This is a rush transcript from "The Journal Editorial Report," January 31, 2009. This copy may not be in its final form and may be updated.
PAUL GIGOT, HOST: Up next, on "The Journal Editorial Report," President Obama's stimulus package passes the House with zero Republican support. Why his bipartisan appeals didn't work and the bill's prospects in the senate.
Wall Street titans at the whipping post, vilified for billions of bonuses and other perceived excesses. But is that any way to help the economy?
The administration makes its first green move. But will it help Detroit sell cars?
"The Journal Editorial Report" begins right now!
Welcome to "The Journal Editorial Report." I'm Paul Gigot.
Well the post-partisan era didn't last long. After trying to shore up GOP support for his $819 billion economic recovery package, President Barack Obama was handed a one-sided victory Wednesday as every house Republican and 11 Democrats voted again the so-called stimulus plan. Debate is scheduled to begin Monday in the senate where Democrats hope for a more bipartisan result. Will they get it?
Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; columnists, Mary Anastasia O'Grady and Holman Jenkins; and in Washington, senior economics writer, Steve Moore.
Steve, to you first. President Obama wined, dined the Republicans, AND answered their questions on Capitol Hill. Why did so few of them, well none of them, vote for the stimulus plan?
STEVE MOORE, SENIOR ECONOMICS WRITER: You know, Paul, I just got back from the Republican House retreat held the day after this vote. I talked to dozens of these members about was this a tough vote to vote against a popular president? Even the moderate Republicans, the 20 or 30 that Obama thought he was going to peel off, when I asked, they said this wasn't a hard vote to vote no on this.
The reason was, there was just so much pork in this bill. There were so many items that had nothing to do with job creation or stimulus. We wrote about this in our editorials. But the National Endowment for the Arts, $600 million for the government to purchase automobiles, football stadiums, all of these things had nothing to do with stimulus. I think it was a bridge too far for President Obama. I think he has learned a political lesson.
GIGOT: Steve, conventional wisdom is this could be a risk for Republicans, because if they vote no, as they have, and the economy recovers, the Democrats are going to say, see, these guys can't be trusted with the economy, we've saved the economy. What do you think about that?
MOORE: I don't think so. Obviously, if the economy recovers, Obama will have a feather in his cap. The Republicans I talked to, they were totally unified yesterday more than I've ever seen them probably since the early 90s. They feel liberated. They feel — they told me is we like Barack Obama very much personally, but his policies were so far to the left on this stimulus bill, there was nothing in the Republicans that they liked in the bill.
GIGOT: This is billed as economic stimulus, but if you look at the fine print, it turns out to be social policy, health care policy, kind of the Democratic wish list for a long time on these kinds of issues.
DAN HENNINGER, DEPUTY EDITOR & COLUMNIST: You know, Paul, to a certain extent, from the point of view of Obama's economic advisers, a lot of that detail is irrelevant. Their theory is the Keynesian economic multiplier. Basically, they want to push some close to $900 billion out the window. You could drop it from planes as far as they are concerned.
GIGOT: So they give you a buck. You will spend it. and it will equal $1.50 in economic out-put. That is the theory?
HENNINGER: That's the theory. Larry Summers has been on television saying, if you people money, they have higher incomes. And with that higher income, they spend money, and it creates more jobs down the road. That's the theory. It doesn't matter how you push the money out.
GIGOT: Let's talk to that famous Keynesian economist, Mary O'Grady.
What do you think about this?
MARY O'GRADY, COLUMNIST: No.
I looked through the bill. First of all, it is entitlement heaven. This isn't just about dropping money out of airplane. This is about expanding the role of government, which is something the Democrats badly want to do. They are going to expand health care to the tune of $87 billion. , they are giving the federal government a larger role in education than it has ever had before. And expanding the government mandated renewable energy.
But I looked through the bill to try to find something that would actually incentivize the productive side of the economy, that is permanent tax cuts. It is not there. Most of the tax cuts are for lower income families. There's a $500 payroll tax holiday for workers. There are some tax cuts for businesses. But they are not permanent. and that is not going to stimulate job creation.
GIGOT: As a political matter, Holman, why didn't President Obama, 70 percent approval in the polls, he really could exert influence over his party on Capitol Hill. he chose not to?
HOLMAN JENKINS, COLUMNIST: That's an excellent question. Republicans took him at his word. He said he wanted a non-pork stimulus bill, one without a lot of earmarks. People on Wall Street, who support Mr. Obama, voted for him, gave him money, are talking about President Pelosi now. So this thing is actually more of a defeat for him, I think, in the long run than we're giving the credit for now.
GIGOT: Steve, do you think that was a miscalculation or was he trying to say this is my opportunity to let Capitol Hill get what it wants, then I can appease them with this bill. and then maybe use my influence on other things?
MOORE: Isn't it unbelievable, Paul? Just nine days ago, President Obama was coordinated. This is a president with 75 percent approval. Nobody expected this to happen. I think the most stunned person in Washington right now is Barack Obama himself. And the mistake he made is exactly the one that Holman just mentioned. He allowed Nancy Pelosi and David Obey and all the appropriators to write this bill. It became a giant Christmas tree that was indefensible. There was no reason it had to happen. There is nothing in this bill, as Mary said, that Republicans said they could vote for. It had become a liberal wish list of programs.
GIGOT: Here's the bet maybe Obama is making — I've got time, the voters are going to give me time to get the economy recovered, two years. In two years, if the economy is better, this won't really matter how much spending there is. And the Democrats will be happy with me because I've let them have the policy choices they wanted.
HENNINGER: Not only that, Paul, I think the Democrats will be in a stronger position politically in the sense that, look closely at what they've done with this bill, you have something like $400 billion dedicated to infrastructure spending. Basically, that means you are transferring this money to the unions that will perform the infrastructure projects. Some percentage of that money will go into their political funds, which will be used to defeat Republicans and flow back to the contribution war chests to the Democrats.
GIGOT: All right, but is this a political defeat for the Democrats, this bill?
HENNINGER: If it doesn't, work it is.
GIGOT: That's the test then, whether or not it works?
O'GRADY: Right. And there's another problem, which is how are you going to pay for all this? The Chinese are now the largest creditor to the U.S. They have over $585 billion of U.S. government securities. They may not be in the mood to buy any more. They have to pay for this. And there's going to be a very big debt overhang.
GIGOT: Mary, thanks.
When we come back, corporate jets, lavish offices, billions of bonuses, the titans of wall street are under fire for what many see as wild excesses in troubled times. But are CEO's getting a bum rap? There's a debate ahead.
(FOX NEWS BREAK)
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: That is the height of irresponsibility. It is shameful.
(END VIDEO CLIP)
GIGOT: President Obama reacting to a report this week that Wall Street employees got more than $18 billion in bonuses in 2008, a 44 percent drop from the previous year, but still the 6th largest pay out on record. The report on the heels of former Merrill Lynch CEO John Thain being slapped with a subpoena from New York Attorney General Edward Cuomo. At issue bill, the billions of dollars in executive bonuses he doled out late last year, just days before Merrill was taken over by Bank of America.
James Freeman joins the panel. He's the assistant editorial page editor of the "Wall Street Journal".
James, John Thain's job as CEO was to protect shareholder value. In selling to Bank of America, didn't he do that as Lehman and others were having their shareholder value wiped out? That sounds to me like he earned a bonus?
JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: I think it was Greg Fleming made the Bank of America deal happen.
GIGOT: He was an employee of John Thain.
FREEMAN: That's right.
GIGOT: Doesn't the CEO get the credit?
FREEMAN: Here's the problem. I'm as appalled as our president, but unfortunately, he's appalled, so he now wants to give the banks more money. I think this shows why injecting taxpayer capital into these banks was a mistake.
GIGOT: That's a second-order question.
GIGOT: Were the bonuses justified?
FREEMAN: No, they had a $15 billion 4th quarter loss. Maybe they could have lost $12 billion.
They've accepted $10 billion in the fall from taxpayers and, now to make the Bank of America merger happen, another $20 million.
O'GRADY: I don't think you can separate the two, whether the TARP was a good idea and how John Thain behaved.
GIGOT: That's the Troubled Asset Relief Program, the program for injecting capital.
O'GRADY: Right, and the way that program operated was they gave them money but they did not make share shoulders lose equity. They didn't kick management out. That in itself was a poor structure. If you started funneling money into a private sector company and the ownership and the management are separated, you are going to have these kinds of problems.
FREEMAN: It's a problem on two levels. As a business case, if you are saying we have to pay bonuses or people will leave, where are they going to go? The only place they may go is to other firms getting taxpayer money, who have the cash to hire them. Or if you look at from it a principle point of view, what is really bizarre, and has got to bother taxpayers, is the people who work at Merrill seem to be less concerned about the systemic risk of Merrill failing than the politicians in Washington, who have taken the money to save Merrill.
GIGOT: Holman, is there a business case for these bonuses?
JENKINS: Yeah, these are the assets of these companies.
GIGOT: The people.
JENKINS: The people. If Morgan Stanley had recruited a bunch of Merrill brokers with a big, lucrative contract, that's the free market. If Merrill pays the money to stay, we call it corruption and it's shameful. The fact is these are competitive businesses. They have to stay competitive or they will die. The government did not donate money to them. It merely invested in them. But they have to keep doing what they do.
HENNINGER: Barack Obama is beating up on Wall Street. Chris Dodd is talking about confiscating bonuses on Wall Street, ordering the Treasury to try to confiscate. Let's put some facts on the table. Bonuses in 2008, across Wall Street, are down 40 percent, the biggest drop in 30 years. The average bonus is $112,000. Most of the people working on Wall Street make relatively small salaries. They depend on the bonus at the end of the year to create a real source of income.
JENKINS: I mean, first of all, Morgan Stanley is another recipient of government money. If they are luring people away, they are doing it in part with tax dollars.
HOLMAN: Do you want the government to turn them into a cartel and say stop competing now that we own all of you?
FREEMAN: We've asked taxpayers to make enormous sacrifices. And we're now saying that people of these firms are not that concerned about the health of the firm. They are saying I'm out of here if I don't get my bonus. What about repairing the capital structure? Couldn't that $3 billion at Merrill — could have been used to offset positions in the mortgage market?
HOLMAN: But how are you in a position to make that call based on what you know? All you know is that there was a bonus paid.
FREEMAN: All I know is our money went into these firms. They're losing money and they're still paying bonuses.
GIGOT: So what I think I hear you saying is that the government now, because it is a shareholder, should come in and set the pay of everybody within Merrill Lynch, you can't make more than X-dollars.
FREEMAN: My argument to say it is time to get the government out and no further investments, as soon as possible. Get the government out. No further investments. This is the folly of it because the government is trying to save Merrill. No one at Merrill is trying to save Merrill. They're...
GIGOT: Hey, James, we're in. We're in this.
Now the question is, how do we make these going concerns and get the financial system moving again, right, so that we can get out.
HOLMAN: We can ask for disclosure. We have to accept that all of these payments were to people who generate profits for the firm.
FREEMAN: That might be true. But perhaps they should disclose that.
O'GRADY: We may be in, Paul, right now, but there is nothing stopping Obama and the new administration from saying, look, either banks are solvent and they should get new capital, they should recapitalize from the private sector, or they should liquidate. Under those conditions, the CEOs who have done a poor job in managing risk, and that's what they are paid for, lose their jobs.
What is interesting about John Thain is he was redecorating his office in the fall of 2007. That was well after what happened in August 2007 when the big subprime crisis blew up. Everybody knew they were sitting on a powder keg or they should have known. And John Thain was still spending money as if none of that was happening. Was he a good risk manager? I don't think so.
GIGOT: Holman, is there any way to get, for the taxpayers, what — to do what Chris Dodd is saying, which is to get legally, legally these bonuses back from 2008?
HOLMAN: Not that I could think of. It would destroy the businesses. It would destroy the morale of the industry. Since taxpayers are only going to get their money back if this business recovers, I think it wouldn't be that smart a move.
HENNINGER: Taxpayers? Talk to the governor of New York. The drop in Wall Street means the revenue lost to New York State in 2008 was $1 billion! They need a healthy wall street.
Wall Street, incidentally in the 2008 election cycle, gave $141 million to the political parties. If you think the Democrats are going to destroy Wall Street, you got another thing coming.
GIGOT: Don't feel too bad for John Thain because now that he has lost his job, under this new stimulus bill, he can get Medicaid.
All right, still ahead, kicking the auto industry when it's down. Why President Obama's first environmental order may be something that really hurts Detroit.
(BEGIN VIDEO CLIP)
ARNOLD SCHWARZENNGER, GOVERNOR OF CALIFORNIA: For too long, Washington has been asleep at the wheel when it comes to the environment. Now, California finally has a partner and an ally in Washington at the White House.
(END VIDEO CLIP)
GIGOT: President Obama signed an order this week directing the Environmental Protection Agency to reconsider an application by California and more than a dozen other states to set stricter limits on greenhouse gas emissions from cars and trucks. It opens the way for higher fuel efficiency standards nationwide. A victory for the green lobby for sure. But what will it do to Detroit's already struggling automakers?
Well, Holman, we own a piece of Chrysler. We own a piece of G.M. now, the taxpayers. What does it mean for them?
JENKINS: That we shouldn't expect to get our money back any time soon.
California, essentially, now will be setting standards for the country, probably 42 miles a gallon or so by 2020, which is almost — you can't make that with any of today's cars, except maybe a Prius and some very small cars.
The problem is, even if you could make the standard, you can't get consumers to pay enough for the car for all the technology you had to put into it to meet these standards. This is a formula for losing money forever in the auto business.
GIGOT: What kind of retooling costs are you talking about to meet those standards? Tens of millions or billions of dollars?
JENKINS: They were talking about $100 billion just to meet the federal standards. This ups the federal standards by 10 or 20 percent. You can do the math. It is big money.
GIGOT: And Americans still have not shown an interest, at least outside of some precincts in Hollywood and other places, in buying a lot of these hybrid cars, as long as gas prices are low.
JENKINS: The only thing that would reconcile the conflicting aims in our auto bailout would be five or ten dollar gas. It could happen, but I won't bet on it.
HENNINGER: You know, last month, Paul, the sale of light trucks rose 50 percent. Whereas, in May, when gas prices were high, they were down around 40 percent.
GIGOT: This is when gas fell to two bucks a gallon in most of the country.
HENNINGER: Yeah. So as soon as the price of gas fell, the sales of those trucks rose. The only way you are going to stop people from buying larger cars and trucks is if you force them and order them to, which is the direction this mandate is heading in.
O'GRADY: This isn't good for job creation either because this could add between $2,000 and $7,000 to the sticker price of a car. But there's small engine manufacturers in places like Wisconsin. They also would have to fall in line with these rules. It is going to be very hard on small businesses also.
GIGOT: James, as a political matter, you have got real tension between the greens on the coast, who favor these. Obviously, California, Arnold Schwarzenegger Republican, thrilled with this. But the blue collar workers, the United Auto Workers and the people who work in manufacturing in the Midwest, a lot of them Democrats, they are going to suffer or have a tougher time. How do you explain why Obama is coming down on this tension within his own party?
FREEMAN: I guess, speaking of politics, I would hope, at some point, politicians would realize that the warming trend hasn't been there since 1998, but assuming leaving that aside...
GIGOT: You are a politician yourself. You are not answering the question.
FREEMAN: Leaving that aside, I mean — honestly, although it is going to be painful for the industrial Midwest, and I'm probably on the wrong side of history here, but this seems like the kind of thing a state ought to be able to decide on its own from a constitutional perspective. I think — it's another reason why I wouldn't want to live in California. It's going to be expensive and reverberate into job loss in the rest of the country.
GIGOT: But that's the point, isn't. This just isn't about California. California is setting its own rules. And you can live in California and make that choice, fine. The fact is, isn't Holman right that this going to spread those rules across the country?
FREEMAN: It is hard to see. As big as the California economy is, that it wouldn't force changes everywhere, more expensive manufacturing in the Midwest and more expensive cars in the rest of the country.
GIGOT: What about in blue collar/green collar tension among Democrats, Holman?
JENKINS: That's one of the peculiar things about this. If you wanted to test-market your environmental energy goals, why would you pile unsustainable costs on the most visible industry in America at the moment taxpayers are having to bail it out. In some ways, this looks like Obama's bid to put in front of the country what it would really cost to follow his green dreams and give us a chance to think twice.
GIGOT: Do you really think that that's what...
JENKINS: He could have gone for a carbon tax. He could have gone for cap and trade. Instead, he decided to lead with this.
GIGOT: But the politics of a carbon tax, particularly a gasoline tax, are horrendous for him. So isn't this a little easier political sell?
JENKINS: Oh, it's very easy.
GIGOT: Meanwhile, you keep the greens very happy. you give them what they want.
JENKINS: And Detroit can't really go to the mat over this because they are too dependent on taxpayer money. So it buys a little time on the green issues.
O'GRADY: Caterpillar tractor cut 20,000 jobs last week. This is not something he is going to pay for or he will have to answer for it.
GIGOT: We're going to hear from the Michigan Democrats objecting to this or are just say going to go say, hey, you've giving us a bailout, we'll have to leave it at that?
O'GRADY: I think workers are going to be very upset.
GIGOT: All right, Mary, thanks.
We have to take one more break. When we come, back our "Hits and Misses" of the week.
GIGOT: Winners and losers, picks and pans, "Hits and Misses," it's our way of bringing attention to the best and the worst of the week.
Mary, first to you.
O'GRADY: A hit for the 76th anniversary of amateur night at the Apollo Theater. The theater has been an institution in Harlem since 1914. But in 1934, a guy by the name of Ralph Cooper, Sr, took his radio show to the theater and started this amateur night. And some of the young contestants who got their start there include Ella Fitzgerald, Stevie Wonder and James Brown. This was sort of an early version of "American Idol." So happy birthday. There's a lot to celebrate there.
GIGOT: All right.
FREEMAN: A miss to his honor, Mayor Bloomberg. He's going being a rock star.
GIGOT: New York mayor.
FREEMAN: New York Mayor Bloomberg who has a plan to cut the salt in restaurant food 20 percent over the next five years. this is none of his business. He ought to be focusing on economic growth in the city. And maybe he ought to tell people to take more potassium instead.
GIGOT: All right.
MOORE: Paul, can you believe it, snail mail is going to get slower! The postal service wants to go to five days a week from six days a week. Mail is getting slower and more expensive all the time.
My solution, Paul — get rid of the postal monopoly. Let's let Federal Express and Fred Smith deliver the mail. That way, people will still be able to get their weekend "Wall Street Journal".
GIGOT: Steve, isn't the postal service already kind of fading away because of e-mail, FedEx and UPS?
MOORE: It is. That's why volume is way down, Paul. But why give a legal monopoly so no one else can deliver mail? Let's open it up in 21st century communications and transportation.
GIGOT: Thank heavens for the technological change. Otherwise, it never would have happen.
Remember, if you have your own "Hit or Miss," please send it to us at email@example.com.
That's it for this week's edition of "The Journal Editorial Report."
Thanks to my panel and to all of you for watching.
I'm Paul Gigot. We hope to see you right here next week.
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