Taxes and the Tax Code -- what a mess

Golub makes some excellent points:

My Response To Buffett And Obama

Before you ask for more tax money from me, raise the $2.2 trillion you already collect each year more fairly and spend it more wisely

By HARVEY GOLUB

Over the years, I have paid a significant portion of my income to the various federal, state and local jurisdictions in which I have lived, and I deeply resent that President Obama has decided that I don't need all the money I've not paid in taxes over the years, or that I should leave less for my children and grandchildren and give more to him to spend as he thinks fit. I also resent that Warren Buffett and others who have created massive wealth for themselves think I'm "coddled" because they believe they should pay more in taxes. I certainly don't feel "coddled" because these various governments have not imposed a higher income tax. After all, I did earn it.

Now that I'm 72 years old, I can look forward to paying a significant portion of my accumulated wealth in estate taxes to the federal government and, depending on the state I live in at the time, to that state government as well. Of my current income this year, I expect to pay 80%-90% in federal income taxes, state income taxes, Social Security and Medicare taxes, and federal and state estate taxes. Isn't that enough?

Others could pay higher taxes if they choose. They could voluntarily write a check or they could advocate that their gifts to foundations should be made with after-tax dollars and not be deductible. They could also pay higher taxes if they were not allowed to set up foundations to avoid capital gains and estate taxes.

What gets me most upset is two other things about this argument: the unfair way taxes are collected, and the violation of the implicit social contract between me and my government that my taxes will be spent—effectively and efficiently—on purposes that support the general needs of the country. Before you call me greedy, make sure you operate fairly on both fronts.

Today, top earners—the 250,000 people who earn $1 million or more—pay 20% of all income taxes, and the 3% who earn more than $200,000 pay almost half. Almost half of all filers pay no income taxes at all. Clearly they earn less and should pay less. But they should pay something and have a stake in our government spending their money too.

In addition, the extraordinarily complex tax code is replete with favors to various interest groups and industries, favors granted by politicians seeking to retain power. Mortgage interest deductions support the private housing industry at the expense of renters. Generous fringe benefits are not taxed at all, in order to support union and government workers at the expense of people who buy their own insurance with after-tax dollars. Gifts to charities are deductible but gifts to grandchildren are not. That's just a short list, and all of it is unfair.

Governments have an obligation to spend our tax money on programs that work. They fail at this fundamental task. Do we really need dozens of retraining programs with no measure of performance or results? Do we really need to spend money on solar panels, windmills and battery-operated cars when we have ample energy supplies in this country? Do we really need all the regulations that put an estimated $2 trillion burden on our economy by raising the price of things we buy? Do we really need subsidies for domestic sugar farmers and ethanol producers?

Why do we require that public projects pay above-market labor costs? Why do we spend billions on trains that no one will ride? Why do we keep post offices open in places no one lives? Why do we subsidize small airports in communities close to larger ones? Why do we pay government workers above-market rates and outlandish benefits? Do we really need an energy department or an education department at all?

Here's my message: Before you "ask" for more tax money from me and others, raise the $2.2 trillion you already collect each year more fairly and spend it more wisely. Then you'll need less of my money.

Mr. Golub, a former chairman and CEO of American Express, currently serves on the executive committee of the American Enterprise Institute.

The High Cost of "Free" Solar Energy

What will it take for people -- Obama -- to understand that all energy is free at the source? It's converting it into a useful form that's expensive. Solar is way up there when it comes to conversion costs. Is anyone in Washington paying attention?

Is the Obama administration going to bail out Evergreen Solar? Not likely. Is Obama himself going to learn a lesson about real-world energy facts? Not likely. Is Obama going to wake up to the punishing costs of his energy dreams? Not likely.

Is the administration embarrassed about the total failure of the green energy industry? How about the fact that green energy is not "clean" energy? Solar panels contain some toxic materials that will eventually need disposal. Then what?

Nevergreen Solar
Another political investment goes bust

In 2008, Reuters published one of those stories predicting that green power would be cost-competitive with fossil fuels in five years. Headline: "As Energy Costs Soar, U.S. Looks to Solar."

Among the prophets was Richard Feldt, then the CEO of Evergreen Solar, who said that "it's not far away" and called for more subsidies. On Monday, Evergreen filed for Chapter 11 bankruptcy.

In the grave-dancing department, let's note that failure is part of the risk-taking and creative destruction that drive growth, and that Evergreen got its start in 1994 with an innovation that reduced the costs of silicon panels. The bankruptcy is notable mainly because the Massachusetts-based manufacturer received so much taxpayer support.

Governor Deval Patrick took a $58 million stake in Evergreen in 2007 with direct subsidies and tax breaks in return for the company building a plant in the state. The goal was "to help Evergreen Solar grow and thrive right here in Massachusetts, and give us a head start toward building a clean energy economy," Mr. Patrick said at the time.

But in January, Evergreen, shedding cash, shut down the Devens plant and fired 800 workers, claiming it was at a competitive disadvantage because U.S. solar subsidies are lower than China's. In a letter to the Journal, the U.S. solar lobby in Washington said the solution was to follow "Chinese policy makers" and make "strategic investments to attract this rapidly growing industry."

Mr. Patrick's economic development secretary, Greg Bialecki, told the Boston Globe that Evergreen's collapse was "a cautionary lesson," but not about the distortions and waste that come with the political allocation of capital. "We knew that it would be challenging to do that kind of manufacturing in the United States. It also probably suggests that Massachusetts can't do it alone—in other words, we probably also need federal policy," he said.

So the Commonwealth subsidies weren't enough for Evergreen to succeed because the federal subsidies weren't enough, even though with the stimulus the Obama Energy Department has become one of the largest venture capital firms in the world. And the federal subsidies will only be enough if Washington emulates the Chinese model of a state-planned economy.

As Evergreen's bankruptcy shows, the real story is that the government-as-investor model isn't going to lead the U.S. back to prosperity.

Solar Energy -- Where are the Blue Skies?

From the Department of This Isn't News:

Evergreen Solar files for bankruptcy, plans asset sale

Greg Turner and Jerry Kronenberg
August 15, 2011

Evergreen Solar Inc., the Massachusetts clean-energy company that received millions in state subsidies from the Patrick administration for an ill-fated Bay State factory, has filed for bankruptcy, listing $485.6 million in debt.

Evergreen, which closed its taxpayer-supported Devens factory in March and cut 800 jobs, has been trying to rework its debt for months. The cash-strapped company announced today has sought a reorganization in U.S. Bankruptcy Court in Delaware and reached a deal with certain note holders to restructure its debt and auction off assets.

The Massachusetts Republican Party called the Patrick administration’s $58 million financial aid package, which supported Evergreen’s $450 million factory, a “waste” of money.

“The bankruptcy of Evergreen Solar is another sad event for the Massachusetts company and highlights the folly of the Patrick-Murray Administration which has put government subsidies into their pet projects instead of offering broad based relief to all Bay State employers,” said Jennifer Nassour, head of the state GOP.

Greg Bialecki, Patrick’s economic development czar, defended the administration’s support for the once-promising Evergreen. The state is still trying to recoup about $4 million in cash from the Marlboro-based company.

“Not every company is going to be successful ... but we still believe the approach of providing business incentives to create and maintain manufacturing jobs in Massachusetts is an important strategy,” he said.

Evergreen — hurt by lower-cost competition in China and plummeting prices for solar panels — also said it will cut more jobs — 65 layoffs in the United States and Europe, mostly through the shutdown of its Midland, Mich., manufacturing facility. That would leave Evergreen with about 68 workers according to a head count listed in the bankruptcy filing.

To cut costs, Evergreen shifted some of its production to Wuhan, China, last year. That joint venture will remain operating subject to financing talks with Chinese investors.

In January, after Evergreen announced it would close the Devens factory, Patrick told the Herald he was disappointed in the job losses but did not regret making the investment.

“I think we did what we could have and should have,” he told the Herald.

In March, during a state Senate hearing that explored the value of tax incentives for Bay State businesses, Evergreen CEO Michael El-Hillow said the company had “earned” 85 percent of the taxpayer benefits it received because of the jobs it originally created.

Evergreen warned investors back in April that it was burning through cash because of slow sales, falling solar-panel prices and weak proceeds from the sale of Devens factory assets.

“Chapter 11 will provide Evergreen Solar with the ability to maximize returns for our stakeholders through the proposed sale process,” El-Hillow said in a statement. “Importantly, we expect to continue our technology development without interruption during Chapter 11 and the sale process.”

But Evergreen shareholders are expected to receive “no distributions” from the asset sales after creditors are repaid.

Shares of Evergreen, which are in danger of delisting from the Nasdaq Stock Market, plunged 57 percent today to 18 cents. The company launched in 1994 and went public in 2000.

Home Ownership -- Cuban Style

One of these days, Alice. One of these days...

Is Cuba Going Capitalist? Its economic reforms are mostly an attempt to tax black market transactions.

By MARY ANASTASIA O'GRADY

Who says dictators don't have a sense of humor? Cuba's Castros have an undeniably comic side, as evidenced by the regime's announcement earlier this month that it plans to provide agricultural advice to 14 Venezuelan states. It sounds like a bad joke. Would you take technical assistance from a government that has turned the chicken into an endangered species in its own country?

This raises the question of how seriously we ought to take Raúl Castro's announcement that he is about to "reform" the Cuban economy. The American press seems convinced. "Cubans Set For Big Change: Right to Buy Homes," the New York Times screamed on its front page on Aug. 2. "Now open in Cuba; Business isn't exactly booming as free enterprise expands, but the slumbering entrepreneurial spirit is starting to stir," said the Los Angeles Times on Aug. 7.

It sounds like a capitalist revolution. But is it really time to get in on the ground floor in Cuba?

History may provide some guidance. This is not the first time we have been told that the communist economy, paralyzed since 1959, is on the verge of a reversal. In 1986, as Fidel Castro convened the III Communist Party Congress, the Miami Herald reported that "dramatic changes are sweeping Cuba," including, the story said, permits to own homes. It is true that the regime officially blessed "home ownership." But those houses could not be sold, only exchanged. And Cubans never actually had legal rights to them, as became apparent when the state discovered that enterprising Cubans were making money by trading houses for profit under the table. A wave of confiscations followed.

The end of Soviet aid provoked another crisis, and by 1994 the regime was again promising economic liberalization. There was some. Taxi businesses and in-home restaurants sprang up. But as soon as some Cubans began to acquire wealth, Castro got nervous, because he understands that economic power translates into political power. Prices for licenses went up sharply, making it so costly to operate in the formal economy that many start-ups disappeared again.

In 2008, three hurricanes and the global financial crisis took a sharp toll on tourism and nickel prices, two of the island's most important sources of hard currency. Food shortages became more acute and the existing housing stock, which was in ruins, shrank. Raúl decided it was time to talk again about reform.

It took a while but Cuba finally made it official earlier this year: 178 tasks have been legalized. By the beginning of next year the government has also promised to make the housing market legal. Property rights and private enterprise are keys to economic development and the idea that Cuba would allow both suggests that the revolution is breathing its last. Yet is this time any different?

There are no details about what it will mean when Cubans are allowed to "buy homes." But given the arbitrary power of the state, it is reasonable to question the certitude of the property right. The real reason the regime wants to formalize the housing market probably concerns the national purse.

Right now Cubans are allowed to trade houses but since it is rarely an even exchange, there are also dollars—provided by the exile community—that flow in the black market. Castro, being short of foreign exchange, most likely wants to get in the middle of this transaction so that he can take a cut.

The strapped government also is looking for ways to unload part of the state work force. To ensure that laid-off employees don't starve, it wants to give them business "opportunities." But in a paper delivered at the annual meeting of the Association for the Study of the Cuban Economy here 10 days ago, former International Monetary Fund economist and ASCE founder Joaquín Pujol noted that at the end of 2009, "there were already 143,000 licensed, self-employed, although thousands more worked for themselves illegally." He also pointed out that "171,000 new business licenses granted so far this year went to people who were already out of work, suggesting that the vast reforms may not be enough of a safety net for the half-million people who are expected to be soon out of a government job."

This problem is exacerbated by the fact that since not everyone has an entrepreneurial nature, job creation by the gifted few will be important. Yet an effective tax rate for micro-enterprises that "could reach and exceed 100%," according to Mr. Pujol, will discourage hiring. Mr. Pujol also noted that despite Cuba's investments in education, there is no private "knowledge intensive" work that is legal, ruling out growth in the sectors of the economy that offer the most potential.

Free prices, property rights and incentives for innovation would signal real change. But those things would also put the regime's grip at risk. So instead it is trying to formalize and tax black market transactions to create jobs for state workers and raise revenues. The idea that this is capitalism would be funny too, were it not so sad.

Buy Stocks says Warren Buffett -- He's right

Warren Buffett believes there's a sale at the stock exchange. Who can doubt him? What changed after Standard & Poors lowered the credit rating of the US? What changed after the Fed promised to hold rates at near-zero level for the next two years? At the company level, nothing changed.

Perhaps prospects are slightly less promising in light of S&P's belief that US government debt will increase more than the government has estimated. But that's hardly a sufficient reason to send the market down 633 points one and up 420 points on another, for a net decline of 175 points for the full week. Buffett sees these moments, when the market drops, as great buying opportuntiies.

Buffett: The lower stocks go, the more I buy
August 11, 2011

Warren Buffett discusses the lowered outlook for Berkshire Hathaway debt, why some of his businesses aren't hiring, and why U.S. debt remains triple-A rated in his mind.

By Andy Serwer, managing editor

Warren Buffett sees buying opportunities

FORTUNE -- "There is no comparison between fear and greed," Warren Buffett is telling me over the phone from Omaha. "Fear is instant, pervasive and intense. Greed is slower. Fear hits," he exclaims. It's Tuesday August 9th, a little less than an hour after the Federal Reserve announced it would hold interest rates at close to zero for two more years and the stock market has gone into yet another major spasm—up at that moment between two hugely down days.

For us mere mortals, this summer's stock market meltdown has a grinding, Groundhog Day feel to it, as in: 'Oh no, not again…" But for Buffett it's invigorating.

Today he's his usual chipper self, saying he's "never been better." And why not? As Buffett reminds me, "The lower things go, the more I buy. We are in the business of buying," [both securities and, if he can find them, big companies.] (And no, he won't tell me what he's picking up on the cheap.)

Buffett always makes his job sound so easy, but of course it isn't. All you need is a multi-billion dollar war chest, nerves of titanium, and a brilliant, analytical mind. Not a very big group there.

I'm calling Buffett to ask him about his company's businesses, because as a diversified conglomerate or holding company, Berkshire Hathaway (BRKA) is a fairly reflective proxy of the overall economy. But first I had to ask him about S&P lowering the outlook for Berkshire Hathaway debt (which is rated AA+) from stable to negative in the wake of the credit down grade of U.S. Treasuries.

So what about it Mr. B?

"They said some time ago that if they changed the ratings on governments they would lower the outlook on certain insurance companies because they own a lot of governments. [Buffett reportedly said that Berkshire holds more than $40 billion of its cash in short term Treasuries.] So as a derivative move I understand it, but I don't agree with it because I don't agree with the Treasury downgrade. U.S. Treasuries are still triple-A in that there is no question that we will repay the interest and the principal. Every contract will be repaid. So our bonds are triple-A. Our currency, the dollar, is not triple-A. Our bonds are."

So what about the health of his businesses?

"Up until right now, all of our businesses have been coming back---even Europe isn't doing that badly---except for businesses relating to home construction which is on its rear end. [Importantly Buffett did say that if events continue like the last few weeks it will change things.] Business has been coming back steadily, even more than the mood of the public."

Of course, some of this talk may be Buffett trying to jawbone that public mood, but remember Buffett is a voracious consumer of his businesses' numbers and wouldn't be one to misrepresent them.

Two examples: A Berkshire subsidiary based in Israel, Iscar, which makes cutting tools for machines, is showing growth, "quarter after quarter," Buffett says, adding that this isn't because of market share gains. "It means that the machines are operating more."

Buffett has another company, TTI, which sells tiny electronic parts. "It's like selling jelly beans, but we sell billions of dollars of them and it is up."

And there's more too: "NetJets' miles flown by customers are up. Rolex watches -- we are the largest seller of Rolexes in the U.S. -- are up 27% this year," he says.

Ah, but is Berkshire hiring anyone? We hear so much about businesses being in good shape because they are so productive. Here things are mixed. Every business looks for productivity gains every year, Buffett notes.

Shaw, Berkshire's carpet manufacturer, let 400 people go over the last month or so, and is down some 6,000 employees overall, Buffett says. Shaw's business, of course, is closely tied to the beleaguered homebuilding business. "But when that business comes back, we will add thousands of employees some day."

On the flip side, Berkshire's giant railroad, Burlington Northern is adding some 3,500 jobs this year as business has picked up. And insurance company GEICO has added 700 jobs, "but we're gaining [market] share there," he says.

So the insurance business is good, I ask Buffett? Not exactly.

"Auto has been good, but catastrophes have been bad. International hit us in the first quarter, and domestic in the second." By that Buffett means the tragedy in Japan and earthquakes in New Zealand, in particular the second Christchurch quake which cased as much damage relative to New Zealand's GDP as ten Hurricane Katrina's.

"We set up a reserve of $40 million for death related losses in the first quarter, $5 million for New Zealand and $35 million for Japan. Natural catastrophes that produce life insurance losses of this order are very unusual," Buffett says.

The domestic debacles were the worst tornado season in history, which included the storms in Alabama and Joplin, Missouri. And Buffett says the elements continue to be most unkind: A freak hailstorm on Long Island, NY on August 1st, led to 15,000 claims worth $60 million, just in auto claims.

And so what does Buffett think about the Fed's move to hold rates low that has the market all in a tizzy that Tuesday? "I don't really think about things like that," he reminds me. I ask him if he sees anything in his data stream that is giving him cause to worry about another downturn. "Not yet, but it would take a little while to show up."

In the meantime, Buffett is looking to buy stocks -- oh, and apparently to sell Berkshire bonds too. Berkshire is reportedly taking advantage of record low rates and issuing bonds to raise dirt-cheap capital. For Buffett right now at least, this is not a time for fear. This is a time for action.

Oil Change for Obama

It's simple. The oil industry can let go of any industry-specific tax breaks in exchange for permission to drill anywhere in the US. A change like that would give something to everyone, and the biggest bonus would go to the American people. Too bad Obama has no grasp of the obvious.

Here’s an Easy $100 Billion Cut

Published: August 7, 2011

If the Republicans are truly determined to slash the budget and end government waste, they will start with two obvious and long overdue cuts: ending the web of tax breaks enjoyed by the rolling-in-dough oil industry and terminating the ethanol subsidy. Together these cuts would save up to $100 billion over 10 years, without hurting the poor and middle class or slowing the economy.

If only. The oil industry’s well-paid defenders — lobbyists and lawmakers in unison — will surely scream “tax hike” and claim that ending $4 billion a year in sweetheart subsidies will decrease production and increase prices at the pump. All of which is nonsense.

In 2005, with oil nearing $60 a barrel, James Mulva, the head of ConocoPhillips, told the Senate that his industry did not need these breaks to keep exploring for oil. They need them even less when oil is $100 a barrel.

According to the Congressional Research Service, ending the subsidies would have no effect on gas prices and a trivial effect on profits. The Big Five — Exxon Mobil, BP, ConocoPhillips, Chevron and Shell — reported combined profits of $35.1 billion for just the second quarter. Yes, you read that right.

The ethanol subsidies are just as unnecessary. The big one is a 45-cents-per-gallon tax credit that costs between $5 billion and $6 billion a year and goes not to corn farmers, as commonly supposed, or to ethanol producers, but to the refineries that blend ethanol with conventional gasoline. Which is to say, the oil companies.

Tax credits might have been useful when ethanol was in its infancy. But making corn ethanol is now a commercially viable technology, and one that is further supported by a 2007 Congressional mandate that requires refiners to blend up to 15 billion gallons of corn ethanol every year. In this sense, the subsidy is a bribe to oil companies to get them to buy and blend a product they are already required by law to purchase.

President Obama has called three times for ending the oil subsidies, and in May the Senate voted 52 to 48 to do so, not enough to overcome a filibuster. In June, the Senate also approved an amendment to a bill that ultimately went nowhere that would have ended the ethanol subsidy.

The roadblock is the House Republicans’ blind opposition to anything that could be characterized as a tax increase. Also nonsense. These tax breaks are merely subsidies under another, politically convenient name. It is time to end both. There is no justification for putting the interests of one industry above those of the country.

I'm from the government. I'm here to hurt

If there's one skill the government lacks, it's the skill to create jobs in the private sector. Yeah, sure, the government can create more government jobs. But that's the last thing we need. More burdens for taxpayers offering no visible benefit to the economy.

Five Ideas to Kick-Start Job Creation
Entrepreneurs don't want government money. They want the chance to invest their sweat equity

Now that the debt-ceiling gyrations are over, the Obama administration is "pivoting" to its biggest problem—jobs. Unemployment ticked down to 9.1% in July, but the real unemployment rate, including discouraged workers, is still 16.1%. The stock market is not pleased. Why? Because the president's calls for "patent reform" and an "infrastructure bank" won't move the needle. It's time to go big or be sent home.

Can we agree that throwing money at the problem doesn't work? The 2009-10 stimulus package wasted more than $800 billion. The Federal Reserve's frantic quantitative easing, QE1 and QE2, printed money and bought mortgage paper on the street, helping banks and financial institutions recapitalize, but it hardly created jobs—not lasting ones anyway. Sadly, the economy grew at a subpar 1.3% rate in the second quarter instead of the typical 5% rocket out of a recession. What's missing is not capital, it's opportunity.

As Otter famously said in "Animal House," this situation "absolutely requires a really futile and stupid gesture be done on somebody's part." Well, at least a gesture that might appear stupid and futile but in reality kick-starts whole new industries and massive job growth. And all it will take is the stroke of a pen. Here are some instant job creators:

• Free spectrum. AT&T is trying to buy T-Mobile to get hold of valuable spectrum for wireless. But there's loads of spectrum lying around that is not being used. Try this: Tune into channel 37 on your TV. Static? Bingo. Put this spectrum in the hands of entrepreneurs and you'll create a million new jobs, not to mention new devices and apps not thought possible in our bandwidth-starved world—phones that work in elevators and subways, remote auto and medical diagnostics, real-time ads on smart phones and other devices ("Hey, your friends ate here last week!"), and that's just in the first six months.

But how? Either allow spectrum to be sold by current owners, typically broadcasters inefficiently using this spectrum, or implement a "use it or lose" it rule. The Federal Communications Commission can declare that if a swath of spectrum is not being used for a real application, then they will open it up to the public, the same way that Wi-Fi is open to all—anyone can use it as long as they don't interfere with others. (AT&T and Verizon will fight this, but so what?)

This is also true of government-owned spectrum. If an entrepreneur can prove far greater potential usage, it should revert to the public. Chips are available today that can be tuned to virtually any new spectrum. Apps can be written in weeks. Venture capitalists and Wall Street would gladly provide access to capital. So what are we waiting for? Start making those "Free the Spectrum!" T-shirts.

• Disease diagnostics. Have the Department of Health and Human Services declare that Medicare will pay for any diagnostic test or device that can be proven to save money over five years—for example, detecting a cancer at Stage I when it's cheaper to treat versus at Stage IV, when it is expensive and often fatal. Some will prove worthy, others won't. But it's a self-correcting process—if a test or device doesn't save money, then reimbursements stop. That will help focus entrepreneurs' efforts, and the resulting innovation will both save money and create private-sector jobs.

• End the mail monopoly. The U.S. Postal Service, which posted a net loss of $3.1 billion in the third quarter alone (there is only so much junk mail and Hallmark cards to deliver anymore), is finally starting to rationalize small post offices, recently putting 4,000 of them on a list for possible closing. Accelerate this task by ending the USPS monopoly on first- and third-class mail. Entrepreneurs will jump into action. Online bill payment will become ubiquitous. UPS and FedEx and a host of new companies will create more productive forms of delivery. The Postal Service won't end, it will just slowly fade away.

• Frack this. The revolution in natural-gas extraction, driven by hydraulic fracturing, or "fracking" of America's huge shale deposits, has boosted shale gas to 25% of America's gas supplies from 1% in 2001. But environmentalists are pushing to close down this booming industry due to concerns over contamination of water supplies. Here's a solution: Declare all hydraulic fracturing legal with the caveat that drillers put up a bond equal to the potential cleanup cost of environmental damage. This will force large players to consolidate what is mostly a "wildcat" market. The big guys will be much more careful in their extraction techniques, knowing mistakes cause huge losses.

• Government platform. The hardest thing to do is interact with the government—the Department of Motor Vehicles being the most painful example. I have yet to see any government agency with an up-to-date user interface. But this is easy to change.

In the technology world, companies view themselves as platforms for others to build on, and they publish what they call application programming interfaces (APIs) so others can easily tap their ecosystem. All government agencies should be required to publish their own APIs by the end of the year. What will happen next is a sea of programmers will emerge to write iPhone apps and other code to integrate government functions into our everyday lives. And yes, this will eventually get rid of entire layers of inefficient government workers, but new companies nowhere near the Beltway will proliferate with virtual connections to the government.

• Rental society. Create a six-month foreclosure amnesty, i.e., initiate foreclosure proceedings on your underwater mortgage, and it doesn't show up on your permanent record. Foreclosure then becomes an individual's choice, not something mired in government red tape or stuck in a bank's back office. This would lead to millions of homes and condos hitting the market at fire-sale prices. This is exactly the price discovery that the finance sector both dreads and needs to move forward. Within weeks, we'd see the rise of Web-based rental agencies and real-estate auctions.

I understand the politics against all these opportunities and doubt any administration has the political will to enable so much change so quickly. But any one of these ideas, while a futile gesture on the surface, would sound like a starting gun for entrepreneurs and get them off to the races. They don't need money—they need somewhere to invest their sweat equity. And that's the only true job creator.

Call AAA to Rescue the Stranded Obama Administration

The Obama Administration is trying to defend itself from S&P's downgrade by claiming that S&P based its analysis on the projection that US debt would total $22.1 TRILLION in 2021, rather than $20 TRILLION, as the administration predicts.

Given the overwhelming evidence of the administration's ability to make accurate predictions about the economy over one- and two-year horizons, there's no reason to think the same people can accurately predict the size of our national debt 10 years down the road -- when all of the predictors will be long gone from their government jobs.

What's ahead in the next 10 years? Who knows? More wars? Probably. Higher aggregate medical expenditures by Medicare and Medicaid? Absolutely. How much higher? If we extrapolate the trend of the last decade, then spending in 2021 will break the bank.

It's amusing that S&P was villified for giving AAA ratings to mortgage securities that later defaulted. It's amusing because S&P is one of a handful of organizations that have a special government designation. They are Nationally Recognized Statistical Ratings Organizations.

What entity issued the National Recognition? The US government did. Thus, the government has given S&P its stamp of approval.

That stamp of approval meant that no investors questioned the accuracy of the AAA ratings given to mortgage securities containing many sub-prime loans. That oversight was essential to the goal of the government, which was to increase home ownership among people who historically were less likely to own homes and build personal wealth.

Rather than stick with well understood lending practices that demanded borrowers have a decent credit rating, reasonable job prospects and a substantial downpayment, the government legislated changes that allowed borrowers to borrow 100% of the purchase price of a home with nothing more than their "promise" to repay the money.

Now the Obama administration is in offended-mode, and it's trying to malign the S&P decision to reduce our national credit rating to AA+. A classic case of shooting the messenger.

Amid Criticism on Downgrade of U.S., S.&P. Fires Back

By NELSON D. SCHWARTZ and ERIC DASH
Published: August 6, 2011

The day after Standard & Poor’s took the unprecedented step of stripping the United States government of its top credit rating, the ratings agency offered a full-throated defense of its decision, calling the bitter stand-off between President Obama and Congress over raising the debt ceiling a “debacle.” It warned that further downgrades may lie ahead.

In an unusual Saturday conference call with reporters, senior S.& P. officials insisted the ratings firm hadn’t overstepped its bounds by focusing on the political paralysis in Washington as much as fiscal policy in determining the new rating. “The debacle over the debt ceiling continued until almost the midnight hour,” said John B. Chambers, chairman of S.& P.’s sovereign ratings committee.

Another S.& P. official, David Beers, added that “fiscal policy, like other government policy, is fundamentally a political process.”

Initial reactions from Congressional leaders suggested that S.& P.’s action was unlikely to force consensus on the fundamental divide over spending and taxes. Politicians on both sides used the decision to bolster their own long-standing positions.

Officials at the White House and Treasury criticized S.& P.’s move as based on faulty budget accounting that did not factor in the just-enacted deal for increasing the debt limit.

Gene Sperling, the director of the White House national economic council, called the difference, totaling over $2 trillion, “breathtaking” and said that “the amateurism it displayed” suggested “an institution starting with a conclusion and shaping any arguments to fit it.”

Even as the ratings agency insisted on Saturday that its move shouldn’t have come as a shock, it reverberated around the world. Officials from China to Europe scrambled to assess the downgrade’s impact on the already troubled global economy, and political leaders in the United States sought to frame the issue in their favor.

Republican presidential candidates on Saturday seized on the downgrade as a new line of criticism against President Obama, suggesting that ultimate responsibility rests in the Oval Office.

“It happened on your watch, Mr. President,” Representative Michele Bachmann said, drawing applause at an afternoon rally in Iowa. “You were AWOL. You were missing in action.”

In a statement, the White House made no mention of the downgrade. “We must do better to make clear our nation’s will, capacity and commitment to work together to tackle our major fiscal and economic challenges,” the White House press secretary, Jay Carney, said.




The wrangling over S.& P.’s downgrade to AA+ from AAA stretched on for days. But interviews with both officials from the administration and S.& P. reveal sharply differing perceptions on whether a downgrade was imminent. The rating agency argued that their intentions had been plain for months if the government didn’t take strong action to curb the debt; administration officials claimed they were blindsided.

The drama, which would culminate late Friday and into the weekend, actually began to gather speed Wednesday, when S.& P. executives came to the Treasury Department to meet with a group of administration officials led by Mary J. Miller, the assistant secretary for financial markets.

At the meeting, the S.& P. executives walked the Treasury Department team through its analysis. Government debt was growing rapidly, they said, and the just-completed deal wasn’t going to do enough to slow it down, endangering the AAA rating.

As early as April, S.& P. had changed its credit outlook on the United States to negative. By July, S.& P. warned that if the government did not agree to a deficit reduction package of about $4 trillion, there was a one-in-two chance a downgrade.

Still Treasury officials claim they were taken by surprise on Wednesday. Just the day before, Ms. Miller and her team met at the Hay-Adams Hotel with a group of senior Wall Street executives who advise the Treasury on its borrowing. None of the members believed that the government’s credit rating would be lowered in the near-term.

On Thursday, the ratings agency informed the Treasury that its seven-person panel would meet Friday morning to assess the creditworthiness of the United States government.

Even then, one administration official said, “We didn’t think they would actually do it.”

At 8 a.m. Friday, S.& P. convened a global conference call of its sovereign rating committee including Mr. Beers, Mr. Chambers and others. By 10 a.m., they’d reached a majority decision — the United States no longer was entitled to its top rating. Mr. Beers would not say whether the verdict was unanimous.

Inside Treasury, meanwhile, John Bellows, an acting assistant secretary, flagged a concern over S.& P.’s methodology. In its analysis, S.& P. had projected the nation’s debt as a share of gross domestic product to reach 93 percent by 2021. That was around 8 percentage points higher than the figure administration officials believed the rating agency should have used — what they now call a $2.1 trillion error.

In a Treasury blog entry, Mr. Bellows wrote that the difference raised “fundamental questions about the credibility and integrity of S.& P.’s ratings action.”

Around 5:30 p.m., S.& P. officials called the group of Treasury officials. “You were right,” Mr. Chambers told them, but said he was prepared to proceed because the revisions didn’t meaningfully affect S.& P.’s conclusion.

In one final effort to prevent what was once unthinkable from becoming inevitable, the Treasury officials again pressed S.& P. to reconsider. At 8 p.m., the ratings agency sent them the final press release on the downgrade. By 8:20 p.m., the news was out.

“For those who follow the fiscal situation of the United States, this shouldn’t be news to anyone,” Mr. Chambers said.