If ignorance of economics is bliss

January 14, 2010

Then President Obama must be one of the happiest men on Earth. FOX’s John Stossel reports on the administration’s latest hare-brained scheme, a plan to tax large banks based on their lending activity:

Today President Obama will propose a new tax on the nation’s biggest banks, reports today’s Washington Post. How will the tax work?

Firms would pay a “Financial Crisis Responsibility Fee” at an annual rate of $1,500 for every $1 million borrowed to finance lending and other activities.

In other words, the Obama Administration is going to punish those greedy banks by making it more expensive for you to borrow money. This is wrong on so many levels, it’s hard to know where to begin. Let’s start with a point made by Jamie Dimon, CEO at JP Morgan Chase:

“Using tax policy to punish people is a bad idea…All businesses tend to pass their costs on to customers.”

Exactly. But don’t worry, the Administration thought of that. They have a plan:

But by imposing the tax on only the largest firms, government officials said, they hope to protect consumers. Firms that raised prices would give smaller rivals a competitive advantage, creating an incentive for companies instead to swallow the cost, potentially by reducing employee pay.

Oh, now I see. They will only punish customers of big banks. If I run a small bank, this will now give me an incentive to stay small.  I wonder how that will encourage lending.

Beyond that nonsense is the idea that they’re “constraining the industry’s ability to take large risks and reap outsize rewards”. The only reason that banks reaped “outsize rewards” for taking bad risks is because the government encouraged them to do that by guaranteeing mortgage loans. Risk taking got wild when government protected risk takers from feeling the consequences of a bad risk.

Stossel’s right on the money about the Bizarro-World nature of this policy. But the Democrats are so addicted to government regulation and intervention in the marketplace that they cannot admit that their attempts at social engineering are what caused the problem in the first place. In other words, more cowbell!

It’s another example of how progressives treat taxes as a static factor that doesn’t affect anything around it, rather than as a dynamic factor with effects that ripple through an economy. As Dimon points out in the quote above, banks will inevitably pass this new cost along to consumers, which will in turn function as a brake on business recovery and expansion. If I want a loan to start or expand a small business, I factor in the cost of the loan in my decision-making. When (not if) the banks pass the cost of these new taxes along to me, I’ll have to recalculate my expected profit versus expenses  and determine if my plans are still worthwhile. Maybe they will be, though I’ll have to live with less profit than before. Or (and I think more likely), I’ll scale back my plans: I’ll start a smaller business or not expand as much, hiring fewer people and generating less revenue – or maybe I’ll drop my plans altogether. In the end, the result is less revenue for the government and fewer real jobs created.

Why would they want to do that?  I dont know

Read the rest of Stossel’s article to learn about some of the other gems contained in this plan, such as imposing this tax on the banks to make up for losses on money loaned to GM and Chrysler. In other words, making profitable businesses pay to recoup money flushed down the toilet of businesses everyone outside of Washington knew were losers, just so Obama could bailout his supporters at the UAW. I’m sure this will have bankers all over America anxious to start writing loans again. As Joe Biden would say, it’s their patriotic duty!

I’ve said it before and I’ll say it again: to be a liberal Democrat requires one to purge the mind of even the smallest understanding of basic economics.

Argh. At wits end

LINKS: More from Fausta, who calls it a populist assault on the finance industry. She’s right, but bear in mind that the real purpose is to distract increasingly frustrated citizens from the Obama administration’s failures.