Man-bites-dog story: French Socialists pursue government spending cuts

Perhaps there’s another way in which American government leaders can learn a lesson from France. The latest issue of Bloomberg Businessweek offers details.

During his 27 months in office, French President François Hollande has consistently disappointed his countrymen with predictions of economic recovery that haven’t materialized. Now the beleaguered Hollande is trying to quell a revolt within his own Socialist Party.

On Aug. 26, he named a new cabinet, ousting ministers from the party’s left wing who attacked his plans to curb government spending and ease taxes on business. In an interview with Le Monde on Aug. 23, Economy Minister Arnaud Montebourg said it was “absurd” for Hollande to propose spending cuts when the economy has barely grown in three years and unemployment exceeds 10 percent. Three days later, Montebourg was out of a job, replaced by a 36-year-old supply-side reformer named Emmanuel Macron. …

… Soon after taking office, Hollande started raising tens of billions in new taxes, mainly on businesses and high-income households. Social benefits and other government spending were left largely untouched, along with rigid labor rules that crimp French companies’ competitiveness. The government “tried to postpone the day of reckoning, hoping that there would be a European recovery” that would lift the economy enough to avoid difficult reforms, says Bruno Cavalier, chief economist at Oddo Securities in Paris. Instead, France Inc. slashed investment and hiring, forestalling a rebound.

Earlier this year, Hollande made a policy U-turn. He named a new market-oriented prime minister, Manuel Valls, and promised some €50 billion ($66 billion) in budget savings over the next three years to help offset lower payroll taxes on business. The plan is “exactly what Mr. [European Central Bank President Mario] Draghi would call growth-friendly,” Cavalier says.

Barron’s D.C. man exposes some flaws in the federal regulatory process

Remember when the financial crisis prompted lawmakers on Capitol Hill to promise to “do something”? Jim McTague of Barron’s does. He offers an update on the new regulatory “crackdown” in his latest “D.C. Current” column.

The Securities and Exchange Commission on Wednesday adopted two related rules aimed at preventing a repeat of the 2008 financial-market collapse, four years after being instructed to do so by Congress within the 849 pages of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The snail’s pace reflects the SEC’s penchant for carefully crafting regulations acceptable to both the wolves of Wall Street and the trusting sheep of Main Street. Leaving the wolves some teeth supposedly makes the ecosystem better for everyone when, in fact, it’s the SEC that could benefit from some fangs.

The rules will become effective in the not-too-distant future.

The first rule demands more detailed disclosures of credit quality from the issuers of mortgage, car-loan, and other asset-backed securities, the instruments at the center of the financial markets’ colossal collapse. The intent is to reduce investor reliance on the credit-rating agencies, such as Standard & Poor’s and Moody’s (ticker: MCO), that in the view of many investors contributed mightily to the disaster through shoddy workmanship.

The second rule is aimed at eliminating the conflicts of interest within the credit-rating agencies that led them to rate risky asset-backed securities as high-quality credits and, in turn, enabled issuers to sell even more of these polecats to unsuspecting investors expecting prime beef. …

… The SEC believes that transparency will attract burned investors back to the asset-backed securities markets, boosting the housing, auto, and equipment-leasing industries. The agency could have been tougher, but Wall Street whined about higher compliance costs. The new regulation applies only to registered securities, not private placements. And it doesn’t cover some important asset classes, such as student and inventory loans, according to Americans for Financial Reform, a Washington, D.C.–based nonprofit group.

THE SECOND RULE is aimed at preventing a credit-rating firm’s analysts from being influenced by management’s pursuit of profits. Of course, the most direct way to ensure this would be for investors to pay for the ratings. Perish the thought that the SEC should try to upend the status quo.

Barron’s editorial page editor tackles the Burger King boogie to Canada

Thomas Donlan‘s latest editorial commentary for Barron’s delves into Burger King’s plans to move operations north of the Canadian border.

Tim Hortons earned more than $425 million last year, which is about twice what Burger King earned, even though the stock market value of each company was about the same before the deal was announced.

On the other hand, Burger King is probably the bigger taxpayer. The U.S. federal corporate tax rate is about 35% (and state taxes range up to 10 percentage points more), while the Canadian rate is about 15%. Even more importantly, Canada does not presume to reach into corporate profits earned in other countries the way the U.S. does.

Putting any multinational company outside the reach of the American universal tax man makes good sense, whether the method is a direct departure from the U.S., a foreign takeover of a U.S. firm, or a corporate inversion, which makes a departure look like a takeover.

Hush. We are not supposed to look at the tax implications of the merger of Burger King and Tim Hortons, which is this week’s prime example of an inversion. Warren Buffett, who is going to put $3 billion of Berkshire Hathaway money into preferred stock in the new venture, joins Burger King CEO Daniel Schwartz in denying that there will be significant tax benefits. The deal is all about creating the third-largest fast-food enterprise in the world, they say.

Talk about a whopper. Burger King and Tim Hortons have aspirations for growth with opportunities primarily outside of North America. Neither Burger King nor a combined company can earn as much from foreign revenues if they have to pay whopping big U.S. taxes on their offshore profits.

A Common Core exit strategy

Jim Stergios of the Massachusetts-based Pioneer Institute for Public Policy Research examines various states’ plans for disentangling themselves from Common Core.

Indiana’s repeal and replace bill showed how not to extricate a state from the Core. Governor Pence demonstrated little interest in policy or in educational quality; nor did he evince a clear vision of truly public process. The truncated effort to develop new “Indiana” standards led to an inside job led by proponents of the Core, it started with the Core as a foundational document, and it ended up with a product even worse than the Core, as Stotsky among others clearly demonstrated.

Oklahoma and South Carolina have taken a different path, and they are trying to build new state-led standards with real public processes. Oklahoma had the benefit of state standards that were in fact of higher quality than the Core. They are therefore going back to the drawing board and using the Oklahoma standards as a foundation stone. South Carolina has the benefit of very strong US History standards, but do not have strong ELA and math standards to draft off of.

That’s where Ohio comes in. Learning from Indiana’s disastrous effort and the good efforts in Oklahoma and South Carolina, Ohio’s HB597 is a huge step forward in that it not only rejects Common Core’s mediocre offerings, but it provides on an interim basis Massachusetts’ nation-leading standards as the new foundation to draft off of in developing new Ohio standards. The Massachusetts’ standards go into place for two years as Ohio educators, businesses, scholars and parents put their heads together in a truly public process—and develop, we hope, even better standards than what Massachusetts had.

And there are several points to be made in favor of states quickly adopting the MA standards for a two-year interim period while developing their own first-rate standards.

First, two years is ample time to engage local communities and constituencies in the kind of public process that upholds the public trust and also can gain the level of teacher buy-in that will help make new standards effective guidance. No such buy-in is possible with Common Core because of its lack of a public process.

Second, the interim adoption of the Massachusetts standards is a cost-effective exit strategy for Ohio and other states.

This idea might interest those who will be charged with coming up with better standards for North Carolina schools.

Shaking down banks to fund left-wing groups

Alex Adrianson of the Heritage Foundation’s “Insider Online” blog documents a disturbing story associated with the U.S. Justice Department’s recent mortgage-fraud settlements with the nation’s big banks.

So far, Left wing activist groups have netted $128 billion from so-called mortgage fraud settlements that the Department of Justice is negotiating with the big banks. Investor’s Business Daily reports the details of the racket, including the latest settlement with Bank of America:

Buried in the fine print of the deal, which includes $7 billion in soft-dollar consumer relief, are a raft of political payoffs to Obama constituency groups. In effect, the government has ordered the nation’s largest bank to create a massive slush fund for Democrat special interests.

Besides requiring billions in debt forgiveness payments to delinquent borrowers in Cleveland, Atlanta, Philadelphia, Oakland, Detroit, Chicago and other Democrat strongholds—and up to $500 million to cover personal taxes owed on those checks—the deal requires BofA to make billions in new loans, while also building affordable low-income rental housing in those areas. […]

BofA gets extra credit if it makes at least $100 million in direct donations to IOLTA and housing activist groups approved by HUD.

According to the list provided by Justice, those groups include come of the most radical bank shakedown organizations in the country, including:

• La Raza, which pressures banks to expand their credit box to qualify more low-income Latino immigrants for home loans;

• National Community Reinvestment Coalition, Washington’s most aggressive lobbyist for the disastrous Community Reinvestment Act;

• Neighborhood Assistance Corporation of America, whose director calls himself a “bank terrorist;”

• Operation Hope, a South Central Los Angeles group that’s pressuring banks to make “dignity mortgages” for deadbeats. […]

In effect, lenders are bankrolling the same parasites that bled them for the risky loans that caused the mortgage crisis. With new cash, they can ramp back up their shakedown campaign, repeating the cycle of dangerous political lending that wrecked the economy.

New Carolina Journal Online features

Dan Way reports for Carolina Journal Online on the potential statewide impact of a legal challenge involving rules for public behavior at the state legislative complex.

Terry Stoops’ Daily Journal examines a recent enrollment drop in North Carolina’s education schools.

Drawing the Wrong Conclusion XIV: the can’t-compete-with-lower-taxes edition

We learned this week that North Carolina offered the mad bribe of $107-friggin’-million in economic incentives to get Toyota to locate its North America headquarters in Charlotte, but lost.

Who won? Texas, with the relatively small bid of $40 million.

How on earth did North Carolina, offering over two-and-a-half times as much as Texas in incentives, lose to Texas? Some of it had to do with getting direct flights to Japan, but there was a bigger reason. Let Commerce Secretary Sharon Decker explain what happened:

Decker told the Observer that Texas’ low taxes meant the state didn’t have to offer as big an incentives package as North Carolina to be competitive.

“We were competing against a state without personal or corporate income taxes,” she said. “It’s a challenging competitive situation for sure.”

Could it be? Are we finally getting to the point where state leaders recognize the one glaringly obvious lesson buried in plain sight in the economic-incentives rationale? If a lower corporate tax rate for one industry would be attractive to the industry, then a lower corporate tax rate for every industry would be attractive to every industry.

What we need is the “all-comers economic incentive package” of eliminating the corporate income tax completely. Decker’s revelation would seem to appreciate that.

If a Texas-sized incentives package can’t beat out Texas because of its greater tax freedom, then maybe all the peer-reviewed research hullabaloo about lower tax rates being correlated with stronger economic growth is actually on to something!

Decker is in the news again this week, by the way. Here is what else she is involved in:

Pressure is building for Gov. Pat McCrory to call lawmakers back to Raleigh for a special session to pass economic incentives measures aimed at sealing the deal with companies considering North Carolina.

Top economic development and business officials on Wednesday joined Commerce Secretary Sharon Decker in calling for a special lawmaking period this year. Decker told the N.C. Economic Development Board at its meeting in Raleigh that job recruiters are “in a difficult spot” after the General Assembly’s failure in its just-ended session to add more money for Job Development Investment Grants and create a special, flexible fund aimed at closing deals in the latter stages of negotiations with companies.

What we have here is a Texas-sized blind spot.


Sure, we can’t compete with Texas because we have personal and corporate income taxes and they don’t. The solution is obvious, isn’t it? Even bigger incentives packages!

This week’s news is why I called Decker’s approach the “Dig UP, stupid!” approach to economic growth.

Previous entries in “Drawing the Wrong Conclusion”: I, II, III, IV, V, VI, VII, VIII, IX, X, XI, XII, and XIII.

Federal study: Hydraulic fracturing safe to proceed in California

The report, commissioned by the federal Bureau of Land Management, investigated possible effects of well stimulation technologies (WST) in California. It points out that potential energy resources are at shallower depths in California and normally require vertical rather than horizontal drilling and fracturing. The shallower depths made possible groundwater contamination more of a concern; however, the report found no instances of such contamination. Chemicals used were, with the exception of a few biocides (which are used to kill bacteria deep in the wells) and corrosion inhibitors, considered either low-toxic or nontoxic. There was no concern over any earthquake hazard, and risk of fugitive methane emissions was considered small.

All things considered, the report concluded, any direct environmental risks from hydraulic fracturing in California

appear to be relatively limited for industry practice of today and will likely be limited in the future if proper management practices are followed.

What about North Carolina?

Those who are interested — or concerned — about hydraulic fracturing in North Carolina are encouraged to read my Policy Report addressing a list of fracking concerns and my Spotlight on the chemicals used. And stay tuned; these are the first two reports in a series.