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Friday, February 22, 2013

Increasing Inequality of Incomes in U.S.: Deregulation to Blame?

Most Americans have no idea how unequal wealth as well as income is in the United States. This is the thesis of Les Leopold, who wrote How to Make a Million Dollars an Hour. In an essay, he points out that the inequality had increased through the twentieth century. His explanation hinges on financial deregulation. I submit that such reductionism does not go far enough.
In 1928, the top one percent of Americans earned more than 23% of all income. By the 1970’s the share had fallen to less than 9 percent. Leopold attributes this enabling of a middle class to the financial regulation erected as part of the New Deal in the context of the Great Depression. In 1970 the top 100 CEOs made $40 for every dollar earned by the average worker. By 2006, the CEOs were receiving $1,723 for every worker dollar. In the meantime was a period of deregulation beginning with Carter’s deregulation of the airline industry in the late 1970s and Reagan’s more widespread deregulation. Even Clinton got into the act, agreeing to shelve the Glass-Steagall Act, which since 1933 had kept commercial banking from the excesses of investment banking. The upshop of Leopold’s argument is that financial regulation strengthens the middle class and reduces inequality by tempering the wealth and income of those “on the top.” Deregulation has the reverse effect.
 
             The increasing role of the financial sector in the second half of the 1900s means that finance itself could claim an increasing share of compensation.  
Leopold misses the increasing proportion of the financial sector in GDP from the end of World War II to 2002. The ending of the Glass-Steagall act in 1998 does not translate into more output on Wall Street relative to other sectors. Indeed, the trajectory of the increasing role of finance in the U.S. economy is independent of even the deregulatory period. Leopold’s explanation can be turned aside, moreover, by merely recognizing that the “young Turks” on Wall Street have generally been able to walk circles around the products of their regulators. Even though financial deregulation can open the floodgates to excessive risk-taking, such as in selling and trading sub-prime-mortgage-based derivatives and the related insurance swaps, I suspect that the rising compensation on Wall Street has had more to do with the increasing role of the financial sector in the American economy.
The larger question, which Leopold misses in his essay, is whether the “output” of Wall Street is as “real” as that of the manufacturing and retail sectors, for example. Is there any added value to brokering financial transactions, which in turn are means to investments in such things as plants and equipment used to “make real things”? Surely there is value to the function of intermediaries, but as that function takes on an increasing share of GDP, it is fair to ask whether the overall value of “production” is inferior.
        Given the steady increase of the financial sector as a percent of GDP, one would expect a more steady divergence of these two lines. Reagan's deregulation fits the divergence pictured, though one would expect a further increase in divergence after the repeal of the Glass-Steagall Act in 1998.  Source: Les Leopold
 
As for the rising income and wealth of Wall Streeters, increasing risk, which is admittedly encouraged by deregulation, is likely only part of the story. If the financial products are premium goods as distinct from the goods sold at Walmart, for instance, then as the instruments are increasingly complex one would expect the compensation to increase as well.
Leopold is on firmest ground in his observation that Americans are largely oblivious to the extent of economic inequality in the United States. Few Americans have a sense of how much more economic inequality there is in the U.S. than in the E.U., where the ratio of CEO to average worker compensation is much lower. One question worth asking centers on what in American society, such as in what is valued in it, allows or even perpetuates such inequality, both in absolute and relative terms. The relative terms suggest that part of the explanation lies in cultural values having relative salience in American society. Possible candidates include property rights and the related notion of economic liberty, the value placed on wealth itself as a good thing, and the illusion of upward mobility that allows for sympathy for the rich from those “below.”
In short, beyond actual regulations, particular values esteemed in American society and the increasing role of the financial sector in the American GDP may provide us with a fuller explanation of why economic inequality increased so during the last quarter of the twentieth century and showed no signs of stopping during the first decade of the next century. Americans by in large were wholly unaware of the role of their values in facilitating the growing inequality, and even of the sheer extent of the inequality itself. In a culture where political equality has been so mythologized, the acceptance of so much economic inequality is perplexing. At the very least, the co-existence of the two seems like a highly unstable mixture from the standpoint of the viability of the American republics “for which we stand.” Yet absent a re-calibration of societal values, the mixture may be an enduring paradox of American society even if the democratic element succumbs.

Source:

Les Leopold, “Inequality Is Much Worse Than You Think,” The Huffington Post, February 7, 2013.

Thursday, February 21, 2013

E.U. Passes Financial Transactions Tax (FTT)

Out of a “desire to ensure that the financial sector fairly and substantially contributes to the costs of the crisis and that [the sector] is taxed in a fair way [relative to] other sectors for the future, to disincentivise excessively risky activities by financial institutions, [and] to complement regulatory measures aimed at avoiding future crises and to generate additional revenue for general budgets or specific policy purposes,” the Council of the European Union took a decision on 14 January 2013 to allow 11 states, including Belgium, France, Germany, and Italy, to act in a coordinated fashion with the Commission and each other in establishing and administrating a tax on financial transactions. That is to say, the tax is to be jointly administered by the Commission and the states, and both levels would share in the proceeds. A few states, most notably Britain and the Czech Republic, abstained in the voting.
 
Back in July 2012 at a European Council meeting, it was clear that the FTT would not find unanimous support, so eleven states were given the go-ahead six months later to proceed because the coordinated effort was deemed a “last resort.” Behind the permission was doubtless a sense (or a hope) that starting a tax regime as a shared competency for a limited number states would grow to encompass more states. The E.U. had progressed in just such a gradual process in the past, so the strategy of beginning a new tax regime with a few states is in keeping with the history of European integration and would be likely to result in future expansion to include every state or at least the vast majority. This is not to say that the coordinated FTT was not without its flaws. Fixing them could facilitate other states in picking it up.
First, the assumption that the financial sector rather than its customers would end up paying for the financial bailouts seems somewhat less tenable. In anything less than strong competition, firms will pass the tax onto their customers. It has by no means been established that the banks’ customers were culpable in the financial crisis of 2008.
Second, it is difficult to see how a tax of 0.01% for derivatives and 0.1% on every other financial transaction, including the purchase of stocks and bonds, would thwart risk-taking. It would seem that for such a goal derivatives, such as those based on mortgages that triggered the swaps that nearly brought down AIG in the U.S., would be taxed at a higher rather than lower rate than stocks and bonds.
Third, the inclusion of adding to the general budgets at both the federal and state level—the competency being shared—could be criticized as evincing “big government” above and beyond the particular objectives of the tax. In other words, the FTT would be on firmer ground were its proceeds exclusively oriented to the financial sector, whether in making up for the costs to the public in having bailed out some financial institutions in the wake of the financial crisis, to treat the sector fairly relative to others in terms of tax, or to fund future financial regulation.
In short, expanding state participation in exclusive or shared E.U. competencies is predicated on public policy being tightly wound around its particular objectives. If risky transactions are to be discouraged, the tax-rate differentials should not be shy in creating adequate monetary disincentives. Combined with going far enough in terms of the objectives, avoiding waste or “spillage” can make all the difference in terms of the efficacy of continued shifts of governmental sovereignty to the E.U. such that the federal system itself comes to enjoy a balance of power between the state governments and that of the Union.

Sources:

European Commission, “Taxing Financial Transactions,” 14 February 2013.

Wednesday, February 20, 2013

Challenges for E.U. Foreign Policy

Foreign policy is typically one of the domains of power that goes to the federal level in a Union of states. The history of the E.U. in its development provides a counter-example, as traditionally lower-level functions, such as government regulation of business, were the first to be federalized. Even as a counter-example, the E.U. is nonetheless a federal system, as such a system is not defined by which competencies are federalized. Even so, there are downsides to leaving foreign policy at the state level. In the case of the U.S. under the Articles of Confederation (1781-1789), the foreign policies at the state level involved the risk that European states would try to break apart the new American union by giving the American republics different geo-political foreign interests.
In the case of the E.U., the problem of differential state involvement in trouble-spots in the Middle East presents a formidable problem for the E.U.’s foreign minister in coming up with a foreign policy for the E.U. itself. For example, in February 2013, Britain and Germany were on opposite sides on whether to arm the Syrian rebels. Reaching a consensus to go beyond the status quo was proving to be too formidable for the E.U. The question on the table here is why.

         Should the Syrian Rebels have more powerful weapons, or would they eventually wind up in the hands of anti-Western forces?  This question is difficult enough without having to come to consensus on the question in the E.U.    Source; ABC News.
The full essay is at "E.U. & U.S."

Tuesday, February 19, 2013

The Debt-Ceiling vs. the Fiscal Cliff as Negotiating Leverage




It is likely a drawback of democracy that hard decisions—that is, those in which fixing the problem goes against instant gratification—get pushed back, or “kicked down the road,” rather than addressed in a definitive way. Such “kicking the can down the road” can be seen in how Congressional leaders and the U.S. President delayed the “fiscal cliff” for two months at the beginning of 2013. In this respect, the elected representatives evinced a fundamental flaw in democracy or self-government itself.

To be sure, excesses in politics were also in the mix, as each side stepped back from closing deals when presented with a more opportunistic bargaining standpoint in doing so. For example, President Obama suddenly added $400 billion more in revenue to his “grand bargain” with Speaker Boehner when the bipartisan “gang of six” in the U.S. Senate announced their own deal, which included more revenue than was in the “grand bargain.” Put another way, Obama got greedy and undercut his own credibility in terms of sticking to a deal that he had led the Speaker to believe had been achieved. Later, as conservative Republican pressure mounted on the Speaker, he walked away from even the “grand bargain” without the $400 billion more in revenue on the table. The result was frustration, distrust, and a “quick fix” that merely “kicked the can down the road” and unnerved markets with the prospect of ongoing uncertainty. At the very least, the trajectory bespoke the dysfunction rather than triumph of politics. More subtly, the verdict on representative democracy could not have been good. Although less transparent, this observation is far more serious, for no alternative to democracy could claim superiority even given the vulnerabilities in self-government. 

Behind the leaders’ “inability” to reach a “grand bargain” capable of solving structural budgetary imbalances (beyond those which come from simply “digesting” the aging of the baby-boom) was pressure from competing ideologies on the size/role of government held within the electorate itself. Reconciling such distant ideologies can be difficult even in terms of reconciling visionary leadership;  deal-making is likely more oriented to a more micro level of policy.

The Speaker had been wise in wanting to do something much bigger in the “grand bargain” than merely getting the country’s debt ceiling raised and making a dent in the budget deficit. He had wanted fundamental tax and entitlements reform that would put the U.S. Government on the path to fiscal balance. “I did not come here to have a big title,” he said. “I came here to do big things.” Indeed, he put his title as Speaker at risk just by negotiating with the President with revenues on the table, given the emergence of the anti-tax “Tea-Party” Republicans in the House Republican caucus.

Upping the ante, as it were, was the choice made by Rep. Paul Ryan (R-WI) to use the debt-ceiling vote as leverage to extract concessions from the White House. According to The New York Times, “Republicans vowed to use the need to raise the federal debt ceiling in early 2013 to force deeper spending reductions before agreeing to an extension until May.” Making passage of an increase in the ceiling in some sense contingent was itself destabilizing to the market due to the new uncertainty on whether the U.S. Government would default. Additional uncertainty in the business environment translates into a business reducing or putting off investments in expanding operations. The announcement itself added risk to U.S. Treasury bonds, even if the strategy would not actually go as far as actually standing by as the United States Treasury defaults on its obligations.

In reaction to Rep. Ryan’s announcement, Tim Geithner, Secretary of the U.S. Treasury, advised the President to make a deal because a default on Treasuries would trigger not only a significant downgrade in the nation’s debt rating, but also another Great Depression that would take generations to run its course. Even if Ryan’s negotiation strategy of “hold no prisoners” is very clever in a narrow sense of politics, it is difficult to accept the “ends justifies the means” justification for even opening up the mere possibility of another Great Depression. In other words, even great political strategy can raise red flags if the country itself is put at catastrophic economic risk even for a time. It makes sense that the American Founders viewed partisanship so negatively, even if the Federalists and Anti-federalists could be as partisan as they come. Being willing to up the ante without limit in terms of the risk of harm to the whole may be part of an escalation of ideological passion that eclipses common sense and eventually sinks the entire ship. An observer from Mars might get the idea that the humans over here are getting more desperate. Given the sheer ideological distance between the competing visions at issue, using something as catastrophic as not raising the debt ceiling as leverage can reasonably be regarded as reckless, if not foolish, even if the political calculus is cleaver and even ultimately effective in terms of the ideological objectives.

Fortunately (relative to having the debt-ceiling as leverage), the minority leader and the president of the U.S. Senate came up with a “fiscal cliff” to effectively replace the debt-ceiling as leverage. Even though legislative patrons of various parts of the federal budget claimed that the across-the-board cuts, or sequestration, would devastate the particular departments or programs, “going over” the “fiscal cliff” would be preferable to even risking the U.S. going into default. In other words, the move to something less catastrophic in what a partisan is threatening if he doesn’t get what he wants represents a ray of sanity in an otherwise insane escalation in systemic risk.

To be sure, the media had made sequestration sound like the U.S. Government would be paralyzed and the sky would fall. The economic fear and uncertainty unleashed by the hyperbolic rhetoric are perhaps more harmful than the actual “cuts” would be. The across-the-board “cuts” scheduled to go into effect on March 2, 2013 absent a deficit-reduction law in the meantime total $85 billion. This is a mere sliver in a budget of more than $3.5 trillion. Indeed, the “cuts” are less  in total than the last annual increase in the budget—far from likely to send the U.S. economy into recession.

According to the Fiscal Year 2012 Mid-Session Review, the enacted 2011 budget called for $3.63 trillion in outlays. The enacted 2012 budget called for $3.796 trillion in outlays, according to the Office of Management and Budget. The annual increase, $166 billion, is almost twice as much as the $85 billion at issue in the threatened sequester for March through December 2013. Put another way, the sequester’s cuts for 2013 beginning on March 2nd equal about half of the increase in the budget from FY2011 to FY2012.

The reckless nature of the sequestration is not in taking back half of the last annual increase. In fact, the total amount of outlays would still steadily increase throughout the ten year period that is subject to sequestration.
Rather, the craziness pertains to two points. First, although the $85 billion is less than half of the prior year’s increase in the budget, the sequestered amount would not apply, according to the Congressional Budget Office, to about 70% of mandatory spending. That mandatory spending, such as social security, medicare and Medicaid, made up about two-thirds of the budget at the time. It follows that sequestration would not touch 47% of the federal budget. This means that for the remaining 53 percent, the reduction would go deeper than the increases in those categories, or “buckets,” from the prior year. In other words, about half of the budget would take on the full weight of the sequester, hence the “cuts” there really would be cuts (i.e., going beyond removing the increase from the prior year). Reports of suspended public services, such as air traffic control at some 100 smaller airports, could thus be expected even though in total the sequester amount is about half of the total budget increase from the prior year.

It would be like adding an additional product to an already-loaded caravan of camels crossing a desert. The caravan could easily absorb the addition, except that the decision is made to put the additional weight onto about half of the camels. From the strain on those camels, an observer might easily conclude that the additional product is too much for the caravan itself. Any question of adding still another product would be dismissed out of hand even though the further addition is feasible and would make the caravan profitable.

Second, each “budgetary bucket” in the 53% of the federal budget subject to the sequestration would face the same percentage or “automatic” reduction, regardless of how vital the particular bucket happens to be. A department could not shift its “cuts” from payroll, for example, to conferences, to avoid layoffs. Put another way, all of the buckets in a given department would have be treated the same way in the sequestration (i.e., automatic, across-the-board). As a result, even just $85 billion out of $3.5 trillion could result in significant layoffs.

From the standpoint of achieving fiscal balance, it could be argued that even more should be cut, or some additional combination of additional revenue and “cuts” going beyond a total amount that merely removes about half of the annual increase in the budget from the prior year.  However, this point would doubtless pale in comparison with the real cuts to the budget buckets subject to sequestration. The way the sequestration is designed implies or gives rise to a perception of severity that is not the case on the macro level, and this perception can arrest any movement to bring spending and revenue further into line. Put another way, the way the sequestration approaches the federal budget makes it more difficult to bring enough political will to “finishing the job” in ending structural deficits and not merely narrowing them.

In conclusion, using the debt-ceiling and sequestration as leverage are not really comparable from the standpoint of actual (rather than media-hyped) harm to the United States. The harm from sequestration applies only to certain “buckets”; the overall “hit” being merely taking back some of the increase from the prior year’s budget. In contrast, the failure to increase the debt-ceiling to the extent that Treasury can avoid default gives rise to the systemic harm of a governmental default. Perceptions notwithstanding, the particular harms from the sequestration are qualitatively and quantitatively different. Accordingly, the move from the debt-ceiling to sequestration as political leverage represents a bright spot on what otherwise looks like democracy being utterly incapable of tackling fundamental problems facing a republic. To be sure, the obsessive fixation on “revenue vs. cuts” contributes to the limited perspective that prevents more fundamental solutions from entering even into public deliberation and discourse. Generally speaking, we the people are holding ourselves back even from being aware of more far-reaching proposals because of the distortions in the media’s “reporting” (or opining) as well as in the design of the sequestration itself. The fundamental question is whether such “holding back” is intrinsic to self-governance of and by the People.

Sources:

“Cliffhanger,” Frontline, PBS, February 11, 2013:

Cavuto, Neil “Sequestration Really the End of the World?” Fox News. 20 February 2013.

Essential Fiscal Charts,” Pew Trusts

Monday, February 18, 2013

Congress Mapping the Human Brain: Is the Oxymoron Constitutional?

In his 2013 State of the Union Address, President Obama cited brain research as an example of how the government should “invest in the best ideas.” He pointed to the $140 return to the economy from every dollar that had been invested to map the human genome. He added that funding the Brain Activity Map would be a job-creating investment in science and innovation. In terms of comparative advantage, enlarging the “knowledge economy” in the U.S. is a good strategy for being able to maintain a formidable standard of living. That the federal government has any constitutional basis to be funding a map of the human brain is a question the American president seems not to have considered. The question ought to be more salient in “industrial” policy debates. Indeed, it is not as though the economic and political domains were so disparate that consideration can effectively be delimited to matters of return on investment to the economy as a whole. By extension, what are taken as purely economic considerations in the E.U., as if it were solely an economic union, actually involve the political dimension.
                                                                A Congressional rendering of how the human brain might be mapped?      Source; nytimes.
As for whether Congress could constitutionally fund scientists to map the human brain, one would probably point to the spending clause of the U.S. Constitution, whereby the Congress has the authority to spend “for the general welfare.”  Scientific advancement, it could be argued, is in line with the general welfare. The problem is that under this rationale, practically any “investment” would be in the public welfare, even if only as a byproduct. It would be difficult to find an instance of public spending that does not have any externality in the sense of benefitting the public generally. Were the spending clause not subject to, or limited by, the enumerated, or explicitly listed, powers of Congress, those powers would not be limited. So by logic or reason alone, it stands to reason that the spending clause must have been intended to furnish Congress with the authority to fund its enumerated powers.
Turning to the enumerated powers of Congress, one might argue that the commercial implications from mapping the human brain qualify the funding as within the interstate commerce clause of the U.S. Constitution. However, for something to have implications for commerce generally—not even specifically interstate—means that that thing is not itself commerce. Even if the activity funded were commerce, it would presumably have to be that which is conducted across state lines. Furthermore, to argue that the regulating of interstate commerce extends to investing in the commerce itself twists the definition of regulation, which is to set rules.
President Obama could be challenged for his presumption that the federal government is the definitive level of government for virtually any matter of public policy to be enacted into law. To be sure, Alexander Hamilton, a delegate to the Constitutional Convention and the first U.S. Treasury Secretary, had wanted the states to be mere districts implementing federal policy. Of course, he also wanted the U.S. President to be in office for life. That he had not been born and raised in any of the colonies that would become the United States may explain his alien political philosophy from an American standpoint. Barak Obama, while doubtlessly born in Hawaii, lived abroad in his formative years. This may be why he has been susceptible to what Sandra Day O’Conner said is Congress “acting like a state legislature.” That is to say, Barak Obama may not have fully realized the distinctiveness of federal government on the empire scale. In other words, that the Founders deliberately gave the U.S. Federal Government the imperial powers that the King of England had in governing the British Empire is probably a point that the future American President would have missed while at school as a boy in Indonesia.
Generally speaking, as the American electorates lose their sense of what these United States are, we increasingly run the risk of having the ship of state operated in ways that are at odds with its design and essence as an entity. Put another way, if you forget who you are and begin to act in ways that are at odds with who you really are, you are undoubtedly headed for trouble—if not soon, then eventually.

Source:

John Markoff, “Obama Seeking to Boost Study of Human Brain,” The New York Times, February 17, 2013.

Sunday, February 17, 2013

What Is Behind Corporate Tax Loopholes?

A company in the U.S. wants a tax loophole to apply. Starbucks, for example, wanted to be able to use the manufacturing deduction by stretching manufacturing to include the roasting of coffee beans. So in 2004 the company hired Michael Evans, a lobbyist at K&L Gates who had just a year before worked as a top lawyer on the U.S. Senate Finance Committee, which writes tax law. Evans was able to urge his former colleagues in the Senate to expand the definition of manufacturing to include roasting in a clause added to a 243-page tax bill called the American Jobs Creation Act.  As you might imagine, Starbucks was not the only company to get a tax break written into that law.
By 2013, the manufacturing deduction had saved Starbucks $88 million that it would otherwise have had to pay in corporate income tax. In 2012, corporate tax breaks and loopholes added $150 billion in lost revenue for the federal government, hence increasing the deficit by that amount.  The provisions are typically not ended, for the lobbyists hired to insert them could simply be hired again to protect them.
To main lessons can be gleamed from this case. First, the damage done to the U.S. debt by corporate loopholes is significant. While dwarfed by having financed the Iraq and Afghanistan wars and the Bush tax cuts on credit ($2.4 trillion added to the debt altogether), $150 billion added on due to corporate tax benefits is nonetheless significant. Moreover, the “insider influence” itself violates the principle of fairness, at least in a democracy, and thus is unethical politically.
Second, the nexus enabling the efficacious lobbying on behalf of corporations seems to be the contacts that lobbyists have in government by virtue of having worked there themselves not long before lobbying. A law prohibiting former legislators and Congressional staffers from lobbying for at least ten years might make a dent in the inordinate insider influence of corporations in Congress.

To be sure, it could be maintained that it would be more difficult to get quality people to work as staffers on the Hill (or in regulatory agencies). However, with a sustained unemployment rate and people attracted to government without any intention of “cashing it in” by lobbying , the fear is likely spurious.  

A more serious objection is the point that power will inevitably find its maker. That is to say, members of Congress will get to the corporate cash one way or another. Looked at from the other direction, power flows down hill. Like water, pent-up power naturally seeks its way around an obstruction with the objective of securing a use. According to Nietzsche, the will to power seeks the pleasure in overcoming an obstacle. Even the eventual exercise of power thus has to do with an obstacle. The difference is that power turns that obstacle to its way. There is pleasure in that, according to Nietzsche.

Therefore, even though more daylight is needed between those in government and corporations, it is in the nature of power to work around obstacles that cannot be overcome in order to find others that can be turned around. Whether capturing members of Congress or entire regulatory agencies, corporate public affairs divisions are oriented to just that. Putting greater social distance between having been a staffer in Congress or even an elected representative or senator and lobbying for corporations would likely only make it marginally more difficult for corporate influence to find its way into the halls of power. The question is whether circumventing the water only slightly is worth the time and energy of passing the law. In the end, the threat to the democracy is the inordinate power, and thus wealth, of large corporations. Besides being at odds with Adam Smith's notion of perfect competition, a capitalist system populated with huge concentrations of private wealth is a threat to democracy.  

Source:

Ben Hallman and Chris Kirkham, “As Obama Confronts Corporate Tax Reform, Past Lessons Suggest Lobbyists Will Fight For Loopholes,” The Huffington Post, February 15, 2013.