product data through 2010, or the first two years of Obama’s administration.
The White House also cited a Center on American Progress report on job growth through 2007, which showed monthly job growth of 68,000 jobs during the Bush business cycle. But, since the recession ended, job growth has been even more anemic under Obama — just 40,500 jobs a month, according to the Bureau of Labor Statistics. … [I]t seems odd to keep blaming poor job growth on the Bush tax cuts, especially because Obama himself pushed through a nearly $1 trillion stimulus and took other actions that have affected the economy, for better or worse.

It’s more than just odd — it’s asinine.  The rate cuts took place in 2001 and 2003, and have remained in place ever since.  If they damaged job creation, then we wouldn’t have seen the explosive job growth we did in 2004-2006, when the economy added over 6 million jobs.  The loss of those jobs had nothing to do with the maintenance of existing tax rates, but in a financial crush caused by the collapse in housing prices which turned government-backed mortgage securities largely worthless, wiping out trillions in accumulated capital.
That’s hardly the only asinine assertion in Obama’s speech, though:

Finally, Obama blames the Bush tax cuts for “massive deficits.” It is certainly true that the Bush tax cuts helped blow a hole in the budget. But they did not do it all by themselves. Welooked at length at this issue earlier this year, assisted by new Congressional Budget Office data.
The data showed that the biggest contributor to the disappearance of projected surpluses was increased spending, which accounted for 36.5 percent of the decline in the nation’s fiscal position, followed by incorrect CBO estimates, which accounted for 28 percent. The Bush tax cuts (along with some Obama tax cuts) were responsible for just 24 percent.
Thus it is simply wrong to blame only the Bush tax cuts for the deficits now faced by the country, especially three years into another presidential term.

Kessler misses another problem, which is the massive increase in budgetary and non-budgetary spending by Democrats after taking control of Congress and the White House.  The last fully Republican budget, FY2007, spent $2.77 trillion.  Democrats took control of Congress and raised annual spending levels in just three years by over a trillion dollars, while tax receipts declined because of the deep recession.  On top of that, Obama pushed through an $800 billion stimulus that supposedly was going to restart job creation, and which failed miserably.  Blaming Bush for deficits in 2009, 2010, and 2011 isn’t just wrong, it’s a flat-out lie, and a very self-serving lie at that.
Finally, Kessler strikes at the heart of Obama’s crusade for fairness, which Obama framed thusly: “Some billionaires have a tax rate as low as 1 percent — 1 percent. That is the height of unfairness.”  What factual support did the White House provide for this argument?  Well … none, as Kessler reports.  They took the claim from a Think Progress post about a conversation that took place on Bloomberg TV.  That puts the intellectual substance of this claim, and the entire presidential address, at the same level as a poorly-sourced gossip column.  Kessler did a little research an discovered that more than half of the country’s 400 billionaires had a marginal tax rate of 35% or more, while only 17 had a marginal rate of 0-26% — and even those probably didn’t see much income, but mainly received capital gains instead.
In response to Obama’s nonsense, Kessler gives the President three Pinocchios.  Maybe he should have added an Elmer Gantry or two as well.

GBTV - To Do List

Solutions organized by the ‘e4′ solution

Tuesday, Nov 1, 2011 at 6:36 PM EST
A few days ago Glenn did a GBTV show on solutions – and now he has organized the things you can do into categories based on his ‘e4′ solution.

E1 – ENLIGHTENMENT
TRADITIONS
PRESERVE WHAT IS IMPORTANT. SHED ALL OTHERS. CONSERVE AND
PRESERVE. RECLAIM AND RESTORE
LIVE NEAR LIKE MINDED PEOPLE. (TEXAS, MOUNTAINS OR WHERE GOD IS)
IF YOU CANNOT MOVE (NO PLACE WILL BE UNTOUCHED) CREATE A NETWORK
DO NOT PLAN YOUR LIFE AND THEN MOVE. PLAN, LISTEN AND OBEY
PRACTICE AT LEAST FRANKLIN’S AMERICAN RELIGION
HONOR ALL OF YOUR OBLIGATIONS

PRESERVE – FOOD, TIME, MONEY, ENERGY

TEACH YOUR GRANDCHILDREN THE BASICS. VALUES/PRINCIPLES

DO WITH LESS NOW. LESS OF A SHOCK IF IT COMES LATER
SERVE/SHARE
JOIN A 9.12 GROUP. LINK ON-LINE. BUT HAVE PHONE NUMBERS AND MEETING LOCATIONS

HAVE A MEETING PLACE ESTABLISHED FOR FAMILY

READ THE BIBLE

E2 – EDUCATION
APPRENTICESHIPS ARE THE FUTURE.
DISCUSS THE VALUE OF SCHOOL FOR WHAT YOU CAN EARN.
DO NOT LOOK FOR LABELS THEY WILL BECOME MEANINGLESS (IVY LEAGUE)
FIND OTHER FORMS OF SCHOOL (ON-LINE)
TEACH YOUNG CHILDREN NOW THAT COLLEGE IS NOT A GIVEN
DEMAND MERIT FROM SCHOOL AND STUDENT OR PULL YOUR TIME AND MONEY
EDUCATE YOURSELF AT ALL TIMES. ALWAYS READ.
HAVE A HARD COPY OF IMPORTANT BOOKS AND DOCUMENTS

LEARN OLD AND OR LOST PRACTICES.

MENDING/CANNING/FARMING

LEARN TO FIX AN ENGINE

RE-LEARN READING A MAP
KNOW THE NEWS. LIFE CAN CHANGE QUICKLY.

BE ABLE TO DEFEND YOUR POSITIONS BY KNOWING THE OTHER SIDE

KNOW HOW TO LIVE ELECTRONICS FREE

HAVE PAPER COPIES OF IMPORTANT DOCUMENTS

KNOW WHERE YOUR DEEDS ARE. TAKE THEM IN EMERGENCY
TEACH CHILDREN WORK ETHIC
TOLERATE NOTHING THAT YOU FEEL IS WRONG BY REMAINING SILENT
LET YOUR CHILDREN SEE YOU STAND

E3 – EMPOWERMENT
MONEY -
GOLD, FOOD, CIGARETTES, LIQUOR, SUGAR, AMMUNITION, GUNS, SEEDS,
SKILLS (BARTER) KNOWLEDGE
HAVE 30 DAYS CASH ON HAND
BUY A HOUSE
STOP ALL EXCESS SPENDING. BUY QUALITY ONLY. FORGET FASHION ONLY
MEASURE TWICE – CUT ONCE. DO NOT WASTE.
CONSIDER A FUEL EFFICIENT – SUV/TRUCK
CONSIDER SOMETHING PRIOR TO 1979 FIX YOURSELF
HAVE A GUN AND KNOW HOW TO SHOOT IT.
RESOLVE THOSE ISSUES THAT ARE HOLDING YOU BACK
STOP ALL BEHAVIOR THAT DOES NOT EXPAND YOU OR OTHERS INTO GOOD
MAKE AMENDS FOR WHAT YOU HAVE DONE
FIND PEACE AND GET TO WORK
UNDERSTAND THAT ANGER IS A PART OF LIFE BUT NEVER FEED IT
THE FIRST LOOK IS NOT A PROBLEM. IT IS THE SECOND LOOK.
NEVER BE THE BEST MAN/WOMAN IN THE ROOM.
BE HAPPY AND OPTIMISTIC. LIFE WILL GO ON. MAKE PLANS FOR THE
FUTURE. GET MARRIED. HAVE CHILDREN.

E4 – ENTREPRENEURSHIP
BUY FARM LAND GROW YOUR OWN FOOD.
LIVE NEAR PEOPLE AND BEGIN TO MAKE ALLIANCES OF SKILLS (BARTER) LIVE NEAR FARM LAND
BUSINESS/WORK: BE THE BEST YOU CAN BE. BE THE ONE EMPLOYEE NO ONE CAN FIRE
SMALL BUSINESS: BE THE PRODUCT OR SERVICE NO ONE CAN CANCEL
CONSERVE AND PRESERVE
LEARN FROM THE DEPRESSION -
ADVERTISE WHEN NO ONE ELSE IS (CHEVROLET)
STAY IN BUSINESS BUT DOWNSIZE AND PRESERVE
HONESTY, INTEGRITY AND CHARITY.
BE GEORGE BAILEY
SPIT YOURSELF OUT OF THE SYSTEM. TURN UPSIDE DOWN NOW

PUT YOUR MONEY WHERE YOUR HEART IS

DO BUSINESS IN SYMBIOTIC WAYS – WE NEED EACH OTHER
DO NOT TRY TO PUT OTHERS OUT OF BUSINESS, LET THEM DO IT.
(GIMBLES AND MACYS)
NEVER BE THE SMARTEST MAN IN THE ROOM
TAKE CARE OF YOUR EMPLOYEES THE BEST YOU CAN.

TAKE LESS AND GIVE MORE

READ FRANKLIN AND WASHINGTON
BE HONORABLE IN ALL OF YOUR DEALINGS

TR vs Obama

1920 & 2011 as Different as TR & Obama

As expected, President Obama attempted to reclaim the mantle of

Theodore Roosevelt in his speech on economic policy in Osawatomie, Kansas. The crux of his address was a comparison of our current situation to that of 1910 when Theodore Roosevelt journeyed to the same town. According to the president, the current downturn is analogous to that of a century ago when the national transformation from a largely agricultural to an industrial economy took place. He sees his own demand for higher taxes on upper income Americans and his party’s ferocious defense of the status quo on entitlement spending as no different from TR’s call for the government to act to ensure fairness for workers who lacked rights and protection at a time when there was virtually no regulation of industry or Wall Street.

But the differences between 1910 and 2011 are even greater than the vast chasm that separates Obama from the Rough Rider. The only thing the situations have in common is that in both years there were protesters in the streets. But whereas a century ago, workers and the poor had a legitimate beef, today’s Occupy Wall Street protests are a function of envy and a sense of entitlement, not genuine grievance.

Obama is right when he says Roosevelt was called a socialist and a communist for his manifest of a “new nationalism.” But Roosevelt was not an opponent of the free market. His objective was to save capitalism from the capitalists whose goal was largely the destruction of the free market and its conversion into a network of monopolies. While TR understood that some concentration of capital was inevitable in a free economy, he believed the coming American century required the nation to adopt measures that would ensure basic fairness for all citizens. Obama believes the 2008 economic crackup requires a similar overhauling of the system, and along those lines, he has given us a stimulus and Obamacare, a vast expansion of government power that bears no resemblance to what Roosevelt believed necessary to create his “Square Deal.”

Yet unlike 1910, the problem today is not that the government is too small and lacks the power to check the excesses of the market. It is that its power is so vast. Today’s federal government is a leviathan whose boot is pressed upon the throats of both individuals and corporations; it consistently deprives our free marketplace the oxygen it needs to thrive and grow. Obama began his speech by speaking of the mortgage debacle that triggered the 2008 collapse but failed to mention the bad debts were largely caused not by an untrammeled free market that begged for more regulation but by government intervention that demanded loans be given to those who could not possibly pay them off. Those who occupy our streets demanding a bigger government and more entitlements may have Obama’s sympathy. But they are out of touch with both economic reality and the sentiments of most taxpayers.

The great dilemma facing the nation is not the grinding poverty of 1910, when no safety net was available. It is the enormous debt that has been created by a system of entitlements that will bankrupt the nation. The middle class Obama says he wants to save will be crushed by that debt. But Obama has ridiculed proposals to reform the system and harps instead on raising taxes on the wealthy, a measure that will kill job creation while doing virtually nothing to fix the problem.

Roosevelt’s proposals in 1910 were an attempt to head off the coming of class warfare that he rightly believed would destroy American liberty if the choice before Americans were only that of J.P. Morgan’s worldview or that of leftist radicals. By contrast, Obama’s political agenda consists of precisely the sort of class war rhetoric TR despised. Obama and his cheering section in the mainstream press may think he is channeling the 26th president. But Roosevelt would have had no patience for either his economic strategies or his vision of America’s place in the world.

Public Sector Union Delema

America’s Public Sector Union Dilemma

By Lee E. Ohanian Saturday, November 26, 2011

Filed under: Economic Policy, Public Square

There is much less competition in the public sector than the private sector and that has made all the difference.

Since the Great Recession began in 2008, there has been a growing criticism of public sector unions, reflecting taxpayer concerns about union compensation and unfunded pension liabilities. These concerns have led to proposals to change public sector union policy in very significant ways. Earlier this month, voters in Ohio defeated by a wide margin a law that would have restricted union powers, although polls showed broad support for portions of the law that would have reduced union benefits. In Wisconsin, a state with a long-standing pro-union stance, Governor Scott Walker advanced policy in February that would cut pay and substantially curtail collective bargaining rights of many public sector union workers. In Florida, State Senator John Thrasher introduced legislation that would prevent governments from collecting union dues from union worker state paychecks. And it is not just Ohio, Wisconsin, and Florida that are attempting to change the landscape of public unions. Cash-strapped governments in many states are considering ways to reduce the costs associated with public unions.

It is important to determine why public unionization rates are so much higher than in the private sector, and whether public union employees are excessively raising costs to taxpayers. Public sector workers may be paid significantly more than private sector workers and their pensions and job security are often higher than in the private sector. Factoring in the lower likelihood of dismissal and layoffs in the public sector, public sector compensation may be 10 percent higher than market rates.
I calculate that bringing public sector wages closer in line with private sector wages by reducing them by 5 percent can reduce state fiscal deficits considerably. For California, which is among the most fiscally strapped states in the nation, reducing state worker wages by 5 percent would reduce the state deficit by about 15 percent. Moreover, some public sector workers, such as California prison guards, are paid far in excess of competitive levels, reflecting a strong union and effective lobbying that has fostered rapid compensation growth. Other unions, such as teacher unions, do not drive up compensation nearly as much, but instead have substantial negative impact by protecting poor teachers, which in turn reduces the quality of public education and reduces human capital.


The Economic Implications of Unions

It is clear that governments must use a systematic approach to public sector compensation if the public is to avoid overpaying government employees.

A union is a form of monopoly, or cartel. It is a single seller of labor services to a business. This means that unions have the ability to raise compensation for its members above the level that would prevail in a competitive marketplace, as well as to define work rules for its members that reduce efficiency. There has been considerable research on the effects of collective bargaining on wages, and consensus estimates are that unions raise wages by about 10 to 15 percent above the rate that would prevail in their absence.¹
There is comparatively less research on the impact of work rules on economic activity, but the available data suggests that union work rules, particularly in industries that face little competition, can substantially reduce efficiency and output. James A. Schmitz of the University of Chicago estimates that during periods of very limited competition, union work rules in the iron ore industry reduced output per worker by about 50 percent.²
By raising wages and adopting inefficient work rules, unions increase business costs and prices, which in turn reduce employment and output. From this perspective, unions seem misplaced in a modern economy in which there is considerable competition in the labor market and in other markets, and in which there is general recognition among economists and policymakers that increasing competition benefits society by improving the allocation of scarce resources, increasing efficiency, and maximizing output.
Unions are largely a carryover from many years ago, when there was much less competition in the economy for workers and unions were considered an important economic force that was necessary to protect worker safety and health. But both labor market conditions and worker health and safety conditions are much different today. Most workers now live in locations with many employers competing for their services. This competition for workers means that wages coincide with worker productivity. And workplace health and safety is now largely covered by federal and state laws. As a result of these changes, the socially useful role of unions has declined considerably over time.
Divergent Trends in Private and Public Unionization Rates
These changes in the importance of unions to workers over time are also reflected in changes in unionization rates. One of the most striking trends in labor markets over the last century is the very rapid increase, followed by the subsequent substantial decline, in unionization rates in the private sector. Figure 1 shows the share of unionized employment from 1929 to the present. The data show a very significant increase in private sector unionization during the 1930s as union membership jumped from about 12 percent in 1929 to about 35 percent during World War II.

This dramatic increase reflects the passage of a number of important pieces of pro-union legislation, including the National Labor Relations Act in 1935, which not only made it easier to organize workers into a union, but also increased union bargaining power, which in turn raised union wages and thus increased the attractiveness of unions for workers.

The cost of California’s prison system is about $44,000 per inmate, compared to a national average of $28,000.

But union representation in the private sector began to decline, at first slowly in the 1960s, and then accelerating in the 1970s. Private sector unionization rates have declined from about 37 percent in 1952 to only about 6 percent today. Declining private sector unionization reflects a number of factors, including that the economy is much more competitive than it was 60 years ago, and that many of today’s workers prefer to negotiate their own opportunities rather than relinquish their individual bargaining rights to collective bargaining.
It is also important to recognize that declining unionization is not the result of the country’s declining industrial base, as is often suggested (see for example Bluestone, 1990, and Rowthorn and Ramaswamy, 1997). In particular, declining unionization characterizes most of the private sector economy, including industry. As Barry T. Hirsch shows, unionization rates in manufacturing and construction, two of the most heavily unionized sectors, fell from about 40 percent in the early 1970s to less than 15 percent in 2006.³
Increased competition is considered by many economists to be a major factor in understanding lower private sector unionization.^4,5 In a competitive industry, competition for workers drives wages up to the level of worker productivity, and competition in product markets drives output prices down to the level that is consistent with the market return on capital. Thus, union attempts to raise compensation or implement inefficient work rules in a highly competitive market would result in firms becoming unprofitable.


In contrast, if a firm or industry is protected from competition, then profits will be higher compared to profits under competition. Excess profits are called economic rents by economists, and unions can obtain a share of these rents for their members by raising wages and/or changing work rules. Thus, the economic rents that result from too little competition are divided between labor and capital, and the relative division between these two parties depends on their respective bargaining positions.

Not surprisingly, much union organization focused on highly concentrated industries in which there was little competition, such as autos and steel.⁶ Unions are likely to be more successful in raising wages in highly concentrated industries because it is feasible to unionize the entire industry, such as the United Auto Workers in organizing General Motors, Ford, and Chrysler in the 1930s.

Consensus estimates are that unions raise wages by about 10 to 15 percent above the rate that would prevail in their absence.

But the auto industry, as well as much of the manufacturing sector, has not only been impacted by foreign competition (auto imports are now about 17 percent of GDP compared to about 5 percent of GDP in 1970), but by competition among the U.S. states. In 1947, the Taft Hartley Act substantially changed the National Labor Relations Act by giving states the right to outlaw the union shop, in which workers must join a union. Today, 23 states have passed these “right to work” laws, including most of the South and many of the Midwest and the Mountain West states. The share of employment in these “right to work” states has increased from about 24 percent of employment in 1955 to about 38 percent today. Thomas J. Holmes has studied how “right to work” laws impact the location of industry and finds that these laws are quantitatively important determinants of where manufacturers choose to locate.⁷ Using detailed county-level data, Holmes examines business activity at state borders in which a “right to work” state borders a non-“right to work” state. He finds that the manufacturing share of employment increases by one-third in the right-to-work state at the border compared to the other state, and concludes that this higher share of manufacturing is significantly due to differences in these unionization policies.

The impact of competition among the states is clearly illustrated by the location decisions of foreign companies like Toyota and Honda. When these companies decided to produce autos in the United States, they chose to locate in right-to-work states, including Kentucky, Texas, Mississippi, and Alabama. Foreign companies now produce about 50 percent of autos manufactured in the United States, and this production share will likely increase in coming years. Auto workers in non-union plants show little interest in United Auto Workers overtures to become organized. One worker at a southern U.S. auto plant stated "We have good communication with management here.
Why would you need a union? The only time a union shows up is to collect dues or at election time".⁸ Another worker of 17 years stated "The UAW has to have a reason to come inside the company. Nissan doesn't give them one. I don't need someone talking to the boss for me”.⁹

Today’s increasingly competitive global and domestic economy indicates that there are important limitations on what unions can plausibly achieve compared to what they were able to achieve in the past. Thus, workers will have little demand for union representation when unions cannot deliver better pay and working conditions than what workers can achieve on their own. From this perspective, the very large decline in private sector unionization is not surprising.
But unionization trends among public sector workers differ considerably. Figure 1 also shows unionization rates for state and local government workers since the early 1980s. But rather than declining, as in the case of the private sector, public sector unionization rates have been relatively high and stable over time, at around 43 percent for local government workers and about 33 percent for state workers. These very different trends reflect large differences in the impact of competition on private versus public sector employees. Specifically, the very large decline in unionization in the private sector has been significantly impacted by increased competition, which has reduced the ability of unions to raise wages or change work rules. But much less competition exists in the public sector, and this means that unions have more opportunities, which makes union membership more attractive.



Figure 2 shows compensation rates for public and private sector workers since 1929, measured in 2008 dollars. Between the end of World War II and 1980, note that private sector and public sector compensation moved in lockstep with each other, as both rose from about $25,000 after World War II to nearly $50,000 in 1980. But after 1980, public sector compensation diverges from private sector compensation significantly, as public sector compensation rises to nearly $70,000 per worker, representing about a 40 percent increase from 1980, but private sector compensation rises to only about $60,000, representing about a 20 percent increase from 1980. The gap tends to become larger during the recessions of the early 1990s and also the Great Recession, reflecting slower compensation growth in the private but not the public sector. Moreover, this rising compensation differential between the public and private sector may be significantly understated, as it does not include pension benefits, which tend to be more generous in the public sector. While other factors are likely involved, it is plausible that the relatively high unionization rates in the public sector can account for some of the acceleration in public sector pay relative to private sector pay over the last 30 years.

Is Public Sector Compensation Too High?

The socially useful role of unions has declined considerably over time.

Some economists have argued that the acceleration of public sector compensation compared to private sector compensation is imposing a significant cost to taxpayers. At first glance, it may seem reasonable that the public sector should provide approximately the same compensation rates as the private sector. However, if one factors in the higher job security and pensions of public sector jobs, public sector wages should actually be lower than those in the private sector.
Regarding job security, Chris Edwards documents that the chance of job loss by layoff is three times higher in the private sector than in the public sector.¹⁰ Since most individuals dislike risk (what economists call risk aversion), the fact that public sector jobs have more job security than private sector jobs raises the benefit of working for the public sector and suggests that the public sector may be able to pay lower compensation rates than the private sector because of this added benefit. This explanation for why the public sector could compete with the private sector even while paying lower compensation follows the same reasoning as why relatively riskless assets, such as U.S. Treasury securities, provide a lower rate of return than risky assets such as stocks and real estate.

I provide an estimate of this differential by conducting an analysis of the difference in private and public compensation, accounting for the additional job security offered by the public sector. To simplify the analysis, I focus on a representative worker, and thus abstract from potential differences in worker characteristics between public and private sector workers that might impact the analysis. I use a standard economic model in which a risk-averse individual faces unemployment risk, which is about three times higher in the private sector than the public sector. In the model, there is a representative worker with a risk aversion coefficient of two, which is close to the consensus estimate in the related literature. At any point in time, the worker in the model will be in one of three possible states: employed in a relatively high paying job, employed in a job paying 25 percent less than the high paying job, or unemployed, in which they receive unemployment benefits. The relatively low paying job is included in the analysis because workers frequently take jobs following a layoff that pay considerably less than their previous job.

I use historical data from the Bureau of Labor Statistics to identify the probability that a worker in the model is involuntarily separated from their job, which is about a 4 percent chance per month, average duration of unemployment, which is about 3.5 months, and the probability of continuing employment, which is about 96 percent.

For the case of the public sector, the probability of involuntary separation is just 1.3 percent, which is one-third as high as the probability in the private sector case. I then calculate the difference in compensation between the public sector (low unemployment case) and the private sector, such that a worker would be indifferent between working in either sector. I find that workers would be willing to work for about 10 percent less compensation in the public sector, given the additional benefit of much higher job security. This estimate is conservative in terms of considering today’s labor market, as average unemployment duration today is much higher than its historical average.

The dismissal rate of teachers for performance-based reasons, which is about 0.1 percent, is very low compared to dismissal rates in other occupations.

This analysis suggests the possibility that public sector compensation may be significantly higher than competitive levels. Moreover, the fact that public sector workers are only about one-third as likely to voluntarily leave their job as private sector workers is consistent with the conclusion that average public sector compensation rates are in excess of competitive levels, indicating that there are relatively few external employment opportunities that dominate public sector workers’ jobs. The fact that average public compensation is higher than average private sector compensation suggests that public sector worker compensation may be well above competitive levels and indicates that public sector wages could be reduced without significantly impacting public sector employment. For example, I’ve calculated the impact of a 5 percent wage reduction for all public employees in California, a state with one of the most severe fiscal crises in the country. A 5 percent wage cut would reduce state spending by $1.33 billion, which would reduce California’s 2011 state budget deficit by nearly 15 percent.

This finding has implications for how public sector wages should be determined. Specifically, there are no systematic efforts in government to evaluate the level of public sector compensation with reference to the private sector, particularly at the local level where unionization among public workers is the highest. Robert G. Gregory and Jeff Borland analyze wage determination in federal, state, and local governments and conclude that pay scales are significantly determined by wage bargaining, which ranges from national wage agreements to decentralized wage agreements within a local area.¹¹ Federal General Schedule compensation is determined by the executive and legislature on the basis of some evidence on private enterprise pay rates for similar types of work. But at the state and particularly the local level, compensation determination takes place through negotiation between employers and unions representing public sector employees. In this case, compensation outcomes depend upon features of the institutional environment, including the extent to which employers are required to bargain with unions, whether arbitration procedures are available to resolve disputes, and whether unions have the legal right to take strike action as part of wage-setting negotiations. Bargaining between employers and unions is the most common method of wage-setting for local government employees in the United States.

It is clear that governments must use a systematic approach to public sector compensation if the public is to avoid overpaying government employees. This approach is imperative because of the limited scope of competition within government for at least some services and because of the relatively high level of unionization in the public sector.

Governments should first make assessments of the adequacy of public sector compensation with reference to private sector compensation, as in the case of the federal government. But all forms of government should evaluate compensation beyond simple comparisons with the private sector by adding in the relative advantages of public sector employment, including job security, relative differences between vacations and other paid leaves, and relative differences between pension and retirement benefits. This analysis could be an integral component in bargaining with public sector unions and insure that public sector compensation levels do not deviate far from reasonable levels. The following section describes what can happen to compensation levels when there is lack of competition, strong unions, and no comparative reference points for assessing compensation levels.

Some states are pursuing reforms that are in this spirit in dealing with public sector pensions. New York Governor Andrew Cuomo and New Jersey Governor Chris Christie have proposed plans that would reduce public pension costs in their respective states by increasing worker contributions to pensions, changing retirement ages, and eliminating the ability of workers to use overtime in late career years to pad pension payments. Both governors support these proposals by pointing out that current pension rules in their states are uncompetitive compared to other plans.

The Economic Impact of Unions: Excessive Compensation in California’s Prison Guard Union
The California Correctional Peace Officers Association (CCPOA) is the bargaining unit for California’s prison guards. CCPOA has been very effective in raising compensation for them. Figure 3 shows prison guard pay across states, and highlights the high level of California guard pay.

I
n 2006, when California’s last contract with the CCPOA expired, about 900 guards received at least $50,000 in overtime pay, and about 1,600 officers received more than $110,000 in pay. The cost of California’s prison system is about $44,000 per inmate, compared to a national average of $28,000.¹² The CCPOA has been able to engineer remarkable compensation growth for its members not through any demonstrable evidence of substantially higher productivity, which is the typical determinant of compensation growth in a competitive labor market, but rather through its monopoly status as a single seller of labor to the state prison system and through political contributions that selectively support legislation and programs that boost the demand for prison guards.

Declining private sector unionization reflects how many of today’s workers prefer to negotiate their own opportunities.

Some of the CCPOA’s political contributions have probably reduced the effectiveness of California’s prison system, particularly regarding its ability to rehabilitate and reform offenders, and as a consequence may have made crime worse in the state and increased its cost. Today’s California prisons are much less effective than in the past, as 77 percent of crime in California is the result of recidivism (crimes by repeat offenders). California’s recidivism rate is about twice the national average, and this is attributed by many to the lack of rehabilitation and training programs in California prisons. These programs, which at one time were common in California prisons and were acknowledged as a central positive feature of California prison policy, lost funding beginning around 1980 and are now largely absent.

CCPOA has actively lobbied against legislation that would enhance training and rehabilitation in prisons. In 2005, CCPOA spent $11 million on political activities, compared to around $3 million in previous years, as 2005 was Governor Arnold Schwarzenegger’s “year of reform” for California government. Some of CCPOA’s lobbying and contributions helped defeat Schwarzenegger’s 2005 proposal to reduce overcrowded prison populations by as much as 20,000 inmates through a program that would have placed parole violators into rehabilitation programs rather than returning them to prison. Schwarzenegger dropped this proposal following television ads funded by the CCPOA that criticized the governor for proposing to release dangerous criminals. In 1999, the CCPOA opposed a bill that would have funded a pilot program for alternative sentences for nonviolent parole offenders, thus reducing the prison population, and which was vetoed by Governor Gray Davis. The CCPOA has also opposed candidates who advocated private prisons, which tend to have lower operating costs. In 2004, CCPOA strongly supported California’s controversial “ three strikes” law—which requires that three-time offenders face mandatory and extended prison terms, including for petty theft and nonviolent drug crimes—by spending over $1 million to defeat Proposition 66, which would have reduced the number of offenders who would serve life sentences under this law.

In 2010, CCPOA contributed about $1 million to defeat Proposition 5, which would have reduced prison overcrowding by providing treatment rather than prison sentences for nonviolent drug offenders. CCPOA also contributed about $2 million to Jerry Brown’s gubernatorial campaign. Governor Brown recently agreed to bargaining terms with the CCPOA, which had been operating without a contract since 2006, having failed to reach agreement with Schwarzenegger. All told, the CCPOA spent about $7 million on 2010 elections, including supporting 107 political candidates, 104 of whom were elected. California State Senator Juan Vargas, who won by 22 votes in 2010, said “I won by 22 votes and without CCPOA I wouldn’t have been close … They literally won this campaign for me.”¹³

And prior to reaching a contract agreement with Governor Brown, CCPOA President Mike Jimenez remarked, “We’ve had a long-term relationship with Jerry Brown. He’s got really good intuition … on what we need as a profession.” Furthermore, Craig Brown, a CCPOA lobbyist, stated, “We should be able to develop a good contract with this governor and we should have no trouble getting it ratified.”¹⁴

The agreement includes eight weeks of vacation per year and a controversial component that would allow prison guards to cash in unused vacation time at a 100 percent accrual rate, compared to an 80 percent rate that is used for most other state employees. Moreover, the unused vacation time can be used to increase pensions. The accrual of unused vacation days and the significant use of overtime is partially the result of California’s prison system being far above capacity, which likely reflects the lack of reform programs in the system as well as California’s three-strikes law. California State Senator Anthony Cannela, who was supported by the CCPOA in last fall’s election, broke ranks with other Republican lawmakers to cast the deciding vote when the State Senate ratified the contract. Cannela remarked that “I feel that the CCPOA was actually critical to my election.”¹⁵

Unions are likely to be more successful in raising wages in highly concentrated industries because it is feasible to unionize the entire industry.

Overall, the CCPOA spent about $7 million on California’s recent elections. And of the 107 candidates they endorsed, 104 won their election. The CCPOA website boasted, “We won big this year. Played a decisive role in electing the governor. Elected new friends in the legislature. Made a difference for the men and women who walk the toughest beat. We win because we never quit, and that’s what makes us CCPOA.”

The CCPOA has consistently and systematically taken positions on candidates and bills that directly impact the demand for prison guard services and that in turn drive up prison guard compensation. The remarkable effectiveness of the CCPOA has resulted in some of the highest paid state workers anywhere, with compensation that significantly exceeds the national average.
But public sector unions do not impact the economy just by increasing wages above competitive levels. They also protect union members who don’t perform adequately. And the economic cost of protecting deficient workers can even be higher than simply increasing compensation.

The Economic Impact of Public Sector Unions: Protecting Underperforming Teachers
Unlike the prison guards union, school teacher unions have not driven compensation up dramatically; teacher compensation has increased at roughly the same rate of all workers.
But teacher unions significantly impact the quality of education and the human capital of new workers by protecting teachers who do not perform well. Recent research suggests that improving teacher quality, particularly by replacing the lowest performing teachers, can generate very large productivity and income gains that are essential if the United States is to maintain its competitiveness in the world economy.

There is considerable research on the impact of teacher unions on education quality and teaching outcomes. For example, Caroline Hoxby presents evidence that teacher unions are an important contributing factor for why quality and efficiency of public education has declined since 1960 despite the fact that state and local government spending on K–12 education has increased, reflecting higher teacher salaries and higher per-pupil expenditures.¹⁶ Hoxby identifies the impact of teacher unions through differences in the timing of collective bargaining, with a focus on when legislation is passed that fosters organization of teachers. She concludes that teacher unions are responsible for increasing the resources devoted to public education by using their market power in bargaining with school districts, and that, despite higher spending, unions depress the quality of education by reducing the productivity of teaching.

There is also evidence that the overall quality of teachers has declined over time and that a significant fraction of this decline reflects teacher unions. For example, Caroline Hoxby and Andrew Leigh find that the share of teachers who are among the top aptitude individuals, as measured by SAT scores, has declined over time from about 5 percent of teachers in 1963 to only 1 percent in 2000, and that much of this decline is due to the fact that teacher unions, like most other unions, compress compensation, which means that the spread in compensation between the highest quality and lowest quality teachers is reduced.¹⁷ And it is not only the very top aptitude individuals that are entering teaching at a lower rate. Wage compression benefits lower ability teachers, but reduces compensation of the best teachers, and this decline in compensation at the top end leads to fewer top aptitude individuals pursuing a teaching career.

Much less competition exists in the public sector, and this means that unions have more opportunities, which makes union membership more attractive.

Hoxby and Leigh also note that there has been a large increase in the lowest aptitude individuals—those in the bottom 25 percent of SAT achievement—entering teaching, and that they now make up about 16 percent to around 36 percent of the teacher population.¹⁸ This change in the composition of teachers is negatively impacting teaching outcomes.

There is significant evidence that teacher unions, which bargain for tenure for their members, protect underperforming teachers through the tenure system. For example, the dismissal rate of teachers for performance-based reasons, which is about 0.1 percent, is very low compared to dismissal rates in other occupations. Moreover, the cost associated with dismissing an underperforming teacher is very high, ranging from $100,000 to $200,000 per case. And union contracts also implicitly protect underperforming teachers with seniority-based layoff policies. Last year, Megan Sampson, a public school teacher in Milwaukee, Wisconsin, was laid off because of lack of seniority, even though she received Wisconsin’s outstanding first-year teacher award.

Some teacher unions have largely eliminated competition from the process of setting compensation. Michael Podgursky describes how teacher pay is often set by inflexible salary schedules in which pay depends on years of experience and degrees, but with no salary differences across teaching area, effort, or performance.¹⁹ He notes that these criteria “virtually guarantee shortages by field.” Moreover, some of the criteria used in wage setting, such as taking additional courses, are unrelated to instructional skill and quality. These courses raise salaries in the Los Angeles Unified School District by about $500 million every year without any significant increase in performance.²⁰

Former teacher union insider A.J. Duffy, who for six years was president of one of the largest teacher unions, United Teachers Los Angeles, acknowledges the severe inefficiencies in union teacher contracts. While Duffy served as UTLA president, Los Angeles Mayor Antonio Villaraigosa called the UTLA “one unwavering roadblock to reform.”²¹ Now, Duffy states that the teacher tenure process requires reform. He advocates a longer review period in order to earn tenure, and that teachers continue to establish that they are effective in order to retain tenure. Duffy also states that the teacher dismissal process should be reformed by substantially shortening it, saying, “I would make it 10 days if I could.”

Recent research shows that protecting poor teachers is very costly. In particular, research by Eric Hanushek finds that the economic impact of protecting poor teachers is remarkably high.²² He estimates that if the bottom 5 to 8 percent of teachers were replaced with average quality teachers, then U.S. student test scores in math and science would be at the top of international comparisons. This means that the human capital of future U.S. workers would rise, and thus generate higher production and income in the future. Hanushek estimates that the present discounted value of higher future incomes that would result from replacing poorly performing teachers would be about $100 trillion.
Some teacher unions are responding to calls for reform by working with school boards to address some of these issues, including unions in Pittsburgh and in some parts of Florida. And at its 2011 annual meeting, the National Education Association endorsed assessing teachers to ensure that they are accountable for student learning. However, teacher union reforms must be much more broadly and deeply based for public education to be efficient and effective.
The Future for Public Sector Unions

After 1980, public sector compensation diverges from private sector compensation significantly.

Unionization is much higher in the public sector than in the private sector, and there has been no tendency for unionization to decline in the public sector. While private sector unionization has declined from about 37 percent to about 6 percent, unionization in local government has been steady at around 45 percent.
Public sector unions have been able to thrive because of the very limited competition in state and local governments. This has allowed unions to increase wages above competitive levels. In particular, state and local government compensation has increased by about 40 percent since 1980, compared to about a 20 percent increase in the private sector. The average public sector compensation level is now $70,000, compared to an average of $60,000 in the private sector.

Moreover, the much higher rate of job security in the public sector, plus superior public pensions, suggest that state and local government workers would be willing to work for less than private sector pay. My findings indicate that accounting for just the much higher rate of public sector job security suggests that public sector employment could be competitive even with compensation that was about 10 percent lower than the private sector. The fact that average public sector worker compensation is higher than in the private sector, without taking into account pension benefits, suggests that public sector compensation levels may be significantly above competitive levels. I find that reducing the wages of state workers by 5 percent would reduce California’s 2011-2012 state budget deficit by nearly 15 percent.

There may be considerable savings from state and local government reforms that systematically develop competitive compensation analyses. Specifically, government should first benchmark compensation, including pensions, to private sector comparisons. Current efforts regarding pensions that have been proposed by New York Governor Cuomo and New Jersey Governor Christie are useful first steps along these lines. These proposals are aimed at reducing pension benefits to levels that are competitive from previous levels that have been the result of negotiations with powerful unions. Compensation analyses should also take into account other beneficial components of public sector employment, including much greater job security.

At the same time, public sector unions must understand that taxpayers will no longer accept uncompetitive agreements with unions. Rather than continue the union model of yesteryear in which unions focus on maximizing the size of the pie that members can receive, unions should understand that increasing wages for their members requires increasing productivity and reducing costs. Southwest Airlines has long been one of the most successful carriers because both labor and management are focused on achieving higher efficiency and levels of service than their competitors. Unions that can follow these principles will succeed, while unions that cannot will continue to come under fire.
Lee E. Ohanian is Professor of Economics at UCLA, and a Senior Fellow at the Hoover Institution.

FURTHER READING: Michael M. Rosen describes “The Real Problem with Government Employee Unions.” Alan J. Haus writes “Right-To-Work Unionism?” Andrew G. Biggs and Jason Richwine contribute “Public School Teachers Aren't Underpaid” and “Public vs. Private Sector Compensation in Ohio.” Biggs also reports “State Pension Hole Is Much Deeper Than Official Estimates.”

Footnotes