Host Chris Wallace moderated a discussion this morning with:

• Dr. Austan Goolsbee, Member of President Obama’s Council of Economic Advisers and chief economist on the President’s Economic Recovery Advisory Board;
• Senator Richard Shelby (R-AL), ranking Republican on the Senate Banking Committee;
• Thayer Capital Chairman Fred Malek; and
• Google CEO Eric Schmidt.

I offer kudos to Mr. Schmitt for his thoughtful responses throughout.  And the hero of the discussion was Mr. Wallace, who in his questions demonstrated a deep understanding of the actual options faced by policymakers, the choices they made, and the serious consequences of those choices.  I thank him for trying to elevate the policy discussion this morning.

Here’s Chris Wallace asking Fred Malek whether the Bush Administration have provided loans before a Chapter 11 filing:

WALLACE:  Let me bring in Fred Malek, though.  The President says that he has no interest in running businesses, he’s just trying to save them from collapse and get out.  [plays clip of President Obama's press conference]  Fred Malek, in the middle of a financial crisis, in the middle of a terrible recession, could the President really let General Motors and Chrysler, AIG and Citibank go under?

MALEK:  … I think what you have here, is you have two different situations.  I would label the injection of capital into the financial institutions, stabilizing the financial systems, that’s a war of necessity.  You had to do that.  But, getting into General Motors, saving General Motors and then taking them into bankruptcy, that’s a war of choice, it’s the wrong choice.

Senator Shelby later commented on this same question, as did Mr. Malek again:

SHELBY:  First of all, I advocated last fall that General Motors and Chrysler’s best bet would have go to Chapter 11 then, it would have saved a lot of money, not a political restructuring like what’s happened, where the bondholders have been sacrificed, the unions have carried the day.  …

MALEK:  … I agree with Senator Shelby.  Look, we’ve had for decades we’ve had a bankruptcy system in this country that has worked well, and has fueled the free enterprise system in a positive way.  It is impervious to politics because it’s run by federal courts.  Now, what have you done?  You have taken it out of the judicial and you’ve turned it over to the executive, and I think you’ve injected politics into it.  Senator Shelby is right, there was no sense in putting billions of dollars in and then declaring Chapter 11 afterwards.  They should have let them go into bankruptcy and let the courts work it through.  …

Mr. Wallace then asks the critical follow-up question:

WALLACE:  Let me just ask.  Mr. Goolsbee, if at some point, either the Bush Administration back in the fall, or you guys when you took over, had just said, go into Chapter 11, we’re not going to take an ownership stake, we’re not going to give you 50 billion dollars, what would have happened?

The answer is that GM and Chrysler would have liquidated.  Neither GM nor Chrysler was ready for a complex Chapter 11 filing.  Had the entered the Chapter 11 process in December or January, the firms and every outside expert told us that the restructuring would have failed and the firms would have liquidated.  We estimated this would have resulted in about 1.1 million lost jobs.

Mr. Malek was right, the loans to GM and Chrysler were a choice, but they were not the choice that he and Senator Shelby thought we faced.  The choice was loan or liquidate.  There was no feasible Chapter 11 option available at the time.  (GM may fail even now, after they have had five months to prepare for Chapter 11.)  Mr. Schmitt frames it correctly:

SCHMITT:  It seems to me that what choice did we have except try to save General Motors, given the roughly million jobs that were related at a time of incredible pain and job loss.  So if you think about it , the choice was bankruptcy, the supply chain goes away, the loss of the American automobile industry, or a band-aid.  It needs to be a band-aid, and it needs to be something we get out of.  …

Government Motors discussion on Fox News Sunday (continued)

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Dr. Goolsbee gets it wrong on the auto loans
2. Understanding the GM bankruptcy
3. Auto loans, part 3: the Bush approach

I want to focus on some incorrect and inflammatory statements by Dr. Goolsbee this morning:

Chris Wallace:  I also want you to talk about the clash between policy and profits.  The governments wants General Motors to make small cars, fuel-efficient cars, while all the indications are, that according to the market, the cars they make most profit on are SUVs and pickup trucks.  So which takes preference?  Profits for the taxpayer shareholders, or environmental policy?

Dr. Goolsbee:  The President made totally clear in his remarks, and he specifically said we are not going to be in the business of telling General Motors or anybody else what kind of cars to make, where they should open their plants, or anything of the sort.  The President made clear we want to get out of this as quickly as possible.  We are only in this situation because somebody else kicked the can down the road, and that’s really an understatement.  They shook up the can, they opened the can, and handed to us in our laps.  Senator Shelby knows that to be true.  When George Bush put money in to General Motors, almost explicitly with the purpose, how many dollars do they need to stay alive until January 20th, 2009?  There was no commitment to restructuring, to making these viable enterprises of any kind. They made none of the serious sacrifices.  And Republicans in the Senate attached a list of conditions, they opposed George Bush’s intervention, because they said the unions had not made the following sacrifices.  In the Obama plan, it asked more and received more from the unions and from the other stakeholders than the people that objected to the bailout last November asked for.  So we have finally put them on that path.

This is incorrect.  I will bite my lip, refrain from commenting on the tone, and focus on the facts.

History

At 3:30 pm on Sunday, November 30, 2008, a quiet meeting occurred at the Treasury Department in Secretary Hank Paulson’s office.  Present for the Bush Administration were Treasury Secretary Paulson and Commerce Secretary Carlos Gutierrez, White House Chief of Staff Josh Bolten, Deputy COS Joel Kaplan, White House Legislative Affairs chief Dan Meyer, Treasury Legislative Affairs head Kevin Fromer, and me.  Present for the incoming Obama Administration were Deputy COS-designate Mona Sutphen, NEC-designate Dr. Larry Summers, Dan Turullo (now a Fed Governor), and WH Legislative Affairs-designate Phil Schiliro.  We had requested the meeting.  They agreed and asked that it be held outside the White House.  It appeared to us that they were quite concerned about leaks, and about the risk of creating a public impression that they were working closely with us.

At that meeting, we (the Bush team) floated a proposal to establish an auto czar.  President Bush would create a new position called a Financial Viability Advisor (FVA) through an executive order.  The President would instruct the FVA, for any auto manufacturer that sought a “bridge loan,” to evaluate that firm’s restructuring plan for viability.  If after 60 days (which the FVA could unilaterally extend for another 30) the firm did not have a plan to achieve viability, then the FVA would produce his own plan to make that firm viable.  The draft executive order was explicit that the FVA could include a Chapter 11 bankruptcy in his plan.  We invited the Obama team to suggest names for the Financial Viability Advisor, so that it would be someone with whom the new President would be comfortable.

Under the Bush team’s proposal to the Obama team, the current Secretary of the Treasury (Paulson) would provide bridge funding from the TARP, and he would state that, as a matter of policy, no further TARP funding would be made available except in support of (1) a plan certified as viable by the FVA, or (2) the FVA’s own plan.

The key to success of this plan was that the Obama team would publicly link arms with us and agree that they would continue the Paulson policy statement when they took over after January 20th.  Thus, the auto company’s stakeholders would know that they had no wiggle room, and that they had no chance of getting additional funding from the next Administration.  The Obama team would voluntarily commit itself to be bound by the restriction self-imposed by the Bush team.

Remember that this was one of two huge issues going on at the time.  The bigger issue was the financial crisis, and we were nearing the limit on the $350 B of available TARP funds.  We were concerned that another too-big-to-fail institution might fail before January 20th without Treasury having the funds available to prevent a systemic collapse.  So our proposal to the Obama team was a package deal:  we will announce the above process for autos, and we will ask Congress for the second $350 B of TARP funding, if the President-elect publicly supports us on both.  They would join with us in convincing Congress to approve the last tranche of TARP funding, since we would need help with Congressional Democrats.

We saw two huge economic issues that posed grave risks to the economy and to a smooth transition.  We proposed to work together with the incoming Administration in a way that we thought minimized these risks and would have positioned the new President as well as possible on January 20th.  GM and Chrysler would not be in liquidation, and there would be a strict, tight, and enforceable deadline (of about March 1) and process for GM and Chrysler to become viable or to have time to prepare for an orderly Chapter 11 process.  We would have a cushion in case another major financial institution failed in the last eight weeks, and the next President would not have to be bothered with having to ask Congress for the last $350 B from the TARP.

The Obama team were polite and professional.  They listened carefully and gave little reaction in the meeting.  We concluded based on their questions in that meeting that they were leaning against the proposal, because they did not want to be bound by the judgment of a Financial Viability Advisor – they wanted the ability to make decisions in the White House.  They also appeared to want to avoid being bound by our strict definition of viability.  (We defined a viable firm as one that would, under reasonable assumptions, have a positive net present value without additional taxpayer assistance.)

Dr. Goolsbee was not in this meeting.  I do not know if he was aware of it, either back in November or this morning.

Despite multiple efforts to get the Obama team on board, they did not take up our proposal, nor did they suggest any modifications.  At the end of that week we gave up on that approach and began to negotiate a bill with Speaker Pelosi, Chairman Barney Frank, and Chairman Chris Dodd that would provide bridge loans from previously appropriated non-TARP funds.  Senate Republicans blocked that bill.  Congress adjourned for the year and went home.  In the last week of December, GM and Chrysler told us they would file under Chapter 11 in early January if they did not get loans from the TARP.  They also told us, as did countless outside experts, that they were not ready for such a filing, and that Chapter 11 would lead to near-immediate liquidation.  We estimated that about 1.1 million jobs would be lost if this happened.

Confronted with a choice between loaning TARP funds to GM and Chrysler, and allowing both to liquidate in the weeks before his successor took office, President Bush authorized loans from the TARP to GM and Chrysler.  We had warned Senate Republicans earlier that month that the President would face this choice if legislation failed.  This was (and still is) a politically unpopular decision, and was the least worst of two bad options.  Based both on his public comments and what I saw privately, President Bush wanted to give the firms a limited amount of time and a hard back end to prepare for and, if necessary, to force an orderly Chapter 11 process.  He also knew that President-elect Obama would be facing tremendous challenges in his first days in office.  Despite their different political parties and policy perspectives, President Bush stressed that we needed to provide his successor with the time and space he would need in the opening weeks of his Presidency.

Structure of the December loans to GM and Chrysler

In the last few days of December, Treasury loaned $24.9 B from TARP to GM, Chrysler, and their financing companies.

According to the terms of the loan (see pages 5-6 of the GM term sheet), by February 17th GM and Chrysler would have to submit restructuring plans to the President’s designee (and they did).

Each plan had to “achieve and sustain the long-term viability, international competitiveness and energy efficiency of the Company and its subsidiaries.”  Each plan also had to “include specific actions intended” to achieve five goals.  These goals came from the legislation we negotiated with Frank, Pelosi, and Dodd:

1. repay the loan and any other government financing;
2. comply with fuel efficiency and emissions requirements and commence domestic manufacturing of advanced technology vehicles;
3. achieve a positive net present value, using reasonable assumptions and taking into account all existing and projected future costs, including repayment of the Loan Amount and any other financing extended by the Government;
4. rationalize costs, capitalization, and capacity with respect to the manufacturing workforce, suppliers and dealerships; and
5. have a product mix and cost structure that is competitive in the U.S.

The Bush-era loans also set non-binding targets for the companies.  There was no penalty if the companies developing plans missed these targets, but if they did, they had to explain why they thought they could still be viable.  We took the targets from Senator Corker’s floor amendment earlier in the month:

1. reduce your outstanding unsecured public debt by at least 2/3 through conversion into equity;
2. reduce total compensation paid to U.S. workers so that by 12/31/09 the average per hour per person amount is competitive with workers in the transplant factories;
3. eliminate the jobs bank;
4. develop work rules that are competitive with the transplants by 12/31/09; and
5. convert at least half of GM’s obliged payments to the VEBA to equity.

If, by March 31, the firm did not have a viability plan approved by the President’s designee, then the loan would be automatically called.  Presumably the firm would then run out of cash within a few weeks and would enter a Chapter 11 process.  We gave the President’s designee the authority to extend this process for 30 days.

In another error this morning, Dr. Goolsbee claimed the “Obama plan, it asked more and received more from the unions and from the other stakeholders than the people that objected to the bailout last November asked for.”  As I wrote last Monday (Understanding the GM bankruptcy), I have seen no convincing evidence that GM workers will now be paid competitive compensation with transplant workers, nor that the work rules are competitive with the transplants.  The negotiations led by the Obama team did meet the Corker targets for the unsecured debt holders and the retiree benefits, but current workers still look to have received a relatively good deal.

Chronology

November 30:  Bush team proposes joint solution to Obama team.

The following week:  Obama team declines to respond.  Bush team begins negotiations with House and Senate Democrats.

Mid-December:  Bush team negotiates compromise legislation with House and Senate Democrats.  Senate Republicans block the legislation.  Congress goes home.

Late December:  President Bush authorizes the above-described three month loans to GM and Chrysler.

January 20:  President Obama takes office.

Mid-February:  GM and Chrysler submit their first viability plans, per the terms of the Bush-era loans.

End of March:  President Obama says GM and Chrysler have failed to develop viable plans, as required by the Bush-era loans.  He gives Chrysler 30 more days, and GM about 60 until the end of May.

End of April:  Chrysler files Chapter 11 with a pre-packaged plan negotiated largely by the Obama Administration.

June 1:  GM does the same.  Chrysler emerges from Chapter 11.

Responding to Dr. Goolsbee

Let’s again examine Dr. Goolsbee’s claim:

We are only in this situation because somebody else kicked the can down the road, and that’s really an understatement.  They shook up the can, they opened the can, and handed to us in our laps.  Senator Shelby knows that to be true.  When George Bush put money in to General Motors, almost explicitly with the purpose, how many dollars do they need to stay alive until January 20th, 2009?  There was no commitment to restructuring, to making these viable enterprises of any kind.  They made none of the serious sacrifices.

Even if Dr. Goolsbee was not privy to the quiet discussion we had with the senior Obama team last November, the public record refutes his claim:

1. The Obama team declined to respond to the Bush team’s offer to work together to create a joint process that would have resulted in a resolution by March 1st or April 1st, rather than by June 1st for Chrysler and maybe September 1st for GM.
2. We then worked with the Democratic majority to enact legislation that would have limited funds to be available only to firms that would become viable.
3. After Congress left town for the holidays without having addressed the issue, President Bush was faced with a choice between providing loans and allowing these firms to liquidate in early January, which would have further exacerbated the economic situation for the incoming President.  President Bush chose to provide the loans.
4. We provided GM and Chrysler with sufficient funds to get to March 31st, not January 20th, and in those loans we gave the incoming Administration the ability to extend them for 30 more days.
5. The loans were conditioned on restructuring to become viable, with a precise definition of viability, specific restructuring goals, and quantitative targets.
6. The Obama Administration followed the restructuring process laid out in the Bush-era loans.  They are now measuring that deal against the targets established in the Bush-era loans.  The only changes the Obama team made were that they extended GM for 60 days rather than 30, and the Obama Administration directly inserted themselves into the negotiations as the pre-packager.

Dr. Goolsbee’s comments this morning were both inflammatory and incorrect.

Dr. Goolsbee gets it wrong on the auto loans

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Auto loans, part 3: the Bush approach
2. Auto loans, part 4: Chrysler gets an ultimatum, GM gets a do-over
3. Auto loans: a deadline looms

1. Auto loans: a deadline looms
2. Auto loans: options for the President
3. Auto loans: the Bush approach
4. Auto loans: Chrysler gets an ultimatum, GM gets a do-over
5. Auto loans: the press forgot to ask about the cost to the taxpayer
6. Should taxpayers subsidize Chrysler retiree pensions or health care?
7. The Chrysler bankruptcy sale
8. Mixed results on the Chrysler announcement

This morning I posted some basic facts on the General Motors announcement.  Now it’s time for some analysis.  Like my post Understanding the President’s CAFE announcement, this is a monster post.  I hope you find it valuable despite its length.

I want to try to tease apart the various questions that get conflated in the public forum.  My primary goal is to give you a structure for thinking about the issue.  My secondary goal is to persuade you to agree with my views on each question.  I will be satisfied if you give me credit for achieving only the primary goal.

Here is how I tease apart the questions:

1. What are the arguments for further government intervention?
2. Given these arguments, should the U.S. government intervene further by putting more taxpayer funding at risk to prevent GM from liquidating?
3. Is the pre-packaged bankruptcy likely to succeed?
4. Is it fair?
5. Did the government structure the taxpayer financing correctly?
6. Will the Administration run GM?

Let’s take them one-by-one.

1.  What are the arguments for further government intervention?

Today the President explained why he chose to put another $30.1 B of taxpayer funds at risk to prevent GM from liquidating now.  Speaking about his decision on March 30th, he said today:

But I also recognized the importance of a viable auto industry to the well-being of families and communities across our industrial Midwest and across the United States.  In the midst of a deep recession and financial crisis, the collapse of these companies would have been devastating for countless Americans, and done enormous damage to our economy — beyond the auto industry.  It was also clear that if GM and Chrysler remade and retooled themselves for the 21st century, it would be good for American workers, good for American manufacturing, and good for America’s economy.

This is more expansive than what President Bush argued last December:

In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action. The question is how we can best give it a chance to succeed. Some argue the wisest path is to allow the auto companies to reorganize through Chapter 11 provisions of our bankruptcy laws — and provide federal loans to keep them operating while they try to restructure under the supervision of a bankruptcy court. But given the current state of the auto industry and the economy, Chapter 11 is unlikely to work for American automakers at this time.

The distinction is important.  President Bush’s arguments were time-dependent: (a) we should try to prevent our weak economy from taking another big hit right now, and (b) let’s buy GM and Chrysler time to get ready to restructure.  He also argued (c) that it was unfair to dump a liquidating auto industry on his successor (even if his successor might do something different than he would).  It was a “too big to fail now” argument.

Today President Obama made it clear that he made the decision to commit additional funds, if his conditions were met, at the end of March.  He then added new reasons to those expressed by President Bush:  that America needs “a viable auto industry,” and that it would be good for America if GM and Chrysler survived.  While he emphasizes what he would not do, “I refused to let these companies become permanent wards of the state,” President Obama defines a national interest in having auto manufacturers headquartered in the U.S.  He reinforced that with his closing line, which was surreal:

And when that happens, we can truly say that what is good for General Motors and all who work there is good for the United States of America.

This is a big expansion of the justification for government intervention in the market.  Ford is not failing, and Chrysler is emerging from bankruptcy.  President Obama is arguing that American taxpayers need to fund the survival of a third (the biggest) U.S.-based auto manufacturer, because it is important “to the well-being of families and communities across our industrial Midwest and across the United States” and because “it would be good for American workers, good for American manufacturing, and good for America’s economy.”  This argument could be extended to almost any large U.S. firm, at almost any time.

My view:  I am extremely uncomfortable with the President’s expanded argument for further government intervention.  Had the President instead argued, “The economy is beginning to recover, and we cannot jeopardize that with another major shock,” I would have been less uncomfortable with today’s commitment of additional taxpayer funds.

2.  Given these arguments, should the U.S. government intervene further by putting more taxpayer funding at risk to prevent GM from liquidating?

The public debate has evolved in the past two months.  Earlier this year the question posed was, “Should the Administration bail out GM?”  The basic options were “yes,” “no,” and “only if they enter bankruptcy, and if they do they should try to pre-package it.”  The President chose the last of these options.  The President decided to put $30.1 B of additional taxpayer funding at risk to help prevent GM from liquidating in the near future, and to help them through a restructuring process.

The benefits and costs are similar to what I described in late March.  Here’s the updated version:

Benefits

• If the firm survives the bankruptcy process intact, it has a higher probability of being viable in the long run (than in a restructuring outside of bankruptcy).
• If the firm survives restructuring, the taxpayer has a higher probability of being repaid.
• Old equity holders faced the full costs of the firm’s failure (by being wiped out).  No additional moral hazard is created.

Costs

• There are still significant risks to GM’s survival:
  • Will GM and the Administration defeat the objecting unsecured creditors in court?  (however unfair that might be)
  • Will the bankruptcy process conclude quickly (within 90 days)?
  • Will GM continue to lose market share?  Can GM make cars and trucks that people want to buy?
  • Will the new fuel economy and emissions rules restrict GM’s ability to make attractive vehicles?
• This is a big new cash outlay from the taxpayer.  This costs the taxpayer, and further constrains available TARP funds.

The President made clear his answer to this question on March 30th.  At that time he laid out the conditions under which he would provide additional funding, and those conditions were met.  No one should be surprised that he is now putting more taxpayer funding at risk.  I am surprised that they only need $30 B.

My view:  We crossed this bridge back in late March.  It is not a new decision today to put more taxpayer funding at risk.  I don’t like it, but I am at least glad that some incentives have been restored:  the firm has to go through a bankruptcy process, shareholders are wiped out, and management was fired.  I remember arguments from last fall and earlier this year that GM should get more taxpayer dollars outside of a bankruptcy process.  That would have been far worse, and today’s actions mitigate some moral hazard.

Given the relative strength of the U.S. economy now compared to last December, I would have preferred an outcome of a pre-packaged bankruptcy + private DIP financing, and not exposing taxpayers to any additional risk.  If GM is really as viable as GM and the President claim it now is, then they should have no problem convincing capital markets to provide them with short-term financing.  (Judge Richard Posner argues this.)  I will guess that this was not actually a viable option, because the pre-packaging could only come together with the direct involvement of the government.  I think the real options would have been expose taxpayers to $30B more risk, or allow GM to liquidate.  I would go with the latter:  if GM can’t find private financing, they’re on their own.  I assume this means they would liquidate.  This would have been harsh and painful for those affected.  I believe the consequences of further intervention now are worse for a larger number of people in the long run.

3.  Is the pre-packaged bankruptcy likely to succeed?

There are two components to this question:

• Is the bankruptcy process likely to be quick and successful?
• Will the resulting company succeed without additional taxpayer aid?

I do not feel well-qualified to comment on the first question.  The talking heads all repeat that “GM’s bankruptcy is more complicated than Chrysler’s,” with little detail about why.  I would point out that the Administration is one for one in this process.  Their use of this part of the bankruptcy code (section 363), and the process where the old GM sells the good stuff to a new GM, and then the remaining parts are liquidated, appears to have worked for Chrysler.  From my perspective, the burden of proof now shifts to those who argue this bankruptcy will take more than 90 days.  I didn’t like it because of the precedent it set, but I wouldn’t bet against the Administration succeeding again.

Other than the “good for GM is good for America” quote, the biggest surprise in the President’s remarks was how heavily he was betting that a restructured GM will succeed.  He could easily have taken the posture, “GM has made some hard decisions, and they have a tough road ahead if they want to survive and succeed.”  Instead, he attached his own credibility to GM’s future success and said:

So I’m confident that the steps I’m announcing today will mark the end of an old GM, and the beginning of a new GM; a new GM that can produce the high-quality, safe, and fuel-efficient cars of tomorrow; that can lead America towards an energy independent future; and that is once more a symbol of America’s success.

Even with a cleaned up balance sheet and more taxpayer funding, it is by no means certain that GM will survive for the long run.  If GM fails in the next few years, the taxpayers will have lost an additional $30.1 B that the President committed today.  In addition, the above quote will come back to haunt the President.  I understand wanting to set a positive and optimistic tone.  I am confused why he did so at such great political risk to himself.

I found it useful to return to my first post on the autos and review what this new pre-packaged bankruptcy + DIP financing does to the wide range of challenges faced by GM:

Revenues

• The economic slowdown means fewer vehicles are being purchased from all auto manufacturers, foreign and domestic.
• Even apart from the economic slowdown, U.S. auto manufacturers have been losing market share over time.
• This is in part because they made a bet on light trucks versus smaller cars.  This product mix doesn’t work when gas prices are high.  Think of the proliferation of SUV’s in the past 10 years.  (Note that this was in part the fault of U.S. government policies.  SUV’s are technically light trucks, and so they qualify for lower fuel economy requirements.)

Costs & productivity

• The Detroit 3’s ongoing labor costs are higher than those of foreign-based firms.  This is still true when you compare an American worker in a GM plant in Michigan, for instance, with an American worker in a Nissan plant in Mississippi.
• Productivity is lower in U.S. plants of U.S. firms than it is in U.S. plants of foreign-based firms.  Some of this is because of the UAW contract that mandates certain inefficiencies.  Some of it is poor management.
• The Detroit 3 have huge dealer networks that are costly to the manufacturers.  These dealer franchises are often protected by state laws that make it hard for the manufacturers to make these networks smaller and more efficient.
• Auto manufacturers face a burdensome and unpredictable legislative and regulatory environment.

Balance sheets

• The Detroit 3 have enormous legacy costs from their retirees.  Past UAW contracts provided generous benefits that continue to burden these firms.  This drains profits (when they earn them) away from productivity-enhancing investments.

So can GM survive, and for how long?  Can they profit and flourish, as the President suggests they will?

• The Administration and GM argue that a restructured GM can break even in a national market of only 10m vehicles sold in America each year.  (We’re now around 9.5m/year.  “Normal” is around 16m/year.)  If accurate, this is astonishing.  This would appear to address all three of the bullets under revenues.  Addressed?  I’m skeptical.  I need to review the assumptions in GM’s new plan, especially about market share.
• I have seen no evidence that GM and UAW have reduced significantly GM’s ongoing labor costs to be competitive with the transplants.  Maybe I have missed it.  Unaddressed.
• Productivity is still lower in U.S. plants of U.S. firms that it is in U.S. plants of foreign-based firms.  As a result of high compensation costs per worker and low productivity, it appears that labor cost per vehicle produced will still be uncompetitive with the transplants.  Unaddressed.
• GM’s dealer network is being dramatically reduced.  Addressed.
• The CAFE and emissions requirements are even more burdensome than predicted, but now have at least some degree of stability, given the national standards.  On net, worse than before.
• The balance sheets will be relieved of enormous debt and legacy health and pension obligations.  Addressed.

My view:  I need to look more at what GM is assuming for market share.  The removal of the legacy obligations, combined with a big chunk of taxpayer change, will buy then many months of survival.

The Administration is stressing the balance sheet improvements, and they deserve credit for that.  Conservative critics focus on the additional burdens of the fuel economy and emissions rules, and they’re right, too.

I would focus even more on the questions asked by several commenters: “Will people want to buy GM cars and trucks?”  Additionally, can GM make a profit with still high labor costs, still low productivity, still burdensome work rules, and still slow product development cycles?

I want to GM to survive and be profitable in the long run.  Their chances are now drastically improved, assuming they survive bankruptcy.  But I don’t know if that’s an improvement from a 1% chance to a 20% chance, or from a 1% chance to an 80% chance.  A lot more needs to change beyond just cleaning up the balance sheet, and many of those needed changes are deep-seated in the culture, structures, and processes of America’s third-largest company.

4.  Is the pre-packaged bankruptcy fair?

Absolutely not.  But I want to be precise in my criticism.

The easiest thing to do in Washington is to criticize the negotiator.  “I could have gotten a better deal,” we say.  I should begin my expressing my sympathy and offering my congratulations to Steven Rattner and the Obama team for closing what was undoubtedly a complex and difficult set of negotiations.  I’m sure this one was not easy, and theirs was a thankless task.

At the same time, I share the concerns of many that the deal was not even-handed, and that the precedent will damage future business lending.  I have grave concerns about how far they were willing to stretch bankruptcy processes and the traditional capital structure to get a deal.

First I need to correct the Administration, as well as some bad reporting today by the Washington Post.  In last night’s background briefing for the press, an unnamed Senior Administration Official claimed (emphasis added):

Secondly, as you know, the UAW has reached a new agreement with GM and that agreement has been ratified that involves significant concessions by the UAW — concessions that are in virtually every respect more aggressive than what the previous administration demanded in its loan agreement.

In the term sheet for the December loan we (the Bush Administration) made to General Motors, we set out “targets,” which we took directly from the Corker amendment offered the week prior on the Senate floor:

1. Reduce outstanding unsecured debt by not less than 2/3 through conversion into equity or other debt;
2. “Reduce the total amount of compensation, including wages and benefits, paid to their U.S. employees so that, by no later than December 31, 2009, the average of such total amount, per hour and per person, is an amount that is competitive with the average total amount of such compensation, as certified by the Secretary of Labor, paid per hour and per person to employees of Nissan Motor Company, Toyota Motor Corporation, or American Honda Motor Company whose site of employment is in the United States.”
3. Eliminate the jobs bank.
4. Apply work rules no later than 12/31/09 “in a manner that is competitive with Nissan … Toyota or Honda in the U.S.”
5. Not less than half of their VEBA payment should be in the form of stock.

As best I can tell:

• They more than accomplished target #1.
• They did little to nothing on #2.  I have seen no evidence that compensation of current workers has been changed.  UAW Chief Ron Gettelfinger claimed in a message to his members, “For our active members these tentative changes mean no loss in your base hourly pay, no reduction in your health care, and no reduction in pensions.”  Maybe there’s a distinction between this statement and “total compensation.”  If so, it would be great if someone could help me understand this.  But it appears GM and UAW did nothing to address target #2.
• UAW agreed to #3 in late March.
• They made no apparent progress on target #4.  I have neither seen nor heard evidence that the work rules have been relaxed.  I am happy to be corrected.
• They accomplished #5.

It was incorrect for the Senior Administration Official to call these “demands” of the Bush Administration.  They were targets, not hard conditions.  It is an overstatement to say that they “are in virtually every respect more aggressive than what the previous Administration demanded,” unless “virtually every respect” means “except for compensation and work rules.”  (I am happy to be corrected if I have just missed the changes.)

The Washington Post then further flubbed it by writing:

Critics say it is unfair that the restructuring plan gives the union health trust a larger share of the new GM than the bondholders. But administration officials defend the plan, offering several justifications.

First, they note that the terms of the proposed GM restructuring echo the terms laid out by the Bush administration in December, when it extended $13.4 billion in loans to GM.

The Bush administration’s loan agreement required a 50 percent reduction or “haircut” for the union trust, but a 66 percent cut for the bondholders. The Obama deal requires larger cuts for both sides, though more for the bondholders.

The agreement does more than meet three of the five targets laid out by the Administration.  It appears to make no progress on the other two targets.  Thus the terms do not “echo the terms laid out by the Bush administration in December.”

More importantly, the targets we (Bush team) laid out said nothing about the distribution of equity shares.  The criticism is not that the deal doesn’t cut the VEBA enough, or reduce unsecured debt enough.  The criticism is that someone lower in the capital structure (UAW’s VEBA) got a much greater equity share than someone higher in the structure (unsecured creditors).  It is disingenuous to point to the targets in the Bush Administration’s December loans to justify this inequity.

The deal is unfair to unsecured creditors, because they get a worse deal than someone standing behind them in line (the UAW’s VEBA).  It has nothing to do with who those parties are (labor vs. creditors).  It is about the importance of maintaining a stable and predictable set of rules to govern the capital structure of a firm, and the value that stability creates for firms’ ability to raise capital.  All these arguments boil down to the cardinal rule of waiting in line for the kindergarten bus:  it’s not fair to cut in line.  If that rule is broken too often, chaos ensues.

The Administration could be arguing, “Sure it’s unfair, but UAW had more leverage on us than the creditors, so we struck the best deal that we could.  We needed UAW to sign onto the deal, while we thought we could roll the creditors in court.”  This would better justify the disproportionate equity shares than claiming, “This is a fair deal.”

The objecting creditors will now defend their rights in court.  If the Chrysler precedent is an example, you should bet against them.  It is interesting that the President did not attack them as “speculators” this time, so at least the rhetorical leverage against them is weakened.

My view:  I am more concerned with the signals this unfair treatment sends to future investors. I worry that the President’s actions create political risk and will permanently raise the cost of capital for certain firms.  I wish I knew whether a different prepackaging was possible, one which would have maintained the precedence of the capital structure and did not stretch the bankruptcy process again.  Unfortunately, it is impossible to know.

5.  Did the government structure the taxpayer financing correctly?

Judge Richard Posner argues the government should have provided a loan rather than taken an equity stake in GM.  The President suggested one reason why they preferred an equity stake:  a loan would further burden GM with a stream of near-term interest payments to the government.

I think Judge Posner strikes a nerve with his suggestion.  It seems that much of the public discomfort comes from the government now being the owner of GM.  It’s the 60% number that made me gasp.  It highlights a tradeoff between two goals on which conservatives focus:  value for the taxpayer, and avoiding government interference and control.  There is a tradeoff between the two.

I believe the U.S. government could auction its equity shares late this year and divest itself completely from General Motors.  This would solve the government ownership problem.  In doing so, I presume that taxpayers would recoup far less than the $30 B of cash provided.

Question for conservatives:  How much of a loss are you willing to take on the $30 B to get the U.S. government out of GM quickly?

My view:  I assume there is a non-trivial chance that GM may still fail in the next several years.  I like the President’s and his team’s strong language today that this $30 B is the last taxpayer aid, but I would like to reinforce that by ending the government’s ongoing involvement in GM as quickly as possible.  I am willing to sacrifice a significant portion of the $30 B to achieve that goal.  I therefore recommend that, if GM emerges from bankruptcy, the Administration then establish a much more rapid timetable for selling its equity stake, even if that means the taxpayer loses much of the $30 B.  Get us out of GM before the end of 2010.  This will strengthen the bulwark against providing additional taxpayer funds if GM fails again.

Note:

• Under current law, the authority to provide any firm with additional TARP funding expires December 31, 2009. Correction:  Secretary Geithner can, after notifying Congress, extend the TARP authorities to October 3, 2010.
• The “set a timeline” argument has direct parallels to a certain national security debate…

6.  Will the Administration run GM?

Here I give the Administration credit for good intent and good initial execution.  I take at face value the President’s statement that he does not want to run or control GM, and I give him points for saying so explicitly.  I am sure there are others, including some in his Administration and some on Capitol Hill, that would love to run GM as Government Motors.  I will trust the President when he says he is not one of those people.

I further give the Administration credit for the “Principles for Managing Ownership Stake” they released in today’s fact sheet.  While they are being released in the specific context of the U.S. government’s new equity stake in GM, the White House writes more generally “(T)he Obama Administration has established four core principles that will guide the government’s management of ownership interests in private firms.”

• The government has no desire to own equity stakes in companies any longer than necessary, and will seek to dispose of its ownership interests as soon as practicable. Our goal is to promote strong and viable companies that can quickly be profitable and contribute to economic growth and jobs without government involvement.
• In exceptional cases where the U.S. government feels it is necessary to respond to a company’s request for substantial assistance, the government will reserve the right to set upfront conditions to protect taxpayers, promote financial stability and encourage growth. When necessary, these conditions may include restructurings similar to that now underway at GM as well as changes to ensure a strong board of directors that selects management with a sound long-term vision to restore their companies to profitability and to end the need for government support as quickly as is practically feasible.
• After any up-front conditions are in place, the government will protect the taxpayers’ investment by managing its ownership stake in a hands-off, commercial manner. The government will not interfere with or exert control over day-to-day company operations. No government employees will serve on the boards or be employed by these companies.
• As a common shareholder, the government will only vote on core governance issues, including the selection of a company’s board of directors and major corporate events or transactions. While protecting taxpayer resources, the government intends to be extremely disciplined as to how it intends to use even these limited rights.

Given that I trust the President’s statements on this point, the risks here are unintended consequences, from within his own Administration and from the Congress.  They are big risks, and these are dangerous waters.  I hope the Administration treads carefully.

My view:  Given the undesirable situation of government equity stakes in, and even controlling ownership of, firms like GM and AIG, as well as potentially Citigroup and other banks, these are good principles. They are also easy to monitor.  It is interesting and good that the White House fact sheet says, “The [UAW’s] VEBA will have the right to select one independent director and will have no right to vote its shares or other governance rights.” (emphasis added)

I urge the President to:

• Enshrine the principles from today’s fact sheet in the term sheets for the taxpayer investments in GM (and other firms). We did this last December in the GM and Chrysler term sheets. Tie yourself to the mast. This will give you an easy excuse later when someone pressures you to vote those shares in a way that conflicts with the taxpayer’s interest.
• Set clear rules for Administration contacts with GM – it’s probably best to funnel all contacts through specific Treasury or NEC officials on the autos task force.  No freelancing phone calls to the Administration-appointed directors or “informal chats” with them from White House staff, or from DOT, EPA, USTR, DOE, even State.  Put a firewall around interactions with GM.
• Come out hard and quickly against the first proposal from a Member of Congress to leverage the ownership stake for a non-taxpayer goal.  Nip it in the bud, especially if the idea comes from a friend.

It’s easy to criticize a huge decision like the one made by the President today.  I strongly disagree with where we are headed, and I am concerned with the precedent that this deal sets for capital investment in American firms.  The alternative, however, is that you have to be willing to allow GM to fail.  I would be willing to do so, and it is therefore easy for me to express my views.  In summary, they are:

1. I am extremely uncomfortable with the President’s expanded argument for today’s government intervention. 
   
2. My first choice would have been to push GM to get private DIP financing.  Assuming that was infeasible, I would have recommended denying GM the DIP financing, even if that meant they would liquidate.  The economy is sufficiently healthier now than it was last December that I would be willing to risk the additional shock.  But I agree the President crossed this bridge at the end of March.
   
3. I would bet in favor of GM emerging from bankruptcy, and against them surviving as an intact firm for 5 years without additional taxpayer funding.
   
4. The pre-packaging deal was unfair to unsecured creditors, to the benefit of UAW retirees.  The Administration loses credibility with me by trying to argue this was a fair deal.  They would have been more credible if they had argued it was the only deal they could get.  I worry that the President’s actions create political risk and will permanently raise the cost of capital for certain U.S. firms.
   
5. If a loan rather than an equity purchase had been possible, I would have preferred that – I find Judge Posner’s arguments persuasive.  Given the equity investment, I urge the Administration to divest as quickly as possible, even if it means a loss to the taxpayer.
   
6. Given the undesirable situation of the U.S. government owning GM and other large firms, the Administration’s new “Principles for Managing Ownership Stake” are solid.  They need to lock them in, and corral or beat back all those people who work in the Executive Branch and Congress who have other goals in mind for GM and will be tempted to exert some leverage.

I thank you for making it through this extremely long post, and again want to thank all of the fantastic commenters.  If you dislike the President’s announcement, I urge you to consider this question:  Suppose the deal announced today were the only possible pre-packaged bankruptcy, and your choice was to take it or allow GM to liquidate now.  What would you do?

Understanding the GM bankruptcy

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Auto loans: a deadline looms
2. Dr. Goolsbee gets it wrong on the auto loans
3. Basic facts on the General Motors bankruptcy

This sounds like a technical question of concern only to “those of us wearing the green eyeshades,” but the Director’s suggested answer has dangerous ramifications, and could mislead or at least confuse taxpayers and financial market participants.

The Director’s answer makes the federal debt appear $1.4 trillion smaller than the way it is traditionally measured.  He argues that we should, in effect, ignore 1.4 million million dollars borrowed by the federal government.  That is breathtaking.

Let’s look at the Director’s argument and why I think it’s dangerous.

Most budget experts focus on debt held by the public, which Director Orszag accurately describes as “the amount that the federal government owes to others.”  I will expand on that a bit with some concrete numbers:

• Take the total amount the Federal government will spend this year.  Specifically, we’re looking at cash paid by the U.S. government to someone outside the government in 2009.  A budget wonk would call these outlays.  I’ll use the nonpartisan Congressional Budget Office’s numbers for current law, so I get $3.85 trillion of outlays for 2009.  That is way (way) above historic norms, in part due to the financial stabilization efforts, and in part due to the new “stimulus” law.
• Now take the amount the Federal government will collect in revenues this year.  This is cash coming into the U.S. government from someone outside it.  Almost all of this is taxes.  CBO says this is $2.186 trillion of revenues for 2009.
• If the U.S. government is paying out $3.85 trillion in cash (outlays) this year, but collecting “only” <sigh> $2.186 trillion in cash, then we need to come up with the difference somewhere.  That difference is $1.667 trillion for 2009.  This is what CBO says is the federal budget deficit for 2009.
• The U.S. government gets this cash by issuing IOU’s to people outside the government, aka Treasury bonds.  The government gets cash from anyone who buys Treasury bonds – individuals, firms, and foreign governments.
• The debt held by the public is simply the accumulation of these IOU’s.  It is the sum of money owed by the U.S. government to others.  (Update:  See the caveat at the bottom.)

Nothing I have said so far is the slightest bit controversial, but this is where Director Orszag and I part ways.  Tuesday he wrote:

As I said at the beginning of this post, I think the most meaningful measure of federal debt is debt held by the public net of financial assets.  If I take a $100 loan from my bank and stick that amount into my bank account without spending any of it, my family and I aren’t poorer, because even as I owe $100 to my bank, my bank owes $100 to me.  On net, and as long as the new asset is equal in value to the new liability, there’s no change in my overall financial state.  There’s a similar effect when the federal government borrows money in order to invest in financial assets.

Suppose I tweak the Director’s metaphor to make it better fit the current situation and illustrate my point.  If he takes a $100 loan from his bank and invests it in the business of his deadbeat neighbor Alan I. Gorp, he still owes the bank $100.  The bank cannot loan that $100 to anyone else.  His (the government’s) borrowing has “crowded out” borrowing by someone else.  And who knows how much his $100 investment will be worth next month?  We should care not just about his net position, but also about his total liabilities, and especially about how much he (the government) is borrowing from the bank (private sector).

In normal times this would not be a big difference, because the U.S. government in large part stays away from owning financial assets.  Now, however, the federal government is buying equity stakes in banks and other large financial firms, and issuing loans to financial and non-financial firms.  Director Orszag’s numbers show that the U.S. government owned $506 billion of financial assets last year, and will buy another $915 billion this year.  (I’m subtracting “Debt net of financial assets” from “Debt held by the public” on Table S-1 of the President’s budget.)  Those are huge numbers, and have a huge effect on what figure you cite for the federal debt.

If you look at the traditional measure of debt held by the public, which you’ll remember is the sum of all IOU’s (Treasury bonds) issued by the Federal government, then under the President’s budget and using OMB numbers, that’s equal to $8.36 trillion.  Compared to one year of our entire national output (GDP), that’s almost 59% of GDP.

If, however, you net out OMB’s estimate of the value of the financial assets, then the debt held by the public net of financial assets, is “only” $6.94 trillion, equivalent to almost 49% of GDP.  That’s still a big bad number, but it’s $1.4 trillion and 10% of GDP less bad than the debt held by the public numbers.  That’s a convenient way to make the problem look much smaller.  Director Orszag argues that it is also the “most meaningful measure of current federal debt.”

Here is his key paragraph:

As the federal government has acted to stabilize the financial sector amidst the worst financial crisis since the Great Depression, the federal government has purchased significant financial assets—such as preferred equity stakes in Fannie Mae and Freddie Mac.  The federal government will likely take a loss on these purchases, but the assets have value.  And just as what my bank owes me should be netted against what I owe the bank in determining the health of my personal finances, the value of these assets should be netted against publicly held debt in determining the health of the government’s finances.  …  Debt held by the public net of financial assets is the most meaningful measure of current federal debt …  (emphasis added)

I disagree with this last statement, but I think I understand why he says it.  From his perspective of the federal budget, he’s netting out some of his liabilities with a somewhat liquid asset that he now holds and hopes someday to sell.  He  concedes the point, however, that he is including some assets and liabilities with his new measure, but excluding others.  This makes his new metric suspect.

From the perspective of the U.S. economy, the “netting” comes from different places.  The U.S. Treasury has to issue $905 billion of Treasury bonds this year to raise the cash to buy those financial assets.  This makes it harder for private firms and individuals to borrow, because they are competing with the government for cash, so they have to pay a higher interest rate.  Those funds are then invested in other parts of the economy.

Another way to see why this is a poor metric is to imagine that the U.S. government were to borrow another trillion dollars by issuing even more Treasuries, and then immediately buy one trillion dollars of credit default swaps with the cash raised.  According to Director Orszag’s preferred measure, nothing would have changed, because the two transactions would net out.  But clearly we would have just had a major impact on the U.S. (and global) financial economies.  U.S. government borrowing in these enormous amounts hurts financial markets, no matter what is done with the funds raised.

Director Orszag touches on another problem with his new metric when he writes “The federal government will likely take a loss on these purchases, but the assets have value.”  He’s right, but the value of the particular assets being purchased by the government is highly uncertain.  How much is he counting as the value of the $19.4 B loaned (so far) to General Motors?  I sure hope he is not counting it at face value.  What about the $70 B “invested” in AIG, or the $5.5 B in Chrysler?  Any private firm valuing these assets would say their values need to be discounted.

The values of these financial assets are highly uncertain and depend heavily on what assumptions OMB uses about the likelihood of them being repaid.  For people to trust this metric, they need to understand how it is calculated, which means that OMB should divulge the discounts they are applying to their financial assets.  I will guess that he does not want to divulge those assumptions.  I wouldn’t if I had his job.

I think the most meaningful measure of current federal debt is still debt held by the public.  I think the public policy debate can be further informed by also disclosing the estimated value of the financial assets held by the U.S. government.  But policymakers should not net out the two and use that measure instead of the one that most directly measures how much the U.S. government is borrowing from the private sector.  This is particularly true when that new measure hides $1.4 trillion of debt borrowed by the U.S. government from the private sector.

Director Orszag, and those measuring his performance, should continue to use debt held by the public as the most meaningful measure of current federal debt.  Budget projections will account for that measure to come down over time as the financial assets are sold and funds recouped.

Net measures can hide meaningful information.  This is a theme I will return to often.  Any time someone in economic policy gives you a net figure, see if you can learn something more by asking about the components that make up the net calculation.

The President’s Budget is titled “A New Era of Responsibility.”  In his February 24th Address to the Congress, the President said,

The only way this century will be another American century is if we confront … the mountain of debt they stand to inherit.  That is our responsibility.

A new era of responsibility does not begin with hiding $1.4 trillion of that mountain of debt.  These IOU’s will not go away just because we ignore them.

Update (12:20 PM Wed): A friend corrects my statement that the debt is simply the accumulation of past deficits.  It’s not.  The Credit Reform Act measures credit subsidies (like for federal loan or loan guarantee programs) differently than it measures cash flows, and the deficit does not capture “means of financing and cash management, like when Treasury borrows funds and deposits the cash at the Fed.”  I stand corrected on these points.  I don’t think this changes my logic above about whether to net out the purchase or sale of financial assets.

Let’s not hide $1.4 trillion of IOU’s

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Does the President’s budget cut the deficit in half?
2. Understanding the GM bankruptcy
3. Is $700 billion enough? Part 2: the Obama warning

• Net payroll employment declined in March by 663,000 jobs.
• That’s a terrible number, and in line with expectations.
• The unemployment rate increased from 8.1% to 8.5%.

Much of the press coverage talks about “5.1 million jobs lost since the beginning of 2008.”  I think that using January 2008 as a start date gives an incomplete and possibly misleading picture.  The past fifteen months can be divided into two parts.  For the first nine months, the economy was shrinking slightly and employment was declining at a disappointing but not panic-inducing rate.  For the last six months, beginning in September as the financial market crisis came to a head, the bottom fell out of the employment market.  Take at look at the sudden drop in employment beginning as the market crashes in September.  This is the best example that what happens on Wall Street affects what happens on Main Street.

Employment was clearly shrinking in the first 8-9 months of 2008.  But the huge employment losses immediately followed the financial crisis.  I include September in the first segment because the employment data was collected for that month before the fateful two weeks in the markets.  2008 was a bad economic year, but it’s the fourth quarter of 2008 and the first quarter of 2009 that were disastrous.

This matters because, if the diagnosis is different, then the solutions may be different.  If the principal cause of the severity of this recession is the financial crisis, then that would suggest that the most important and urgent element of the solution is to fix the problems in financial institutions and financial markets.

Nobody would or should be happy if the economy were losing 137K jobs per month.  But that would be a huge improvement compared to the 600K+ jobs lost over each of the past six months.  By the same logic, you use different tools and prioritize different policies if the principal cause of the severe decline in growth and employment is the financial sector trouble.  This may sound obvious, but I don’t think it is a given in the Washington policy debate.  Everyone says “severe recession,” and then immediately jumps to “huge stimulus” or (“we need a second stimulus”).  Fiscal and monetary stimulus can undoubtedly increase GDP growth, but they cannot solve the problems in financial institutions and financial markets.

This is why I try to remind myself to talk about economic problems and a financial crisis.  It is also one reason why I am much more concerned about whether the Administration’s new financial policies will work, than whether their spending bill will stimulate GDP growth.  In my view, if the financial problems are not fixed, we’re still in trouble almost no matter what else happens.  This means I’m in line with Fed Chairman Bernanke, who included a crucial if clause in his March 3rd testimony to the Senate Budget Committee:

Although the near-term outlook for the economy is weak, over time, a number of factors should promote the return of solid gains in economic activity in the context of low and stable inflation. The effectiveness of the policy actions taken by the Federal Reserve, the Treasury, and other government entities in restoring a reasonable degree of financial stability will be critical determinants of the timing and strength of the recovery. If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the beneficial effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit.

Jobs Day

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. The Economic Report of the President
2. Can we ever know how many jobs the Obama Administration has saved?
3. Rose Garden Statement by President Bush on financial markets

I wrote last November about the first G-20 Economic Summit, initiated and hosted by President Bush.  You can see some neat behind-the-scenes photos of the gorgeous National Building Museum and read about the accomplishments of that summit.  Last November the press tried to write the story “Lame duck President … not much accomplished.”  That storyline was incorrect.  Now we have a new American leader and one fundamental policy shift, but much of the agenda remains consistent.

There is a symbolically important change to watch for in the text of the leaders declaration, compared to that in the November text.  I fear that the word “free” may be absent in the successor statement to this sentence from the November leaders declaration:

12.  We recognize that these reforms will only be successful if grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems.

Losing “free” would be an enormous step backward.  All G-20 nations agreed to the above statement last November, so there is no good reason to change it if the U.S. objects.  In the short run, it is easy to see how a negotiator might give this up for a more concrete immediate objective.  In the long run, few things are as important.  I hope the American team will insist on repeating this language, and in particular keeping the phrase “a commitment to free market principles,” as our negotiator did last fall.

Four of the five major topics of discussion at the summit are extensions and continuations of the November efforts.  There is one big difference, influenced greatly by our new President.  After reviewing the available press and talking with Dan Price, President Bush’s “sherpa” for the first G-20 summit last November, here are my expectations for the London G-20 summit.

1. Global macroeconomic stimulus — The big difference is the new #1 agenda item for the G-20, global macroeconomic stimulus.  President Obama’s first domestic economic policy effort was the enactment of a law that he argues will stimulate near-term macroeconomic growth.  He is pushing other nations to take similar actions, and for the G-20 as a whole to support similar global efforts.

   I expect the final G-20 statement will broadly support national actions for macroeconomic stimulus, but will not include any numbers.  It will say something like “Nations should do what is necessary…”  It may also emphasize the fiscal actions already taken by a large number of nations.  Reading between the lines of President Obama’s answer to a question in a press conference this morning confirmed this expectation.

2. Financial market stabilization — I expect this will be a continuation of efforts in November, but with some details fleshed out.  The final statement will likely highlight three subgoals to financial stabilization: restarting lending, enhancing the capital structure of financial institutions (aka recapitalizing banks), and dealing with toxic assets.  This is consistent with discussions from last fall, but I expect a greater American emphasis on the last item from the new team.

3. Regulatory reform – While financial market stabilization focuses on short-term actions the G-20 nations need to take, the regulatory reform section will focus on longer-term reforms to reduce the chance that these same problems recur in the future.  The negotiators and their staffs have spent a lot of time on these issues, and I expect the final product will continue to flesh out the construct created last November, with a lot of details now filled in.

   I expect an emphasis on improving oversight and greater cooperation among national regulators.  To my delight, I do not anticipate any mention of any sort of “single global regulator.”  There is a so-called “college of supervisors” that was part of the November and prior efforts, but my expert advisors on this subject assure me that this group is about coordination, not the creation of a supra-national sovereign group.  Participant nations appear interested in coordination of national efforts while maintaining national sovereignty.  This is a big deal for me.  Let’s work together, but Americans should have the final say in what America does.

   There is an interesting debate about “convergence” of national regulatory structures that underlies this question.  I expect the statement will emphasize the goal of “convergent” regulatory structures.  A tension exists between two goals.  We want a level playing field across nations so that government policies distort capital flows as little as possible.  In this respect, convergence of national regulatory structures can be a good thing.  At the same time, if they converge to a consensus position that is unwise, then that’s a bad thing.  My own instinct is to worry that, in a politically governed process negotiated by national governments and regulators, there will be a tendency to converge to a structure that is overly restrictive and burdensome.  This is a tension that will play out in obscure international regulatory fora over months and years, and can have long-lasting and important consequences on the international flows of capital.  I could be OK in theory with “convergence” language, if I knew what the final details would look like.  Since no one can know that in advance, “convergence” language makes me nervous now, as it did last November.

   I further expect that the regulatory reform section will talk about the importance of better oversight of “systemically important institutions” (read:  too-big-to-fail) in ways that parallel how Secretary Geithner, and Secretary Paulson before him, and Chairman Bernanke, have spoken about the issue.  This will send an international signal that the problem of regulation of institutions that are deemed to be too big to fail is a critical area for future policy development.  My own view is that this is the big enchilada.  I trace back much (most?) of our current financial pain, as well as almost all of the tension between Wall Street and Washington, to consequences from being on the back end of a too-big-to-fail problem, where all options are terrible.  I think it’s our primary long-term financial policy challenge.  I wrote about the causes of the financial crisis last October, following a speech by President Bush.

   There is an important follow-on question about the relative importance of strengthening the oversight of huge banks and insurance companies on the one hand, versus expanding regulation into hedge funds and private pools of capital on the other.  I am absolutely convinced that the former needs major reform.  I am far less certain that the second is as large of a problem.  I am in the minority in this view.  This is a topic for further discussion.

   I also anticipate that the final statement will say something on tax havens.  My views here on international convergence of taxation differ significantly from those expressed in the past by those who are now senior American officials.  I will refrain from commenting while they are overseas negotiating.  They have the ball for America.

   I expect the regulatory reform section will talk about the importance of moving the trading of Credit Default Swaps (CDS) onto organized exchanges, which parallels efforts that Secretaries Paulson and Geithner have pushed here in the U.S.  This is a good and important thing.

   I expect the statement will continue to flesh out work to harmonize accounting standards.  This is simultaneously mind-numbingly boring and incredibly important.

   There will also be some structural changes to the Financial Stability Forum – they will change the name to the Financial Stability Board and add more members from the G-20.  They will also have language, I think, similar to that in the November document on executive compensation.

4. Increased resources for the IMF and restructuring of the World Bank and IMF – One of the advantages of being Treasury Secretary is you get some leeway to push issues that are important to you.  Secretary Geithner has spoken of tripling the IMF’s budget, and Prime Minister Gordon Brown has spoken of doubling it.  We will see where the number ends up, but it’s clearly going to increase.  I am interested to see how willing Congress will be to fund the increased U.S. contribution.

   They will also change the governance structure of the IMF and World Bank.  I anticipate that China and other developing countries will get more weight in decisions of these international bodies, but only if they pay their share of the budgets.  There is an important thematic here for China and India that crosses a range of international economic policy issues.  In international negotiations, China and India sometimes try to have it both ways.  Their negotiators argue they should have the same say in international economic policy questions as major developed economies like the U.S., Japan, and major European economic powers.  At the same time, they plead poverty and argue that they cannot possibly sacrifice economic growth for the global good.  My view is:  in or out.  You decide.  If you want to be a first-tier economic nation, that’s fantastic.  You play by the same rules as everyone else, and you make the same sacrifices for the global good.  You cannot have it both ways.

   Finally, I anticipate the U.S. and Europe will give up what some call the “knightship rights” of choosing the leaders of the World Bank and the IMF.  I expect one result will be some kind of new (supposedly) merit-based selection process.

5. Fighting protectionism – This is the topic that I hope will make almost all of the G-20 leaders uncomfortable.  In November the G-20 leaders agreed to a fantastic strong statement that opposed protectionism, in which they said,
   

   We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports. Further, we shall strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO’s Doha Development Agenda with an ambitious and balanced outcome. We instruct our Trade Ministers to achieve this objective and stand ready to assist directly, as necessary.

   And yet on March 17th the World Bank reported that 17 of the G-20 nations “have implemented 47 measures that restrict trade at the expense of other countries.”  The U.S. is one of the 20, and the World Bank highlighted “the US direct subsidy of $17.4 billion to its three national [auto] companies.”  President Obama’s Monday announcement extending the auto loans make this a challenging topic for him in London.

   I’d like to praise World Bank President (and former U.S. Trade Representative and Deputy Secretary of State) Bob Zoellick for this excellent and well-timed study.  We need more “name and shame” tools to highlight protectionist actions by governments.  The fragile world economy makes it even more important that everyone push for free trade and open investment.

   Dan Price was President Bush’s international economic advisor in the White House, and also the President’s “sherpa” for the November G-20 summit.  Dan suggests that President Obama could demonstrate U.S. leadership with a move that promotes both free trade and his clean technology agenda, by getting the G-20 nations to agree to eliminate tariffs on clean energy technologies.  President Bush launched this effort last November, and it would be a huge win on multiple fronts for our new President if he could bring this to a successful closure.  I strongly agree with Dan.

   I conclude with a warning from Dan Price, who says, “In the process of needed reform, there is a risk of political demonization of particular products or services, like CDS or securitization, that in fact perform a very useful function.”

   I wish President Obama and his team the best in their efforts to represent America at the G-20 summit.

A quick guide to the G-20 summit

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. What was accomplished at the G-20 Summit?
2. The G-20 Summit in pictures
3. President Bush’s speech on financial markets and the world economy

In the first three parts of this series, we (1) covered some background, (2) analyzed the President’s options, and (3) learned about the loans President Bush authorized in December, which laid the groundwork for President Obama’s decision.

An Associated Press headline reads, “GM, Chrysler Get Ultimatum from Obama on Turnaround.”  I think this is a misread.  It appears to me that Chrysler got an ultimatum, and GM got a do-over.

Here’s my analysis of the different messages to Chrysler and General Motors contained in the President’s remarks and in the fact sheet released by the White House.  I’m trying to weed out the political and communications signals the White House might want the press and various constituencies to think they heard, from the definitive and binding statements made today by the President and by his Administration.  As an example, while the President’s words and the documents tip their hats to more fuel efficient vehicles, I see no specific new hard fuel efficiency requirements for either Chrysler or GM.   This is in contrast to the clear language that Chrysler will get more funds after April 30th only if it has merged with Fiat or someone else.

In 6+ years working for President Bush I wrote and edited hundreds of White House fact sheets, and worked with the speechwriters and fact-checkers on a similar number of Presidential speeches.  We meant exactly what we said in those speeches and documents.  Here is my attempt to boil down the text of the President’s remarks and the White House fact sheet into their essential, definitive, and binding statements.

Message to Chrysler:

• You are not viable as a standalone company.
• We do not think that you can become viable as a standalone company.  “[W]e have determined … that Chrysler needs a partner to remain viable.”
• We will subsidize you through April 30th, so you have time to try to merge with Fiat.  (How much?)
• We’ll consider subsidizing the merger with Fiat by up to $6 billion of taxpayer funds, as long as we get paid back first.
• If that does not work and you can’t find another merger,  you’re on your own.
• We will not subsidize you as a standalone company beyond April 30th.
• Your “best chance at success may well require utilizing the bankruptcy code in a quick and surgical way.”
• We will guarantee your warrantees for all new cars you sell.

Then there is a more detailed and quite specific set of terms.  “Fiat, Chyrsler and all of Chrysler’s stakeholders must clearly understand that for this deal to succed, significant hurdles must be cleared…”

1. Chrysler must, at a minimum “extinguish the vast majority of [their] oustanding secured debt and all of its unsecured debt and equity…”
2. Chrysler, Fiat, and the UAW need to reach an agreement that entails greater concessions than those outlined in the existing loan agreements.”
3. “Chrysler and Fiat need to demonstrate with a greater degree of detail an operating plan that is truly viable, that can generate meaningful positive cash flow in a normal business environment and that can demonstrate credibly that taxpayer loas will be repaid on a timely basis.”
4. You’ll get no more than $6 billion, and that only after you’ve restructured.
5. You have to make sure you can finance cars purchased by your dealers and customers.
6. You need to have a credible plan.  “Given the magnitude of the concessions needed, the most effective way for Chrysler to emerge from this restructuring with a fresh start may be by using an expedited bankruptcy process as a tool to extinguish existing liabilities.”

Message to General Motors:

• The plan you submitted does not propose a credible path to viability.
• There is a potential plan that will make you viable as a standalone company.
• We will “provide [you] with working capital for 60 days to develop a more restructuring plan and a credible strategy to implement such a plan.”  (How much?)
• We will guarantee your warrantees for all new cars you sell.
• Your CEO, Rick Wagoner, has to resign.  A majority of the board has to go as well.
• Your “best chance at success may well require utilizing the bankruptcy code in a quick and surgical way.”
• We (the U.S. government) will be involved in your restructuring.  “The Administration team, consisting of Treasury officials as well as private sector auto industry and restructuring experts retained by the Administration, will work closely with the company.”

The clearest contrast I can provide is in these two sentences from the President’s remarks:

But if [Chrysler] and [its] stakeholders are unable to reach such an agreement, and in the absence of any other viable partnership, we will not be able to justify investing additional tax dollars to keep Chrysler in business [after April 30].

…

What we are interested in is giving GM an opportunity to finally make those much-needed changes that will let them emerge from this crisis a stronger and more competitive company.

Let’s put this in the context of the options I laid out in part two of this series.  Remember that option 1 is to continue loaning GM or Chrysler taxpayer funds even if they are not yet viable, while option 2 is to provide taxpayer funds only after a firm has entered a Chapter 11 restructuring (aka “debtor-in-possession financing,” or “DIP financing”).

• On Chrysler, the President chose option 1, while making a hard commitment to a variant of option 2 after April 30th.  He has locked himself into this strategy, even if it means that Chrysler fails and liquidates.
• On General Motors, the President has chosen option 1, and explicitly threatened option 2 after 60 days, but has left himself room to wiggle out of option 2 if he thinks that it might lead to GM’s liquidation.

If you disagree with my interpretation, I’d like to hear a different view.  Please provide specific textual references to the President’s remarks or the White House documents.  I would like to rely on primary sources rather than the press filter.

I hope to post some more on the additional exposure to taxpayers, as well as provide more of my own analysis.  Check back later tonight if you’re interested.

If you’re new to this series, here are the three prior posts:

1. Auto loans: a deadline looms
2. Auto loans, part 2: the President’s options
3. Auto loans, part 3: the Bush approach

Auto loans, part 4: Chrysler gets an ultimatum, GM gets a do-over

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Auto loans, part 5: The press forgot to ask about the cost to the taxpayer
2. Auto loans, part 3: the Bush approach
3. Auto loans: a deadline looms

The press is reporting that General Motors CEO Rick Wagoner has agreed to step down at the request of the Administration.

If you have read the first two parts of this series, then you have some background, and you understand the cost and benefits of the options the President faces.

As you hear news about the President’s announcement tomorrow, it may help you to consider the approach taken by President Bush.  The loans we provided in December set the initial conditions and context for President Obama’s decision.

Here are President Bush’s remarks from December 19th when he announced the loans.  First, he talks about the hard choice:

This is a difficult situation that involves fundamental questions about the proper role of government. On the one hand, government has a responsibility not to undermine the private enterprise system. On the other hand, government has a responsibility to safeguard the broader health and stability of our economy.

Addressing the challenges in the auto industry requires us to balance these two responsibilities. If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers. Under ordinary economic circumstances, I would say this is the price that failed companies must pay — and I would not favor intervening to prevent the automakers from going out of business.

But these are not ordinary circumstances. In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action. The question is how we can best give it a chance to succeed. Some argue the wisest path is to allow the auto companies to reorganize through Chapter 11 provisions of our bankruptcy laws — and provide federal loans to keep them operating while they try to restructure under the supervision of a bankruptcy court. But given the current state of the auto industry and the economy, Chapter 11 is unlikely to work for American automakers at this time.

Now he highlights an important concern that existed in December, but should no longer exist.  This is an important change that should affect President Obama’s consideration:

Additionally, the financial crisis brought the auto companies to the brink of bankruptcy much faster than they could have anticipated — and they have not made the legal and financial preparations necessary to carry out an orderly bankruptcy proceeding that could lead to a successful restructuring.

We (President Bush’s advisors) counseled him in December that a Chapter 11 bankruptcy/restructuring filing was highly likely to lead to liquidation, because the firms (especially GM) weren’t ready for it.  Everyone wants the companies to restructure successfully outside of bankruptcy, but they may be unable to do that with their stakeholders.  To maximize your chance of a successful restructuring through bankruptcy, you need to prepare a legal, financial, and operations strategy for a Chapter 11 filing.  I was astonished that a firm whose management had approached us in October about a possible bankruptcy filing (GM) had not yet prepared for it, but they had not.  This meant that a DIP-financing option, implemented in late December, had an extremely high probability of leading to rapid liquidation.  Here’s President Bush again:

The convergence of these factors means there’s too great a risk that bankruptcy now would lead to a disorderly liquidation of American auto companies. My economic advisors believe that such a collapse would deal an unacceptably painful blow to hardworking Americans far beyond the auto industry. It would worsen a weak job market and exacerbate the financial crisis. It could send our suffering economy into a deeper and longer recession. And it would leave the next President to confront the demise of a major American industry in his first days of office.

And so President Bush decided to provide loans to GM and Chrysler, and to their finance companies.  Notice both points — they’re important:

A more responsible option is to give the auto companies an incentive to restructure outside of bankruptcy — and a brief window in which to do it.

… These loans will provide help in two ways. First, they will give automakers three months to put in place plans to restructure into viable companies — which we believe they are capable of doing. Second, if restructuring cannot be accomplished outside of bankruptcy, the loans will provide time for companies to make the legal and financial preparations necessary for an orderly Chapter 11 process that offers a better prospect of long-term success — and gives consumers confidence that they can continue to buy American cars.

These companies have now had “a brief window” to put in place plans to restructure into viable companies.  We defined a “viable firm” in the loan terms as a firm that has a positive net present value without additional taxpayer assistance — in other words, the firm would be worth something if the taxpayers were to stop subsidizing it.  If it were to meet this test, we believed that it could get private financing for its short-term operations.

The Obama Administration is required by the terms of the existing loans to determine whether they think the firms’ plans meet that test.  By Tuesday, or by late April if the President so chooses, the Obama Administration must determine whether these firms can survive without additional ongoing taxpayer funding.

The companies have also had time to prepare for an “orderly Chapter 11 process,” so the DIP financing option (#2) should now be feasible, when it was not in December.

What we tried to do was set a hard deadline of March 31st, with only the flexibility to extend it to April 30th.  To put it in the context of the options described in part two, we were implementing option 1 to buy the companies time to both negotiate with their stakeholders, and to prepare for a DIP-financing Chapter 11 restructuring if those negotiations failed to produce a company that could survive without ongoing taxpayer funding.

Our hope was that the Obama team would be able to use the deadline of our loans as a bad cop to force tough negotiations.  We’ll see tomorrow how they did.

I imagine the news, and possibly the President’s remarks, will focus on the hard choices that have been made in the negotiations.  Rick Wagoner’s resignation is a part of that story.  If the changes are significant, then the Obama team should be complimented for them.  I argue, however, that “look at how far we have come” is the incorrect metric.  What matters instead is, “Do the companies still need taxpayer funding to maintain ongoing operations?  If so, for how long is the President willing to provide those taxpayer funds?  Is there a limit, in time or in dollars?”

We all want the companies to make the hard choices needed to restructure and become profitable again.  The hard question is, “For how long are you willing to continue subsidizing them, if they’ve done a lot, but still not enough to stand on their own?”

Auto loans, part 3: the Bush approach

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Auto loans, part 4: Chrysler gets an ultimatum, GM gets a do-over
2. Dr. Goolsbee gets it wrong on the auto loans
3. Auto loans, part 5: The press forgot to ask about the cost to the taxpayer

Several weeks ago the Obama team began to lay the groundwork for such a request.  Here are four signs.

1.  In his February 24th Address to the Nation, the President said:

Third, we will act with the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times. … Still, this plan will require significant resources from the federal government – and yes, probably more than we’ve already set aside.

2.  The President’s budget submission includes a $250 B “placeholder for potential additional financial stabilization effort.”  See Table S-6, page 125, the Treasury section in the President’s budget submission.  Importantly, the budget puts this $250 B placeholder in federal Fiscal Year 2009, which ends September 30 of this year.  So they have a placeholder in the President’s budget for another $250 B request some time in the next six months.

3.  In his written testimony before the Senate Budget Committee on March 12th, Secretary Geithner wrote:

It acknowledges that, as expensive as it already has been, our effort to stabilize the financial system might cost more. It establishes a placeholder to help ensure we can cover any additional financial stability costs.

I should note here that the existence of the $250 billion placeholder for financial stability in the President’s Budget does not represent a specific request. Rather, as events warrant, the President will work with Congress to determine the appropriate size and shape of such efforts, and as more information becomes available the Administration will estimate potential cost.

4.  Budget Director Peter Orszag has similar language, both in his written testimony, and on his blog.  Here’s a quote from page two of his written testimony:

Because of problems in financial markets, the costs of stabilization may amount to $650 billion or more – including the placeholder should additional efforts prove necessary to address the crisis we have inherited.

And here’s his blog:

Requiring $650 billion or more to stabilize financial markets (including placeholder):

• $171 billion for stock purchases in Fannie Mae and Freddie Mac
• $247 billion in federal costs for TARP
• $250 billion placeholder in case additional actions are necessary

These are not small signals.  This is a coordinated, Administration-wide message:  “Hey, Congress, we may need to ask you for more TARP funds.  Assume $250 B for now, and we’ll come back to you with a real number when we know it.”  If they do make this request, it will dominate the legislative agenda.

Congress:  you have been warned.  Are you listening?

In part three of this series (coming soon), I will provide my views and recommendations.

Is $700 billion enough? Part 2: the Obama warning

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Is $700 billion enough?
2. Is $700 billion enough? Clearing up the confusion (or at least trying to)
3. Is $700 billion enough? Part 3: Secretary Geithner says we have more room

About Keith Hennessey

I served as the senior White House economic advisor to President George W. Bush.  My job was to coordinate economic policy for the President, including macroeconomic issues, financial markets and institutions, tax policy, energy and climate change, health care, pensions, Social Security and Medicare reform, housing, transportation, technology and telecommunications, and agriculture.  I also worked on budget and international trade and financial issues.

From August 2002 through the end of 2007, I served as Deputy Assistant to the President for Economic Policy and Deputy Director of the National Economic Council at the White House.  In 2008 and the first three weeks of 2009, I was Assistant to the President for Economic Policy and Director of the National Economic Council, a position now held by Dr. Larry Summers for President Obama.  I spent most of my waking hours for almost six and half years of my life here, based in #19 and then #18.

I’m now taking some time off to recover from 6+ years in the White House.  For fun I’m doing a little bit of TV commentary and this blog.

Before working in the White House, I spent eight years working on Capitol Hill.  I spent the bulk of that time as a policy advisor to Senate Majority Leader Trent Lott (R-MS).  I also worked for two years on the Senate Budget Committee staff for the Chairman, Senator Pete Domenici (R-NM), and for six months on the staff of the Bipartisan Commission on Entitlement and Tax Reform, which was co-chaired by Senator Bob Kerrey (D-NE) and Senator Jack Danforth (R-MO).  Many years ago, I designed and tested software for Symantec Corporation.

I earned a B.A.S. in math and political science from Stanford, and a Master in Public Policy degree from the Kennedy School at Harvard.

I like to bike and wish I had a dog.

About this blog

This blog is an experiment.  During my time in the White House, I wrote and edited hundreds of memos and presentations for President Bush.  I’d like to do the same now directly for the taxpayer who finances the U.S. government, as well as for students of American economic policy wherever they might be.

While working for President Bush I had a semi-public mailing list titled White House Economics.  All the posts you see on this blog dated before January 20, 2009 are from that mailing list, with only slight clean-up tweaks.  So where it says “Posted [date],” where [date] is before 01/20/09, it actually means “Emailed to my White House Economics mailing list on [date].”

I am new to blogging, and I welcome suggestions about how to improve this blog.

About the National Economic Council

The National Economic Council (NEC) is one of four policy councils in the White House.  The others were the National Security Council, Domestic Policy Council, and Homeland Security Council.  (President Obama has since folded the HSC into the NSC.)  Every policy issue that comes to the attention of the President “belongs” to one of those councils.

The NEC is a coordinating body that helps the President manage economic issues.  My staff and I were responsible for:

• analyzing economic policy problems and coordinating design of the President’s economic policies;
• framing strategic decisions and policy options for the President, integrating economic and other policy analysis with legal, legislative, and political constraints;
• acting as an honest broker among the various Cabinet secretaries and senior White House advisors, resolving conflicting views where possible, and structuring and chairing Oval Office meetings at which issues and options were presented to the President;
• after a Presidential policy decision, working as part of the core White House team that wrote the speech, communicated the policy to the public, worked with Congress to enact a new law, and oversaw the implementation of that policy.

About my work in the White House

I worked for the President for 6+ years.  The last thirteen months were by far the most important, helping advise President Bush on his Administration’s response to the financial crisis.  In addition to that work, here are some of the major Presidential policies that I helped design, enact, and implement:

• the 2003 law that cut taxes on income, capital gains, dividends, marriage, children, small businesses and estates;
• the 2008 economic stimulus, as well as tax cuts in 2004, 2005, and 2006;
• successfully opposing repeated Congressional efforts to raise taxes in 2007 and 2008;
• reforming the regulation of Fannie Mae and Freddie Mac;
• two energy laws that support nuclear power and other alternative energy technologies, and will reduce U.S. gasoline consumption 20 percent by 2017;
• eliminating the ban on offshore drilling for oil and natural gas;
• the “Major Economies” process that is restructuring global climate change negotiations to ensure participation by all large economies;
• creating Health Savings Accounts and implementing health policies to improve price and quality transparency;
• bringing private sector competition and market forces to Medicare and adding a prescription drug benefit;
• providing loans to U.S. auto manufacturers in 2008;
• coordinating the response to the 2002 West Coast Port Strike;
• coordinating the response to the 2002 Mad Cow disease outbreak;
• creating Terrorism Reinsurance after the 9/11 attacks; and
• the most popular policy change of President Bush’s tenure: the Do-Not-Call list.

I was heavily involved in budget and international economic issues, including all of the President’s budget submissions from 2003-2008, his line item veto proposal and earmark reforms, the G-20 summit of 2008, several Free Trade Agreements and the Doha global trade negotiations, and the President’s open investment policies.

There are several policies which, while not enacted into law during the Bush Administration, I hope will serve as models for future reforms, including President Bush’s:

• Social Security, Medicare, and Medicaid reform proposals, with the goal of making these entitlement programs sustainable over the long run;
• proposal for a standard tax deduction for health insurance and health insurance market reforms, to move toward market-based health care and make health insurance more affordable for tens of millions of Americans;
• proposal to make our farm programs less trade-distorting and more fiscally responsible; and
• proposals to make permanent the tax relief enacted in 2001 and 2003 and prevent future tax increases.

In my final days on the President’s staff, I answered some questions on the Freakonomics blog about working at the White House and on the NEC staff.

About

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. USA Today op-ed: Keep taxes low
2. Understanding the GM bankruptcy
3. A quick guide to the G-20 summit