End Crony Capitalism

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Posted: Aug 18, 2010 11:35 AM
Guest Post by The Heritage Foundation

At 300 East 23rd Street in the exclusive Gramercy Park neighborhood of Manhattan, where to get into parts of the park you need a key granted just to residents, a new 98-unit luxury apartment complex has been built with an outdoor movie theater and panoramic city views. The problem is that not enough buyers are coughing up the $820,000 to $3 million the project’s developers are asking for the privilege to own a unit in the building. But don’t worry, the Obama administration is coming to the rescue. Last December, the Federal Housing Administration loosened its financing rules so that U.S. taxpayers would have the honor of backing loans with downpayments as low as 3.5%. Now rich Manhattanites can better afford condos in buildings with pet spas, concierges and rooftop lounges like the one in Gramercy Park, all on the taxpayers’ dime.

You read that correctly: the FHA, created in 1934 to make homeownership attainable for low- to moderate-income Americans, is now subsidizing Manhattan luxury condominiums. How did we get here? The mindset that allowed this unconscionable public policy to occur was on display yesterday in Washington, where Treasury Secretary Timothy Geithner hosted his Future of Housing Finance symposium. While Secretary Geithner promised “fundamental reform” of our nation’s housing policies, he also insisted that the federal government must continue to play a strong role in U.S. mortgage markets: “There is a strong case to be made for a carefully designed guarantee in a reformed system, with the objective of providing a measure of stability in access to mortgages, even in future economic downturns.”

Geithner was not asked if FHA’s backing of Manhattan luxury condos fit his definition of a “carefully designed guarantee in a reformed system,” but American Enterprise Institute fellow Alex Pollock was there to at least throw some cold water on Geithner’s central-planner arrogance: “You can either, in my view, be a private company or a government agency — one or the other, but not both.”

Geithner’s “carefully designed” government intervention mindset is at the core of why the Obama administration’s economic policies have been a complete failure. Since taking office the Obama administration has used the Troubled Asset Relief Program (TARP) and other initiatives to buy one car company, give another to union allies, punish non-union workers, undermine the bankruptcy code, enrich Wall Street at the expense of Main Street, bail out Mickey Mouse, keep unionized zombie firms from dying and generally terrorize the world economy. That is why, for the first time ever in 2010, the United States fell from the ranks of the economically “free,” as measured by The Heritage Foundation’s Index of Economic Freedom. From housing, to banking, to spending and taxation, the U.S. economy will only truly recover once it is clear to private enterprises that their best bet is investing in employees, machines and ideas, not lawyers and lobbyists in Washington. To that end, Heritage’s just-released Solutions for America chapter on Restoring the U.S. to a Free Economy recommends:

Unwind Government Intervention: The government should end the interventions it has made since 2008, starting with abolition of the TARP program. It should then abolish Freddie Mac and Fannie Mae and repeal all U.S. government regulatory measures that interfere with mortgage markets. Congress should also repeal the Sarbanes–Oxley Act, which discriminates against small firms and reduces competition. Companies should be allowed to fail, and laws and regulations should create no expectation of a future bailout.

Reduce Government Involvement in Commercial Decision-making: Congress must eliminate the insidious practice of earmarking, which corrupts the legislative process. The government needs to divest itself of all assets acquired in connection with the financial crisis and recession and refrain from interfering in bankruptcy cases.

Reduce Tax Rates: Our corporate income tax rate, currently the second highest in the developed world, must be cut to restore U.S. competitiveness. The corporate tax rate should be set at or below the Organization for Economic Co-operation and Development average of 26% to eliminate the incentive for businesses and jobs to move overseas. We should also stop taxing businesses as individuals, but rather reduce rates to 25%, which would help business to grow and create jobs.

Spend Less and Devolve Responsibilities: Congress should enact a firm cap on the annual increase in total government spending, limited to inflation plus population growth. Lawmakers should exert all effort to keep overall federal spending to less than 20% of U.S. GDP, the historical post–World War II average for federal spending.

Give Workers a RAISE: Union contracts set both a wage floor and a wage ceiling. Unionized employers may not give productive workers pay raises outside those envisioned in the collectively bargained contract. The RAISE Act (Rewarding Achievement and Incentivizing Successful Employees) would allow employers to pay individual workers more, but not less, than the union contract specifies thus restoring to millions of union members the inherent American right to earn individual raises through individual efforts.

On Monday, President Barack Obama visited the ZBB Energy battery factory in Menomonee Falls, Wis. Last January, the Obama Energy Department invested $14 million in the company, and President Obama was on hand to claim credit for every employed person there. But The Wall Street Journal did some homework and found that since going public in June of 2007, ZBB has been hemorrhaging money. The firm lost $4.9 million in fiscal year 2008, $5.5 million in fiscal year 2009, and has a “cumulative deficit” of $44.1 million. ZBB has admitted that its ability to continue as a “going concern” depends on securing additional investment. In a free market economy, private investors would provide those funds, reap the rewards if ZBB prospered and suffer the losses if ZBB failed. But under President Obama’s crony capitalist economy, ZBB is the big winner if the company survives, and if they fail, it is you, the taxpayer, who loses.