The Maine Mantra: Relief to Taxpayers

Taxpayers everywhere, not just in Maine, want relief. But Mainers, more than most, may be entitled to it. Year after year the Tax Foundation has ranked Maine among the two or three most heavily taxed states in terms of the combined state and local tax burden as a percentage of per capita income. Maine's figure of 14% compares to the national average of 11%.

Governor John Baldacci would like Maine to retreat to the middle of the pack. In 2005 he signed LD 1, a measure to limit year-to-year increases in public spending at all levels--municipalities, school districts, counties, and state. Formulas were devised to calculate for each budget a Growth Limitation Factor, itself a function of changes in average personal income and property valuation. Each town must calculate its own GLF, which is the maximum percentage increase that may be applied to its Property Tax Levy Limit. Any spending above the limit must be approved through an override vote.

My town, good old Peru, Maine, will act on a proposed 2008-09 budget by referendum on June 10. For the first time, Peruvians will be asked by the Selectmen to override the LD 1 cap. Actually, the Selectmen nearly forgot to ask. When it was pointed out to the Board that the municipal budget would expand by 9.2% with passage of all articles, somebody said uh-oh! and called the Maine Municipal Association for guidance. Hence Article 3-A , a late insertion to the warrant that first appeared in the annual town report.

At a public hearing last night, the Selectmen justified the juiced-up Levy Limit by insisting that the budgets for 2006 and 2007 were artificially lean and that you cannot run a town for so little money. I happened to chair the Board during those two cycles. So if anyone deserves scorn for holding the line, it is I. [Never mind that the merger with SAD 21 was growing Peru's school spending by double digits annually, effectively starving the rest of the budget.]

If Article 3-A and all subsequent spending articles are passed, the municipal budget for 2008-09 will reach $583,400. Together with an expected $1.3 million school assessment and a $76,853 county assessment, total appropriations will fall just shy of $2 million. The total tax commitment will come in at roughly $1.555 million, which, according to Selectman Jim Pulsifer, may raise Peru's mill rate from 14.3 to as much as 16. Bon appetit.

What $8 Gasoline Will Buy

Eight reasons you'll rejoice when we hit $8-a-gallon gasoline - MarketWatch

Bates College Commencement, May 25, 2008

Brett Hine, Bates 2008, B.A., Music

Drinking Water in Short Supply

Pictured above is the reservoir for the city of Barcelona, Spain. So where is the water, you ask? And what's with the building? Submerged when the reservoir was commissioned 40 years ago, the building once again sees the light of day, thanks to human thirst and climate change. Barcelona now imports water on tanker ships.

Dwindling water supplies are also a problem in parts of the U.S. Last week the San Francisco Chronicle reported that the East Bay Municipal Utility District is now rationing water to its 1.3 million customers. After two dry years and the driest spring on record, the District has declared a water-shortage emergency and instituted a drought management program that would cut overall use by 15 percent. The rest of California may soon follow, as the Sierra Nevada snowpack is only 67 percent of normal. Orange County began rationing to its 330,000 customers last year.

Drought has also hammered the Southeast, where reservoirs are dangerously low. There are even rumblings of a border war between Georgia and Tennessee over rights to a part of the Tennessee River. Elsewhere efforts are under way to make brackish water potable. Albuquerque, Las Vegas, Orlando, San Antonio, and San Diego are all currently considering desalination plants.

Reading stories like these, Mainers are quickly reminded that they are sitting on an increasingly valuable resource: clean, fresh water. It is an asset which multinational corporations are eager to monetize, and they are blitzing local planning boards with large-scale proposals to pump groundwater, bottle it, and truck it outta here. To their credit, some communities are resisting. Perhaps Maine should consider legislation similar to what Vermont passed last month, declaring the state's groundwater a public trust and establishing a permitting process for high-volume users.

So THAT'S What They Mean by Self-Storage!

Sometimes you have to get out of rural Maine to recognize broad cultural trends, especially emerging ones. In June 2001 my daughter and I hit the road to look at college campuses. We exited Maine on U.S.-2 and wended our way across northern New England and into New York for our first stop, Skidmore College. All told, we visited ten colleges in seven states over eleven days. We saw a lot of the upper Midwest.

There were three things that we saw too many of: single-occupant vehicles (particularly SUVs), golf courses, and the newest of the three, self-storage facilities. Let me dismiss the first two quickly. We all know about Americans' over-reliance on the automobile. Idling in congested commuter traffic on Chicago's freeways (there's a misnomer) reinforced my conviction that cheap gasoline is a curse. As for golf courses, they swallow up wildlife habitat and farmland to benefit relatively few people. They are an ecological scourge.

So what about self-storage units? At the time we joked about how Americans have so much STUFF that they cannot fit all of it in their domiciles anymore. There are houses for people and now houses for their stuff. Remote storage seems a tacky testament to modern consumerism and excess.

Now for the newest trend, reuniting people with their stuff. This is no joking matter, as explained in the N.Y. Times earlier this week. People facing foreclosure on their homes need to park their stuff temporarily, so they turn to self-storage units. Problem is, the people who cannot keep up with their house payments also tend to fall behind on their storage rentals, thereby running the risk of having their stuff auctioned off. The solution for some people is to walk away from the house and move in with their stuff (storing themselves, as it were), which must drive local code enforcement officers crazy. My suggestion: put car pads next to the storage units and use retired SUVs for housing.

For more on the booming storage industry (and on the vultures who descend on the property auctions), go here:
Losing a Home, Then Losing All Out of Storage

[update, May 14, 2009--]
James Quinn at Minyanville has calculated the following: "Americans have accumulated so much stuff that their McMansions can’t contain it all. In 1984, there were 6,601 self-storage facilities with 290 million square feet space; in 2008, there were 51,250 “primary” self-storage facilities representing 2.35 billion square feet - an increase of more than 2.0 billion square feet. There's 7.4 square feet of self-storage space for every man, woman and child in the nation; thus, it's physically possible that every American could stand -- at the same time -- within the space we've allotted to self storage."

Mother, Meet Meredith

Meredith Whitney is today's E.F. Hutton: when she talks, people listen. And what she is saying today about four of Wall Street's biggest firms will not please shareholders. The Oracle of Oppenheimer describes the outlook for Merrill Lynch, Goldman Sachs, Lehman Brothers, and Morgan Stanley as "far more bleak than that reflected in the market." She has cut 2008 earnings estimates for the group in half and singles out Mother Merrill for an "underperform" rating.

Whitney first made a name for herself last October 31, when she pointed out that the biggest U.S. bank of them all, Citigroup, had insufficient cash flow to cover its dividend to shareholders. Unless it slashed the dividend, raised capital, or sold assets, it was on a path to bankruptcy. Within a week Citigroup's CEO was gone. By January Citigroup was implementing the measures recommended by Whitney, who by then had received death threats for telling it like it is.

This was a classic the-emperor-has-no-clothes shift in perception. Investors were forced to accept that valuations were spun out of thin air. Balance sheets were (and still are) stuffed with derivative dark-matter that is illiquid and hard to price--marked to myth, not to market. How can anyone figure out what these firms are worth? "You can't really know,'' says Whitney. "The financial disclosure is terrible. They're all either liars or they don't know--but I assume they really just don't know.''

And for that company executives have been paid mega-millions, way more than what Whitney makes as a lowly analyst.

Bull in a China Shop

In its zeal to solve one problem, Congress has created another. Lawmakers thought they were doing the right thing last year when they mapped out a timeline for increasing the supply of biofuels in the U.S. The goal: reduce our dependence on foreign oil. The strategy: expand domestic production of renewable fuels five-fold to 36 billion gallons annually by 2022. Corn farmers will be the big winners in the early going, as annual production of corn-based ethanol will double to 15 billion gallons.

It has been just five months since President Bush signed into law the Energy Independence and Security Act of 2007, supported by all four members of Maine's congressional delegation. Already the ethanol mandate is coming under fire. Last Wednesday the Senate Homeland Security and Governmental Affairs Committee examined whether the rush to corn-based ethanol is contributing to higher food prices. Susan Collins of Maine, the senior Republican on the committee, thinks so. The week before she had joined 23 other Senate Republicans in drafting a letter to the Environmental Protection Agency (EPA) calling for a change in the mandate. In the words of presidential candidate John McCain, "this subsidized program--paid for by taxpayer dollars--has contributed to pain at the cash register, at the dining room table, and a devastating food crisis throughout the world."

Did he say subsidy? That's right, ethanol blenders qualify for a federal tax credit of 51 cents a gallon for helping to meet the Renewable Fuels Standard (RFS) mandate passed in 2005. That comes to $2.5 billion a year. Corn growers get their own subsidy, and they are further protected by a tariff on imported ethanol of 54 cents a gallon. That keeps Brazilian sugar-based ethanol out of our market, to the consumer's detriment. Ethanol from corn costs $1.05/gal. to make with a per-acre yield of 400 gallons. Ethanol from sugar cane costs $0.81/gal. at 590 gallons per acre. Which business would you rather be in?

All told, corn ethanol is subsidized to the tune of $1.45 per gallon. But a gallon of ethanol does not deliver the same energy as a gallon of gasoline. In reality the subsidy comes to well over $2 for every gallon of gasoline replaced. We get way more bang for the buck for subsidies paid directly to the oil industry. Meanwhile, diversion of corn (as much as one-fourth of the crop) from food to fuel has jacked up food prices by 25%--"the best example I've seen of the law of unintended consequences," said Collins at Wednesday's hearing.

When it comes to predicting consequences, politicians struggle. As Henry Hazlitt wrote many years ago in Economics in One Lesson, "the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." Subsidies and tariffs tend to lead to a sub-optimal allocation of resources, to stubborn inefficiencies. "Free prices and free profits will maximize production and relieve shortages quicker than any other system."

If we must subsidize something, perhaps we should move away from corn ethanol and toward cellulose ethanol derived from crop wastes, wood wastes, and perennial grasses. Corn currently gets ten times the subsidy as the other biofuels combined. A more balanced program would allow different regions of the country to match their R & D to the available feedstocks. As it stands now, corn-belt agribusinesses get fat while the rest of the world starves.

[update, May 15:]
The U.S. Senate today passed the Food, Conservation and Energy Act of 2008 by a lop-sided 81-15 margin. Among many other things, the bill reduces the tax credit for ethanol refiners from 51 cents a gallon to 45 and expands subsidies for cellulose ethanol, steps that Senator Collins would presumably support. However, she voted against the entire package, perhaps because it proposes to spend roughly $300 billion over five years and preserves subsidies to farmers making as much as $750,000 in annual farm income. Currently there is no limit whatsoever; President Bush had proposed a limit of $200,000. The President has threatened a veto, but the Senate has enough votes to override.

Pain in the ARS

Why can't we ever get lawyers like that? I ask on behalf of all Mainers, who can only watch with envy as Massachusetts Attorney General Martha Coakley adds another notch on her belt. This time it is UBS Financial Services Inc., the latest Wall Street firm to be nailed for marketing "enhanced" cash investments to municipal entities. As reported on the front page of this morning's Boston Globe, UBS has been coaxed (sorry, couldn't resist) to repay $37 million to 17 cities and towns for auction-rate securities (ARS) for which there is no longer a market. Towns had been parking excess cash in ARS, which rolled over weekly or monthly until the market seized, to juice returns.

The settlement with UBS follows an earlier deal with Merrill Lynch whereby the City of Springfield was refunded $14 million for money invested in collateralized debt obligations (CDO). In each case, the broker/dealer was forced to admit that the investments in question were not permitted by state law, which restricts municipal cash to highly liquid accounts that guarantee the principal. Also in each case, the broker/dealer admitted only to a one-time misdemeanor. "UBS is pleased this matter has been resolved," said a company spokesperson.

Maybe it has, maybe it hasn't. Massachusetts Secretary of State William Galvin has issued subpoenas to UBS, Merrill Lynch, and Bank of America regarding the sale of ARS to individual investors and businesses. Conducting its own investigation is the Securities and Exchange Commission. If a pattern of abuse is revealed, then aggrieved investors, public and private, will be lining up for restitution.

The State of Maine continues to wait for resolution of the MainSail II fiasco. Creditors were alerted in March that "no valuation of the Issuer's asset portfolio [...] provides any reasonable expectation" that senior secured parties will get all their money back. Other investors may get nothing. The assets (which have shrunk in value by two-thirds since Maine jumped into the pool) are now in receivership, so the eventual outcome for investors will be, if not entirely satisfactory, at least orderly. Price discovery awaits.

Meanwhile, Maine Treasurer David Lemoine, still ticked off at Merrill Lynch for pushing the MainSail investment, has blackballed the firm. The State will be selling nearly $120 million in general obligation bonds later this month, and Merrill will be getting no piece of that action. “Until the Mainsail II matter is fixed and I am satisfied that the Merrill Lynch brokerage culture is trustworthy," said an exasperated Lemoine, "this office will not bring Merrill Lynch into any of our bond deals.” Take that, Merrill Lynch.

A Class Act

This morning's Globe has a must-read piece on Dan Doyle, a Bates College grad and trustee whom I had the good fortune to meet, quite by happenstance, three years ago--at Pep Boys in Auburn. It was a Saturday night, just before closing. He was there for a new tire prior to driving back from campus to his home in Connecticut. I had arrived by tow truck, my Taurus in need of a new idler pulley after breaking down on the Maine Turnpike in Gray.

After making the Bates connection (my son, Brett, was then in his first year), our conversation was off to the races. Dan's knowledge of New England sports is encyclopedic; he was able to name the coach and best player of the Yale basketball team that I had watched as a student (1967-71). Dan wanted to know all about Brett, whose budding tennis career he promised to follow. I gave Dan a tip about a high-school hoop phenom in the River Valley, a gal named Kaubris, but we ended up letting her get away. She went to Bowdoin instead.

Dan is all about appreciating and respecting people. There is no greater ambassador of sportsmanship, as you may read here:
Dan Doyle draws up a game plan for sports parenting - The Boston Globe

Flight Suit, Pants Suit...Whatever

Five years ago today the war in Iraq ended. We know that for a fact because our president told us, right there on the deck of the USS Abraham Lincoln. And so said the sign behind him, "Mission Accomplished." Ever since then we have simply been mopping up. Good thing, too, that we got it over with as quickly as we did. There is no telling how much a five-year war would have cost us.

P.S.--That circus stunt in a jumpsuit, obviously staged for a future campaign ad, debased the office of the Presidency almost as badly as Tricky Dick's dispatch of his "plumbers" to the Watergate complex.

"Fill 'er up, it's on me!" said Hillary Clinton yesterday to a sheet-metal worker in South Bend, Indiana. Actually, she said it to the cameras. But Jason Wilfing did not mind being a mere stage accomplice; he was getting 63 bucks worth of free gas for his boss's Ford F-250. Good deal.

And has Hillary got a great deal for the rest of us, too! With no bandwagon of her own, she jumped on John McCain's and seconded the call for a moratorium on federal motor fuel taxes this summer. That's right, Mr. Middle Class Consumer, you should get a break from having to pay 18.4 cents per gallon of gasoline into a fund that pays for highway repairs. Put that money right back into your pocket. We will offset the resulting revenue shortfall by, now get this, billing the OIL COMPANIES!

Believing that Exxon will not pass a new windfall profits tax right back to the consumer is like believing that the Iraq War is over. Exxon charges what it does because it can. It is a matter of supply and demand. Removing the fuel tax will not increase supply, but may very well increase demand, bringing the pump price back to the original balance point. We will be right back where we started, except with new costs of compliance for extracting a new tax. McCain's proposal would be even worse: what is now being paid as a federal tax will eventually go to the oil companies instead, inflating their profits and executive compensations. This favors the little guy?

When Hillary has time actually to think a little more about a gas-tax holiday, she will recognize the proposal for what it is: a bad idea. But who has time to think? Hillary is campaigning 24/7, trying to survive from one primary to the next, hustling votes any way she can. Her fixation on the short term reminds me, indeed, of Aviator Dubya himself.

Are We There Yet?

The bottom in the housing crisis is nowhere in sight, according to data released today. Take your pick, the stats are all bad:

* Foreclosure filings: up 112% in the first quarter compared to 2007.

* Home prices: down 12.7% in one year (Case-Shiller index).

* Vacant homes: up 5.7 % in 2007.

* Owner-occupied homes: stuck at 68%--and headed lower.

The vacancy rate is the one that really gets me. It is a capsule summary of the colossal, almost obscene misallocation of capital (aside from war spending) that took place in the U.S. over the past decade.

Let's look at the vacancy numbers more closely. In 2007 the number of vacant homes increased by one million to a record 18.6 million. If we take out seasonal homes, we are left with 13.9 million vacant homes that are suitable for year-round occupancy. Of those, 4.1 million are for rent (over 10% of the total rental stock). Another 7.5 million are off the market for one reason or another; they may be second homes, homes in foreclosure, or homes in undesirable locations. Bottom line: there are 2.3 million vacant homes awaiting buyers, an overhang that is nearly double the usual.

How did it happen? The Federal Reserve helped with its loose monetary policy, encouraging risk-taking among lenders and borrowers alike. Artificial demand was created as homes (particularly at the high end) morphed into something else: fungible assets that investors could swap in and out of. In other words, these homes were not built for occupancy. Wall Street fueled the boom by securitizing home loans and hence increasing the velocity of all that easy money.

Many (most?) of these home loans were structured to serve quick flippers, not long-term occupants. These so-called "exploding ARMs" (adjustable rate mortgages) came with low introductory interest rates good only for two or three years before resetting much higher--no problem if you can get out before the reset. Oh, wait, you mean you actually want to live in that house? Then you had better be ready for higher monthly payments. Hybrid ARMs worth $362 billion will reset in 2008 and will devour a lot of those IRS rebates going out in the mail starting this week. Unless these loans can be reworked, many will fail.

Vacant homes lose value in many ways. Not only do they have to be repriced (downward) according to the law of supply and demand, but they are beset upon by squatters and vandals. The physical deterioration, in the words of a Boston attorney, is "like Katrina without the water." And it will get worse before it gets better.

These Lips Are Not For Reading

"Read my lips," said Republican presidential nominee George H. W. Bush 20 years ago, "no new taxes." The man got himself elected largely on that pledge, then was dismissed by the electorate four years later after, you guessed it, raising taxes. It was an infamous, though hardly unprecedented, example of saying one thing and doing another. Happens all the time in American politics.

And also in American finance. Two weeks ago Merrill Lynch's Chief Executive Officer, John Thain, reassured investors in Tokyo that his company had no plans to raise further capital, that the $12 billion already obtained from sovereign wealth funds would suffice. At that moment Merrill's Chief Financial Officer, Nelson Chai, squirmed in his seat. Chai knew the numbers, which have no lips and thus do not lie. "I wish he didn’t say that," Chai said later of Thain's remark.

Chai's caution was understandable in light of last Thursday's earnings update (see my April 18 post). Despite the reported losses and writedowns, Thain insisted that the firm is "well-capitalized" and that "we do not have any plans to raise any additional common equity, and Nelson actually agrees with that"--at which point Chai squirmed again. During the Q & A segment of the conference call, a Citigroup analyst pressed Thain on the possible need for additional capital. No problem, said Thain, who pointed out that the $12 billion already raised exceeded losses in 2007 by $4 billion. "That capital, that excess capital, was intended to reassure the market that we didn't have to come back into the equity markets and it'd give us the capital base to go forward into 2008. And that continues to be the case."

Given Thain's hope for restored profitability in 2008, Merrill's stock was up on Thursday and Friday. It retreated this morning, however, after the company's announcement of a preferred-stock offering at 8 5/8%. Oops, so much for Thain's reassurances. One wonders if his loose lips in recent days might provoke more shareholder suits. Meanwhile, bean-counter Chai continues to fret over Merrill's balance sheet and the $44 billion of debt maturities coming due in 2008. "We obviously continue to roll commercial paper and repo [repurchase agreements]," said Chai during the conference call.

How long can the juggling continue? Merrill is lunch, in my opinion.

[update, April 24:]
Merrill Lynch announced today that it will continue to pay out a quarterly dividend of 35 cents a share to holders of common stock. No matter that it is rolling over short-term debt at 6% and offering preferred stock at almost 9%. The dividend, which makes no sense from a business standpoint, is obviously meant to buy investor confidence.

[update, May 6:]
Minyanville's Bennet Sedacca has an updated scorecard on the need for new capital and the prices being paid by troubled Wall Street firms:

They just keep coming and coming and coming.
Legg Mason, Fannie Mae, Freddie Mac, Fifth Third, Citigroup. I'm hearing JPMorgan too.
Insurance companies are gobbling up this paper, but at some point they'll say 'no mas'.
What seemed 'cheap' at 7% is now getting done at 9%.
They're on their way to 12%. Or until companies just can't justify paying those yields and start cutting dividends and selling common stock.
As they should.

It Ain't Over

Has it really been three weeks since I last made fun of Merrill Lynch? Well, I am back to fix that. Merrill reported first-quarter earnings yesterday, and it was another disaster. The third-largest investment bank lost almost two billion dollars, compared to a profit of over two billion in the year-ago quarter. It was the firm's third straight quarterly loss. Another $6.8 billion was written off for troubled assets (CLOs and mortgage-backed securities for those of you keeping score), raising the nine-month total to over $30 billion. Money heaven is running out of room to keep all that wealth.

Still, Merrill's CEO said that he was "optimistic" about the remainder of 2008. His remarks harmonized with those heard earlier this week from the CEOs of JPMorgan Chase, Lehman Brothers, and Goldman Sachs, all of whom sang the same tune: the worst of the credit crisis is behind us. This was music to the ears of Wall Street investors, who bid up stocks all week.

Don't be fooled. Nobody's dancing at Merrill, where 4,000 employees will be laid off. Today Citigroup (Q1 loss of $5 billion and write-downs totaling $12 billion) compounded the damage by announcing lay-offs of as many as 6,000. Add another 5,000 at Goldman and 7,000 at Bear Stearns, and pretty soon you're talking about some serious unemployment--over 30,000 up and down Wall Street.

The cheerleading by overpaid executives is a pathetic attempt to buoy investors' confidence and somehow to disrupt the negative feedback loop that threatens to take the financial sector down. The fact is that all these firms hold impaired assets for which there is no market. These collateralized debt/loan obligations--little more than cleverly formulated perfumes to mask the stench of worthless loans--amount to "your basic, garden-variety nuclear waste, which isn't trading," points out Minyanville's Bennet Sedacca. "So how you can you say the crisis is over when the market is frozen? To me, it will be over only when all of this garbage trades, defaults and clears the market. Not until."

So much for the banks on Wall Street. How about the ones on Main Street? On Wednesday Wachovia announced a quarterly loss and slashed its dividend. Particularly ominous were remarks during the conference call by Wachovia's Chief Risk Officer, Don Truslo, who noted that even their most creditworthy customers are abandoning upside-down mortgages. "When a borrower crosses the 100% loan to value," said Truslo, "their propensity to just default and stop building their mortgage rises dramatically and, I mean, really accelerates up." The bank's risk models did not see that one coming, so capital is being hoarded to boost reserves. That means less for business investment, which spells S-L-O-W-D-O-W-N.

At least Wachovia has a Chief Risk Officer. Merrill finally hired one of its own, but only after the sh-sugar hit the fan. And if Merrill wants me to stop picking on them, all they have to do is give Mainers our $20 million back.

Quick Hits: Slots, Minimum Wage

Not on my watch, said Governor John Baldacci yesterday as he vetoed legislation to allow slot machines on Indian Island, the Penobscot reservation near Old Town. Baldacci insists that gambling is too important an issue for mere legislators to decide. In his view, a new gambling venue should be created only through a ballot initiative passed in a statewide election, such as the 2003 referendum that allowed the Hollywood Slots racino in Bangor. The message to Native Americans: get your own referendum. Any exception to the referendum process, in the Governor's words, "sends Maine down a perilous path, fraught with risk of unfair, arbitrary treatment among future gaming proposals."

His logic escapes me. The slippery slope was created when Maine first introduced a lottery in 1974. That was when Maine voters decided that gambling was OK. All regulation since then has been "unfair" and "arbitrary." I may be running against her, but I agree with Representative Sheryl Briggs of Mexico when she sees discrimination against the Penobscots. "What gives us the right to tell them no?" she asks.

The "path" that we are on right now leads us to annual referenda on specific gambling proposals. Last year it was a casino in Washington County; this year it's one in Oxford County. Let's stop cluttering our ballots ad eternam and settle the question once and for all. Either gambling is allowed anywhere in Maine, subject to local approval, or it is allowed nowhere in Maine, in which case we dispense with the Maine State Lottery. It is a matter of fairness and consistency.

Raising the minimum wage gets votes, but is it the right thing to do? The State Legislature on Friday gave initial approval to a plan to raise Maine's minimum wage from $7 an hour to $7.50. Setting a minimum wage is a form of price control (in this case the price of labor), and government has never been good at price controls. Artificial prices interfere with free-market pricing and are ultimately self-defeating. Wages propped up by fiat eventually lead to fewer jobs.

According to U.S. Census data, over 98% of employees whose wages would be increased by this proposal live with working parents or relatives, live alone, or have a working spouse. Less than 2% are sole earners in families with children, and each of these sole earners has access to supplemental income through the federal and state earned income tax credit (EITC). Economists generally agree that the EITC is a better way to target resources at poor families than boosting the minimum wage.

Politicians jumping on the minimum-wage bandwagon will argue that rising wages are needed to counteract inflation in the costs of food, energy, and housing. But will they lower the minimum wage when deflation sets in (as I believe will happen in the coming depression)? Not likely. Ultimately, the ones best able to determine the fair price of labor are employers and employees freely negotiating between themselves.

Pigging Out Is All Too Human

Be careful what you wish for, the saying goes, because you just might get it. So what is so bad about wishing for food? Can't survive without it, right? Throughout human history survival meant successfully finding food--and packing it in when you finally found it. Days of gluttony would get you through weeks or months of scarcity. You became adept at identifying and favoring energy-dense foods. At the end of the day, you burned enough calories hunting and foraging that you never worried about crushing your bathroom scale.

But that was then. Or maybe now, just not here. In 21st-century America a huge caloric imbalance has come to exist, with more energy consumed than expended. And the imbalance is killing us. Two-thirds of American adults are at least 20% over their ideal body weight, an ominous statistic since obesity is a risk factor for diabetes, heart disease, and stroke. What's worse, their kids are being groomed to follow along. "This generation of children," says Yale Psychologist Kelly Brownell, "may be the first in American history to live shorter lives than their parents."

Blaming folks for a lack of willpower, according to Brownell, misses the point. He argues that we are genetically programmed to prefer dense diets. Our bodies still think scarcity even though we live in an age of abundance. Add to that an economic system that strives for surplus and capitalizes on consumption, and you have a recipe for excess. Brownell suggests that we address the problem of overeating the same way we do tobacco consumption: regulate product advertising (especially to children), raise student awareness in public schools, and tax empty calories.

Some may think that a public-policy approach may be too heavy-handed. But if we are looking for ways to share or socialize the costs of healthcare, then we also must make a collective commitment to manage risk. Let me say it another way. If you want society to pay your medical bills, then you have to do your part by adopting a healthy lifestyle. Of course you are free to choose prehistoric pig-outs. Just don't ask the rest of us to pay for the consequences. "Eat less and exercise more," says Arthur Frank, medical director of the George Washington University Weight Management Program. "You cannot violate the laws of thermodynamics."

For more on Kelly Brownells' work, check out:
The Belly of the Beast

Making Money the Old-Fashioned Way (Not)

Remember the old Smith Barney commercial? "We make money the old-fashioned way," a dignified John Houseman solemnly asserted to the camera, "we earn it." He enunciated with such gravitas (we UHR-RN it!) as to signify peerless professionalism and unstinting performance--earnings into eternity. You just knew that it was safe investing with him.

He may just as well have been speaking for General Electric, a veritable icon of American ingenuity and industrial engineering. But the U.S. economy has evolved during the years since the Houseman ad. This morning we got a reminder that GE, like so many American companies, has been juicing earnings by straying from its roots. It doesn't just make stuff anymore; it also plays with its excess cash, hoping to boost the bottom line with vigorish. It has become a financial company in drag.

GE's first-quarter earnings came up light. Net income fell by 5.8% compared to a year ago even though revenue grew by 7.8%. How can that happen, you ask? Answer: only through a markdown in paper assets--or, in the words of Chairman and CEO Jeff Immelt, "higher mark-to-market losses and impairments" in the financial-services side of the business. In truth, GE's global infrastructure business peformed admirably, with revenue up 23% and operating income up 17%. But when your betting operation turns south, you suffer.

GE's stock is getting hammered today, off over 10%, largely because of its tepid guidance for coming quarters. But it is not just GE investors who should be concerned here. If a triple-A credit like GE is struggling, then imagine what will happen to other companies who made money by financial legerdemain and not by earning it. Profits will vanish, as will the corporate tax payments they generate. State governments used to receiving their piece of the action will continue to see revenue shortfalls. Taxpayers will have either to ante up or to lose programs.

Meanwhile the Wall Street firms who specialize in financial alchemy are still at it. The Wall Street Journal reports this morning that Lehman Brothers has repackaged $2.8 billion in unsold debt--stuff that no one wants--into a collateralized loan obligation called "Freedom." The new debt securities issued by Freedom have been given investment-grade ratings by Moody's and S&P, qualifying them to be offered to the Federal Reserve as collateral in exchange for U.S. Treasuries through the Fed's new Primary Dealer Credit Facility. That's the way to do it, as Mark Knopfler sings in Money For Nothing.

Governor Proposes Increased Funding for Bridges

One bridge in seven in Maine is structurally deficient, according to data gathered by the Federal Highway Administration in 2007. This compares to a nationwide average of one in eight. To address the problem, Governor John Baldacci yesterday submitted a bill to the Legislature that would raise an additional $40 million a year through increases in fees for motor vehicle registrations, titles, and vanity plates. The new revenues would boost spending on bridges to over $100 million annually.

Car registrations would jump 40% from $25 to $35. Reviewing registration fees in other states, one cannot easily determine whether the new fee in Maine would be above or below average. Some states charge a flat fee, while others have sliding scales based on vehicle weight, age, horsepower, or sticker price. Comparisons are apples-to-asparagus, at best. While a fee proportional to vehicle weight makes sense--after all, heavier loads have greater impacts--such a fee is better collected at the pump, where fuel usage captures both weight and miles driven.

35 bucks seems cheap to me. Last fall Delaware doubled its fee from $20 to $40. California Governor Arnold Terminator wants to go from $41 to $52, Wisconsin DOT from $55 to $80. Colorado Governor Bill Ritter has floated the idea of a one-hundred-dollar increase. Triple-digit registration fees, I predict, will be commonplace within five years.

And for good reason. As long as we pour hundreds of billions of dollars into securing and rebuilding Iraq and trillions of dollars into treating and managing lifestyle diseases, we will not have enough left to restore our transportation infrastructure without new user fees. Massachusetts Governor Deval Patrick wants to borrow to build now and figure out the revenue sources later. This morning he is unveiling a $3.8 billion bond proposal to repair more than 400 bridges over the next eight years.

Governor Patrick points out that aside from the issue of public safety, the initiative will create jobs during an anticipated economic downturn. We should be doing the same in Maine: putting people to work in order to pave the way to future prosperity.

Chalk Up Number 3

This Jayhawk fan is smilin'. Last night the University of Kansas men's basketball team erased a nine-point deficit with two minutes remaining in regulation, forcing overtime and eventually pulling away from Memphis to claim its third NCAA title ever.

I joined the Jayhawk fan flock as a grad student in 1971-72. Even then Kansas was a storied franchise, with such celebrated alums as Clyde Lovellette, Wilt Chamberlain, and Jo-Jo White and a coaching succession going back to the game's creator, James Naismith. They were coming off a Final Four appearance in 1971, and the highlight of my season in Lawrence was a 50-point blitz by All-American Bud Stallworth against arch-rival Mizzou in the season finale. There was no three-point arc then. Bud was throwing up heat checks from all over the court, and making them. I have been bleeding K.U. blue ever since.

Title Number Two came twenty years ago when Danny Manning carried a dark-horse Kansas team to an upset over favored Oklahoma in the championship game. The first half of that game was played with as much energy as you will ever see in a basketball game, with each team scoring fifty. This year's team brought similar intensity to the Final Four, nearly running a very good North Carolina team out of the gym in the first fifteen minutes of their semifinal. They did it with hyper-alert help defense and breakneck transition. That same ferocity eventually wore down Memphis in the final. The Tigers had no legs at the end and could not hit their shots.

"That's a T-E-A-M, if I've ever seen one," writes the Boston Globe's venerable hoops guru Bob Ryan. Indeed, teamwork has been a trademark at Kansas since forever. This year's edition can be viewed as the Clydesdales of the tournament, pulled together by pedigree, practice, and purpose, perfectly harnessed. Such is the esprit de corps at Kansas that very few players leave early--Paul Pierce, Drew Gooden, and Julian Wright (who would have been a junior on this year's team) are the only ones that come to mind. The Jayhawks seldom want for senior leadership.

So what happens now? First of all, expect a lot of newborns named Mario in the Sunflower State soon after New Year's Day 2009. As for the basketball program, rumors are flying that Coach Bill Self will move on to his alma mater, Oklahoma State, and that Brandon Rush and Darrell Arthur will follow Wright into the pros. We'll see. Sad it would be if rock-solid Allen Fieldhouse were to be retrofitted with a revolving door.

Privatizing Gains, Socializing Losses

Will homebuilders get a mulligan? That's golf-speak for a do-over. When a golfer hits a truly horrendous shot, his buddies (once they get done laughing) might graciously ignore his shot, pretend it never happened. He gets to hit again from the same spot without a penalty--a mulligan.

The U.S. Senate wants to grant a similar reprieve to two industries that conspired to create a bubble in housing. Builders and lenders made fat profits for several years by putting up houses faster than Americans could occupy them. It got to the point where houses were bought not for mere shelter, but for the prospect of resale at a higher price. Why bother moving in when (a) you already had a decent home and (b) you were just going to flip the property anyway? Easy money created by the Federal Reserve led to an artificial demand and, eventually, an over-supply of unaffordable homes.

It was a train wreck in slow motion. We all knew the pace of building was unsustainable, but the lenders kept lending and the builders kept building. The activity served no useful social purpose, but dished up immediate profits. Company executives got mega-salaries and stock options. Investors saw rising share prices, and Uncle Sam collected rising corporate tax payments. Short term, steroids are awesome.

Now come the consequences. Homebuilders and mortgage lenders are reeling from a falloff in demand and the failure of borrowers to keep up with their payments. For these companies, the bad news that they are now losing money outweighs the good news that, hey, at least they don't have to pay income taxes anymore. But wait, Congress has a solution in the Foreclosure Prevention Act of 2008: how about if we refund to these companies the taxes that they paid when times were good!

That's right, we will expand the so-called "tax loss carryover," an accounting tool by which companies are allowed to deduct net operating losses retroactively against earlier profits. Ordinarily companies can reach back two years to erase earlier profits (hence, earlier tax liabilities), but the Senate bill hashed out on Wednesday would double that to four years. Lobbyists had failed to get the new provision included in the economic stimulus bill passed two months ago. But lobbyists are nothing if not persistent. Only once before, in the wake of 9/11, has Congress extended the carryover timeframe.

This is yet another case of taxpayers bailing out risk-takers, this time to the tune of $6 billion. In the words of Minyanville's Fil Zucchi, "if ever there was an action that should undermine investors' confidence in the U.S. market system and reinforce the view that the government exists to grease the palms of those who pay their way into influencing the government, this is it."

What's In Your (Candidate's) Wallet?

"Clean" money has its own agenda. If my candidacy accomplishes nothing else, it may at least disabuse you of the notion that public funding of political campaigns somehow purifies the process. No matter where it comes from, money is money. By itself it is neither "clean" nor "dirty." It is a means toward an end, a means by which people motivate and influence each other. More money means more influence.

The State of Maine spends about $6 million each election cycle in public financing of campaigns for the Legislature. Of the 305 House candidates who have registered thus far in 2008, 258 are seeking public financing (about 85%). The intent of the Maine Clean Elections Act is to level the playing field by limiting campaign expenditures and equalizing contributions, thereby empowering ordinary folks who might not otherwise have the resources to run.

If every candidate were required to run "clean," then the field would indeed be level. But such a requirement would be an unlawful abridgment of a candidate's First Amendment rights. So privately financed campaigns are still part of the political landscape, and any spending limits pertaining to these are strictly voluntary. It is still possible for a candidate to outspend his opponent and for "outside" money to impact a race.

But even a "clean" system can be gamed, and Maine's Democrats have shown that they are quite good at it. Of the 154 Democrats seeking House seats, 146 want house money (95%), compared to 75% of Republicans, 70% of Green-Independents, and 67% of Unenrolled candidates. If you are a Democrat thinking about running, you will be directed by party leaders to the public trough.

Let's look at our local House District as an example. LD 93 serves the towns of Mexico, Dixfield, Peru, Canton, and Carthage. The seat became vacant last August, prompting a special election. Democrats and Republicans had one month to hold their caucuses and nominate their respective candidates for the November election. The Democrats picked a first-timer named Sheryl Briggs and within 48 hours had her seed money of $500 taken care of: $100 from Speaker of the House Glenn Cummings (of Portland), $100 from Rumford Rep. John Patrick, $50 from House Majority Whip Sean Faircloth (of Bangor), $50 from County Sheriff Wayne Gallant (Rumford), $40 from Roy Gedat (Norway), and the other $160 from contributors residing in the district.

Think of it. Two-thirds of Sheryl's seed money came from outside the district. To whom does she owe her loyalty? How about to career politicians with future plans. Cummings is posturing for a gubernatorial run, Faircloth would like to be the next Attorney General, and Patrick is running for County Commissioner. These guys are players. When they tell Sheryl to jump, she will ask "how high," not "what for?"

Counting her seed money, Sheryl spent almost $8,000 on a ten-week campaign. She was authorized by the Ethics Commission to spend $7,495.18 of public funds; of that, she spent $7,493.99 and returned $1.19 to the MCEA kitty. This year she will do it all over again. I expect to spend much less, and none of it will be taxpayers' money.