The Obama administration is planning to change the tax consequences of carried interest.  Carried interest is simply the profits of hedge funds, partnerships, real estate investment trusts, etc.  They pay taxes on that profit as if it were capital gains and not ordinary income.  Investment companies tax their earnings that way, too.

They argue that

"Venture capital investors put up some personal money, and then more importantly we put up our brains just like the entrepreneur does,” [said Mark G. Heesen, president of the National Venture Capital Association.]   “We don’t just put up money and walk away, and see you in a couple of years. We take an active role in growing these companies."

So if auto workers, hamburger flippers and just about anybody else who wants to lower their tax rates before the administration changes this rule, just tell the IRS that anybody can hold a wrench or a spatula, but that you “put up your brains” behind those modest implements to take “an active role in growing these companies." And while you’re at it, you can demand a portion of the profits.

Investment partnerships generally work this way: They are run by managers who use money from investors to buy and sell buildings, companies and other assets. When the investments are sold, the investors typically take 80 percent of the profits. The managers collect the remaining 20 percent (known as the carried interest).

You can’t make this stuff up.

I hesitated to post this, not wanting to appear even more ignorant than many think I am.  But I scanned the comments section of this story and found that at least I’m not alone in not getting this.  So if I’m stupid, there is at least one poor soul who is as dumb as I am.

Top brokers at Morgan Stanley and Citigroup‘s Smith Barney, which are to join forces in a joint venture later this year, learned last week that they will receive packages worth 105 percent of their annual revenue. That means a broker who brought in $2 million last year would get $2.1 million. Much of it will be awarded next year, and the remainder in 2012.

No wonder financial companies are losing money.  They pay their brokers more money than the brokers bring into the company.

Somebody enlighten me here.

If you listen to CNBC as much as I do, you’ll hear about the beauty, power and moral good of the “free markets.”  The free market always produces the best outcome for the country.  These same people argue for “personal responsibility,” which usually means if you’re poor, on welfare, work for the auto industry, lost your home or otherwise have been slapped upside the head by free market, you need to just shut up and take your lumps.

Now read this snippet from an article about Obama administration’s proposal to discontinue a certain student loan program.

Since the early 1990s, federal student loans have been implemented through two programs. The program that the administration proposes ending, the Federal Family Education Loan Program, uses private-sector lenders such as Sallie Mae and Citigroup to originate and service the education loans, keeping the debt off the government’s books.

Under this program, the government pays a subsidy to private lenders. Congress sets the interest rate on loans, and the federal government covers nearly all the losses if a student defaults. (emphasis added)

If only there were “free markets.”  You and must take responsibility for our bad actions, but businesses (including, you’ll notice, Citigroup, which just gave you and I nearly 40% of itself to “take responsibility for”), but free enterprises are guaranteed a profit, or at least shielded from any losses.

Doesn’t sound like free markets to me.

The Washington Post’s Steven Pearlstein again nicely summarizes a key issue in his column today.  The prevailing view is that the sum of all narrow special interests eventually leads to society’s overall best interests.  As we witness repeatedly the clout of special interests and the truly selfish objectives they pursue, we know that isn’t true.  Pearlstein puts Obama’s challenge succinctly.  It is one that all of us — who believe that a founding principle of this country is not only personal freedom to maximize our self-interest but that we have an obligation to achieve a common good that is really our own self-interest — must argue.

While his budget incorporates bold proposals to rescue the financial system, stabilize the auto industry, jump-start the economy, reform the health-care system and eventually bring down the federal deficit, he knows he’s unlikely to win any of it if he cannot change the way business is done in Washington.

It’s not simply a matter of toning down the partisan rhetoric, putting aside the reflexive ideology and getting people together at cocktail parties at the White House, though all of those are important. The bigger challenge is to get Americans and their representatives in Washington to take a broader view of their own self-interest — to see that the benefits they’ll get from finally balancing the budget or reforming health care or weaning the economy off its carbon addiction are so great that they will more than offset the sacrifices they might have to make in terms of paying higher taxes or losing a subsidy or accepting some increase in government regulation.

The trick is how to balance personal and societal interests.  I maintain that the progressive income tax is a key instrument to achieve that balance, and that there is no justification for piling on debt on pollutants on future generations to achieve some personal goals.

In yesterday’s post about Germany re-thinking its fiscal strategy, I mentioned that I was surprised that it, and not China, is the world’s leading exporter.  I asked the reporter about it, The Washington Post’s Berlin bureau chief and the article’s author, Craig Whitlock.  He said China is right on Germany’s heels and is expected to overtake it by the end of the year.

Listening to Barney Frank on MSNBC’s “Hardball” with a Repug colleague, I give him credit for adopting a Repug debating technique:  Never give up the floor/mic.  It’s hard to get a word in edgewise when Barney talks!

There’s a great article in today’s Washington Post about Germany’s about face on the economic crisis.  It initially took a strong stand against helping other countries but has apparently seen a broader picture as its exports have fallen.  This, in a country whose consumers are more like the Chinese than Americans.

Few countries are as politically and culturally averse to debt as Germany. Ever since the days of the Weimar Republic eight decades ago, when hyperinflation ruined the economy and led to the rise of the Nazi Party, Germans have been dedicated savers who eschew credit cards and mortgages in favor of old-fashioned cash.

In recent years, as other European countries spent freely and saw their property and financial markets boom, German lawmakers raised taxes and cut popular welfare programs so they could balance the federal budget. Today, Germany’s public finances are the healthiest in Europe — but now the country is being called upon to pay for the sins of its undisciplined neighbors….

…In a speech in December in Stuttgart, [German Chancellor Angela Merkel] said any thrifty German housewife would have better sense than some of Germany’s allies. "She would give us some short and correct advice, which would be this: ‘You cannot live beyond your means in the long run.’ "

What surprised me is that Germany is the world’s leading exporter, not China as I would have thought.

Barack Obama can’t give a bad speech.  His voice and smooth delivery are enough to wow most observers.  The "listening meter," if that’s what it’s called, on MSNBC indicated that throughout the speech, both Republicans and Democrats gave him consistently high marks.  If the objective was to calm fears and provide hope, he may have succeeded with the broad public. 

The chatter on Wall St. this morning is less effusive.  The talking right-wing head nuts on CNBC say he still is lacking details.  But given their political biases and lack of journalistic integrity, that shouldn’t surprise anyone.  "Wall St.," by their interpretations, is what the market does today, this hour, this minute. 

(I’ve actually heard someone on CNBC say during a speech that the "market reacted positively to so-and so’s speech,"  when all it did was tick up a couple of points.  They are financially ADD, with both the attention span and the intellect of gnats.  But that’s another story.)

A speech with details of his banking solution would probably have been wasted on most listeners.  Hope and confidence is are what’s missing right now, so it’s understandable that he would focus on those broad themes.

But I had the feeling throughout the speech that there was nothing new here and that he wasted an opportunity to explain things in ways that would have restored confidence not just in the public’s own fortunes but more precisely, in their confidence in him.

He tried to channel FDR’s first fireside chat in his explanation of the credit markets.

You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll.

But credit has stopped flowing the way it should. Too many bad loans from the housing crisis have made their way onto the books of too many banks. With so much debt and so little confidence, these banks are now fearful of lending out any more money to households, to businesses, or to each other. When there is no lending, families can’t afford to buy homes or cars. So businesses are forced to make layoffs. Our economy suffers even more, and credit dries up even further.

But after that, there were wasted opportunities.  When he talked about the danger of the economy struggling for years if we don’t act boldly, that would have been a good time to better explain how that spiral worked in the "lost decade" in Japan.  He might also have talked about how China is moving much more aggressively in infrastructure spending to support its economy, as a way of preparing the public for more such spending.

He emphasized his willingness to confront the banking industry, but could have also talked about what this teaches us about the lack of fairness and balance in our economic system.  It’s not just the CEOs, but the entire management teams and highly paid traders and brokers who have proven themselves incompetent.  It He could have drawn the parallels between the debate of the financial crisis and the auto industry crisis.  The financial elite argue that only the banking elite can lead us out of the problem they got us into and that we shouldn’t punish those on Wall St. who benefited from irresponsible risk, while at the same time, these apologists want auto workers to sacrifice for the bad decisions of  top management.  If auto workers must work for less, why not traders?  He might also have pointed out that what this entire economic collapse has taught us is that huge compensation packages don’t guarantee competent management.

He might also have pointed out that boards of directors bear partial responsibility for this debacle.  Too often, they are simply cronies of the management who are paid lavishly to attend a few meetings and fail their fiduciary duties of oversight.  They, too, must be held accountable, and the system for choosing boards and holding them responsible must be changed.

He also could have given us greater assurances and explained how we all benefit when we help responsible home owners keep their homes.  A missing piece is his home financing plan is some sort of give back to the taxpayer when prices recover.  Not all the benefit should go to the homeowner.

He needs a better explanation of why healthcare, energy, the banking industry and education are interrelated and why it’s imperative that we take this opportunity to address the systemic problems.  A few anecdotes that explain the interconnection would have helped.

He also needed to make the case for government.  Those who say keep government out of our lives are selective in their criticism.  I wonder how many of the free market advocates would be OK with removing all tax deductions for business expenses.  True free markets would mean if you buy someone lunch to close a business deal or equipment to improve your processes, that money comes off the bottom line.  Taxpayers will not subsidize those expenses.  Of course, that would provoke a right-wing hue and cry.  They like government involvement when it serves their purposes.  Government is already integral to the economy.  We are not trying to increase government involvement; we are simply trying to make it fair for everyone.

He could also have tied energy development to the stimulus bill.  We are not only improving our competitiveness, we’re putting people to work.  He did it a bit but not to the extent I think necessary.  Explain the extent to which developing "technologies like wind power and solar power; advanced biofuels, clean coal, and more fuel-efficient cars and trucks built right here in America" puts people to work, the kinds of jobs it requires and the connection to his education programs.

In his health care discussion, I wish he had said, "While we have the most expensive health care system in the world, it is far from the best.  We don’t live as long as people in other countries and our infant deaths are higher than other nations.  We need to not only decrease costs; we need to improve our results."

In his discussions of taxes, he should have put it in historical perspective.  At the end of WWII, we were in a similar situation.  Our debt was even a greater portion of our GDP.  We came out of it by investing in infrastructure and transforming our economy.  And we did it when we had  tax rates much higher on the wealthy.  Much higher than Obama is proposing.  Taxes, as former Republican advisor Mark Zandi has pointed out, have a minimal impact on the economy.  Minor changes in the tax code also do not impact investing, despite the right’s argument to the contrary.  You can’t argue that changing an investor’s return from 100% to 98% is going to cause them to stuff their money in a mattress.

I wish he also had not reinforced the idea that Social Security is in peril. As Robert Kutner pointed out in yesterday’s op-ed in The Washington Post, that’s a minor problem that he easily fixed when we reinforce the value of work and level the compensation playing field.  Obama could also have more clearly related the Medicare problem to the ineffective, costly system of health care we have today.

The president’s three stories toward the end of the speech were effective.  I wish there were more of them to explain the problems we have.  The end was also effective, challenging Congress to live up to its expectations.

Obama has a gift for delivery, but I’
m not so certain it he takes full advantage of it.  Financial issues make most of our eyes glaze over.  We need someone to explain things — and himself and his policies — more effectively if his significant support is to continue.

CNBC’s John Harwood reports that from his preview by administration officials of tonight’s speech by the president to Congress he’s learned that Obama plans to channel FDR when he explained the banking crisis to the American people in his first fireside chat.  I never thought the FDR speech was that clear to his audience.  Maybe you feel different.  Here it is.

President Obama’s outreach to the GOP during his first weeks in office is apparently paying dividends while debiting the GOP’s nearly bankrupt account.

Most Americans said the president was trying to make good on his promise to bridge the partisan divide. About three-quarters, including 6 in 10 Republicans, said Mr. Obama had been trying to work with Republicans. But only 3 in 10 Americans said Republicans were doing the same.

Many point to the votes on the stimulus package as evidence that he’s not succeeding in actually accomplishing bipartisanship.  But does it matter?  Chief of Staff Rahm Emanuel gave a remarkably candid assessment.

“The public wants bipartisanship,” he said. “We just have to try. We don’t have to succeed.”

I’ve argued from he outset that he and the Congressional Democratic leaders have played a fairly effective game of good cop/bad cop.  It is nearly impossible to change many minds about the partisanship of Nancy Pelosi (or the fecklessness of Harry Reid).  So why not make her the bad cop?  In fact, it hasn’t hurt Congressional Democrats who are still viewed more positively than their GOP colleagues.

Sure, the public would like to see greater comity in political discourse, but not at the cost of ineffectuality or gridlock.  Such a result would paint Obama and both naive and a failure.  Some argued that by his reaching out and grasping only air and insults he diminished his brand.  But I think it was a smart political ploy — and a ploy may have been all it was and is. 

In fact, his one mistake was to endorse the initial package with more tax cuts and less infrastructure development that it has.  The GOP still stonewalled it.  He probably could have gotten a better balanced bill by offering a less balanced bill and then compromised a little in response to GOP complaints.  (His other mistake was to let the House Dems write the package.) Yet his brand is still strong and the GOP seems to be imploding.

The GOP, who raised a hue and cry when the Dems would force a cloture vote, are quickly losing credibility as the number of cloture votes the GOP forced has doubled the Dems.  If the GOP thinks that bipartisanship means they get to write half of each bill, they don’t understand election mandates.  Fortunately, I think the public does.