Category Public Policy

Republicans Are Trying To Undermine the EPA

Danny Vinik Leave a comment

Republican Senators Jeff Flake (R-SC), John McCain (R-AZ), Deb Fischer (R-NE) and Dean Heller (R-NV) introduced legislation yesterday attempting to limit the EPA’s regulatory ability by restricting its spending. Last Friday, the agency rolled out new rules regarding the carbon dioxide emissions of new coal- and gas-fired plants. New gas plants will all likely be able to comply with the rules relatively easily due to existing technology. Coal-fired plants, however, will almost certainly be unable to comply with the new rules. That’s why Republicans immediately criticized the President for waging a “war on coal.” And as Slate’s Matt Yglesias notes, they’re right! That doesn’t mean that Obama shouldn’t be waging the war. On the contrary, he has to wage it, because Republicans won’t consider any legislation that will force companies to internalize the costs of their emissions. Those costs are a negative externality on the economy that the entire country pays for. Cap-and-trade or a carbon tax are both solutions to that market failure, but neither has a chance to pass Congress. So Obama and the EPA have taken it upon themselves to wage this war outside the realm of Congress.

Not surprisingly, Republicans don’t like that. Flake and his co-sponsors are attempting to fight back against the Administration by limiting the EPA’s regulatory power. Here’s the text of their bill:

A bill to require the Administrator of the Environmental Protection Agency to include in any proposed rule that limits greenhouse gas emissions and imposes increased costs on other Federal agencies an offset from funds available to the Administrator for all projected increased costs that the proposed rule would impose on other Federal agencies.

Got that? Me neither. In layman’s terms, the EPA’s new rule will increase the compliance and supervision costs of other federal agencies. Those agencies simply have more work to do. Flake et al. want the EPA to offset those costs within the EPA’s own budget. 

A positive way at looking at this bill is that Republicans are so worried about other federal agencies’ ability to enforce limits on greenhouse gas emissions that they want the EPA to fund those additional regulatory costs. However, this is certainly not the case. Instead, Republicans are looking to slow down the rule-making progress and take money from other parts of the EPA’s budget.

Other agencies have their own budgets that they must work within and it’s not the EPA’s responsibility to cover the costs of additional regulation for them. When all of these agencies submit budget requests in the upcoming year, they will factor in the additional costs of implementing rules limiting greenhouse gas emissions. They will ask for larger budgets. This bill is trying to limit those budgets and force the EPA to choose between using its funds for rules on greenhouse gas emissions or use them on other regulatory issues. None of the co-sponsors care where the EPA would take the offsetting funds from. It doesn’t matter to them, because the entire goal is to undermine the agency.

Luckily, Democrats will never allow this bill to get far and it doesn’t have a chance to become law. But it’s yet another case where Republicans are attempting to use any legislative tactic to hamper federal agencies, without regard to what the agencies are actually doing.

Richmond Residents Are The Ones Harmed By Eminent Domain

Danny Vinik Leave a comment

Richmond, California’s use of eminent domain continues to move forward. As regular readers know, the entire plan is a fraud intended to rip off investors so that Mortgage Resolution Partner (MRP), the firm supplying the capital to Richmond, can profit. Why Richmond agreed to take MRP up on it’s ridiculous plan has been unknown for a while now. Maybe they really don’t understand it. Maybe there is corruption involved. It’s unclear.

What is clear though is that the ultimate losers from this play will be Richmond residents. Investors are (rightfully) infuriated by Richmond’s decision to move forward with eminent domain and have filed a lawsuit attempting to block the plan. A judge threw out that suit, saying it was “premature,” but the legal battles are just beginning. Once the city does seize the mortgages, investors will file suit again. Hopefully a judge immediately sees through this highway robbery and isn’t fooled as well. This entire thing is an unnecessary and costly waste of time.

In the end though, investors will be okay here. MRP’s plan will fail. The losers will be Richmond residents, which Moody’s made clear last Friday. The credit rating agency named the plan “credit negative.” From the report:

The eminent domain program is credit negative for the city because it will likely lead banks to raise mortgage interest rates and reduce mortgage availability, which will in turn limit the growth of property values and related taxes

…

Lenders will factor in the additional risk by raising mortgage interest rates or decreasing their availability

None of this is surprising, but it’s still sad to hear.

If this plan was done properly, Richmond would offer up a fair value to investors. Some of those investors may disagree with Richmond’s valuation. There would be quibbling and the two sides could look to work out a fair deal. Some banks may be wary of the additional risk and factor it into higher rates, but the rise would be small. If investors are properly compensated, they won’t be too upset to offload defaulted, underwater mortgages. They may not even put up much of a fight. In the end, mortgage rates wouldn’t rise much, if at all. But MRP’s plan is such a ripoff that if it were to go through, banks would jack up rates. Luckily that won’t happen, but it shows what a mess this entire situation is. MRP’s plan is a fraud, Richmond fell for it and its residents pay the price.

The Unemployment Rate is Just One Indicator

Danny Vinik 1 Comment

One criticism of the Fed’s recent communication strategy has been that it relied too heavily on the unemployment rate as an indicator of the health of the labor market and communicated that reliance to the market. As I wrote earlier, the unemployment rate is falling, but the economy is barely improving. In his June prepared statement, Fed Chairman Ben Bernanke said:

And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains

The Fed projections at the time expected the unemployment rate to be at 7.2-7.3% in the fourth quarter of this year. In August, the unemployment rate fell to 7.3%, well ahead of the Fed’s projections. Except this was not the result of above-average economic growth. On the contrary, financial markets tightened and the August jobs report was disappointing.  The drop in the unemployment rate was not representative of the overall economy.

Bernanke had hinted that the unemployment rate would be around 7% when asset purchases fully ended, but it had not even begun tapering yet. That was one major reason that so many journalists and investors expected the taper last week. Yet, this is once again not the Fed’s fault. The central bank could have done better in a number of areas. The long silence from the Fed governors provided little guidance for investors and Bernanke should have emphasized more that the Fed uses many different pieces of economic data to judge the labor market, not just the unemployment rate. But fundamentally, this was the market misreading the Fed.

Investors took one economic indicator and assumed the Fed would base its monetary policy on it. Worse, they knew that the drop in the unemployment rate was not the result of improving economic growth. It should have been common sense that the Fed would not that into account. But it wasn’t. There’s no doubt the Fed and Bernanke could have been more clear, like NY Fed president BIll Dudley was today and Bernanke was in his press conference last week. There, the chairman emphasized that the Fed looks at other economic indicators as well:

Last time, I gave a 7 percent as an indicative number to give you some sense of, you know, where that might be. But as my first answer suggested, the unemployment rate is not necessarily a great measure in all circumstances of the–of the state of the labor market overall. For example, just last month, the decline in unemployment rate came about more than entirely because declining participation, not because of increased jobs. So, what we will be looking at is the overall labor market situation, including the unemployment rate, but including other factors as well. But in particular, there is not any magic number that we are shooting for. We’re looking for overall improvement in the labor market

Too many commentators overreacted to what Bernanke said in June. The 7% unemployment rate number was treated as a trigger, not a threshold, even as Bernanke emphasized that it was the opposite. The unemployment rate was treated as the pivotal economic indicator influencing Fed decision-making. If you take a step back and look at the economic growth the past three months, there were few reasons the Fed would taper and many it wouldn’t.  The most important thing is that the economy underperformed Fed expectations. Yet, it was conventional wisdom that the taper was coming. That doesn’t mean Bernanke couldn’t have been clearer in June, but it means it was a fundamental misreading by journalists and investors. The Fed’s over-reliance on one economic indicator doesn’t change that.