Pasadena Sub Rosa

THE CASE AGAINST PASADENA'S JOHN BRYSON

The Case Against John Bryson

By David Bier - The Competitive Enterprise Institute

August 03, 2011

President Obama's nominee for secretary of commerce, John Bryson, is a terrible choice for a Cabinet department ostensibly dedicated to promoting economic growth and job creation. In fact, Bryson has made a career out of undermining both. Over the years, he has used his government connections to game the political process and receive billions in bailouts and subsidies. America does not need any more crony capitalists in high places.

Bryson's began as a regulator in California in 1976, when then-Gov. Jerry Brown appointed him to the State Water Resources Control Board. In 1979, Brown appointed him to chair California's Public Utilities Commission (PUC). As chairman, he deliberately drove up electricity rates by using fixed-rate contracts that passed the costs of massive wind energy projects on to consumers.

Bryson readily acknowledges the effects of his policies during this period. "What California has done is knowingly incur higher cents per-kilowatt-hour costs," he boasted in 2009. "They're substantially higher than the U.S. average in order to invest in the kind of systems we have in California. ... That's been part of the regulatory environment for the investor-owned utilities as long as I've been close to it."

As PUC chairman, Bryson helped create a regulatory structure that fixed utilities' profits at a percent of costs. As a result, the utilities make money not by bringing costs down and selling more electricity, but by raising costs with unnecessary, expensive and redundant projects.

Moving from government to industry, Bryson parlayed his intimate knowledge of the regulatory landscape - which he helped create - into a high-level position with the utility Southern California Edison in the mid-1980s. After rising to CEO of parent company Edison International, he then used his government connections to make a series of cushy political deals for the utility.

As part of the Golden State's phony electricity deregulation of the mid-1990s, Edison and other utilities lobbied for a bill in the California legislature that would allow them to pass the costs of their poor investments onto ratepayers. The bill passed the legislature and was signed into law by Gov. Pete Wilson in 1996. Literally overnight, California ratepayers were put on the hook for $27 billion - nearly $3,375 for every family in California.

The deal was a bailout, and it wouldn't be Edison's last. Just five years later, Edison was heading toward bankruptcy and back in Sacramento begging for more taxpayer dollars.

Edison executives and employees gave Gov. Gray Davis nearly $350,000 in campaign contributions, and Bryson used the close relationship to secure another rescue. The state agreed to purchase Edison's electricity transmission system for $3 billion, twice the system's value, but enough money to save Edison from bankruptcy. As a result, Bryson was able to retire in 2008 with a $65 million severance package.

Since retiring from Edison, Bryson has served on a number of corporate boards, including BrightSource Energy and Coda Automotive - both of which rely heavily on government support. Coda is a major beneficiary of electric car subsidies from the Obama stimulus package. BrightSource, where Bryson serves as board chairman, has received one of the largest one-time loan guarantees ever - $1.6 billion to build a solar energy project in California.

A commerce secretary ought to believe in commerce - the voluntary exchange between entrepreneurs and consumers that is the source of real prosperity. Bryson, however, makes it no secret that he lacks faith in free enterprise. For years, he has advocated for energy efficiency standards like the ones that banned the incandescent light bulb and gave Americans low-flow toilets and washers that don't get clothes clean.

Bryson's career demonstrates that he trusts politicians and bureaucrats, not businesses competing in the market, to drive the economy. Just as voters in 2010 rejected bailouts and subsidies for politically favored businesses, the Senate should reject the confirmation of John Bryson.

 

TEA PARTY: DEBT REDUCTION WITHOUT DEREGULATION = DISASTER

The collapse of America's middle class
By Spengler 

People seem to act irrationally when they have nothing to lose. Often we observe in wars that the losing side expends more blood and treasure after its position becomes hopeless. 

The American South sustained most of its casualties in the Civil War after July 1863, when the dual defeats at Gettysburg and Vicksburg made its position untenable. Athens suffered its worst casualties in the Sicilian gamble at the end of the Peloponnesian War. 

The Spanish ruined their empire and depopulated their core

  
provinces during the second half of the Thirty Years War of 1618-1648 rather than cede dominance to France. Germany took most of its casualties after Stalingrad. Japan was prepared to absorb an arbitrarily large number of casualties after Okinawa, and its resistance was terminated only by nuclear attack. 

Some aspects of the apparently suicidal behavior observed in great wars may be at work in the present budget stalemate in Washington, where the Republican right and the Democratic left yet may undo a compromise. I do not think this will happen - yet. But the extremes of polarization in the American body politic are different from anything I have seen in my lifetime. 

If the Tea Party wanted most of all to govern, it would declare that a split government cannot accomplish the agenda on which its members were sent to congress, and that the 2012 presidential election would become a national referendum on America's future. It would then agree to an interim compromise on the debt ceiling. 

The trouble is that both the Tea Party and President Barack Obama have existential reasons to force a crisis. Obama, as I wrote two weeks ago, faces probable defeat with a becalmed economy, and may benefit from a crisis in which he casts himself as savior-in-chief (see Obama could stir a Tea Party crisis, July 19). The Tea Partiers may conclude that no compromise will benefit them, and decide to take the system down in revenge. 

There is an underlying economic motive for this confrontation: the cure for the American economy is not necessarily a cure for the majority of the American middle class. The only recovery thus far (and the only recovery possible under the circumstances) has occurred in corporate profits and equity prices. 

But this benefits only the small minority of wealthy American families who hold financial assets. The majority of Americans hold most of their wealth in real property (mainly their own homes). They have had no recovery and have no prospect of one. And the quickest path to recovery is one that offers few benefits to them. 

The home price bubble drew on a flood of foreign investment in American mortgage-backed securities and other assets; Americans saved very little, because foreigners shipped their savings to America. 

After the crisis, savings rose sharply, and the current account deficit shrank by half. That is just what was supposed to happen; from a macroeconomic viewpoint, that was the reason a crisis was necessary in the first place. 

Savings stagnated as current account deficit widened 
– and reversed after the crisis 

Source: Bureau of Economic Affairs 

The savings of the rest of the world, in short, invested in an already overbuilt American housing market that has few prospects for recovery. The toothpaste can't be squeezed back into the tube. America needs to compensate for its years of under-saving, and the normal way to do that is to export more to other countries and save the proceeds (or, correspondingly, to import less). The reduction in the current account deficit is the correct outcome, particularly as it is driven by a jump in exports. 

US exports of goods and services 

Source: Bureau of Economic Affairs 

Only a tiny proportion of the American labor force, though, contributes to the rise in exports. Manufacturing in the US is so capital-intensive that a substantial increase in output has a negligible impact on employment. 

America is exporting and saving. An increase in savings is the same thing as an increase in demand for assets. But the asset of choice of the late 1990s and 2000s, namely housing, continued to suffer from declining demand. 

Home prices (30 major metropolitan markets)

Source: S&P Case-Schiller Index 

Housing faces a demographic headwind that may last indefinitely, as I showed in a May 2009 study for First Things entitled "Demographics and Depression." As I wrote:

America's population has risen from 200 million to 300 million since 1970, while the total number of two-parent families with children is the same today as it was when Richard Nixon took office, at 25 million. In 1973, the United States had 36 million housing units with three or more bedrooms, not many more than the number of two-parent families with children - which means that the supply of family homes was roughly in line with the number of families. By 2005, the number of housing units with three or more bedrooms had doubled to 72 million, though America had the same number of two-parent families with children.

This will get worse, not better: The Virginia Tech economist Arthur C Nelson predicts that American households with children will comprise just a quarter of the total by 2025 compared to half in 2010 as the Baby Boomers retire, and that demand for large-lot single family homes will fall by 40%. 

That leaves most American households deeply in the hole: according to the Federal Reserve's most recent survey of personal wealth, American households' real estate is worth about a third less than it was in 2006, that is, $16.1 trillion compared to $22.7 trillion. The problem is that most Americans approaching retirement age in 2007 had most of their net worth in non-financial assets. 




Apart from real estate, the next-largest component of middle class wealth was in the form of equity in small businesses. Small business has had no share in the recovery. A rough gauge of small business income is non-farm proprietors' income as reported in the gross domestic product (GDP) tables. 

As the table below indicates, corporate profits have soared to a record, but proprietors' income remains below the pre-recession peak. Judging from the surveys published by the National Federation of Independent Business and other organizations, small business remains in a slump. That is not surprising, for reasons spelled out in a recent study by New York Federal Reserve economists. Most small business growth during the past decade followed the housing bubble. 



Corporate profits surge while
proprietors' income stagnates 

Source: Bureau of Economic Affairs 

As corporate profits rose, so did stock prices. The trouble is that the top 10% of American households by net worth own roughly 80% of all the stocks owned by households. That does not take into account corporate pension funds, to be sure, the vehicle through which the less affluent usually participate in the stock market. 

Nonetheless the vast majority of American households concentrated their wealth in housing during the decade before the crash, and for apparently good reasons. With home prices rising at 10% a year and banks demanding a 10% down payment or less for most mortgages, the rate of return on equity for a homeowner on such terms was often 100% per year. No other asset class offered a fraction of the returns available to the general public. 

America's path to recovery lies through exports. There is no way around this. The growth rate of emerging nations with young populations struggling to enter the modern world far exceeds that of mature economies, including the United States. Americans need to save, and exports generate income to be saved. But the kind of exports at which America excels, including farm products, employ a tiny fraction of the workforce. And the financial benefits to the turnaround - in the form of higher equity prices - accrue mainly to the top 10% of American households. 

The Tea Party reflects the frustrations of the middle class, especially the middle-aged middle class in places where you can’t sell a home, maintain a business, and fund a retirement. It believes that cutting the deficit is the problem, and a balanced budget is the solution. They are half right. The federal deficit is the monster that gobbled up the credit markets. The growth in federal borrowing corresponds almost exactly to the decline in mortgage borrowing. 

Mortgage borrowing collapses while federal 
government borrowing surges 

Source: SIFMA 

Eliminating federal borrowing (which at present would mean reducing government payments equivalent to 10% of GDP) would not, however, lead to a recovery in mortgage borrowing, but an economic crash on the scale of 1933. The notion that a balanced budget would solve America's problems has the stench of a millennial cult. America is spending far too much, and needs to restore its finances. 

But that requires economic growth and rising tax revenues, and a massive cut in spending would bring about neither. For that, America needs deregulation and tax cuts - and that means living with a deficit for a while longer. It was Ronald Reagan who shocked conventional wisdom in the early 1980s by telling the country not to worry about the deficit while his tax cuts restarted the economy. 

The Tea Party has the chance to become a catalyst for fundamental economic change. But it remains at risk of becoming the Ghost Dance of the American housing bubble, a millennial movement inspired by sinking circumstances, like the pathetic resistance of the defeated Plains Indians after 1890, or the New Guinea Cargo Cults of the 1940s. The economic cure America requires will benefit the beleaguered middle class slowly, and too late to prevent misery for many of them. 

If economic fundamentals leave the middle class in the cold, they have put the core constituency of the hard left into the deep freeze. The welfare state is collapsing because the money isn't there to support it. State and local governments have eliminated 400,000 jobs since August 2008, and are cutting spending at a 2.4% annual rate. That eviscerates the so-called public service unions, the core of the Democratic Party's activist constituency. 

The poorest and least-educated Americans, moreover, have seen no recovery at all. High-school dropouts have a reported unemployment rate of 13%, while Americans with a bachelor's degree have an unemployment rate of 4.5%. The discrepancy is much worse, because the labor force participation rate of high-school dropouts is only 46%, against 77% for college-educated workers. 

Neither the middle-class Republicans who support the Tea Party, nor the core Democratic constituencies who elected Barack Obama, have much of a stake in the outcome of the budget debate. That explains why the debt ceiling has turned into a cliffhanger, to the consternation of financial markets. 

I do not think America will go over the brink this time. The Tea Partiers ultimately will accept the argument that they have to keep some dry powder for the 2012 presidential election. But the polarization of American politics will get worse, not better, and the crisis of American governance will be delayed but not defused if congress and the president reach a budget agreement this week. 

Spengler is channeled by David P Goldman. Comment on this article in Spengler's Expat Bar forum. 

TEA PARTY GETS BIGGEST BUDGET CUT IN 15 YEARS

from Wall Street Journal

A TEA PARTY TRIUMPH

If a good political compromise is one that has something for everyone to hate, then last night's bipartisan debt-ceiling deal is a triumph. The bargain is nonetheless better than what seemed achievable in recent days, especially given the revolt of some GOP conservatives that gave the White House and Democrats more political leverage.

***

The big picture is that the deal is a victory for the cause of smaller government, arguably the biggest since welfare reform in 1996. Most bipartisan budget deals trade tax increases that are immediate for spending cuts that turn out to be fictional. This one includes no immediate tax increases, despite President Obama's demand as recently as last Monday. The immediate spending cuts are real, if smaller than we'd prefer, and the longer-term cuts could be real if Republicans hold Congress and continue to enforce the deal's spending caps.

The framework (we haven't seen all the details) calls for an initial step of some $900 billion in domestic discretionary cuts over 10 years from the Congressional Budget Office (CBO) baseline puffed up by recent spending. If the cuts hold, this would go some way to erasing the fiscal damage from the Obama-Nancy Pelosi stimulus. This is no small achievement considering that Republicans control neither the Senate nor the White House, and it underscores how much the GOP victory in November has reshaped the U.S. fiscal debate.

No wonder liberals are howling. They have come to believe in the upward spending ratchet, under which all spending increases are permanent. Not any more.

The second phase of the deal is less clear cut, though it also could turn out to shrink Leviathan. Party leaders in both houses of Congress will each appoint three Members to a special committee that will recommend another round of deficit reduction of between $1.2 trillion and $1.5 trillion, also over 10 years. Their mandate is broad, and we're told very little is off the table, but at least seven of the 12 Members would have to agree on a package to force an up-or-down vote in Congress.

If the committee can't agree on enough deficit reduction, then automatic spending cuts would ensue to make up the difference to reach the $1.2 trillion minimum deficit-reduction target. One key point is that the committee's failure to agree would not automatically "trigger" (in Beltway parlance) revenue increases, as the White House was insisting on as recently as this weekend. That would have guaranteed that Democrats would never agree to enough cuts, and Republicans were right to resist.

Instead the automatic cuts would be divided equally between defense and nondefense. So, for example, if the committee agrees to deficit reduction of only $600 billion, then another $300 billion would be cut automatically from defense and domestic accounts (excluding Medicare beneficiaries) to reach at least $1.2 trillion.

This trigger is intended to be an incentive for committee Members of both parties to agree on more cuts, but defense cuts of this magnitude would do far more harm to national security than they would to domestic accounts that have been fattened by stimulus. This is the worst part of the deal, and Mr. Obama's political goal will be to press Republicans to choose between tax increases and destructive defense cuts. The GOP will have to fight back and make the choice between domestic cuts and harm to our troops fighting multiple wars.

While the "trigger" includes no revenue increases, the committee itself could agree to raise taxes to meet the $1.2 trillion deficit reduction target. This means GOP leaders Mitch McConnell and John Boehner have to be especially careful in their choice of appointees. No one from the Senate Gang of Six, who proposed tax increases, need apply. The GOP choices should start with Arizona Senator Jon Kyl and House Budget Chairman Paul Ryan, adding four others who will follow their lead.

One reason to think tax increases are unlikely, however, is that the 12-Member committee will operate from CBO's baseline that assumes that the Bush tax rates expire in 2013. CBO assumes that taxes will rise by $3.5 trillion over the next decade, including huge increases for middle-class earners. Since any elimination of those tax increases would increase the deficit under CBO's math, the strong incentive for the Members will be to avoid the tax issue. This increases the political incentive for deficit reduction to come from spending cuts.

Mr. Obama's biggest gain in the deal is that he gets his highest priority of not having to repeat this debt-limit fight again before the 2012 election. The deal stipulates that the debt ceiling will rise automatically by $900 billion this year, and at least $1.2 trillion next year, unless two-thirds of Congress disapproves it. Congress will not do so.

Given how much the current debate has damaged the public perception of Mr. Obama's leadership, this will be a relief at the White House. This is part of the negotiating price that Mr. Boehner had to pay because of the back-bench revolt that showed he couldn't guarantee a debt-limit increase with only GOP votes. This gave Democrats more leverage.

***

The same supposedly conservative Republicans and their talk radio minders may denounce this deal as a sellout, but we'll be charitable and assume they've climbed so far out on the political ledge they don't know how to climb back without admitting they were wrong. They're right that this deal doesn't "solve" our fiscal crisis, but no such deal is possible as long as liberals run the Senate and White House.

The debt ceiling is a political hostage the GOP could never afford to shoot, and this deal is about the best Republicans could have hoped for given that the limit had to be raised. The Jim DeMint-Michele Bachmann-Sean Hannity alternative of refusing to raise the debt limit without a balanced-budget amendment and betting that Mr. Obama would get all the blame vanishes upon contact with any thought. Sooner or later the GOP had to give up the hostage.

The tea partiers pride themselves on adhering to the Constitution, which was intended to make political change difficult. Yet in this deal they've forced both parties to make the biggest spending cuts in 15 years, with more cuts likely next year. The U.S. is engaged in an epic debate over the size and scope of government that will play out over several years, and the most important battle comes in the election of 2012.

Tea partiers will do more for their cause by applauding this victory and working toward the next, rather than diminishing what they've accomplished because it didn't solve every fiscal problem in one impossible swoop.

 

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