This morning we awoke to find that the New York Times Editorial Board and Redstate’s Erick Erickson had aligned themselves on an issue by both taking a shot at the American Energy & Infrastructure Jobs Act , a bill the House will consider next week. Usually when a situation like that arises, something’s amiss. And that is certainly the case today. It’s not surprising the New York Times hates the bill – it’s the most conservative plan for America’s infrastructure in anyone’s lifetime. That’s why Erick’s post this morning was so surprising. But there’s an explanation. Put simply, he has his facts wrong. I’ve known Erick a number of years, and he’s usually a straight shooter, but his critique this morning missed the mark – big time. If the bill did what Erick suggested, heck, we’d be against it too. So let’s clear up some things. For starters, let me explain quickly the central premise of the American Energy & Infrastructure Jobs Act . By breaking down government barriers, it expands domestic energy production and puts in place a long-term plan for America’s infrastructure that is controlled by the states and completely paid for –without raising the gas tax. The bill starts by opening up additional federal land for drilling and energy exploration and uses those royalties to shore up current shortfalls in the highway trust fund. Then, it completely overhauls the way highway spending is done and gives states the ability to set five-year plans to meet their local needs. Erick suggests that “spending will outpace income over the next five years” in the House bill. There’s no factual basis to support that claim. He’s right that, currently, the gas tax does not generate enough revenue to meet all the infrastructure needs in America. That’s why the energy component is so critical. Not only will more domestic drilling create jobs and address rising gas prices, the additional revenue that is generated will help fill in the funding hole. And because, as some have pointed out, it takes time for additional exploration to come online and royalties to come in, the bill also cuts spending in the short term – largely for federal workers – to make sure the plan won’t add a dime – ever – to our deficit. Erick also suggests that Washington would still be pulling the strings under the House bill. In reality, the plan eliminates federal mandates and returns control back to the states. There’s a reason President Obama’s Transportation Secretary called it “the worst transportation bill” he’s ever seen – it eliminates or consolidates 70 of his wasteful and duplicative federal programs. Currently, only about two-thirds of federal highway dollars go back to the states for them to control. Under this bill, it will be 93%. What’s more, for the first time in three decades, ALL of the gas tax revenue – the user fee paid by every motorist on the highways – will go to core highway programs. This means no more federal mandates to light a sidewalk or beautify a park. These core programs will provide state authorities with more flexibility and autonomy than ever, so that the states – not the feds – can determine how best to prioritize scarce resources. Perhaps Erick’s biggest whopper was to say “it raids government trust funds for pet projects.” The last highway bill had more than 6,300 earmarks – including the Bridge to Nowhere. This bill has zero. No earmarks. No pet projects. No more funneling your money to parochial interests. That is a sea change in Washington that conservatives should be proud of, not cloud with false statements like that. The only specific project the bill makes sure is approved is the Keystone pipeline, overruling President Obama’s cave to his environmental base. Some are questioning why we need to reauthorize highway spending at all. For starters, if we don’t advance conservative reform, the miserably broken system we currently have will persist. And, because of the reckless way highway spending was done under Democrats and Republicans in the past, the Highway Trust Fund will be insolvent within 16 months unless we fix it. Erick’s central, unfounded, argument seemed to be that conservatives had gone Keynesian. That’s ridiculous. No one is suggesting we need to build roads to create jobs. We’re suggesting you can’t have robust commerce and private sector growth without roads and bridges that work. It’s difficult to find anyone with more credibility on this issue than Speaker Boehner. He has never voted for a highway bill in his 21 years in Congress. Some who want to criticize this bill have. But the Speaker was one of only eight members of the entire House to vote against the 2005 bill that still lingers as a symbol of what Republicans did wrong last time we held the majority. The American Energy & Infrastructure Jobs Act seeks to right the wrongs of the past – not only of the misguided way the President has approached infrastructure, but also the way Washington has been hosing taxpayers on highway programs for decades. To review, this plan opens up drilling that President Obama has blocked. It approves the Keystone pipeline. It eliminates 70 wasteful government programs . It’s fully paid-for without a tax hike. It stops federal funding of sidewalks and bike paths. It allows states to control how highway dollars are spent. And it has no earmarks. Now, you see why the New York Times is so furious. Brendan Buck serves as Press Secretary for Speaker of the House John Boehner (R-OH).
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House Brings Conservative Reform to Broken Highway System
Jennifer Rubin, the Washington Post ‘s resident Romney campaign mouthpiece, has been joined by another conservative pundit in the “I left my dignity at the altar of Mitt Romney” club. This time, as you may have heard, the offender is Ann Coulter, whose support for the former Massachusetts governor (and lack of publicity to date leading up to her CPAC appearance next week) has led her to offer – in print – a full-throated (albeit screechy) defense of the biggest piece of baggage Romney possesses: the Massachusetts Health Care Reform Act of 2006, or ‘Romneycare.’ Coulter’s column, titled “ THREE CHEERS FOR ROMNEYCARE! ” (yes, the title is all caps in the original), provides a defense of Romneycare that simply and completely ignores both conservative objections and the reasons why it has been a dismal failure as policy. For example, she drops the names of people and organizations that supported it at the time, despite the fact that such supporters were few and far between (opposition was much more commonplace), and that many of those supporters have since publicly changed their minds. An example of this is her declaration that “A leading conservative think tank, The Heritage Foundation, helped design Romneycare, and its health care analyst, Bob Moffit, flew to Boston for the bill signing.” Fine – but what Coulter ignores is the fact that Heritage has since repudiated the idea of an individual mandate at any level, writing in an amicus brief (pdf) filed in a challenge to Obamacare that “since [the passage and implementation of Obamacare], a growing body of research has provided a strong basis to conclude that any government insurance mandate is not only unnecessary, but is a bad policy option .” Where she does acknowledge the obvious issues with Romneycare, Coulter simply throws mud at “Democrats” for ruining Romney’s beautiful program. She writes: What went wrong with Romneycare wasn’t a problem in the bill, but a problem in Massachusetts: Democrats. First, the overwhelmingly Democratic legislature set the threshold for receiving a subsidy so that it included people making just below the median income in the United States, a policy known as “redistribution of income.” For more on this policy, see “Marx, Karl.” Then, liberals destroyed the group-rate, “no frills” private insurance plans allowed under Romneycare (i.e. the only kind of health insurance a normal person would want to buy, but which is banned in most states) by adding dozens of state mandates, including requiring insurers to cover chiropractors and in vitro fertilization — a policy known as “pandering to lobbyists.” Philip Klein has deals with this claim appropriately at the Examiner : This is more silliness. To start, Romney signed the health care law with a smiling Ted Kennedy at his side knowing that Democrats had the votes to override any symbolic line-item vetoes of certain provisions. Furthermore, when he signed the law, he had already announced he wasn’t seeking reelection as governor and knew that it would almost certainly fall on Democrats to implement the law. Part of being a limited government Republican is realizing that once you put the infrastructure in place, successors can always add to it. Regardless, what he actually signed was bad enough. Additionally, Coulter puts her derision for members of the conservative movement on full display by declaring that the only reason opposition to the law exists is because the nickname ‘Romneycare’ sounds like ‘Obamacare.’ Seriously. Of course, that’s not the issue at all – nor is the issue whether or not Romneycare is ‘constitutional’ according to the guiding documents of the United States or of the Commonwealth of Massachusetts, a straw man Coulter spends the remainder of her column arguing against. The problems with Romneycare are plenty without adding straw men to the list. Access to insurance has been increased (as have the penalties for not purchasing it). thanks in no small part to Massachusetts’ ability to stick the federal government and national taxpayers with a hefty portion of the program’s tab, but insurance is not care – a fact many casual participants in the health care debate conveniently ignore. The price of care and treatment has skyrocketed, causing the Office of the Attorney General to declare that government price controls (including the requirement that patients pay the difference out of pocket if they see a provider that charges more than the government-approved rate) must be implemented a quickly as possible to stem the rising tide. The Beacon Hill Institute found that , between Romneycare’s 2006 implementation and 2011: State health care expenditures have risen by $414 million over the period Private health insurance costs have risen by $4.311 billion over the period The federal government has spent an additional $2.418 billion on Medicaid for Massachusetts Over this period, Medicare expenditures increased by $1.426 billion Problems abound besides just these key points, but to understand them in their proper context, it’s important to address just what Romneycare’s three-pronged approach to dealing with the “problem” of the state’s uninsured population, which was relatively low at the time (about 550,000 according to state figures, and 657,000 according to the U.S. Census Bureau), consisted of. Some of the numbers below reference FY 2008 because a portion of this description comes from an analysis I wrote in 2009, when the program was being used as a blueprint for Obamacare. First, Romneycare expanded subsidies for low-income (below 300% of the federal poverty line) residents to obtain health insurance. While this sounds like a valuable benefit being provided to indigent Massachusetts residents, the funding for those subsidies was primarily pulled from the state’s so-called “free care pool,” which had provided medical and mental health services to poor Bay Staters at locations ranging from community clinics to emergency rooms, regardless of their insurance status. As an ironic result of this program, more poor residents had access to subsidized insurance, but fewer could afford care when faced with a deductible and coinsurance – meaning the amount the patient had to pay up front before insurance kicked in, and the percentage of treatment costs past the deductible that fall on the policyholder. The burden of paying for service the Health Care Reform Act placed on the state’s indigent population, combined with the draining of resources from facilities that had previously cared for the poor free of charge, left a larger number of poor Massachusetts residents without access to care than before the system was ostensibly “reformed” to help them gain more affordable access to care. Second, under the Health Care Reform Act, all businesses with over 11 employees located within Massachusetts were legally required to provide health coverage for their workers or face a fine of $295 per uninsured employee. Besides being a flagrant violation of the federal Employee Retirement Income Security Act (ERISA) – a federal law that, among other things, prevents states from mandating employer benefits – the employer mandate has failed to fulfill its primary purpose in the eyes of those who pushed for its inclusion in the bill: not enough employers opted to pay the fine (rather than offer health insurance to employees) to cover the portion of the program cost ($45 million) that proponents expected. In fact, by Spring of 2008, only $5 million had been collected from businesses that declined to offer coverage to their workers – an amount less than one-half of one percent of the $1.1 billion the program cost state taxpayers that year. The vast majority of the rest of that cost had to be covered by diverting funds from the “free care pool,” which, again, severely limited the indigent population’s access to care. Third, Romneycare included its famous individual mandate, making the failure to carry health insurance a violation of state law which that is punishable by a four-figure fine. That fine, collected along with state income tax, essentially operates as an onerous, regressive tax on the uninsured (despite the fact that those who actually file and pay income taxes are statistically the least at risk of being uninsured). The fine can be avoided if an uninsured individual can prove to the state that “no affordable coverage is available” – something that over 20% of the state’s total uninsured have successfully shown, despite promises that the Health Care Reform Act would bring the cost of insurance down to a level that would be affordable by all of the state’s residents. A new “independent agency,” called the Connector, was established by the state government to oversee the enactment of the employer and individual mandates and the implementation of health insurance subsidies for the indigent population. Along with monitoring compliance with those mandates, the Connector is responsible for determining what insurance policy each resident must enroll in, be they subsidized or paying full price, and for enforcing a rationing of care to those who qualify for subsidized coverage. Benefits for those who are below 300% of the poverty line (thus qualifying for subsidies) are limited by what the indigent individual is able to pay in terms of premium, deductible, and coinsurance, with those at the bottom of the income pyramid often qualifying for such severely restricted coverage that they would have been far better off remaining uninsured and continuing to receive care at facilities funded by the “free care pool.” While the establishment of an agency to study the relationship between the uninsured and high health care costs and to help those who qualify for state-administered health coverage programs choose the best fit for their circumstances is not a bad idea in principle – Pennsylvania’s Health Care Cost Containment Council is a good example of one that functions well – the Connector has simply become another regulator, on top of the existing Massachusetts Department of Insurance, that gums up the health care market with excess regulation and adds to the cost of health insurance through the surcharges added to premia in order to fund its continued operation. As with most government-related oversight boards, the Connector has been beset by requests from special-interest advocates, and it has had a very difficult time saying no to many of them. The result has been the imposition of onerous coverage mandates on the insurance policies state residents are now required by law to purchase. With four dozen coverages that are required to be included on every single policy sold within the state, from coverage for the services of nurse midwives to Mental Health Parity (an innocent-sounding mandate that requires mental health to be covered, dollar-for-dollar, to the same level as physical health), insurance premium and health care costs have skyrocketed under the Health Reform Act. Further, the addition of so many mandates actually caused nearly 200,000 previously insured Bay Staters to lose their coverage status because the prescription drug coverage in their private policies was no longer deemed “up to snuff” by the new gatekeeper of health insurance “quality” in Massachusetts. Massachusetts’s attempt at health care reform has increased the number of insured residents by 443,000 (covering about 66% of those who previously lacked insurance). However, the program has cost far more than predicted ($1.1 billion in FY 2008 and $1.3 billion in FY09), due in part to the fact that over half of those added to the rolls of the insured qualify for some form of subsidy. As the program was hemorrhaging cash in 2008, current Governor Deval Patrick (D) declared that it would be kept afloat at all costs, even though (quite ironically) the only way to continue funding it was to drain money from the public hospitals and community clinics that had already been providing care, under the free care pool, to those who were now appropriating that funding in the form of insurance subsidies. Further, the state’s redirecting of free care pool funding and imposition of caps on reimbursements for care has created an access problem by dramatically reducing the number of providers available to see and treat patients, regardless of whether those patients have insurance or not – a reinforcement of the fact that insurance, even when it is as universally prevalent as a government can make it, does not equal access to care. Far from reducing the cost of health insurance, Massachusetts’s individual mandate has driven costs up at twice the average national rate. This was entirely predictable; after all, what can possibly reduce downward pressure on a price more effectively than a legal requirement to purchase it, whatever the cost? According to the Connector, the least expensive price for an insurance policy for a 50 year old non-smoker in 2008 was $3,599 a year ($299.94 per month), with a $2,000 deductible. Next door in Connecticut, that price was just $1,468 a year ($122.36 per month, with a $2,500 deductible) – and Connecticut hadn’t even spent $1.3 billion on controlling and engineering their state’s health care marketplace! The biggest issue with Romneycare from the conservative perspective, though, is simply the massive expansion of government size, control, and intrusion that it represents. Constitutional or not, similar-sounding to ‘Obamacare’ or not, and effective at expanding insurance or not, the Massachusetts Health Care Reform Act is a law which requires individuals living in the Commonwealth to purchase a good or service, allows the state government to decide what an acceptable form of that good or service is and how it can be used, forces healthy individuals into costly high-risk pools to balance out risk and cost (thereby increasing price and severely limiting choice), and demands that residents of Massachusetts and the other 49 states pay an ever-increasing bill to sustain the ever-growing program. Whether or not you support Mitt Romney, the simple truth is that Romneycare is in no way a conservative program, and is in no way supportable by conservatives. Period. On a personal note, I’ve had little use for Ann Coulter for some time now. It’s been clear to me for years that Coulter’s only interest and commitment is herself and the publicity she can garner, not conservatism, the conservative movement, or the GOP. One of my RedState colleagues went so far a few years ago as to call her a “detestable harpy,” and while that may not be the most accurate choice of words to describe her, this latest “contribution” to the primary election discussion simply reinforces Coulter’s lack of direction, conviction, or compass outside of her personal gluttony for publicity.
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‘Three Cheers for Romneycare’
As part of their ongoing “jobs agenda,” House Republicans will unveil this week and soon consider the American Energy & Infrastructure Act (AEIA) to reauthorize transportation spending for five years. The “highway bill” promises a host of reforms (consolidating programs and streamlining red tape) and includes increased oil and gas exploration. But unfortunately these reforms are meant to distract from the overall size of the program, and the fact that such spending will require a massive bailout from federal taxpayers. [Before getting into the proposal, let’s first reflect on something. What does it say about a Republican Majority when their number one priority heading into an election year is to pass a massive federal infrastructure bill? I know Republicans are split on the issue, and that many burn all of their anti-Keynes stimulus talking points to give transportation spending a special dispensation as a government “job creator.” But really? This is what they want to fight on and draw stark differences with the other party? That is depressing.] Proponents of federal infrastructure spending have long maintained its legitimacy based on the fact that it is user financed by drivers who pay gas taxes. Good driving years generate enough revenue for generous spending on roads and bridges, and bad driving years require such spending to be ratcheted back. The problem is that the last highway bill—the Safe, Accountable, Flexible, Efficient Transportation Act (SAFETEA)—increased spending levels far above what the trust fund could support ( and 31% over previous levels ). Of course, Congress refused to scale back the spending and instead infused the programs with money from general taxpayers. These bailouts of the highway trust fund occurred in 2008 ($8 billion), 2009 ($7 billion), and 2010 ($19.5 billion). This is confirmed by the nonpartisan Congressional Research Service : Historically, the trust fund-based revenue collection system was a reliably growing source of funding for surface transportation, as the trust funds collected more than was expended to implement the program defined by Congress. This situation has changed under SAFETEA, as spending on highways and transit has exceeded both highway and mass transit account revenues on a regular basis. And under current law, if Congress does not reduce the spending, another billion dollar bailout will likely be needed right before the election. According to numerous press reports and the marketing material released already , the GOP bill will set the “long term reauthorization at current funding levels” and “revenues from additional oil and gas production will help fund programs” (emphasis added). Obviously, increased energy exploration is a good thing, but using the revenues generated to pay for existing unaffordable transportation obligations when we are running trillion-dollar deficits each year is insanity. Furthermore, it is unlikely that the energy revenues will come anywhere close to being able to cover a $59 billion shortfall over five years. That means other offsets and gimmicks will be needed or a massive straight-up bailout from taxpayers. All of us want better roads and bridges, but conservatives have long championed devolving the highway program to the states to collect and spend gas tax revenues as they see fit without heavy federal micromanaging. Both regularizing the recent taxpayer bailouts and relying on offsets elsewhere in the federal government will ensure that conservatives will never be able to devolve these programs and that the federal government will never get out of the federal highway business. It is great that Republicans are proposing to consolidate programs, but rationalizing transportation policy while growing government at an unaffordable pace harms the country. In short, it may be the difference between Chinese communism and Soviet communism, but it’s still communism. Furthermore, the claims that federal highway spending creates millions of jobs are dubious. These claims are typically based on economic models that ignore that a billion spent on highway projects is a billion that needs to be borrowed or taxed from the private sector, thereby destroying jobs somewhere else. During the last reauthorization of the highway bill, Heritage’s Ron Utt looked at the available research on the subject and concluded that, “such claims…are highly questionable given the mixed findings of decades of independent academic studies on the relationship between federal spending programs and job creation.” One last point. The GOP highway bill, which will violate the House-passed Ryan budget, is arguably another violation of the Republican Pledge to America, that specifically pledged to “end the practice of packaging unpopular bills with ‘must pass’ legislation to circumvent the will of the American people. Instead, we will advance major legislation one issue at a time.” Now Republicans will argue that “must pass” meant only appropriations bills, but the sentiment behind that component in the Pledge was to guard Congressmen from being pressured to support overwhelmingly bad policy (a highway bailout) that includes some long-sought conservative victories (increased energy drilling). Remember, the old Republican majority had a habit of packaging items like a minimum wage increase and ANWR together or health savings account reforms with a prescription drug expansion, and thus the Pledge included the line of advancing major issues one at a time. I fear a bums rush in the next few weeks. Republicans love them some highway spending. The last highway bill, with the 31% increase in spending, passed by a vote of 412-8 and 91-4 . Speaker Boehner has made this “jobs bill” a priority of his Speakership, and many conservatives are tired of fighting their Leadership. Who wants to oppose a bill that fixes potholes and increases energy drilling? But not fighting bills like this is exactly how our country got in its current fiscal situation. Conservatives in the House need to rise up and fight this legislation, and they need to fight hard.
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House Conservatives Need to Block the Coming Highway Bailout
Today’s crop of central planners and big spending politicians could learn a thing or two about economics from Henry Hazlitt’s classic bestseller, Economics in One Lesson , published in 1946. Common sense doesn’t have an expiration date. “There is no more persistent and influential faith in the world today than faith in government spending,” Hazlitt wrote. “Everywhere government spending is presented as a panacea for all our economic ills. Is private industry partially stagnant? We can fix it all by government spending. Is there unemployment? That is obviously due to ‘insufficient private purchasing power.’ The remedy is just as obvious. All that is necessary is for the government to spend enough to make up the ‘deficiency.’” With “public works” viewed primarily as a means of “providing employment,” explained Hazlitt, an endless array of projects will be “invented” by the government. The “usefulness” of the final product or the likeliness of success of a project, whether it’s a bridge to nowhere or a bankrupt solar panel company, “inevitably becomes a subordinate consideration.” In fact, once creating jobs is viewed as the chief purpose of government spending, said Hazlitt, a project with more waste and more inefficiency in its implementation, and less labor productivity, will be viewed as superior to a less wasteful project. The “more wasteful the work, the more costly in manpower,” he explained, “the better it becomes for the purpose of providing more employment.” A key fallacy in this thinking, Hazlitt explained, is that it ignores the incomes, wealth and the jobs that are “destroyed by the taxes imposed to pay for that spending.” What’s visible is the new school or new road, but what is unseen are those things that were lost through higher taxation, the unbuilt homes and unbuilt cars that don’t exist because of the money that was redistributed away from those who earned it in order to pay for inefficient make-work projects. What is unseen are the unbuilt stores and unbuilt factories, the uninvested funds and the new enterprises that would have been created. And so we end up with politicians cutting ribbons at new $500 million per mile tunnels, acting as if they’ve created something. No one at the celebratory event sees what is invisible, what has been destroyed. No one sees how the tunnel’s funding and taxes created disincentives to entrepreneurial risk-taking and investing. No one sees the tunnel as an obstacle to economic growth, a job killer. Rep. Don Young (R-Alaska), for instance, likes the idea of the rest of us paying $315 million to build a useless and costly bridge in rural Alaska to an island with only 50 residents, an island that’s already sufficiently accessible via a 7-minute ferry ride. Giving a free $2 million yacht to every man, woman and child on the island would have been $215 million cheaper than the bridge, but Rep. Young was Chairman of the House Transportation and Infrastructure Committee, not the owner of a yacht company. Economically nuts as it was, the U.S. Department of Transportation approved the useless bridge in Alaska project is 2004. Funding was later cancelled, but the bridge, like the irrepressible Jason in Friday the 13th, received funding again in the 2011 federal transportation bill. Rep. Young is currently the senior Republican on the House Transportation and Infrastructure Committee.
Internal Revenue Service data from 2009 shows that 58% of all of the tax-exempt interest reported to the IRS was from individuals with incomes of $200,000 or higher. (Bondbuyer.com) In recent weeks, The Federal Reserve and the so-called Obama Administration have teamed up to restrict the ability of American Municipalities to finance long-term, necessary infrastructure projects. Of course, this was neither the stated, nor the implicit intent of either organization in promulgating new policy initiatives. However, the unintended consequences of what both The White House and The Federal Reserve are doing to counteract economic sluggishness would probably have this effect. The Federal Reserve recently announced a plan to roll-over short-term, government debt by selling bonds with longer maturities. This would force down interest rates on long term debt securities. This reminds many observers of an old John F. Kennedy-era anti-recessionary policy dubbed “Operation Twist.” This policy endeavored to reduce the cost of long-term capital investment without simultaneously draining American cash assets abroad. An academic study of Operation Twist concluded that The Federal Reserve is able knock down interest rates on government securities (make these bonds a cheaper way to borrow money) by statistically significant amounts. We find that Operation Twist lowered long-term Treasury yields by about 0.15 percentage point (15 basis points), an amount that was highly statistically significant, but moderate…. For example, 0.15 percentage point (15 basis points) is the typical response of the 10-year Treasury yield to an unanticipated 1 percentage point (100 basis point) cut in the federal funds rate target (Gurkaynak et al., 2005). President Obama, meanwhile, intends to pay for his new American Jobs Act of 2011 by eliminating the tax exemption for interest on municipal bonds for taxpayers earning more than $200,000 in income. Many people of differing ideologies will voice some support for the idea. It flattens the tax code and takes away a tax break for the dreaded Leisure Class. However, it does so at an unintended cost. The tax-exempt status on municipal bonds represents a truce of sorts between high income workers and class warrior types who claim to speak for the poor. The wealthy get a productive place to park their money, while cities that would otherwise never have access to credit get their hands on money to maintain and build municipal infrastructure. The primary economic justifications for the concentration of assets in a municipality are convenience and shared facilities. One of these two sources of municipal advantage could become imperiled if the city has trouble getting enough money to provide such shared infrastructure. What is more troubling than either the lower yields on long-term bonds or the loss of the municipal bond tax break individually is the potential synergetic effect of both of these policies being executed in synonymy. Corporate and Municipal bond yields are set in a manner analogous to how mortgage rates are calculated. The issuers take the UST rate for a security of similar duration and then tack on an appropriate credit risk premium. When the UST rate drops, the bond yield drops in reaction. Long term bonds, like pass-book savings accounts, have now fallen victim to misguided government policy. One of the prime reasons investors are willing to lend Cleveland, Ohio money to build schools and Hospitals is the concept of tax-equivalent yield. This tax-break has the implicit effect of allowing cities with poor credit ratings to offer bonds at a lower premium. The tax break in comparison to corporate bond issues of similar safety and duration acts as a subsidy against the risk premium that cities would otherwise have to pay in order to make investors willing to lend them money for infrastructure. The knock-on effects of these combined policies also impact the ability of corporations with dubious credit to raise money in debt markets. Investors take risks on these firms in return for high-yield corporate debt. They are more willing to do so when they can effectively hedge these risks via Municipal Bond Arbitrage. The risk of the corporate bonds is hedged via an interest rate swap. The transaction cost of the interest rate swap is subsidized via the tax-free income from some market basket of municipal bonds. The key to municipal bond arbitrage is the tax-free nature of the municipal bond acting as a subsidy to lower the cost of the interest rate swap. Kicking the subsidy-prop out from under the transaction makes the interest rate swap a more expensive hedge and thereby reduces the ability of an investor to afford risky corporate bonds. This impacts corporations by further drying up their pool of available credit. Eventually, fewer workers will get hired, and fewer high-risk, high-potential-return technologies will be researched in the private sector. So we once more see the large and overly-complicated machinery of our government work against its own intended effect. Barack Obama wants to put people back to work in time for his reelection campaign and Ben Bernanke wants to make more credit available to business and consumers. Building lots of roads, schools and hospitals with Federal expenditures paid for by repealing the municipal bond tax exemption for interest income seems counterproductive. Our government’s current portfolio of policies robs Peter to pay off Paul. Doing so at a time that the Federal Reserve is decapitating long term bond yields makes municipal bonds a risky investment that has minimized yield. Again, our government will miserably fail to stimulate our economy because it is institutionally incapable of getting out of its own way.
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Does Our Government Now Hate American Cities?
