Beware Of Thousand Page Laws, Immigration Edition

There's no question that the situation of our immigration laws is a mess.   So, how about a "comprehensive" reform, with a new law of now-standard size for what comes out of Congress, say 1000 pages, plus or minus? 

Unfortunately, it is not possible to come up with a thousand-page law without introducing hundreds of unintended consequences into the system.  I cannot identify with certainty all the minefields that are lurking in the gigantic "gang of 8" comprehensive immigration reform bill now working its way through Congress, and neither can anyone else.  But universal "e-verify" is definitely one of them. 

John Cochrane of the University of Chicago has an important article on this subject in Friday's Wall Street Journal.   Title:  "Think Government Is Intrusive Now?  Wait Until E-Verify Kicks In."  Cochrane makes the obvious point that everyone is missing:  just because it is talked about as part of immigration reform and appears in an immigration bill does not mean that e-verify is just about immigrants.  E-verify is about everybody, and it is a system whereby everybody will need prior government approval to earn a living in the United States.

E-Verify is the real monster. If this part of the bill passes, all employers will be forced to use the government-run, Web-based system that checks potential employees' immigration status. That means, every American will have to obtain the federal government's prior approval in order to earn a living.

Does anybody really believe that once it is established that prior government approval is required to earn a living that the criteria will be limited to just immigration status?  Cochrane lists some of the obvious categories that the government can easily add to its criteria.  Shouldn't we check for child porn convictions before hiring someone to work with children?  How about DWI convictions before hiring someone to drive a bus or pilot an airliner?  Heck, how about a required check of federal records for any and all past criminal behavior?   

And what a great system this will be to enable the government to keep its political opponents down!  Those who think the government would never do such a thing have not been following the IRS scandal.  But how about taking an example from just a few days ago:  On Tuesday July 30 the Chattanooga (Tennessee) Times Free Press published an editorial titled "Take Your Jobs Plan And Shove It, Mr. President."  It happened that President Obama was in town that day to give a speech on his new so-called "jobs" plan.  Key quote from the TFP editorial:  

That’s because your jobs creation plans so far have included a ridiculous government spending spree and punitive tax increase on job creators that were passed, as well as a minimum wage increase that, thankfully, was not. Economists — and regular folks with a basic understanding of math — understand that these are three of the most damaging policies imaginable when a country is mired in unemployment and starving for job growth.

Within two days the editor of the editorial, one Drew Johnson, had been fired, and the title had been changed to "President Obama's Policies Have Harmed Chattanooga Enough." 

Investor's Business Daily on August 2 asks whether the White House had a role in the firing.  They accompany their question with a list of prior White House actions in meddling with press stories about the President and first family:

We have no special information, but it's significant that President Obama was in town that week, visiting an Amazon operation to tout his jobs plan. Johnson's hard-hitting editorial drew unwelcome attention to that failed employment blueprint.

And this is a White House that has called up newspapers and asked them to remove lines in stories.

In 2011, Gina Channell-Allen, president of the Pleasanton Weekly in California, said she "received a call from the White House asking us to take out part of the story because it reflected poorly on the first lady."

The White House also threatened to blacklist San Francisco Chronicle reporter Carla Marinucci from the press pool during Obama's visit to the Bay Area in 2011 because she covered an unflattering-to-Obama protest.

The White House has also targeted the press with the Internal Revenue Service, as happened to Commentary magazine, as described by editor John Podhoretz last May. Accuracy in Media's Cliff Kincaid reported that two other media outlets were also IRS targets.

It is just not possible for government bureaucrats to avoid political mis-use of the tools at their disposal. 

So, for immigration reform, how about scrapping the 1000 page bill and pass a one-pager that loosens restrictions on high skill immigrants? 

Taken In By His Own Fraud

Perhaps the most common financial fraud goes by the name of "channel stuffing."  The basic idea is that a metric - for example, revenue generation - has been selected to serve as a proxy for business success.  As long as the metric is not manipulated, it may be an excellent proxy for business success.  But then management realizes that it can manipulate the metric, and thereby deceive people into thinking the business is succeeding when it is not. 

The classic example arises in a manufacturing business.  The accounting profession somehow decided that the best proxy to use for determining when to recognize revenue is the time when the finished product leaves the factory on the way to the customer.  This metric can give a less volatile and arguably more accurate picture of the success of the business than alternatives such as when contracts are signed or when cash is received.  But then from time to time management realizes that it can goose revenue for a quarter and make the business appear more successful by the expedient of sending a truck filled with product out to a customer a day or two early.  Or maybe it's two trucks, or five, with quiet instructions to "drive slow."  The next quarter, of course, the revenue hole is a little deeper, so make it ten trucks.  This can go downhill very quickly.  Many corporate executives have gone to jail for this.

There is a completely parallel situation in the world of government accounting, namely government manipulation of GDP and jobs numbers to deceive people as to the success of the economy.  For purposes of GDP accounting, the accountants decided to adopt a metric where government spending counts at 100 cents on the dollar in the measure of GDP.  That may have made sense before politicians figured out that they could then manipulate GDP by the simple expedient of wasting government money or giving it to their friends and supporters, and thereby deceive the voters into believing that the economy is growing.  There is nothing fundamentally different between this game and corporate channel stuffing, other than that the government practices its fraud in the trillions of dollars rather than the millions or tens of millions involved in the corporate frauds.  

So here we have President Obama's big "jobs" speech in Tennessee a couple of days ago.  After five years of a languishing economy on his watch, now he is going to lay out his ideas to improve the economy!  And the big idea is ............  channel stuffing!!!  OK, he doesn't call it that; he calls it "job creation" through government spending.  Just to take a few examples:

[W]e need to keep creating good jobs in energy -- in wind and solar and natural gas.  Those new energy sources are reducing energy costs.  They're reducing dangerous carbon pollution.  They're reducing our dependence on foreign oil.  So now is not the time to gut investments in American technology.  Now is the time to double down on renewable energy and biofuels and electric vehicles, and to put money into the research that will shift our cars and trucks off oil for good.

Natural gas development does not require or call for any government involvement at all.  Wind and solar are pure wealth destruction, and any rational measure of GDP would record government spending on them as a reduction in GDP.  But no, the government spending is recorded as adding to GDP at 100 cents on the dollar.  Pure deception.  (You may think that using wind and solar energy is a good idea to "save the planet"; but if so, you should at least be honest with yourself and recognize that you are asking the American people to accept making themselves poorer - through higher energy costs -- to achieve an environmental goal.)

And then this: 

 We've got about $2 trillion of deferred maintenance here in this country.  So let’s put more construction workers back on the job doing the work America needs done.  (Applause.)  These are vital projects that Amazon needs, businesses all across the country need, like widening Route 27 here in Chattanooga -- (applause) -- deepening the Jacksonville Port that I visited last week.  These are projects vital to our national pride.  We're going to be breaking ground this week at the St. Louis Arch.  Congress should pass what I've called my “Fix-It-First” plan to put people to work immediately on our most urgent repairs, like the 100,000 bridges that are old enough to qualify for Medicare.  That will create good middle-class jobs right now.  (Applause.)  And we should partner with the private sector to upgrade what businesses like Amazon need most.  We should have a modern air traffic control system to keep planes running on time.  We should have modern power grids and pipelines to survive a storm.  We should have modern schools to prepare our kids for the jobs of tomorrow. 

I'm not opposed to all infrastructure spending, but this is just complete acceptance of the idea that all government spending on no matter what is an unalloyed benefit.  We'll replace all the bridges!  We'll replace all the schools!  This is exactly the strategy that Japan has embarked on for the past two decades -- massive, uncontrolled infrastructure spending to "create jobs" and "stimulate" the economy.  Result:  twenty years of stagnation and national debt at 200% of GDP.  And that's with full fraudulent 100 cents credit in GDP for all government spending.  Without that manipulation, Japan's economy has declined significantly.  So let's imitate them! 

Well, we could call President Obama the fraudster in chief, but to his credit I truly believe he really thinks that uncontrolled government spending benefits the economy.  He has been taken in by his own fraud!  (OK, and to be fair, by that of his predecessors.) The problem is, if this were corporate fraud, the fact that the CEO truly believed that his channel-stuffed numbers represented a correct picture of the corporation's financial position would be no defense whatsoever.  Off to jail with you!

What Is The Difference Between "Flexible Underwriting" and "Predatory Lending"?

Even as Fan and Fred reinflate rapidly out of sight of everyone, there is a new nominee to head their "regulator," now going under the name of the Federal Housing Finance Agency (FHFA).  He is Congressman Mel Watt, Democrat of North Carolina.  Haven't heard of him?  He is the representative from the most preposterously gerrymandered district in the country, NC-12, which snakes in a narrow band across half the state to take in portions of Greensboro, Winston-Salem and Charlotte.  

More on the merits, Paul Sperry at Investors Business Daily in its July 29 edition has a long piece on Mr. Watts and FHFA.  Watts is one of, if not the, leading advocates of "flexible underwriting" as a means of increasing home ownership among low income groups.  IBD gives some of the history:

On the eve of the financial crisis, Watt actually proposed the creation of the regulatory agency he now seeks to run — only, he designed it not to reform Fannie and Freddie but to pressure them to underwrite even more affordable housing, exposing them to even more risk.  The bill he co-sponsored with then-banking panel Chairman Barney Frank — the Federal Housing Finance Reform Act of 2007 — would have forced the federally backed mortgage giants to meet even tougher quotas for affordable lending, while contributing to an "Affordable Housing Fund" to rebuild blighted urban areas.  "The real benefit of this bill is that it will provide a big stimulus for more affordable housing," Watt said at the time, ignoring concerns the agencies already were overexposed to low-income loans.

Shortly after Watt's proposed bill to let Fan and Fred inflate things even further n 2007, the twins collapsed to the tune of a direct $189 billion cost to the taxpayer, not to mention the additional indirect costs of the financial crisis.   A further article from IBD on May 6 lists some of the proposed reforms to Fan and Fred that Watt resisted and voted against over the years:  for example, a proposal to require them to hold more capital, and a proposal to cut off their line of credit from the Treasury.

Of course what occurred in 2008 and after was that Watt's "flexible underwriting" turned overnight into "predatory lending."  Suddenly the banks that had had the chutzpah to follow Fan and Fred's guarantees into making sub-prime loans turned instantly from good guys providing "affordable housing," into bad guys leading the unsuspecting and unsophisticated into underwater mortgages from which there was no escape.

IBD points out that there is no indication that Watt has changed his views, and every reason to believe that he will use his post at FHFA to goad Fan and Fred into inflating the next housing bubble as fast as possible and to make it as big as possible.  Is there any possible good that can come of this?  Does Watt, or his sponsor President Obama, really believe that it helps the intended beneficiaries to use Federal guarantees to get people of low income and iffy credit into large loans that they can barely afford?  Well, we're now getting started on another round of that, with little to no chance that it will come out any better than the last round.

Our "Disinterested, Neutral, Expert" Regulators In Action

The theory under which we have dozens of Federal and state regulatory agencies overseeing our economy is that they are disinterested, neutral experts who can set fair and just rules and oversee a transparent and clean marketplace.  Another theory is that they are venal and self-interested human beings like everyone else, having as their primary goals personal advancement and self-aggrandizement and caring little or not at all about the public interest.

So let's consider an example or two.  Back on July 1 in a post entitled Annals of Government Self-Promotion, Big Bank Edition, I considered the large number of huge recent settlements between government regulators (state and Federal) and big banks, and suggested that it would make sense to look at them as a "very sick game of government aggrandizement" whereby the government passes big profits to the banks by keeping interest rates low, and then "any Federal agency that wants its name in the paper can pick one of the big banks and go out and get at least a few hundred million" by purporting to enforce some incomprehensibly complex regulation. 

Well, the tide continues.  Last week J.P. Morgan put out its latest earnings release for the second quarter of 2013, showing net income of $6.5 billion for the quarter -- a very large number, clearly blown up by the continuing if perhaps slightly diminished efforts of the Fed to keep the banks' cost of funds at or near zero.  And literally days later comes a big front page article in the Wall Street Journal that yet a new Federal agency, this time the Federal Energy Regulatory Commission (FERC) is about to hit up JPM for a few hundred mil.   And yes, there on page 2 in the print edition, there is a photo of FERC Chairman Jon Wellinghoff, formerly obscure energy regulator now launched into greatness by his realization that he just needed to go after the right designated villain for some big money.

What is the alleged wrong?  The WSJ article says "market manipulation," but a July 22 article here at Reuters goes into more detail.  Seems that there are basically two electricity markets in California, one for the next day and the other immediate.  JPM figured out that there were pricing discrepancies between the two markets such that it could bid one price in one and a different price in the other, and almost always make money:

JPMorgan's trading strategy, the ISO said, was to submit bids [in the day-ahead market] with high minimum load costs but exceptionally low - sometimes negative - power prices, making them attractive enough for the grid to schedule the plant to run the next day.  But in the following day's real-time market, JPMorgan would change its prices, submitting very high bids that discouraged the grid from "dispatching," or running, the plants.  That would leave the unit running below its minimum level or not at all, triggering a "minimum load" payment to cover those costs.

Is it just me, or that basically just smart trading?  I thought the whole idea of trading for a financial player was to figure out a strategy to exploit pricing discrepancies between different markets or between similar but not identical products so that you could make money no matter which way the market went.  Go long on the stock and short on the option, or long on the convertible debt and short on the stock, or something like that. 

According to the WSJ, the question of whether to settle has divided executives at the bank.  The head of commodities trading was taking the position that "these employees and the bank did nothing wrong."  Maybe not, but that's not how this game is played.  These Federal regulators must not be embarrassed, and must get their names in the paper, and hey, we just earned $6.5 billion as a back door gift to enable the game to go forward.  So the word is that a settlement of around $400 - 500 million is in the works.

I wonder which agency will get the next one? 

Meanwhile, Fortune Magazine in the June 28 edition carries a big story on the rebirth of Fannie and Freddie.  Remember them?  They are the giant "mortgage twins" who securitized and/or guaranteed most of the housing mortgage market, leading to the housing bubble and the financial crisis.  Oh, and they "stuck the taxpayers with a $189 billion bailout bill after their collapse in 2008."  Did you think that after that debacle they were being wound down or phased out?  Guess again.

It seems that in order to conduct "quantitative easing" I, II, III or whatever we are now up to, the Fed needs to buy some $85 billion of bonds per month.  Where to get them?  Well, they have decided that Fan and Fred debt qualifies.  Thus, buy as much as you can, as fast as you can, with the infinite checkbook.  You probably have already guessed where this is going.  First, Fan and Fred get far more money for housing finance with far lower cost of funds than any other player can even approach.  So nobody else can compete with them in buying up and securitizing mortgages.  So the Fan/Fred market share in buying and/or guaranteeing mortgages soars, now back to about 80%. 

But isn't this exactly what got us into the last mess?  As far as I can tell, yes.  All orchestrated by the disinterested, neutral experts at the Fed, who have just multiplied their own balance sheet by a factor of about 5 in the last few years.  Thankfully, no self interest involved there. 

In other news from the Fed, today's WSJ, page 1, reports that none other than Larry Summers is one of the leading candidates to replace Ben Bernanke as head of the Fed.  Larry Summers, former President of Harvard, is the guy who's so smart that he knows that more spending causes less debt and less spending causes more debt.   At the Manhattan Contrarian, we have dubbed him the man among all men with "more credentials and less actual competence."  But he does know to say the most ridiculous of things that the President wants said.  Make him head of the Fed!  He'll be a good "disinterested, neutral expert."

UPDATE, July 26:  I was thinking more about this last night and I suddenly realized that the alleged wrong of JPM in the California electricity matter is that its trading somehow marginally increased the cost of electricity in California to consumers.  Wait a minute!  California has an entire "cap and trade" carbon restriction scheme, the whole idea of which is to artificially increase the cost of electricity to consumers.  Does FERC not understand that that's how to save the planet?  JPM, I have figured out your defense!   

So, New York Times, What Form Of Energy Generation Is Acceptable?

My eye just happened to catch the editorial in Sunday's New York Times celebrating the impending removal of a large power-generating dam on the Penobscot River in Maine.  To the Times, this is a great thing: 

 [Demolition of the dam is] critical to the entire Penobscot River watershed, which covers nearly a third of the state. Thanks to the work of the Penobscot River Restoration Trust and its partners, the lower river will be free-flowing once again, allowing the revival of a complex migratory ecosystem once teeming with fish working their way up from the sea.

Of course, there is no mention in the editorial of how much power is produced by this dam, or what source Maine is going to use to replace it.  Perhaps the Mainiacs are just supposed to reduce their power usage?

Wouldn't you have thought the New York Times would love hydropower?  It's "renewable," and, unlike wind and solar, it works all the time and doesn't need back-up capacity from the hated fossil fuels.  Sure it has some impact on the environment, but so do wind and solar.   Wind and solar take vast amounts of land to generate small amounts of power, and then they go dead at night for solar and on calm days for wind. 

And how about the thousands of birds killed by wind turbines?  If you haven't seen it, check out this article from Britain's Mail Online from June 27.  The headline is:  

Rare bird last seen in Britain 22 years ago reappears - only to be killed by wind turbine in front of a horrified crowd of birdwatchers

It seems that a group of some 40 bird enthusiasts went out to a remote Scottish island to see a rare "white-throated needletail," a type of bird not observed in the area for decades.  Even as they were observing the bird, it was smacked out of the sky and killed by a wind turbine.  There is a video of the killing at the link.   Is hydro's environmental impact really worse?

Hydro produces meaningful amounts of reliable power -- 7% of total power and 19% of the electricity in the U.S., according to this from the U.S. Geological Survey.  Get rid of that, and where do you go?  Fossil fuels (coal, oil, natural gas) are obviously the dominant option -- filling 82% of U.S. energy demand according to this from the Institute for Energy Research.  The New York Times hates all fossil fuels with a huge passion.  (it thinks that fossil fuels cause "climate change.")

Well, the New York Times likes wind.  According to this from Forbes, with huge government subsidies wind had made it up to 3.5% of U.S. electricity generation by 2012 -- which makes it well less than 2% of total power generation.  (No wind-powered cars!)  The Forbes article notes that the large increase in wind capacity over the last few years was largely driven by Federal tax credits that effectively offset about 30% of the cost of building the turbines.  But the tax credit ended on January 1, 2013.  Without that, wind goes from being somewhat uncompetitive to extremely uncompetitive.  Meanwhile, solar is stuck at less than 1% of capacity and is so expensive that massive government subsidies have not made it go anywhere. 

Is there any option left with the prospect of generating enough power to keep this economy going?  As far as I know, there's exactly one: nuclear.  According to this from the World Nuclear Association, nuclear generates about 19% of U.S. electricity, which would put it at somewhat less than 10% of total power generation.  Oh, but not a single new nuclear plant has been built and opened in the U.S. since the Three Mile Island incident in 1979 emboldened the regulators to make the approvals impossible to get.  The regulatory tourniquet was loosened a bit a few years ago, and according to the the WNA, there are now a total of three nuclear plants under construction in the U.S.  That may or may not be enough to replace the old ones being retired over the next few years.  And then there was the Fukishima incident in 2011.

To its partial credit, the Times has spoken modestly in favor of nuclear power, at least as recently as 2010.   Since Fukishima?  Not that I can find.  Needless to say, its friends from groups like Greenpeace, NRDC, and WWF are passionately against nuclear.

I can say that a few years ago I attended an event at the apartment of the then head of the New York Times editorial board, and she definitely had electricity there.  I seriously doubt that she is ready to give it up.  It's just that, in the New York Times mindset, things like electricity come from the tooth fairy. 

Can New York Learn Any Lessons From Detroit?

The good news about Detroit's bankruptcy filing is that it is causing lots of news coverage of that city and how it got where it is.  While most people may have been vaguely aware that Detroit was not doing too well, not many outside Michigan have known the full magnitude of the disaster:  loss of almost 70% of the population since 1950; going from America's wealthiest large city in 1960 to the poorest today; nearly 70,000 abandoned houses; houses for sale for $1000 or even $1 with no takers; most parks closed and almost half of streetlights out; highest murder rate in the country but police response time almost an hour; etc., etc. 

This is the end game of Progressive government.  Here's the recipe:  be the highest tax jurisdiction in the vicinity; agree to generous pensions and benefits for unionized city workers in return for their working to get you re-elected; get as many people as possible into dependency and handouts; have a business environment hostile to start-ups and entrepreneurship while doing big-time crony-capitalism and show projects to get politicians' names in the papers and generate political contributions (e.g., Renaissance Center, casinos, new stadiums, the GM Poletown plant, the People Mover, etc., etc.).  Of course, the demise of the UAW-ized auto industry didn't help, but that's only a reason why Detroit declined faster than other Progressivized cities, not a reason it was in decline to begin with. 

The lessons appear incredibly obvious, screaming out to anyone who will look.  Is it possible not to see?  Well, yes.  The last few days since Detroit's bankruptcy filing have brought out of the woodwork advocates for a Federal bailout, giving every possible reason why Detroit's situation has nothing to do with failed Progressive policies and instead comes from something else.  Here, for example, is John Nichols today in The Nation, giving his explanation of the sources of Detroit's problems:

But only the most deliberately disengaged commentator would imagine Washington to be blame-free in all this. America’s urban communities—and many not-so-urban communities—have for decades been battered by free-trade policies that foster deindustrialization, by tax policies that encourage offshoring, by all the missteps and misdeeds of Congress and successive presidents.

Funny, John, how those policies of Congress didn't seem to affect Atlanta, or Houston, or Charlotte, or Dallas, or Phoenix, or lots of other growing cities that didn't follow the Progressive prescriptions.  And, of course, the conclusion of Nichols' piece is, since Congress caused the problems, it is up to Congress to solve them, with, of course, a bailout.  Also joining the call for a bailout is Steven Rattner (former "Czar" of the GM bankruptcy) in Saturday's New York Times.

I'm actually somewhat amazed that President Obama and his team haven't been offering up a bailout -- do they actually realize that the Federal government might have some limits?  Well, probably the calculation is far more cynical than that.  They have to realize that all public focus on Detroit can only make people realize that the policies that have brought Detroit to ruin are very much the same policies that Obama is bringing to the whole country.  Let alone that an offer of a bailout to Detroit would have Cleveland and Philadelphia and Baltimore immediately in line, with Chicago next, and the entire state of California following and looking for maybe a trillion.  They still may do it, but I'm betting against it.

And back here in New York, are we capable of learning any lessons from this?  The funny thing is, 40 years ago in the 70s, New York looked very much to be going the way of Detroit, at least in the early stages.  Our taxes got way, way above the neighboring states (19% combined top state/city income tax rate in the 70s vs. 0% for NJ and CT at that time), and we lost about 12% of the population in that decade.  But New York's tax rates were cut dramatically in the late 70s and early 80s.  And now since 1994 we have had almost 20 years of Republican or semi-Republican mayors in the City, during which we have had huge declines in the crime rate (murders dropping from about 2200 to about 500 per year), welfare dependency cut to about one-quarter the previous level, professional management of city services, and, for the most part, a lid on tax rate increases.  And the City has come way, way back.

Yet the Democratic candidates for mayor are competing in offering new Progressive prescriptions, from increased "affordable housing," to easing up on access to cash welfare, to universal pre-K, to, of course, paying for it all by increasing taxes on the high earners.  Can someone please shout the word "DETROIT" at them every time they appear in public?