What's the Fed to do?

Even though Wall Street has suddenly decided that American companies are worth 15% more than they were worth at about 2:00p.m. est on Friday. I still don't think that anyone has any clue what's going on with the American and global economy. Last week was mostly bad news all around. This is a short week here in the States and I expect it to be quiet.

But of interest is a continuation of what I touched on Friday... what is the Fed to do?

Right before Halloween, the Fed set the target rate for federal funds at 1%. But the reality is much lower than that: the effective rate according to the Economist is 0.25% (it is now about 0.50%):

The irony is that, were the gap to disappear, there would be a de facto tightening of monetary policy. On the other hand, if the effective rate remains near zero, the Fed will have to turn to more unconventional means of stimulating growth. Michael Feroli of JPMorgan Chase proposes outright purchases of mortgage-backed securities—another faint echo of Japan.

So what are unconventional means?

I'm not sure, but one suggestion: Don't do what Japan has done since the 1990s.

And suddendly things look bad again...

The stock market is down, unemployment is up, consumer spending is down, banks aren't loaning money to anyone... that's right the economy still looks bad. And while we might have dodge a total collapse of the credit markets, the key word is "might". A week ago I think most people would have assumed that we/the world had done so. Now? Not so much.

And on top of all this the truly scary word of deflation has begun to be uttered after the announcement this week that consumer prices had fallen 1% in October.

Deflation is, simply, a continuous fall in the general price level of goods and services. This sounds like a great thing—prices go down meaning you and I can buy more stuff. But that's in the very short term. If firms are making less from their goods or services, that means they have to cut back on costs—that can mean anything from cutting jobs, wages, or closing factories. And therefore you and I will be making less, and thus not spending more.

The other worrisome aspect of deflation is that firms and consumers may decide to wait to build/expand their business or wait to purchase goods. If prices are falling, I may wait to buy a new TV or car knowing that in 9 months it will cost less. A firm may wait to build a new factory because the price of the material goods and labor will be less in six months than it is today. What this means is that people aren't spending money and therefore demand continues to fall.

From a policy perspective there is only so much a government can do. Interest rates can only be cut so low—zero percent obviously. The Fed has set interest rates at about 1%. So it can't cut rates too much more (and more on that later).

Krugman and some others have begun to call for a huge stimulus. This makes sense since it would inject billions into the U.S. economy (if Americans are good at anything, it's spending money). While this might be problematic—people might just save that money, pay off debt, or invest it in some market—it also may fix the problem at hand if people spend the money.

But again, policy makers can only do so much in a deflation cycle or period. However, we are seeing policy makers acting quickly and doing something, and as I've aruged, something is better than nothing. Why? Becuase the last time we did nothing, the Depression went from bad to Great. Japan did nothing and it's stuck in 1991. Sweden did something at it is still one of the strongest economies in the world. So although you and your neighbor and some talking heads on TV might not like, sitting on our hands has proven to be the wrong decision.

Three Reasons Why We Should (and Should Not) Bailout GM (and maybe Ford)

Although it doesn't look likely at the moment, The Big Three from Detroit have gone to Congress asking for money to bail them out.

I'm working under the assumption that Chrylster is unsavagable. Also, as a disclaimer, your author owns seven shares of GM stock. That's right, $20 bucks! Drinks on me!

Why the U.S. Government Should Bailout GM (and maybe Ford)
1.) According to David Cole of the Center for Automotive Research if:

Detroit’s production falls by 50%. He estimates that in the first year that
would cost 2.5m jobs: 240,000 from the carmakers themselves; 795,000 from
suppliers and 1.4m from other firms indirectly affected. The cost in transfer
payments and lost taxes would exceed $100 billion over three years. Some of Mr
Cole’s assumptions are likely to be too pessimistic, but his blood-curdling
forecast and others like it have helped to convince legislators that the $50
billion of help that the carmakers are asking for would be cheap at the price.

If the Center for Automotive Research's cost/benefit analysis is even sort of on target, giving the money to GM and Ford is a no brainier.

2.) The long term prospects of each company are actually pretty good. Both have a strong presence in Europe (especially Ford) and other emerging markets (especially GM). They have both started producing competitive compact and fuel efficient cars (everyone seems to rave about the Focus) moving away from the SUVs that American drivers demanded for such a long time. And in 2007 GM and Ford struck a deal with the UAW union which allowed them to cut costs by about $1,000 a car.

Should they have been making more fuel efficient cars? Probably, but that's easy to say today. The SUV market in the 90s and early 2000s was not a result of Ford and GM forcing American buyers to buy big gas guzzling cars. SUVs were attractive to American consumers because gas was so cheap... thanks in part to the U.S. government levying such small taxes on gasoline.


3.) Lehman Brothers - When the Treasury let Lehman Brothers die everyone seemed to support the decision. But it quickly became evident that letting Lehman 'die' might have been a huge mistake. The financial world simply was not ready for a bank as big as Lehman Brothers to go "buh-bye". Is the American economy ready to lose a few million jobs? And what about the pressure the bankruptcy of GM and Ford would have on the Pension Benefit Guaranty Corp--the Federal agency that insures benefits to retirees in the auto industry and other industries?


Why the U.S. Government Should NOT Bailout GM (and maybe Ford)
1.) When Becker speaks, I listen:

Nevertheless, I believe bankruptcy is better than a bailout for American consumers and taxpayers. The main problem with American auto companies is that during the good times of the 1970s, 1980s and 1990s, they made overly generous settlements with the United Auto workers (UAW) on wages, pensions, and health benefits...

It is not that cars cannot be produced profitably with American workers: the American plants of Toyota and other Japanese companies, and of German auto manufacturers, have been profitable for many years. The foreign companies have achieved this mainly by setting up their factories in Southern and border states where they could avoid the UAW, and thereby introduce efficient methods of production. Their workers have been paid well but not excessively, and these companies have kept their pension and health obligations under control while still maintaining good morale among their employees.

Bankruptcy would help GM and Ford become more competitive by abrogating significant parts of their labor contracts with the UAW.

2.) A.I.G. - What a mess this has become. This is in part the fault of the Treasury which basically has given A.I.G. billions upon billions of dollars without out any oversight. Conservatives cannot complain about welfare anymore after the A.I.G. fiasco. These guys are paying themselves bonuses for running the company into the ground... why? Because they don't want to lose the talent that nearly caused the company to disappear. Congress and taxpayers are right to be cautious about handing any private company billions of bucks after watching A.I.G. reward themselves for being total fucking morons (pardon my French).

3.) While I don't agree with much of Mitt Romney's reasoning he does make an important point in his Op-Ed today:
Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.
A bailout does not guarantee further restructuring within Ford and GM. Both companies need further diversification in their products--the pickup truck and SUV business was lucrative until gasoline became expensive. And since both companies relied far too much on those big gas guzzlers and didn't really have smaller, fuel efficient cars to offer consumers, they're in the position that they're in today. Giving them a few billion won't guarantee a change in philosophy in Detroit, something we should all be worried about.

Not surprisingly Joesph Stiglitz has Some Good Ideas on How To Fix Everything

Nobel Prize laureates Joesph Stiglitz has been busy over the last two months writing about the economy. But of interest for us here, is his 'State of the Economy' piece in Vanity Fair "Reversal of Fortune." Let's break it down... Dr. Jack style.

The real meat of the essay is towards the end, but he does pick apart the policy decisions that got us into this mess. And he places much of this blame on George W. Bush. This is a tad harsh—there were fundamental policy problems prior to Bush taking office. But Stiglitz is correct to place more blame on Bush's handling of the economy (if you can call it that) than other non-critics:

...the tax cuts in 2001 and 2003 set the stage for the current crisis. They did virtually nothing to stimulate the economy, and they left the burden of keeping the economy on life support to monetary policy alone. America’s problem today is not that households consume too little; on the contrary, with a savings rate barely above zero, it is clear we consume too much. But the administration hopes to encourage our spendthrift ways.

He is on the mark with this assessment. What is happening today is a result of the spend today worry about tomorrow... tomorrow ways of the last five plus years. The Bush administration encouraged everyone to spend, spend, spend. Aside from cutting the capital gains taxes, Americans weren't encouraged to save money.

I haven't railed against it too much here, but I am against our current policies towards corn ethanol. Giving any sort of tax credits or subsideis to corn ethanol production is silly as Stigliz sums up:

Our ethanol policy is also bad for the taxpayer, bad for the environment, bad for the world and our relations with other countries, and bad in terms of inflation. It is good only for the ethanol producers and American corn farmers. It should be scrapped. We currently subsidize corn-based ethanol by almost $1 a gallon, while imposing a 54-cent-a-gallon tariff on Brazilian sugar-based ethanol. It would be hard to invent a worse policy.

And on to fixing the current housing mess:

Remember, too, that we already give big homeowner subsidies, through the tax system, to affluent families. With tax deductions, the government is paying in some states almost half of all mortgage interest and real-estate taxes. But many lower-income people, whose deductions are meaningless because their tax bill is too small, get no help. It makes much more sense to convert these tax deductions into cashable tax credits, so that the fraction of housing costs borne by the government for the poor and the rich is the same.

A ways back I was critical of the Feds handling (or lack there of) concerning inflation. Stiglitz points out that I was off base:

The standard analysis coming from financial markets these days is that inflation is the greatest threat, and therefore we need to raise interest rates and cut deficits, which will restore confidence and thereby restore the economy. This is the same bad economics that didn’t work in East Asia in 1997 and didn’t work in Russia and Brazil in 1998. Indeed, it is the same recipe prescribed by Herbert Hoover in 1929.

It is a recipe, moreover, that would be particularly hard on working people and the poor. Higher interest rates dampen inflation by cutting back so sharply on aggregate demand that the unemployment rate grows and wages fall. Eventually, prices fall, too. As noted, the cause of our inflation today is largely imported—it comes from global food and energy prices, which are hard to control. To curb inflation therefore means that the price of everything else needs to fall drastically to compensate, which means that unemployment would also have to rise drastically.

This makes total sense. Worrying about inflation during a recession or depression is silly, and when the cause of inflation is not a result of domestic economic forces, attempting to control it is only more difficult for central bankers.

Finally, like any good economist, Stigliz believes that American economic policy should follow:

Spending money on needed investments—infrastructure, education, technology—will yield double dividends. It will increase incomes today while laying the foundations for future employment and economic growth. Investments in energy efficiency will pay triple dividends—yielding environmental benefits in addition to the short- and long-run economic benefits.

If growth is the goal of capitalism, then techonology is probably the biggest force in economic expanision. And techonology and innovation comes about though strong education. We could have a debate about how big of a role the government should play in the building and maintaining infrastrucutre; but I think the government should play a bit, if not the biggest role, in infrastrcutre projects.

Anyway, I highly suggest checking out the entire essay, there are some really good ideas, sorry common sense, in there.

Spreading the Wealth Around

I got this chain e-mail from a friend of mine a few days ago and heard some GOP Talking Head mention it on the radio a day or two later.

Yesterday on my way to lunch I passed a homeless guy with a sign that read 'Vote Obama, I need the money.' I laughed.

Once in the restaurant my server had on a 'Obama 08' necktie, again I laughed as he had given away his political preference -- just imagine the coincidence.

When the bill came I decided not to tip the server and explained to him that I was exploring the Obama redistribution of wealth concept. He stood there in disbelief while I showed him a ten-dollar bill and told him that I was going to 'redistribute' his tip to someone who I deemed more in need--the homeless guy outside. The server angrily stormed from my sight.

I went outside, gave the homeless guy $10 and told him to thank the server inside as I've decided he could use the money more. The homeless guy seemed genuinely grateful. (surprised me).

At the end of my rather unscientific redistribution experiment I realized the homeless guy was grateful for the money he did not earn, but the waiter was pretty angry that I gave away the money he did earn even though the actual recipient needed the money more.

I guess redistribution of wealth is an easier thing to swallow in concept than in practical application.

A few things about this e-mail:
1) The homeless guy is working and he earned that money... he's hustling. He got 10 bucks out of his efforts/work. While some people might not find pan-handling working, it technically is: one is using their time sitting or standing in high foot traffic areas hoping to get contributions (a wage) from passer bys. And that's what work is—a worker is paid for his/her time for someone else.

2) Obama does not want to take all of Paul's money to give to someone else. And that's what happening in this story, all the money is being taken away from the waiter and given to the pan-handler. No where in Obama's policy proposals does he even imply that he'll do this. While his now somewhat infamous quote to Joe the Plummer about how he wants to "spread the wealth around" is the reasoning behind this story above, Obama is not talking about taking all the money people make and dividing it equally.

Rather Obama is more speaking about closing the gap between the wealthiest and poorest in this country. This indicator, called the Gini Coefficient, has increased over the last 20 to 25 years at a pace that probably worries most policy makers and economists. According to the UN, the U.S. Gini Coefficient is 40.8, which is about the same as Georgia, Sri Lanka, Ghana, Turkmenistan, and Mali. And another recent study showed that American cities are as unequal as those in Latin America or Africa.

Slowing down or even closing the gap between the have and have nots in this country isn't the worst idea in the world; espiecially if it's done so in an intellegent, pragmatic way.

Is the Culture War Over? Did it ever begin?

One of the reasons that Sarah Palin was chosen to be John McCain's running mate was because of her cultural values. A social conservative, Palin helped McCain bring the GOP base together. For a week, it looked like Palin was the perfect pick.

But then Lehman Brothers went under and the credit crunch got rolling... and the voting public became very worried about the economy. The economy was always the biggest issue during the 2008 election, and pretty much every issue (the War on Iraq, energy policy, education) was all put on the back burner. And cultural issues, which weren't a big issue during the summer, became a complete non-factor.

Why? Because people don't care as much about gay marriage, abortion, and school prayer when they're not sure where their next pay check is coming from.

What about Proposition 8 in California? True, cultural issues still exist, but when it comes to voting for a President or Senator or Representative or any elected office, the candidates cultural views do not matter as much as the media and social conservatives (and some social liberals) would like us to believe. If voters did care as much about cultural issues as some would like us to believe, Obama would not have won Califorinia.

And here in lies the problem with the Republican party today—they have lost their way obsessing over cultural issues. True, it delivered back-to-back Presidential victories for Geroge W. Bush (barely), but the fact that the Republicans barely won should have been a sign that as a policy issue, it is a fickle issue. An issue that matters only when things are going very well economically, and even then that's debateable. The cultural divide that we hear so much about actually isn't that deep.

Poll after poll, focus group after focus group show that the vast majority of Americans -- the Silent Majority, perhaps? -- are pragmatic, independent and un-partisan in their basic views. They are eclectic: "liberal" on some matters, "conservative" on others. They are not slaves to that hobgoblin of small minds, consistency. On fundamental matters such as belief in equality for women and minorities, or how large a role religion and family play in individuals' lives, the consensus among voters is broad. Unlike other times in U.S. history, there simply are no issues such as slavery, Prohibition or Vietnam that inspire violent protest or social disruption.

However, no matter what, God has made his decision and therefore social conservatives just have to have faith that it was the right one.

A Most Peculiar Editorial

Lame title, I know... but let's just get down and dirty to one of the more peculiar editorials out there today:

His triumph was decisive and sweeping, because he saw what is wrong with this country: the utter failure of government to protect its citizens. He offered a government that does not try to solve every problem but will do those things beyond the power of individual citizens: to regulate the economy fairly, keep the air clean and the food safe, ensure that the sick have access to health care, and educate children to compete in a globalized world.

This is true, but it reeks of anger and raises a fair question: Did W fail to protect America and American citizens? I think it's a bit harsh. Where many of his policies either misguided or short sided? Yes. Is he—most likely—going to go down as one of the worst Presidents in history? Yes. But Bush did not expose this nation to harm. No a better way to say what he failed to do was that... well he failed to do anything.

Mr. Obama inherits a terrible legacy. The nation is embroiled in two wars — one of necessity in Afghanistan and one of folly in Iraq. Mr. Obama’s challenge will be to manage an orderly withdrawal from Iraq without igniting new conflicts so the Pentagon can focus its resources on the real front in the war on terror, Afghanistan.

Obama was not elected to fix or end Iraq. For Obama's political sake, I hope he realizes this.

The campaign began with the war as its central focus. By Election Day, Americans were deeply anguished about their futures and the government’s failure to prevent an economic collapse fed by greed and an orgy of deregulation. Mr. Obama will have to move quickly to impose control, coherence, transparency and fairness on the Bush administration’s jumbled bailout plan.

A harsh critique of W... but the Times is on the right path here. Obama was elected to fix the economy. But unlike Paul Krugman, the NYT editorial board doesn't totally get it.

Climate change is a global threat, and after years of denial and inaction, this country must take the lead on addressing it. The nation must develop new, cleaner energy technologies, to reduce greenhouse gases and its dependence on foreign oil.

Mr. Obama also will have to rally sensible people to come up with immigration reform consistent with the values of a nation built by immigrants and refugees.

There are many other urgent problems that must be addressed. Tens of millions of Americans lack health insurance...

This editorial is exactly what Obama should not listen to and HAS to avoid when he takes office. Obama needs to realize that he was elected to fix the economy—not Iraq, not immigration, not education, not energy—and to a certain extent health care. So why is the New York Times calling for Obama to leave Iraq, bring about immigration policy changes, fix the environment, and change energy policy?

Because the New York Times doesn't get it. They're too busy believing that Obama has this huge mandate to change everything W has done and fix everything he didn't bother to deal with. This would be a mistake. Those are issues you deal with as time moves on. And these were the issues that prevented John Kerry and Al Gore from being elected.

The New York Times is calling for Obama to be ambitious and to tackle a buch of issues quickly. This would be a mistake. There is a lot to be done, but slow and steady wins the race. If Obama can come in and do something about the economy, then he'll have the political capital to fix everything the New York Times wants. But to waste his political capital on something like, oh, climate change or immigration reform, would be a gigantic mistake since there is a good chance nothing would get done. And as we saw with W; once you burn your political capital, it ain't ever coming back.

So much to blog... editorals first

First congratulations to Barack Obama for yesterday's victory over John McCain to be come the President elect of the United States.

So what does this mean? Where to start? Let's look at editorials first.

What's interesting is that they focus on race... which isn't all that shocking until you realize, they the media ignored race throughout most of this election cycle.

From the Chicago Tribune:

Obama’s victory is one of those events that reveal how far the nation has traveled. When he was born in 1961, African-Americans risked death merely to register to vote in some Southern states. The pivotal civil rights and voting rights laws had yet to be enacted. Yet today, the nation is willing to entrust its future to a man whose father was black. His election is a moving vindication of the ideals on which this nation was founded...

Most Americans are ready to give Obama a chance to show he can deliver needed improvements. The financial crisis has also made them open to ideas they would not have considered before. But their motivation is pragmatic, not ideological, and the new president will be judged on results rather than intentions.

And from the LA Times:

By any measure, this is a monumental day in our nation's history. African Americans are rightly proud. The brutal facts of black existence -- slavery, segregation and the stunting of social and political ambition -- have dashed the hopes of black progress time and again. The election of Barack Obama symbolizes the resurrection of hope and the restoration of belief in a country that has often failed to treat its black citizens as kin. For millions of blacks abandoned to social neglect and cultural isolation, Obama's words and vision have built a bridge back into the American family.

And then the BBC:

Back in June, on the night when he finally saw off the challenge from Hillary Clinton, his celebration speech made no reference to his historic racial first, and noticeably he dedicated his victory to his white grandmother.

Throughout the campaign, Mr Obama has emphasised his whiteness as much as his blackness. The president-elect understood one of the great paradoxes of the civil rights era.

While it helped pave the way for his ultimate success, it also made it more difficult for northern candidates, like him, to win the presidency.

And I leave with one of the most condescending pieces of crap journalism ever written. As only the Brits can do:

They did it. They really did it. So often crudely caricatured by others, the American people yesterday stood in the eye of history and made an emphatic choice for change for themselves and the world. Though bombarded by a blizzard of last-minute negative advertising that should shame the Republican party, American voters held their nerve and elected Barack Obama as their new president to succeed George Bush. Elected him, what is more, by a clearer majority than one of those bitter narrow margins that marked the last two elections.

Thanks but no thanks guys. We did something you guys could only dream about.

Taking the Day Off

Not a ton of policy to talk about on the purest political day of the year (or of every four years).

I will say, no matter who wins, both Obama and McCain—from a policy position—should be much better than George W. Bush. I'll tackle Bush from a policy perspective in the next few days.

However, I will say this about election day... voters should not have to wait very long in line. There should not be long queues and hour plus waits for people to vote. This only encourages and creates disenfranchisement. So from a policy perspective, we should do what is necessary to keep those lines fairly short.

Palin and Newspaper editorials

No Con Con talk here... just a few articles that I thought I'd pass along.

Newspapers and policy go hand in hand, mainly because it's historically been the easiest place to start to make a case for a policy. Editorial and Op-Ed pages are filled with policy ideas every day. Therefore, I check out a lot of opinion pages every day.

And in this process I couldn't help but notice the number of newspapers endorsing Obama. But what's truly shocking is that most of these editorials read the same: 'Obama is thoughtful, introspective, and pragmatic. While we liked John McCain, but he's has run as the guy we liked, and nothing proves that more than his decision to take Sarah Palin. And we really don't like Sarah Palin'. In fact, the Chicago Tribune who had never endorsed a Democrat for President choose Obama—in what my opinion was the best written endorsement—in part because of the Palin pick. But for a look at a lot of other papers, I turn it over to the Reader here in Chicago:

Alaska’s largest newspaper, of course, also endorsed the Obama-Biden ticket. “Despite her formidable gifts,” said the Anchorage Daily News of the state’s own Sarah Palin, “few who have worked closely with the governor would argue she is truly ready to assume command of the most important, powerful nation on earth. To step in and juggle the demands of an economic meltdown, two deadly wars and a deteriorating climate crisis would stretch the governor beyond her range.”

Palin was a godsend to editorial writers penning Obama endorsements for Republican papers. The Courant: “Most worrisome, however, is Mr. McCain’s choice of a running mate . . . who is not yet ready for prime time.” The Record: “[McCain’s] selection of Palin as a running mate was appalling.” The Eagle: “She is a candidate of little intellectual curiosity who appears to be hopelessly unready to be president.” The News-Register: “What could McCain have been thinking . . . ?”

Without Palin, some historically Republican editorial pages might have struggled to find words to reject McCain that their readers would accept, and perhaps even endorsed him against their better judgment. But now they can make the argument they believe in, knowing they’ve got Palin to nail it down. She signs, seals, and delivers the case for dumping the GOP. She’s the closer.

Ouch. From a political stand point, assuming that McCain does lose tomorrow, it will be interesting to see how the Palin pick goes down in history. Was it increditably stupid? Short sighted? Obviously transparent? Did it cost him the electin? Or did the Fall 2008 Credit Crisis hurt McCain more than Palin?

No matter what, it should be a fun topic of discussion for years to come at cocktail parties.

Oh, and check out the differences between the Guardian and Economist endorsements of Obama. Oh wait, there isn't one. Weird.

Is it Time for a Con Con -- Part VI

Editors note: This is the last one. I swear. Enjoy. Part I
Part II
Part III
Part IV
Part V

The issues that supporters of a Con Con have been laid out, but what do groups who are against calling for a Con Con believe? Or at least, what do they argue as to why the state should not rewrite the constitution?

Opponents to a Con Con will quickly point out that there are no single issues, which calls for a convention. And given the current political infighting in Springfield, opponent’s figure those differences will carry onto a convention. But maybe most importantly, the current Constitution can be changed—amendments can be added to the Constitution. And since this option is available, this is the route that policy makers should take rather than calling a convention where no one knows what the resulting document would look like.

Few people who follow Illinois state politics would claim that the current problems in the state are related to the structure of the government—rather most people would agree the problems the state is currently going though are due to politics. And while the Constitution is not perfect, opponent’s claim that there is no one single issue that should lead voters to call for a convention. So the fixing the Constitution does need can be fixed though the underutilized legislative amendment mechanism .

The General Assembly can advance a constitutional amendment to voters if both houses agree with a three-fifths super majority. However, the General Assembly has been conservative about using the Legislative Amendment process. Since the current Constitution was written, the legislature has advanced only sixteen proposed amendments of which nine have been adopted . In 2006 and thus far in 2008, the legislature has not proposed any amendments to the constitution. And, ten of the proposals over “the last 37 years have dealt with arcane issues of relative political ease, yet limited substance,” according to the Illinois Business Roundtable.

Other means of changing the constitution like a citizen’s initiative, have had been unsuccessful for the most part and, as noted above, would be a topic of conversation at a convention. Therefore, the legislature is the only branch of government in the state that can amend the constitution. And, the legislature is reluctant to change itself. As Ann Lousin, a law professor at John Marshall said, a constitutional convention and the legislature are “natural enemies.”

So why even have a constitutional convention? Is the political gridlock in Springfield, where hundreds of bills attempting to change or reform the current policy problems the state faces, sit idly, enough of a reason to call for a constitutional convention? The constitutional change that some would like to make can be changed through the legislative amendment process, but since it has not been used very often in the last 38 years, is this a reason to call for a convention? Or is it that the reason we have not seen changes to something like, say the income tax, because there just is not enough popular support behind such a reform? And of course, a convention does not guarantee that the problems the state faces will be fixed with a new constitution.

In the end, a Con Con is a situation of risk and reward. How much of a risk are constituents willing to take for a reward, i.e. progress, in the structure and policies of the state government. Something good and something bad will come out of a Con Con for everyone and each voter or interest group needs to figure the odds that a Con Con would produce the results they so desire. As Steven Pflaum of the Chicago Bar Association asked, “Is the status quo so bad that we should risk making it worse to make it better?” That is something every voter will have to weigh in their minds when they vote on November 4th.

Is it Time for a Con Con -- Part V

Editors note: I did a lot of work researching the Illinois Constitutional Convention; I'm going to post that research that I wrote up here. It should be about five or six parts in all. I'll do a post or two a day.
Part I
Part II
Part III
Part IV

Term limits: Some people feel that there are far too many politicians in the state who have been in office for too long. If this were to gain support at a Con Con, delegates would most likely cap the number of terms an official can hold at two, or eight years. Term limits may also be placed on those officials who are appointed to their position.

Tort Reform: Although major tort liability reform legislation was passed in 1995, the Illinois Supreme Court over turned the law in 1997. Those seeking to reform the state’s tort laws, like the Illinois Civil Justice League, may use the Con Con to change the tort laws in a new constitution. The group has said as much in the past, “The League believes the reforms enacted in the Civil Justice Reform Amendments of 1995 were necessary and constitutional, and thus the League will support and lead future efforts to enact similar legislation.” Reformers may attempt to limit the ability to sue for punitive damages and how much of the damages can be shared by the victims and their lawyers.

* * * * * * * *

These will not be the only issues that will be considered prior to the referendum and if it passes, after the Con Con is called. What the Con Con will do is completely get rid of the 1970 constitution and that means anything and everything could find itself into a new constitution. And the fear is that the special interest groups, who where not that influential in the 1970 constitution, may be much more so this time around. “I think the interest groups would have considerably more influence this time than they did in the late 1960s. I think you would see strong interest group involvement in the election of delegates, and that involvement would continue into the session and on the votes on issues in the convention…And then you’d see the right-to-life and the pro-choice people. You’d probably see groups who want to advance gay marriage, and on the other side of it would be some fundamentalist religious groups,” says Lawrence.

Issues such as abortion, gay marriage, gun control, capital punishment, campaign finance, even the right to privacy, could all become focal points in a convention. “I think that there’s a real potential for a lot of mischief,” says Wayne Whalen who was a delegate in 1970. Some of these “cultural” issues could prevent a new constitution from passing. If the delegates were to take a stance on something like gay-marriage or capital punishment, it may sink the new constitution with voters. In 1970, two of the more controversial amendments were put to the voters separately, and doing that with such controversial topics may happen again during the process of writing the constitution. But of course, there is no guarantee, especially if a single special interest group was able to send a block of delegates to the convention—or if enough different interest groups were elected that they divided the pie amongst themselves.

Is It Time for a Con Con -- Part IV

Editors note: I did a lot of work researching the Illinois Constitutional Convention; I'm going to post that research that I wrote up here. It should be about five or six parts in all. I'll do a post or two a day.
Part I
Part II
Part III

Income tax: Of the 41 states that have a state income tax, Illinois has the lowest personal income tax rate and one of the lowest corporate tax rates in the nation. The state has a flat rate of three-percent for personal income and a 4.8 percent rate for corporations. According to the 1970 Constitution the income tax rate is determined by an eight to five (business to individual) rate ratio and has only been hiked twice—once temporarily—since the Constitution was written.

Obviously there are and will be a plethora of opinions about changing the income tax. Those who want to change the tax rate, especially those in favor of changing education funding, will want to raise the rate and then use that revenue to help fund schools in the state. This would lower the burden on funding from local governments for education—and may well lead to a lowering of property taxes.

Proponents of changing the income tax will also point that the poor and middle class in Illinois pay a higher percentage in taxes than those who are wealthy. These reformers will fight to change the income tax in Illinois from a flat tax to a progressive tax where people with higher incomes pay a higher rate of income tax to the state.

The current revenue system places a lot of stress on local governments to raise their own revenue to pay for services. This means that there is a dependence on property taxes, casino/lottery revenue, and sales taxes at both the state and local level. The recent hike in the Cook County sales taxes, giving Chicago the highest sales tax rate of any major city in America, will probably be used as a means of calling for a Con Con. Many will argue that by increasing the income tax and distributing the revenue from the increase will lessen the burden that the county and city governments have in funding services (not only in Chicago but across the state). Therefore they will be able to lower sales taxes and other current forms of taxation that local government’s place upon constituents.

Yet, Chicago falls 13th behind New York, Philadelphia, Portland, Milwaukee, Atlanta, Detroit and Boston when totaling the amount of state and local taxes that a household making $75 thousand pays—or 10.4 percent of income. Based on 2003 data, the tax burden of Chicago, when compared to the largest cities of other states, is not nearly as bad as proponents will claim. Chicago did rank 4th in sales tax but what Chicagoans pay in income taxes was near the bottom and property taxes were still lower than New York and Los Angeles (coming in 12th overall).

However, those in the business community will not want to change the rate and would fight any proposed change. And they will probably gain support from an unlikely source—unions. The Illinois Education Association has already come out against the Con Con. The teachers union is afraid that they may lose pension benefits if a Con Con is called. While other unions, like the AFL-CIO, do not have a lot at stake since they do not have pensions tied to the state—they will probably stand in solidarity with the teachers union.

But to add to the twist, businesses do see the more than $100 billion in debt that the state is under. And much of that debt comes from pension benefits. Because of underfunding since the 1970s, the pension system in the state was only 48 percent funded in 2003. Unless reformed, the state will continue to owe 8.5 percent interest on the $43 billion unfunded pension liability annually—$3.7 billion a year. The huge debt created because of pensions may gain the attention of reformers. At that point it is anyone’s guess at how things would play out. If the income tax is raised, that money may go towards pensions. Or the pension system in the state may be changed to a two tiered system where new employees would see considerably less in pension benefits.