Archive for the ‘Economic Justice’ Category

Holding BP Accountable (Hopefully): The Case to Remove Liability Limits

By William Schoell and Jeremy Koulish

One cannot turn on the news today and not get pelted with an overload of Deep Horizon oil leakage updates and BP slamming.  The president is consulting with experts so he knows whose ass to kick on this whole ordeal.  So when it’s time to settle up with BP, what laws are in place to allow our government to hold BP accountable and ensure taxpayers aren’t stuck with the bill? You likely have heard about the current $75 million cap on liability for damages.  So how did that cap get into place, is it justified, and what can be done to rectify the situation?  The House Transportation and Infrastructure Committee held a hearing to examine these issues on June 9th.

For starters, here’s a brief overview of the current law.  The Oil Pollution Act of 1990, or OPA90, was written in response to the Exxon Valdez Oil spill in 1989.  This bill requires the responsible company to pay all of the damages associated with cleanup and pay economic damages related to lost incomes of newly unemployed fishermen, decreased tourism and more.  The catch is that OPA90 has a liability limit for those economic damages of $75 million.  That amount is utterly dwarfed by estimates for the damages related to Deep Horizon ranging from a “modest” $1-$3 billion as quoted by Chairman James Oberstar (D-MN08) to more current projections of closer to $40 billion.  Clearly that $75 million cap will not do the trick when holding BP accountable on its promises to cover all costs related to the spill.  Aside from the cleanup responsibilities and responsibilities for economic damages (with the cap), the bill also has created an industry-financed $150 million trust fund for emergency spending.  Its purpose is to fund the Coast Guard to start containment and cleanup work before any company pays the government or starts working themselves.  Problem is, the Coast Guard is almost out of that money.

Some valuable ideas emerged from this hearing, although their fate remains unclear given the institutional obstacles in Congress.  A few possible actions the Congress could take are increasing the liability cap, removing the cap altogether, expanding the emergency trust fund and implementing tighter regulations on offshore drilling.  At the hearing, those supportive of action seemed content with expanding the emergency trust fund and raising the cap on liabilities, although there were differences over how much to raise the cap, how much to expand the trust fund and when to pay for it.  But seeing how most Americans want to see swift actions taken on this issue, these kinds of deals will most likely be worked out in the near future.  Indeed, Chairman Oberstar said he hopes to see a bill on the floor and passed before the 4th of July recess.

One of the hearing’s witnesses, MIT economics professor Dr. Michael Greenstone, set forth a concise argument for why there should be no cap at all on damages.  The main problem with capping damages is its moral hazard effect, in other words that it creates an incentive to ignore safety protocol and cut corners in order to save money.  This is because a company knowing of a cap will not care if damages exceed the cap’s value.  In this case, BP will not care if damages are $75.1 million or $75 billion; with the cap they are only responsible for $75 million.  Not only does BP not care, insurance companies will only insure them up to that $75 million because the insurance company knows quite well that $75 million is all BP would be responsible for.  So in effect a cap gives a company incentive to act with excessive risk because they know that they will only be responsible for the cap’s value.

One of the arguments against removing the caps (or even raising them) that served as the g0-to point for Republicans including Ranking Member John Mica (R-FL07), was the unintended consequence of small and medium sized businesses would not be able to afford insurance with raised caps or no caps at all.  If the cap were raised significantly, the argument goes, companies would have to be able to pay higher premiums on more coverage, driving out smaller companies with less money.

However, regardless of the issue that barriers to entry in the oil-drilling business are already extremely high for all but the largest conglomerates, another major  problem with this argument exists. As Robert P. Hartwig of the Insurance Information Institute and others pointed out, insurance companies generally price premiums based not on company size but rather on risk.  It does not matter to an insurer if your company is worth $500,000 or $20 billion, the riskier the behavior the more their premiums will be.  So as long any company, small or large, takes the right levels of safety precaution then no company should have a problem getting insurance.  Looking at the issue a slightly different way, an efficient market for oil-drilling operations would price the full costs of unforeseen events to society into the cost of doing business. Therefore, if a company cannot afford insurance in the absence of a liability cap, drilling on oil well is not an economically viable endeavor and therefore should not be undertaken. Thus, the argument favored by most Republicans seemed oddly out of step with their traditional embrace of free market principles.

In summary, removing liability caps actually creates proper incentives for companies and insurers to act safely.  As Dr. Greenstone mentioned, the goals of off shore drillers and the public are not in line, and a cap on liability only increases this effect.  Without a cap, companies will be forced to place their drills in the safest areas with proper safety regulations in order to get insurance and/or avoid paying damages.

Congressman Rush Holt (D-NJ12) has introduced a Big Oil Bailout Prevention Act that would retroactively increase the cap limit from $75 million to $10 billion. In the hearing, Rep. Holt said he did not close the door on removing all cap limits, but he did not include it in the bill. That bill is matched by a similar proposal in the Senate by Sen. Robert Menendez (D-NJ), which has been brought to the Senate floor only to be blocked multiple times, first by Sen. Lisa Murkowski (R-AK) and then by Sen. James Inhofe (R-OK).

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Our Emotional Senate?

So financial reform certainly beats health care reform in terms of drama and action Via Open Left:

2. Susan Collins and Ben Nelson on board, but progressives blocking passage
Republican Susan Collins, and uber-ConservaDem Ben Nelson came out in favor of cloture today.

If all other Democrats held together, this would mean there are enough votes for cloture to succeed. However, many progressives–Cantwell (reinstating Glass–Steagal), Dorgan (ending naked credit default swaps), Harkin (capping ATM fees at $0.50), Merkley (reinstating Volcker rule), Levin (same as Merkley) and others–remain angry that their strengthening amendments have not received votes, and as such are not promising to support cloture. In fact, Cantwell just said she does not support cloture, as of right now.

Progressive anger over this turned into chaos–or as close as the Senate ever gets to chaos–on the floor last night. Tom Harkin openly angry at Harry Reid, Senators huddled every which way to strategize, strange procedural moves were employed (see bullet point below for the prime example), and more. Ryan Grim and David Dayen have good rundowns of the events.

Everything related to HRC took forever and never seemed to include any surprises on either the House and Senate floor. Pretty much every vote turned out as predicted, the changes happened in the in between periods. The little bits of drama were in the various of periods of wringing out votes. Don’t know if all the drama will make for a better bill, but it’s a lot more interesting then the endless debates about pulling together. Maybe it’s just the absence of Joe Lieberman’s oxygen depleting presence as a central figure in the debate.

Today in “That Really Happened?”

So today’s illustration of how weird politics can be comes in the form of President Barack Obama kind-of walking back his comment that people shouldn’t be gambling in hard economic times.

It may not have been an actual apology, but President Obama nevertheless brought the crowd here to its feet in this Las Vegas suburb Friday with an impromptu exchange with a tourist at his town hall meeting.

Obama annoyed Las Vegans recently by saying that struggling families shouldn’t “blow” their hard-earned cash in Vegas. The comments annoyed everyone from cab drivers to the city’s mayor, who snubbed Obama by not showing up for his arrival this week.

So the president was presented with the perfect opportunity to make amends when he offered a question to a man who said he was from Jonesboro, Ark.

“What are you doing in Vegas?” Obama asked.

“Everyone comes to Vegas,” the man said, prompting massive applause.

“That’s what I’m talking about,” Obama said.

“Did you spend some money here in Vegas?” he asked? After getting a “yes,” Obama added: “That’s good. We like to see that.”

The standing ovation was especially raucous.

I’ve never really looked into it, but I’m pretty sure the Bushes, Clinton, Reagan, etc weren’t in favor of struggling families blowing money in Vegas.

-Chris

The DC Council Thinks You’re Stupid

Specifically, Councillors Jack Evans, Kwame Brown, David Catania, Vincent Gray, Marion Barry, Muriel Bowser and Mary Cheh. These are the sponsors and co-sponsors of the “Global Security and Aerospace Industry Tax Abatement Act of 2010“, a proposed tax giveaway to gigantic war contractor Northrop Grumman. In the midst of a budget crisis, they believe our scarce resources are best used throwing $25 million at a rich, politically-connected corporation? It’s just infuriating that even in an overwhelmingly liberal Democratic city, the politicians here claim the budget shortfall is causing them to make cuts to schools, public transportation, homeless shelters and even failing to provide core emergency services like snow removal, yet have the gall to offer millions in tax breaks to a top defense contractor already bloated on the taxpayer dole. It’s a very telling statement about where the priorities of these elected officials really are.

Here’s some background on the Northrop Grumman corporate welfare bill:

Northrop Grumman Corp. would receive $25 million in incentives to relocate its headquarters to D.C. under a bill introduced Tuesday by the D.C. Council.

The “Global Security and Aerospace Industry Tax Abatement Act of 2010” would provide $19.5 million in real estate tax breaks over 10 years and up to $5.5 million in grants to offset relocation costs the company could incur in its planned move from Los Angeles.

The bill is sponsored by Councilman Jack Evans, D-Ward 2, along with six other of the city’s 13 council members. Evans said the bill “sends a clear message to Northrop Grumman that we are absolutely interested in having them as one of our corporate citizens.”

He said if the city can provide a comparable financial package to the suburbs then he believes D.C. has a chance to land the company because of its proximity to the Capitol, White House and Pentagon.

Yes, that’s probably true. DC does likely have some chance or other to get the company’s HQ within its borders. However, those tax incentives probably wouldn’t be what brings them here. Good Jobs First has spent a great deal of effort chronicling the nefarious impacts of such giveaways (and is a great resource for further research on the subject if you’re interested). As the case of subsidies for foreign auto assembly plants shows us, corporate decisions on where to locate their activities generally are predicated on two major factors: proximity to markets and labor costs (in terms of corporate headquarters, quality of life in the region also makes a difference).

Taxes do matter, but to a much lesser extent than the other considerations. Often, a company has made up its mind where to locate before an announcement is made, then it plays neighboring local jurisdictions against each other to secure a nice chunk of change from the state or locality where they were going to go anyway.

And that extortion money offered by the city, in this case DC? It’s not exactly money the city can afford to spare:

All the subsidies are subject to inclusion in the city’s budget, which would add to hundreds of millions of dollars of budget gaps already expected in the coming years….

The company would also likely qualify for further tax breaks through a 2000 law aimed at luring tech companies. Called NET 2000, the legislation offers to eliminate the city’s 9.98 percent franchise tax for five years and charge a 6 percent rate thereafter.

Well, yeah. Sure sounds like a boondoggle. But…..really, it’d be worth the investment and create tons of new jobs for the city, right?

Fenty has said his administration will do whatever it can to lure Northrop’s headquarters and an expected 100 to 150 new jobs to the area. His deputy mayor for planning and economic development, Valerie Santos, says she was “working very aggressively” to assemble a package for the company that would beat those being offered in Maryland and Virginia.

$25 million – and possibly much more – for just 100-150 jobs going to people who are probably gonna live in Virginia? DEFINITELY a boondoggle. It’s truly amazing that nearly half of the overwhelmingly Democratic city council would consider this to be a prudent measure of their tax dollar priorities.

Thankfully, this all may very well be a moot point here anyway.

Sources on the public and private side of negotiations have said the Meridian Group’s National Gateway in Crystal City is leading the pack of potential sites.

And that’s why I brought up all that stuff about the uselessness of tax incentives in influencing relocation decisions. Chances are, Northrop Grumman has already decided to go to Crystal City, simply because it’s a stone’s throw away from their cash cow in the Pentagon. If they do end up coming to DC, it’s because they’d rather be closer to the White House and Congress. Location location location, baby.

Neither DC nor Virginia should get suckered into thinking it’s about anything other than that.

But just in case, definitely drop the offending Councillors a call or e-mail, especially chief sponsor Jack Evans. Let them know just how much you appreciate their pro-corporate-welfare priorities.

-Jeremy

Taxing Wall Street – event review

(Intro by Jeremy) I see Chris just posted something about international speculation taxes. Closer to home, proposals are floating around in both the House (DeFazio) and Senate (Harkin) to impose a similar transaction tax of financial speculation. The Center for American Progress hosted an event on the issue last Tuesday, and our intern James Hazzard wrote the following review of the event:

Facing persistent revenue shortfalls and motivated by a healthy amount of populist anger directed towards Wall Street, Democrats in Congress are considering the unprecedented step of raising taxes in the midst of a recession. The concept gaining steam is a transaction tax, which would take a small percentage from every stock, futures, and credit trade. The tax is expected to raise $150 billion dollars annually, half of which will go to job creation and transportation issues while the other half will go directly to paying down the deficit.

In response to this proposal, the Center for American Progress (CAP) opened a snow-bound forum last Tuesday morning titled “Taxing Wall Street.” Moderated by Greg Ip of The Economist, the forum focused on the possible economic impacts of the Democrats’ proposal.

Mr. Ip, the U.S Economics Editor for The Economist, started off the discussion by filling in the history of a transactions tax. Beginning in 1934, the SEC has applied an extremely small tax upon every transaction to help offset its operating costs. Louder discussions of a transactions tax began in 1972, and have become especially potent over the past several years. Both Great Britain and the International Monetary Fund are considering similar taxes, although the Obama administration currently appears cold to the idea.

Michael Ettlinger, Vice President for Economic Policy at CAP, emphasized the necessity of a transactions tax. Even with a complete freeze on discretionary spending, the country is still running a chronic deficit. Taxes must be raised or entitlement programs must be cut, and the latter is extremely unlikely. For Ettlinger, the core question isn’t whether or not there should be a tax, but would the tax cripple the financial services industry? The answer is no. The tax is light, would have a negligible effect on long-term investments, and would only take a small amount of money out of a huge industry.

Dean Baker, Co-Director of the Center for Economic and Policy Research (and featured speaker at our recent Green Bank briefing), focused on the behavioral implications of the tax. The last 30 years of technological development have not skipped over the financial industry, and has become significantly cheaper to make trades. If the Democrats’ proposed tax increase were to be instituted, it would put costs back into the levels of the early 90’s. Dr. Baker argues that such costs would not only leave the financial system in perfect health, but improve behavior. Higher transaction costs will discourage highly risky trades but leave safe transactions untouched, and encouraging long-term behavior in the stock market is key to avoiding another collapse.

The last speaker was Ellen McCarthy, Managing Director of Government Affairs at the Securities Industry and Financial Markets Association (essentially the Wall Street trade association). McCarthy argued as “the other bookend” of the debate by attacking the proposal. She argued that instead of punishing Wall Street, the tax would be passed along to the American household by the traders. While the tax will change short-term behavior, it will also reduce the liquidity of stocks and make the market less flexible in response to crises. And, of course, such a tax would hurt employment in the financial sector.

During the Q&A session, the discussion focused on whether or not Wall Street deserved to be taxed. Dean Baker, while defending the tax, acknowledged that taxes can’t just be applied on the basis of being deserved – the government wouldn’t make any money. Michael Ettlinger argued that the tax wasn’t specifically directed to punish Wall Street – that was just the language of the bill. The real danger in Wall Street isn’t derivative trading, but speculative and destructive behavior. The forum concluded with Ettlinger arguing that any legislation that imposes a transaction tax without additional reforms would be innocuous. Wall Street needs to be transparent before it can be taxed.

Taking $150 billion out of an industry worth hundreds of trillions of a dollars isn’t likely to cripple it, and it’s pretty likely that the American people can get behind this small fee. But this is a small battle in a much wider war over financial system reform. The final success or failure of this tax will likely depend on the resolution of issues entirely separate from a transactions tax, issues like much-need regulation reforms designed to bring hedge fund and derivatives transactions out of the shadows (a weak version of such a measure has passed the House). At least we can be somewhat assured that if everything works out, and the tax does get imposed, our society will not be brought to its knees by a quarter of a percent tax.

To watch the video from the forum, visit the Center for American Progress website.

Financial Speculation Tax International Edition

Across the pond:

Big Problems, Need Big Solutions

Tom Toles continues to a great job explaining big issues with simple illustrations. Although like seemingly everything these days, the problem has a lot more to do with the Senate, then Obama.

Anyway it’s good that Toyota is thinking outside the box in terms of ways to help American car makers

“Seems Like”

More from the SOTU (emphasis added):

They don’t understand why it seems like bad behavior on Wall Street is rewarded, but hard work on Main Street isn’t; or why Washington has been unable or unwilling to solve any of our problems

The Federal government did a bail out, but didn’t nationalize, or set conditions on executive pay. Today Wall Street and the banks have recovered much more then the public at large. So how else are people supposed to see things?

Obama did a good job laying out a vision for improvement moving forward, but there’s no point in soft selling the last year.

-Chris