8 October 2009

8 October 2009

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Anyway, I have, indeed, been critical of SAFRA, but not primarily on the grounds that more aid will continue to fuel college-price inflation. I think it will, but what troubles me most about SAFRA is that it is likely to cost taxpayers tens-of-billions of new dollars, while its defenders claim it’s going to save us major dough. More to the point here, though, SAFRA never once came up in the debate, nor was the event in any way framed around it. Indeed, the debate stemmed from a paper by economist Robert Martin that examines numerous potential drivers of the college-cost problem – a very probing study – and says not a thing about SAFRA.

Intemper, Intemper! [Cato at Liberty] OCT 07, 2009 05:20P.M. Yesterday, in conjunction with the Pope Center for Higher Education Policy, Cato held a debate on how to control spiraling college costs. It was a terrific discussion, and I encourage everyone to check it out. It also got some coverage in the Chronicle of Higher Education, though nothing beats taking in the whole thing for yourself!

Now, on to the substance – such as it is – of Goldrick-Rab’s treatment of the Bennett Hypothesis.

Concerning the latter point, I’d like to respectfully suggest that at least one person who saw only the Chronicle’s piece imbibe the whole event, as well as what follows in this blog entry. Unfortunately, it appears that the Chronicle article got her a tad apoplectic, and I think she might have written some things she didn’t really mean.

First off, despite what Goldrick-Rab asserts, I am well aware of the Hypothesis. For proof of my not-total ignorance, check out a 2003 op-ed I wrote about aid fueling college-price increases. Moreover, I am quite familiar with the conflicting research on Bennett’s proposal, and what it enables us to definitively conclude: neither that the Hypothesis is right nor that it is wrong. Indeed, despite Goldrick-Rab’s pronouncement that Bennett’s suggestion is “nonsense,” the quote from Harvard professor Bridget Terry Long that Goldrick-Rab offers to defend her case-closer makes clear that the research doesn’t offer any definitive answers:

On her blog, Sara Goldrick-Rab calls me an “ideologue,” accuses me of being totally ignorant of empirical research on aid and college prices, and even calls me “unoriginal” because in 1987 then-U.S. Secretary of Education William Bennett asserted what I did yesterday: that government aid to students enables colleges to keep raising prices. Oh, and she matter-of-factly declares that “after more than 20 years of this nonsense it’s time to call the idea what it is– just plain stupid– and stop giving ink to the people who repeat it.”

While several studies do find a college price response, their overall results are mixed and often contradictory. In summary, none of the numerous studies on the subject have found a “smoking gun” in terms of college pricing behavior.

Hey, wait! I need that ink… Why no “smoking gun”? Because as Long explains in the article to which Goldrick-Rab links (apparently in an effort to prove me and Bennett wrong):

Now, I might very well be an ideologue (if by that you mean someone who doesn’t pretend to approach every issue as if I’ve never given it, or anything else, any previous thought), and I might even be a pretty ignorant guy – nobody’s perfect, right? – but that doesn’t change several, glaring problems with Goldrick-Rab’s assault on my character and on the Bennett Hypothesis.

One possible reason for these conflicting results is that it is difficult to isolate the effect of government aid on tuition pricing from other factors. It is unclear whether changes in tuition are due to changes in the Pell or other general trends in higher education.

Let’s start with Godlrick-Rab’s understanding simply of what, exactly, was discussed at our event. She says that “faced with a thoughtful, responsive piece of federal legislation to reform the financial aid system, some ideologue had to come forward with a proposal to end federal student aid entirely.”

In other words, as is so often the case in social science, it is very hard to isolate specific variables to reveal only their effects on outcomes. In 2001, Cunningham, et al., were clear about the same thing, stating that the sort of statistical modeling they could do was incapable of providing definitive answers on the effect of aid on price. Indeed, they reported that:

Presumably, the legislation to which she is referring is the Student Aid and Fiscal Responsibility Act, which is working its way through Congress. Of course, we ideologues might disagree with the utterly unsubstantiated description of the legislation as “thoughtful,” but I nonetheless think I know which bill she’s referring to.

Finally, even with future improvements in definitions and prospective data collection, the technique of cost analysis will

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always provide only partial answers to questions about the reasons for price increases at colleges and universities.

8 October 2009

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Hurting the Sick Is Not Good Politics [Cato at Liberty]

Perhaps illustrating how muddled the research is, in 2004, Long – to whom Goldrick-Rab points to attack the Bennett Hypothesis – looked at the effect of Georgia’s HOPE scholarships on college prices and found that schools both increased prices and decreased institutional aid in response to the new state scholarships. In other words, she found significant evidence that the Bennett Hypothesis is, in fact, accurate!

OCT 07, 2009 04:33P.M. I was glad to see James Pinkerton engage my criticism of Louisiana Gov. Bobby Jindal’s (R) endorsement of federal price controls for health insurance. I was even more pleased to see that Pinkerton has his own blog devoted to developing a Serious Medicine Strategy.

But there’s a flip side: Cunnigham, et al., found no clear correlation between aid and prices, but did report a strong correlation between decreasing state support for institutions and rising public-college tuition. This finding supports a popular ivory-tower explanation for price inflation: Increasingly tight-fisted states force schools to make up lost revenue through tuition.

If I understand Pinkerton, his argument is essentially: it’s all well and good for some unelectable wonk in the “citadel of libertarian thinking” to “uphold ivory-tower free-market purity” by opposing price controls. But Republicans need “art-of-the-possible solutions” to win elections, and 90 percent of the public support those price controls. “Everyone has a right to his or her principled position,” Pinkerton writes, “but the majority has rights, too.”

But here we see another common problem in extant research: The researchers examined only a small span of time – from 1988 to 1997 – not a long enough period to see medium or long-term effects of aid. As the chart below (which uses State Higher Education Executive Officers data and I employed yesterday) shows, the period studied was a trough in state funding, and per-pupil revenue through tuition did rise. What the analysis missed were the periods before and after the one explored, when both tuition and government appropriations to schools increased.

Two problems. First, Pinkerton suggests that libertarians oppose price controls for reasons that only matter to libertarians, and therefore may be safely ignored. Problem is, price controls hurt people. Were Pinkerton to explore the merits of Jindal’s proposal, he would soon conclude that imposing price controls on health insurance taxes the healthy, reduces everyone’s health insurance choices, and creates even greater incentives for insurers to shortchange the sick. (Turns out that what Larry Summers said about price controls applies to health insurance, too.) As John Cochrane explains, those price controls also block innovative products that would provide more financial security and better medical care to the sick.

Of course, there is more research than this (you can read about some of it here) and it is admittedly mixed. (In fact, I said in my presentation that aid is certainly not the only driver of colleges prices.) But as should now be clear, the Bennett Hypothesis is far from disproven, and statistical research may well be incapable of definitely settling the question. This has at least two major implications: (1) Calling on broad, long-term data – as I did at our forum – is highly relevant to the college-cost debate, and (2) if we want to get to the truth about the effect of aid on prices, it will be absolutely necessary to continue “giving ink” to the Bennett

But Pinkerton’s advice for Republicans is, essentially: “Do what’s popular now, even if it hurts people and voters end up blaming Republicans for it later.” How is that a good strategy?

Hypothesis.

Second is this idea that “the majority has rights.” Majorities don’t have rights. Individuals have rights. For example, you have the right to negotiate the terms of your health insurance contract with the individuals at this or that insurance company. Majorities may attain power, but that’s the opposite of rights. (See the Bill of Rights.) Finally, a couple of important odds and ends. Pinkerton suggests it is “un-libertarian” to be “pro-life,” or to “support the police, the military, and other upholders of public order,” or to “support government restrictions on…euthanasia.” Writing from the “citadel of libertarian thinking,” I can assure him he is wrong. Might I suggest Pinkerton read the relevant chapters from The Encyclopedia of Libertarianism? (The health care chapter is a page-turner!) Also, I did not “denounce Jindal” any more than Pinkerton denounced me. I criticized his ideas, and I respect the man.

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8 October 2009

(Cross-posted at Politico’s Health Care Arena.)

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New Video: Eight Years in Afghanistan [Cato at Liberty] OCT 07, 2009 03:28P.M.

Key Vote Alert - Travel Promotion Act [The Club for Growth]

The United States has been in Afghanistan for eight years and the end of our engagement there is not in sight. In this new video, Cato foreign policy experts tackle myths associated with the war in Afghanistan and offer solutions to American involvement there.

OCT 07, 2009 03:33P.M. Watch:

KEY VOTE ALERT

Ted Galen Carpenter and Malou Innocent are authors of a new paper,

“NO” ON TRAVEL PROMOTION ACT OF 2009 (HR 2935, S 1023)

Escaping the Graveyard of Empires: A Strategy to Exit Afghanistan.

FISCALLY CONSERVATIVE BLOG FEEDS The Club for Growth urges all members of Congress to vote “NO” on the Travel Promotion Act of 2009 (HR 2935/S 1023). The bill is expected to be considered as early as this week in both chambers. This vote will be included in the Club for Growth’s 2009 Congressional Scorecard.

Congress’ Secret Plan to Pass Obamacare [The Club for Growth]

This bill would “promote leisure, business, and scholarly” travel to the United States by taxing these same travelers.

OCT 07, 2009 02:18P.M. Heritage’s top notch Senate watcher, Brian Darling, believes Senate Majority Leader Harry Reid may use quirky Senate rules to ram Obama’s nationalized health care scheme through the Senate without any significant participation by the GOP or the American public. You’ll want

The proposal would set up a new $400 million slush fund called the “Travel Promotion Fund” that would be run by the tourism industry itself to promote tourism. This inefficient allocation of money would prevent tourists from spending that same money on shopping, food, and other expenses. This fund would also put into place yet another private-public spending program that can be expanded and abused using tax dollars, much like what happened with Fannie Mae and Freddie Mac. Furthermore, foreign governments will likely retaliate with similar protectionist taxes on American tourists, making this even more senseless. A far better alternative would be to cut corporate taxes so that the tourism industry has additional resources to promote their

to read this.

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Wednesday Links – Afghanistan Edition [Cato at Liberty– Afghanistan Edition]

own services.

OCT 07, 2009 01:41P.M. Today marks the eighth anniversary of the U.S. war in Afghanistan. Cato foreign policy experts have been following and analyzing the war since the beginning. Here’s a round up of their assessment thus far: • Why we must narrow objectives in Afghanistan. Before implementing a new strategy, we must first define victory. • Why the Afghanistan strategy does not require more troops. • Once we have defined our objectives, we need to follow an exit

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strategy.

8 October 2009

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Kudlow Interviews Mike Pence [The Club for Growth]

• Why Pakistan also plays a crucial role in this effort. • In today’s podcast, foreign policy analyst Malou Innocent discusses

OCT 07, 2009 01:03P.M.

the future of policy in the region.

In announcing his interview with Pence, Larry Kudlow writes, “Is a new supply-side, fiscally conservative awakening at hand?” FISCALLY CONSERVATIVE BLOG FEEDS

Dumb Travel Promotion Act of 2009 [The Club for Growth] OCT 07, 2009 01:28P.M.

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On Tonight’s Kudlow Report [Larry Kudlow’s Money Politic$]

Back in June, I wrote about a dumb bill called the “Travel Promotion Act of 2009.” This piece of dirt bill would create a $400 million slush fund controlled by the tourism industry to encourage foreign tourists to travel to the U.S. This public-private fund, which Senator Jim DeMint calls “Fannie Travel,” would be financed with a $10 tax on foreigner travelers.

OCT 07, 2009 01:02P.M.

Put another way, this bill wants to encourage foreigners to come to the U.S. by taxing them! For more information, here’s DeMint’s op-ed on the subject.

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This evening at 7pm ET:

How Cap and Tax Will Hurt Pennsylvania [Americans for Tax Reform]

KING DOLLAR IN DANGER... Debate: inflation vs. deflation

*Don Luskin, CNBC Contributor; Trend Macro Chief Investment Officer *Michael Mussa, Senior Fellow, Institute for International Economics; Former IMF Chief Economist

OCT 07, 2009 01:21P.M. In our continuing, daily, state by state, look at the financial impact of the Waxman-Markey Cap and Trade Tax Bill, we will show you the projected

HOW TO PLAY GOLD’S SURGE Joining us with his insight will be Frank Holmes, U.S. Global Investors CEO & CIO.

losses in Gross State Product, Personal Income, and N...

EARNINGS CENTRAL Is Alcoa’s positive report a harbinger of Q3 earnings? CNBC’s Bertha Coombs reports. “ROAD TO RECOVERY” Will profits help drive recovery? *Doug Kass, Seabreeze Partners Management Inc.

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*James Paulsen, Wells Capital Management Chief Investment Strategist

8 October 2009

Treasury and the Fed are in denial about it. The gold price has jumped all the way to $1,050, while the dollar index has fallen again. Without question, the U.S. is creating too many dollars through the Fed, and fiscal disarray continues to threaten more of the same.

CBO SCORES BAUCUS BILL CNBC’s Hampton Pearson reports from Washington. MONEY POLITICS: FIGHT FOR PENNSYLVANIA SENATE SEAT

And here’s a real conflict brewing in the financial markets: The Fed is fighting deflation with a near-zero interest-rate target, while gold, the dollar, and commodity markets are signaling that inflation is the real problem. Somebody is going to be very right here, and somebody is going to be very wrong. I’m betting on the markets being right.

*Rep. Joe Sestak (D-PA) *Former. Rep. Pat Toomey (R-PA)

So I have a thought, at least for the short run: The Fed should follow Australia, the first G-20 country to raise its target interest rate. The Aussies lifted their rate a quarter point to 3.25 percent. Right now the U.S. Fed should lift its target rate by 25 basis points. The fed funds target is currently 15 basis points, so this move would make it 40 basis points. It would be a dollar-protection signal; a price-stability signal. At the least, it would be a beginning. Next, the Treasury should buy some dollars in the open market to back up the Fed.

Please join us. The Kudlow Report. 7pm ET. CNBC.

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The Mundell-Laffer Solution [Larry Kudlow’s Money Politic$]

And as the White House considers a second stimulus package, here’s another thought: Go for growth. Reduce tax rates to provide growth incentives (something Team Obama has avoided like the plague). Cut the top corporate tax rate from 35 to 25 percent, and accompany that with a small-business tax cut from 35 to 25 percent. And leave the Bush tax cuts alone. Don’t let them expire in 2011. That’s cap-gains, dividends, and the top personal rate.

OCT 07, 2009 12:21P.M. Team Obama is in economic trouble on two fronts right now: The dollar could be headed toward its demise while the jobs and unemployment numbers have gotten worse. (The unemployment rate is up to 9.8 percent as of the September report released last week.) And there’s a simple policy mix the White House could adopt to fix this. It could enact the Mundell-Laffer supply-side approach of a steady King Dollar for price stability and low marginal tax rates to spur jobs and economic growth.

Yes, this is a supply-side solution: Reducing tax rates will ignite growth incentives. And by applying it, Team Obama would be borrowing from George W. Bush, Bill Clinton, Ronald Reagan, and John F. Kennedy. (And Calvin Coolidge and Andrew Mellon, too.) Forget about Keynesian spending multipliers, which Harvard’s Robert Barrow writes are less than one. Forget about class warfare. Forget about income redistribution. Go for growth.

Columbia professor and Nobel Prize winner Robert Mundell and Reagan advisor Arthur Laffer put this formula to work nearly 30 years ago, and it launched a massive low-inflation, bull-market prosperity. Of course, I am a supply-side fossil. I am a dinosaur and a relic of the past. But I still believe this approach could work again, even if it’s not going to happen.

Again, I know I’m a supply-side fossil and a relic of the past. But the Mundell-Laffer policy plan — which has worked historically for Republicans and Democrats — could truly save the nation and its economy at this critical juncture. Monetary restraint and the incentives of lower tax rates will solve the dollar and unemployment problems.

The dollar has been falling on and off for nearly ten years, and it’s in big trouble right now. The commodity inflation, housing bubble, and oil shock of recent years all can be traced to dollar weakness and excess money-creation by the Fed. A weak dollar helped destroy the Bush Boom and create the Great Recession. But now people are talking about ending the dollar’s reserve-currency status.

In our supposedly post-partisan era, why not give it a try, President Obama?

According to London’s Independent, the Arab oil producers in the Gulf are planning with China, Russia, Japan, and France to end dollar transactions for oil and move instead to a basket of currencies that might include the Japanese yen, the Chinese yuan, and the euro, along with gold and some kind of regional Gulf-state currency. I say, where there’s smoke there’s fire. The dollar-demise story just won’t go away, and it’s clear now that China and others have lost confidence in the greenback. For the U.S., this is mostly a self-inflicted wound. And the

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8 October 2009

vote?

50 Examples of Government Waste [The Club for Growth]

Pat Toomey banks $1.5 million in the Pennsylvania Senate race.

OCT 07, 2009 12:12P.M. FISCALLY CONSERVATIVE BLOG FEEDS The Heritage Foundation has the list.

New Paper: Why Sustainability Standards for Biofuel Production Make Little Economic Sense [Cato at Liberty]

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Wednesday’s Daily News [The Club for Growth] OCT 07, 2009 11:41A.M.

OCT 07, 2009 11:12A.M. Here’s a new format for the Daily News. Do you like it? Send your feedback to @club4growth on Twitter.

The U.S. sustainability standard currently requires ethanol production to emit at least 20% less CO2 than the gasoline it is assumed to replace. In a new study, authors Harry de Gorter and David R. Just argue that sustainability standards for ethanol are, by definition, illogical and ineffective. Moreover, say de Gorter and Just, those standards divert attention from the contradictions and inefficiencies of ethanol import tariffs, tax credits, mandates, and subsidies, all of which exist whether

Club President Chris Chocola pens an op-ed about the NY-23 race. On health care, Daddy has said “No”, so the Democrats’ new strategy is to compromise Mommy so Daddy will say “yes.” The Senate Democrats’ health care bill has $29 billion MORE in taxes than originally thought.

ethanol is sustainable or not.

Pelosi says a VAT is on the table. FISCALLY CONSERVATIVE BLOG FEEDS Larry Kudlow says “protect the dollar and go for growth.”

Eight Democrats Ask Reid for Healthcare Transparency [The Club for Growth]

The Wall Street Journal has a great guide to ObamaCare. Cash for Clunkers’ unintended consequence? It will kill General Motors. The teachers’ unions are emperors with no clothes

OCT 07, 2009 11:11A.M.

Labor unions and manufacturers want Obama to label China a “currency manipulator.”

Eight Democratic senators yesterday wrote a letter to Majority Leader Harry Reid urging healthcare transparency, with time built into consideration of any healthcare bill to allow for final cost estimates and posting of legislative language. Key paragraph from the letter:

Approval of Congress falls to 21%, driven by Democrats. The Cato Institute has a new website devoted to downsizing the goverment. It’s a “department-by-department guide to cutting the federal government’s budget.”

Every step of the process needs to be transparent, and information regarding the bill needs to be readily available to our constituents before the Senate starts to vote on legislation that will affect the lives of every American. The legislative text and complete budget scores from the Congressional Budget Office (CBO) of the health care legislation considered on the Senate floor should be made available on a website the public can access for at least 72 hours prior to the first vote to proceed to the legislation. Likewise, the legislative text and complete CBO scores of the health care legislation as amended should be made available to the public for 72 hours

Republicans leading the generic ballot, 43% to 39%. Steve Malanga asks how the “tax the rich” thing is working out. My guess? Not so well. Senators rejected a Coburn amendment that would strike $165 million in earmarks from the Defense appropriations bill. How did your Senator

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prior to the vote on final passage of the bill in the Senate. Further, the legislative text of all amendments filed and offered for debate on the Senate floor should be posted on a public website prior to beginning debate on the amendment on the Senate floor. Lastly, upon a final agreement between the House of Representatives and the Senate, a formal conference report detailing the agreement and complete CBO scores of the agreement should be made available to the public for 72 hours prior to the vote on final passage of the conference report in the Senate.

8 October 2009

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Club Op-Ed on NY-23 Race [The Club for Growth] OCT 07, 2009 10:58A.M. Club President Chris Chocola wrote this op-ed about the NY-23 special election in today’s Washington Examiner. Key exerpt: This all goes to a larger point. If [Republican candidate Dede] Scozzafava wins, what kind of “victory” would that be for the GOP?

If these senators stick by their demand if they have to vote on a procedural motion, this should help ensure that the public has some knowledge of what is in the bill before it comes up for a final vote. Senators Blanche L. Lincoln, Evan Bayh, Mary L. Landrieu, Joseph I. Lieberman, Claire McCaskill, Ben Nelson, Mark L. Pryor and Jim Webb

Yes, she would cast a vote for a Republican Speaker of the House. But she would also be one more vote for Card Check, one more vote for stimulus spending, one more vote for bailouts. It would further tarnish the Republican brand at a time when the vast majority of House Republicans are working hard to rebuild it. In so doing, it would further delay, not speed up, the moment when the GOP wins back the majority in Congress.

signed the letter.

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Eyewitness to Government’s Robbery of Chrysler Creditors [Cato at Liberty]

PAID FOR BY CLUB FOR GROWTH PAC AND NOT AUTHORIZED BY ANY CANDIDATE OR CANDIDATE’S COMMITTEE. 202-955-5500.

OCT 07, 2009 11:08A.M. FISCALLY CONSERVATIVE BLOG FEEDS Further to Ilya Shapiro’s post this morning, let me also point you to a concise chronology of events culminating in the government’s robbery of Chrysler creditors.

The Big Spenders Keep On Spending [The Club for Growth]

The story is that of Richard Mourdock, Treasurer of the State of Indiana and the man responsible for stewardship of the state’s pension funds, some of which were victimized by the Obama administration’s prepackaged and then forced-fed bankruptcy deal for Chrysler. I strongly urge you to read Mr. Mourdock’s testimony, which is at once revealing, sobering, compelling and, regrettably, a frightening sign of the times.

OCT 07, 2009 09:59A.M.

Mourdock will be speaking on this very topic at Cato, along with bankruptcy law expert David Skeel, on Thursday, October 15 at noon.

Yet Hatch voted for all six appropriations bills that have come to the Senate floor so far (there are 12 spending bills which comprise Obama’s “absurd” budget).

A couple of weeks ago, we told you about how Sen. Orrin Hatch complained earlier this year that Obama’s budget spent too much. Calling it “reckless,” Hatch said, “This budget increases discretionary spending by $490 billion over five years. This is absurd.”

Reserve your seat now.

Well, now with the passage of the pork-filled Defense approps bill, 7 of the 12 spending bills have passed the Senate. So which Republican Senators have supported all 7? They are: Lamar Alexander — TN Robert F. Bennett — UT Thad Cochran — MS Susan Collins — ME Orrin G. Hatch — UT Kay Bailey Hutchison — TX Mike Johanns — NE

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Richard G. Lugar — IN Lisa Murkowski — AK Richard C. Shelby — AL Olympia J. Snowe — ME George V. Voinovich — OH Roger Wicker — MS

8 October 2009

more extreme elements. I admit talking to the Taliban sounds weird and scary. But my contention is that there is no shortage of Pashtun militants willing to fight against what they perceive to be a foreign occupation of their region. Certainly the Taliban does not enjoy support among the majority of Pashtuns—as Lodhi and Lieven point out—but neither did the IRA in Northern Ireland or the FLN in Algeria. The point is not exclusively about popularity (although that’s a critical component, along with local legitimacy), but the fact that these indigenous groups are willing to fight the United States and NATO indefinitely. Indeed, it is the western military presence that is driving support for the Taliban both in Afghanistan and in Pakistan.

As in our last post, here are the Senators who have voted NO on all the approps bills: Tom Coburn — OK Jim DeMint — SC John McCain — AZ John Ensign was previously on this list, but he voted YES on the Defense

Moreover, the notion that we must protect Pakistan from the Taliban is ludicrous. Pakistan’s intelligence service helped create the Taliban and they continue to protect the Afghan Taliban to keep India at bay. From this point of view, deploying more troops would be irrelevant to the fight against al Qaeda and counterproductive in our attempts to pacify the

bill.

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region. For more on what we should do, check this out.

Exiting the Afghan Quagmire [Cato at Liberty]

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OCT 07, 2009 09:54A.M.

The Government Robbed Chrysler Creditors [Cato at Liberty]

Maleeha Lodhi, Pakistan’s former ambassador to Washington, and Anatol Lieven, a professor at King’s College London, discuss in the Financial Times how we can exit the Afghan quagmire: The west should therefore pursue a political solution, open negotiations with the Taliban and offer a timetable for a phased withdrawal in return for a ceasefire. This should begin with the military pulling out of specific areas in return for Taliban guarantees not to attack western bases and Afghan authorities in those areas. If the Taliban refuses such terms, then military pressure should continue. The point should not be to eliminate the Taliban – which is impossible – but to persuade it to agree to a deal.

OCT 07, 2009 08:36A.M. In January 2009, Chrysler stood on the brink of insolvency. Purporting to act under the Emergency Economic Stabilization Act, the Treasury extended Chrysler a $4 billion loan using funds from the Troubled Asset Relief Program (TARP). Still in a bad financial situation, Chrysler initially proposed an out-of-court reorganization plan that would fully repay all of Chrysler’s secured debt. The Treasury rejected this proposal and instead insisted on a plan that would completely eradicate Chrysler’s secured debt, hinging billions of dollars in additional TARP funding on Chrysler’s acquiescence.

Lodhi and Lieven’s argument echoes one that David Axe, Jason Reich, and I made yesterday on ForeignPolicy.com.

When Chrysler’s first lien lenders refused to waive their secured rights without full payment, the Treasury devised a scheme by which Chrysler, instead of reorganizing under a chapter 11 plan, would sell its assets free of all secured interests to a shell company, the New Chrysler. Chrysler was thus able to avoid the “absolute priority rule,” which provides that a court should not approve a bankruptcy plan unless it is “fair and equitable” to all classes of creditors.

… regime change, and democracy, are not necessary for counterterrorism. Propping up President Hamid Karzai’s Western-style government in Kabul does not make operations against al Qaeda any easier or more successful. If anything, it distracts from the conceptually simpler task of finding and killing terrorists. Without U.S. and NATO protection, Karzai’s regime would, sooner or later, probably fall to the Taliban. But U.S. observers should not equate that eventuality with “losing” the war. The war is against terrorists, not Islamist governments. The United States should be prepared to make peace, and amends, with a resurgent Taliban — and to encourage the group to excise its

Cato joined the Washington Legal Foundation, Allied Educational Foundation, and George Mason law professor Todd Zywicki on a brief supporting the creditors’ petition asking the Supreme Court to review the transaction’s validity. We argue that the forced reorganization amounted to the Treasury redistributing value from senior, secured creditors to

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8 October 2009

debtors and junior, unsecured creditors. The government should not be allowed, through its own self-dealing, to hand-pick certain creditors for favorable treatment at the expense of others who would otherwise enjoy first lien priority. Further, a lack of predictability and consistency with regard to creditors’ expectations in bankruptcy will result in a destabilization of existing and future credit markets.

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The Court will be deciding whether to hear the case later this fall. Thanks very much to Cato legal associate Travis Cushman for his help with the

All Eyes on the Virginia Governor’s Race [Larry Kudlow’s Money Politic$]

brief.

OCT 07, 2009 06:53A.M. National attention is turning to Virginia, where voters will choose their new governor this November. According to RealClearPolitics, the Republican gubernatorial candidate, Bob McDonnell, has the momentum and is pulling away in the polls. Right now he’s up 50-43.

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ATR and CFA Urge Opposition to Senate Finance Health Care Bill [Americans for Tax Reform]

I spoke with Mr. McDonnell last night on the race, his plans for Virginia, and whether to some extent, the race is a hidden referendum on President Obama.

OCT 07, 2009 08:11A.M.

I was impressed with Mr. McDonnell—he’s a big positive surprise.

CFA and ATR have sent a letter to the Senate Finance Committee, urging members of the committee to vote no on the health care bill. The committee rejected an amendment to its health care bill that wou...

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An Interview with Mike Pence [Larry Kudlow’s Money Politic$] OCT 07, 2009 07:02A.M. Is a new supply-side, fiscally conservative awakening at hand? Distinguished Congressman Mike Pence (R-Ind) – the #3 Republican in the House – joined me last night to discuss surefire ways to light a fire under the U.S. economy and get this country of ours growing again.

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