Gramm, Leach and Bliley ruined everything

No one outside the economic community is a more forceful opponent of market concentration than I am, and the 2008 financial crisis is a big reason why. My family was not affected, but we’re all extremely conservative about money. So is the Canadian banking system. The American one used to be, but the inescapable truth is that if that hadn’t changed, much of the fallout might have been avoided – leading some experts to wonder if it isn’t time to go back to the future.

The discussion centers on two important pieces of banking legislation: the Glass-Steagall Act of 1933 and the Gramm-Leach-Bliley Act of 1999. While both bills cover multiple facets, they mostly come up because of their effects on the nature of the banking industry. The former restricted activities between commercial banks and securities firms. The latter repealed those barriers, on the grounds that individuals could put money into savings and investments at the same time and only have to worry about the investments in hard times.

While I don’t consider myself knowledgeable enough about banking to conclude whether or not Glass-Steagall should be revived, I do wish to address a couple of arguments made against the idea. The first, from Moshe Orenbuch of Credit Suisse: “You could get a financial system that could not be able to sustain itself in times of crisis if you don’t have large banks. There’s ample evidence that large, well-run banks provide benefits to the economy.” This financial system wasn’t able to sustain itself in times of crisis. Furthermore, Canada has large banks, too!

The second, from Dick Bove of Rochdale Securities: “There are in fact laws in this country, and you can’t simply go and tell a company you’ve got to be broken up because we want you to be broken up.” Does he not realize that the process that breaking up the largest banks would entail comes from a law? Nobody’s overstepping any boundaries.

The third, from Bove again, is that “conventional banking” is no guarantee because plenty of regional banks failed during the financial crisis and afterward. Would he then like to argue that these banks should have been bigger and fewer, because then they could have been bailed out and saved? Conventional banking allows for failure that is natural for any marketplace. You’d think someone as clearly anti-regulation as he is would agree.

It’s possible that, rather than breaking up the banks, they might simply be regulated more strongly to increase transparency and decrease complex risk. I would personally favor something faster than that, but if it works to end “too big to fail,” I’ll take it.

Take it to the Eximbank

At first I was wary of writing about the brewing congressional showdown over the Export-Import Bank (Eximbank) because I really wasn’t sure if it affected taxpayers measurably or not, as most accusations to that effect come from reliably right-wing sources. A visit to Business Insider cleared it up. The point is that Democrats want to renew its charter and Republicans kinda don’t. It’s worth noting that this is possibly the first time either party has given this renewal much political thought.

The Eximbank provides loans and other forms of credit assistance to U.S. companies when private banks consider their new markets too risky for loans. Since the Eximbank uses “repayments of old loans to guarantee new ones,” plus fees, and it only lends up to $100 billion a year, you could argue that it’s “self-sustaining” and taxpayers have little to worry about. Yet corporate welfare, patronage and comparisons to Fannie Mae and Freddie Mac are common tropes among its critics.

Republican and conservative approaches to renewing the Eximbank range from approval with conditions to outright opposition. None have been able to point to an actual example of taxpayers taking a hit from the Eximbank’s actions, instead raising the specter of that possibility in light of controversy surrounding said housing companies. Meanwhile, Democrats want to raise the lending cap by $40 billion, which might be popular among those who haven’t seen job growth firsthand.

Since the Eximbank has actually been profitable throughout its history and did not sink during the recession, it certainly seems as though the most fervent opponents of its renewal are more concerned with political sexiness than actual history. That does not mean there isn’t room for reform, given some more specific aspects of the Eximbank’s history. For example:

• Raise the lending cap by just $10 billion and spend an extra bit of money on enforcement against waste, fraud and abuse.
• Companies that have received a certain percentage of their revenue in the form of government subsidies on any level should be less eligible for Eximbank loans, if at all.
• All companies who seek Eximbank loans should be subject to investigation for political connections.

If the Eximbank is one of a very few federal efforts that has actually yielded jobs without tanking, it’s worth renewal. I can probably name 50 other ways to save taxpayers $100-$140 billion in upfront costs. One way to do it would be shaving time off the paychecks of members of Congress who spend their working hours with political lobbyists instead of constituents.

Haven’t we met somewhere before?

As much as Congress has gotten in the way, it’s not unfair to rag on President Obama for not overseeing much measurable economic expansion while in office. As a greater president once said, the buck stops at the Oval Office. Most people will tell you that some of the ideas he has thrown out are time-tested. Yet he’s recommended that entire appetizer sampler of ideas before, and he’s doing it again now. Naturally, people aren’t impressed.

For only $8.99, you get a platter with all the T.G.I. Obama’s favorites:

• R&D tax credit extensions!
• Educational investments!
• Regulatory reductions!
• Domestic energy extraction!
• Lower corporate taxes!
• Clean energy subsidies!

Let’s focus on those last two. Lower corporate taxes don’t mean much unless you can guarantee that its beneficiaries will use it for your desired ends, capital investment and hiring in this case. If anyone knows how to do that, please come forward with them. As for the clean energy subsidies . . . many of you will recall that I’d hoped for green tech to be the “market mover” of this decade. Unfortunately, massive amounts of federal subsidies and a generally weak private investment environment don’t contribute much to achieving that objective.

The other ideas are all standard-issue. I seem to recall them being present in stimulus legislation and the American Jobs Act, the latter of which hasn’t even gone anywhere in piecemeal form. No wonder the above article explored his proposals from the “deja vu” angle. Since they would probably win bipartisan support in Congress, he should work a new bill around them and save the more contentious stuff for separate bills. Will that get anywhere? Only about 11% of Americans would say yes or maybe.

After those, which are too fundamental to be noticed any time soon, one or both of these things need to happen: 1. A market mover. By this, I mean some miraculous new invention that will create an industry for itself and cottage industries on the periphery. And that’s something the government can assist when it’s found, but can’t and shouldn’t try to create. 2. Large-scale infrastructure investment. It’s not new, it’s not all that affordable and it’s not permanent, but it’ll do until someone else gets a better idea. Americans want it. Cities need it. It’s easy to measure. It’s literally the best this government can do.

Of course, this would be more effective if “jobs now” was paired with “debt reduction now.” But that would require asking them to do two things right at once.

Fail of the Year 2011

On the closest Saturday to New Year’s Day, I will bestow this award upon the past year’s ultimate fail. This one, selected by 54% of voters, was posted on April 2 as “Why we should read bills.” In second place was Congress, posted on August 6 as “I got your values right here!” In third was Donald Trump and Newsmax, posted on December 3 as “Win an endorsement from Donald Trump!” See you next year!

This week’s fail was brought to you by anyone who was involved in the creation and implementation of the Troubled Asset Relief Program (TARP), also known infamously as the bank bailouts, and didn’t call for more oversight and/or strings. This article by Neil M. Barofsky, who was the inspector general for TARP from 2008 to Wednesday of this week, wrote in the New York Times (though I read it in the Minneapolis Star Tribune) that it “cannot be considered a success.”

According to Barofsky, the banks have grown by 20 percent, with at least one of them (Goldman Sucks) lavishing its executives with perks almost upon receipt of the money. The injection of TARP funding was intended to stimulate the banks to unfreeze credit for American consumers. Can any of them look American consumers, homeowners and taxpayers in the eye and claim to have done that to a sufficient extent, if they care at all?

Barofsky spells it out plainly: “Treasury, however, provided no effective policy to compel the extension of credit — despite our strong recommendation, not even a request that banks report how they used TARP funds.” They did in April 2010, far too late to be effective. The only explanation I can offer for this refusal is the fact that so many of the higher-ups at Treasury have spent their careers at the big banks, to the point of being unable to truly grasp the benefits of more and smaller companies in a sector.

In the earlier days of TARP, I defended the concept of it, insisting that the big banks who would receive its $700 billion-plus funds represented two entire industries that were in danger of crumbling altogether. Nobody liked that fact, but we grudgingly accepted it on the grounds that it was better than a scorched-earth approach to banking. I have never been a supporter of economic concentration and repeatedly insisted that the banks should break up of their own volition. (See “olsondaniel’s” comment on the Strib article. He knows what’s up.)

As much as we all would have appreciated caps on executive pay and perks, for the federal government to have legislated them into place would have been unconstitutional. Treasury did, however, reserve the right to impose rules on what was done with their own money. Their failure to do so suggests a deep-seated flaw in its policy-making culture.

Disposal Day #96: Antitrust-busters

STORY #1: They’re not chicken

I’m not quite sure how this happened, but agricultural economics is one of my favorite topics, especially when it comes to competition law. So you can imagine my joy at getting to write about potential regulations against massive meat companies such as Tyson Foods. Proposed new regulations by the Department of Agriculture (USDA) include a) allowing small farmers to prove that a company’s competitive practices have harmed their business, as opposed to harming the entire industry and b) eliminating the “tournament system” of payment, described here. Congress has scuttled them both.

No one is a bigger opponent of corporate concentration than I am, but more rigorous enforcement of existing antitrust laws, such as the Packers and Stockyards Act, would do more to free up the meat market than either of these proposals. The first opens the door to all manner of lawsuits; the second is probably nothing the government could get away with. So, the USDA ought to go back to the drawing board. In the meantime, buy local. Corporate meat is gross.

STORY #2: The less-than-1 percent

The idea of professional athletes, especially NBA players, complaining about reductions in their compensation makes me want to tie a string around a kitten’s neck and bounce it against the wall like a yo-yo. (I’ve kind of had a hate-on for kittens since the new one at Adam’s house almost bit me. I apologize.) Yet, that’s exactly what they’re doing. Carmelo Anthony and Kevin Durant allege that the NBA has “violated antitrust laws and conspired to ‘boycott players’” by trying to accept thinner paychecks. Waaaah!

I don’t claim to know anything about sports economics, but are you kidding me? In what twisted universe does antitrust law actually apply here? My understanding is that the victims of trusts are consumers and business owners. If anyone can break down the reasons for this, please do so immediately.

STORY #3: Downwardly mobile

The kind of antitrust enforcement I mentioned in Story #1 is at work here; the Justice Department (DOJ) is preparing to sue AT&T to stop its acquisition of T-Mobile. As I pointed out in an earlier column, this would make AT&T the sole provider of a certain type of wireless technology. I don’t know how many consumers care about that sort of thing, but smaller carriers can’t be too happy about it. Why Attorney General Eric Holder has recused himself, I don’t know (looking for a lost memo, maybe), but I’ll be interested to see what comes of the rest of the DOJ going after this one.

How real Americans would create jobs

I don’t know who runs this, but President Josiah “Jed” Bartlet is on Twitter, along with most of his senior staff, and they’re all very popular. (And if you have no idea who President Josiah “Jed” Bartlet is . . . die.) He created a hashtag campaign, #MyJobsPlan, in which everyday Twitsters wrote their own proposals. He and four other people retweeted my suggestion, which I will cover below, along with the most popular ones.

Infrastructure. This was a big one; virtually every second hashtagger mentioned it. Most brought up road and school construction projects, but a couple of people encouraged nationwide wireless Internet, and another suggested railroads. I have already written of my support for a national infrastructure bank so these projects wouldn’t have to wait for a recession to get funding. This is a sensible idea, but one that has become a shade overtired. (Also, high-speed broadband might be better than wireless.)

Tax reform. The options were endless: ending capital gains taxes; penalties on outsourcing companies; incentives for ones that hire the long-term unemployed; incentives for green tech; lower taxes rates on “earned vs. passive income”; eliminating all breaks except for the ones for charitable giving; breaks for companies that buy local. The conclusion I draw is that any changes to income taxes don’t seem to impress people.

Education reform. This mostly referred to school investment, but others had more unique ideas: high school-based NGOs that would aid developing nations; making creativity a preferred outcome to SAT scores; student loan forgiveness; and mine: reviving the importance of basic trades. Why? This. The trend is this: If the lessons don’t have direct benefits to employers (“soft skills” don’t count), save it for electives.

Occasional socialist stuff. I never expected many hardcore economic conservatives to be found among Pres_Bartlet’s followers. Here are some recommendations from the exact opposite: readjusting the income ratio (how?); increasing stock ownership by employees (30% per, he said; must have been a typo); more state aid; single-payer health care; personal bailouts; shorter work weeks; death to special-interest lobbying (not much argument here); and income taxes rebates for those who create union jobs and “living wages.” Don’t expect these to go far.

Totally random. Legalize marijuana and boost manufacturing of hemp products; require the government to buy only U.S. art; voluntary human extinction; space programs; marry rich; reduce every job to 66% of responsibility; vote Democrat; sell some guy’s books; “enforce leisure.” Always nice to have a laugh in these discussions, no?

On new jobs, it’s not them, it’s you

It took a Senate rejection to do it, but Congress has finally convinced President Obama that his jobs package just won’t fly in package form. Now he’s agreeing to take a piecemeal approach, which I don’t like on principle but am willing to accept, as it’s simply an incremental version of a larger vision – even one that’s already been tried before, as Senate Minority Leader Mitch McConnell (R-KY) didn’t hesitate to point out. Recent good news might change things up a bit for future plans.

The first piece of good news is that jobs exist in America. Thousands of them. Within well-known, high-technology companies. “High-technology” is the problem; these companies are having trouble finding enough skilled workers to fill them. That means direct investment in businesses might not be as necessary as we thought. Investment in trade schools and math and science programs, that’s another story.

The second, third and fourth pieces of news are that three long-awaited trade agreements have just passed in the House. These, collectively, have been touted as the key to economic success. I’m not particularly optimistic about the Colombia agreement given its problems with violence and labor rights. However, the South Korea and Panama agreements could generate some interesting possibilities.

In short, we’re finally getting somewhere on jobs. It might not be much, but it’s a start. Now what’s left to do is to pick out which pieces of the American Jobs Act are most likely to pass. Here are a few I would vote for if I were in Congress:

• prohibiting discrimination of unemployed workers (unless they’re legitimately unreliable)
• a national infrastructure bank
• tax credits for hiring veterans
• expanding wireless spectrum access
• elimination of any unnecessary regulations with net negative economic impact (and I do mean net)
• funding for school science and computer labs and new textbooks

After that, I might consider a payroll tax holiday, or at least the afternoon off, so to speak. Other changes may not require much federal involvement; states ought to take the lead in pushing for more training in the trades and applied math, science and computer science, and increased access to two-year colleges should be supported. Let’s hope Congress reacts to that part of today’s good news accordingly. If all they do from this point forward is an unholy stew of non-contingent tax cuts, then it really will be just like old times, except that Obama will be slightly less to blame for the fallout.

Nothing good ever comes after “offshore”

If anyone in the future asks me for my opinion of the best way to create jobs in the U.S., I will give them my catch-all answer: Bring back the ones that have been lost to outsourcing. That means making it more appealing for larger companies to do business in the U.S. An option I have often recommended is forcing these companies to pay extra for foreign worker protections. Changes in taxation are another way to go, although I prefer something more fundamental, but this will do.

This change in particular has to do with overseas income deferral law, which allows multinationals to keep the profits they make from foreign facilities “parked” there. That means they avoid bringing it back to the States, where it might be subject to the same 35 percent corporate tax as domestic profit. Both conservatives and liberals have solutions to the problem. The former: Exempt it from taxes. The latter: Repeal income deferral law.

The conservatives on this side of the debate don’t have a completely off-base argument. If these companies cannot bring their foreign-generated profit back to the States without the threat of heavy taxation – yes, it is heavy compared to corporate taxes elsewhere, for all you rich-eaters out there – they cannot reinvest it in the States and create jobs that way. Of course, that carries the assumption that all companies will reinvest their profit to the benefit of everyone. Because that’s always true.

By contrast, the liberals’ solution can work both ways. If the companies decide operating overseas is too expensive with a new tax, moving operations back to the U.S. becomes more appealing. If they don’t, the public treasury gets a fresh supply.  Since Congress has trouble deciding between job creation and deficit reduction, they might as well make both possibilities stronger at once.

Nonetheless, I think we might be able to forge a compromise here. If these multinationals can demonstrate that they would be using their overseas profits for reinvestment in domestic manufacturing, then they get to pay lower taxes. If not, they can suffer through the taxes on top of the payment for international facilities, labor, transportation and legal navigation, or just return to the U.S. and suffer through the taxes and a lesser version of all of the above.

The last thing Congress should do is make it easier for American companies to create non-American jobs and products. If your distaste for taxes in general is compelling you to support the conservatives, let your distaste for unemployment outweigh it.

If only we could regulate their mouths

Congressional gridlock has led quite a few pundits to consider the merits of so much power in the hands of a legislature. I tend to believe that this system works, if the members of the legislature, collectively, take a balanced approach to their work. In such an unbalanced Congress as this one, the results – when there are any – can be, to say the least, ridiculous. So it is with interest that we observe Speaker John Boehner’s (R-OH) request for even more legislative authority, this time over federal regulations.

President Obama’s pledge to identify existing burdensome regulations has been met fairly well, at least by Republicans. It’s another in a long, long line of concessions on the White House’s part. Unfortunately, Boehner and Co. are the type to want a glass of milk if you give them a cookie. He says the House is considering legislation that would have them review all proposed federal regulations with a financial impact exceeding $1 billion.

Given current limits on executive action, I’m surprised they haven’t done this already. This review program would likely save us the tiresome exertion of yet another debate on the Commerce Clause, which alone could persuade me to support this legislation. That clause is about the only constitutional justification for the mere existence of countless arm’s-length federal agencies.

But a Congress that is so unfriendly to regulation in principle, especially if it could hinder job creation even on the smallest level, cannot be trusted to handle this freedom effectively. While job creation needs to happen now, I’m not so sure that we should celebrate the creation of jobs that put the public interest at risk. If that risk leads to heavier costs elsewhere, that victory would be nothing short of Pyrrhic.

If this happens, the agency in question, in conjunction with the Congressional Budget Office (CBO), should prepare reports listing the following: statement of purpose, up-front financial impact (immediate costs to business), long-term fiscal impact (i.e. government savings on health and environmental costs) and estimates on job numbers. This would speed up the review process, assuming the reports check out. Moreover, it would ensure that all factors are considered, not just the political advantages of opposing regulations.

Even then, certain politicians need to realize that some advantages of regulation outweigh the economic. I don’t care how many jobs can be created in a plant that makes irradiated meat. I’m not serving it for dinner.

The taxman giveth and the taxman taketh away

Someone is going to look at this and accuse Republicans of wanting to protect their rich friends at all costs, even if it means raising – yes, raising – taxes on lower- and middle-income earners. While I am not one to accuse people of such dastardly thinking, which would normally be reserved for this show, it doesn’t look very good to demand that income tax cuts for the rich be untouched, but approve of letting a tax cut on everyone who has or hires for jobs expire.

The issue is the payroll tax, which all workers and employers pay in order to add to Social Security funds. Before last year, both paid 6.2 percent. President Obama requested that the workers’ share be reduced to 4.2 percent in December; the employers’ share did not change. That reduction is on track to return to normal levels on January 1 of next year. Obama wants it to stay. Republicans are not so sure. And you know how rare it is for them not to be sure.

Here’s Rep. Jeb Hensarling (R-TX): “It’s always a net positive to let taxpayers keep more of what they earn, but not all tax relief is created equal for the purposes of helping to get the economy moving again.” He’s both right and wrong on this one. The savings for workers enable them to spend more, which, if all the money went to stuff, might enable the makers of that stuff to hire more people. However, in this climate, it’s more likely that they’d spend it on necessities.

Some Republicans suggest shifting the reduction to the employers’ side, which could in theory allow them to hire more people, or at least gave wages a boost. Again, that is not always a guarantee, and they could in practice do anything with the extra cash. But if the goal is to create a climate for increased hiring now, they’re on the right track.

A compromise could entail either increasing the workers’ share to 5.2 percent and cutting the employers’ share to the same rate, or letting the workers’ share go back to normal levels and cut the employers’ share to 5.2 percent. The former would satisfy demands for measures to spur hiring; the latter would do that and generate a little extra revenue for Social Security, but would not necessarily spur consumer spending. These are the most reasonable plans I can see being put on the table. Let’s hope “reasonable” is the keyword.

But while we’re on the topic, let’s settle this: Would the expiration be an actual tax increase? For people who just started dealing with this after the reduction, yes. For those who are used to it, it’s business as usual. It’s all about the timing.