The Lie about Regulations

Over the last month or so there have been a number of posts by bloggers I respect regarding the conservative mantra that excessive government regulations are strangling the economy and keeping unemployment high.  See here, here and here.

Not only is there little evidence that this is the case, but, as Kevin Drum points out in an excellent piece, the fact is that large corporations prefer regulations that are complex, cumbersome and opaque to those that are simple and easy to understand:

The "Volcker rule" is a simple thing. Basically, it says that if you're a bank that takes deposits and benefits from federal deposit insurance, you can't also make risky trades that might blow up your bank and cost the taxpayers a bundle. Wall Street never liked the rule, because banks make a lot of their money these days trading for their own accounts and didn't want their trading profits cut off. They fought the idea in Congress, but in the end, the Dodd-Frank bill that passed in 2010 included a version of the Volcker rule in its final draft.

Was this a victory for common sense? Hardly. Last month regulators unveiled their first take on the actual implementation of the Volcker rule, and it had become a monster. "Only in today's regulatory climate could such a simple idea become so complex, generating a rule whose preamble alone is 215 pages, with 381 footnotes to boot," complained American Bankers Association Chief Executive Frank Keating.

Poor banks! But step back for a moment. How did Paul Volcker's baby get so bloated? Keating's crocodile tears aside, the answer is: banks. When it comes to financial regulation, fighting against new laws is merely their first line of defense. When they lose, as they did in the Dodd-Frank battle, the action simply moves to the regulatory agency charged with implementing the law. James Stewart explains what happened next:

When the proposed regulations for the Volcker Rule finally emerged for public comment, the text had swelled to 298 pages and was accompanied by more than 1,300 questions about 400 topics.

…"Here's the key word in the rules: 'exemption,'" former Senator Ted Kaufman, Democrat of Delaware, told me. "Let me tell you, as soon as you see that, it's pronounced 'loophole.' That's what it means in English." Mr. Kaufman, now teaching at Duke University School of Law, earlier proposed a tougher version of the Volcker Rule, which was voted down in the Senate. "We've been through this before," he said. "I know these folks, these Wall Street guys. I went to school with them. They're smart as hell. You give them the smallest little hole, and they'll run through it."

This is probably the biggest reason that no one should take too seriously Republican complaints about burdensome regulations strangling the economy. The truth is that most reformers prefer fairly simple rules. In the tax world, they'd prefer to simply tax all income. In the environmental world, they'd prefer to set firm limits for pollutants. In the financial world, they'd prefer blunt rules that cut off risky activity at its knees.

But businesses don't like simple rules, because simple rules are hard to evade. So they lobby endlessly for exemptions both big and small. This is why we end up with tax subsidies for bow-and-arrow makers. It's why we end up with environmental rules that treat a hundred different industries a hundred different ways. It's why financial regulators don't enact simple leverage rules or place firm asset caps on firm size. Those would be hard to get around and might genuinely eat into bank profits. Complex rules, conversely, are the meat and drink of $500-per-hour lawyers and whiz kid engineers. If the rules are complicated enough, smart lawyers can always find ways around them. And American corporations employ lots of smart lawyers.

I started practicing as a tax lawyer in 1984, and a couple of years later I accompanied a senior partner of our firm to Washington to lobby on behalf of a bank client of ours for a special exemption from newly-passed limitations on the foreign tax credit rules, which were enacted as part of the Tax Reform Act of 1986.  I remember being quite convinced of the rightness of our client's position, as well as being kind of in awe of being in the heart of power.  As a Navy brat from San Diego, son of a junior officer who had not achieved the upper ranks, I really had only been exposed to the upper echelon of power like this once before - as a intern on Capital Hill in 1980 while I was in college.  I had stars in my eyes both in 1980 and 1986, and was really kind of oblivious to what I was doing there.

When I think back on it now, I cringe at the thrill I felt at the time.  Things have changed in a lot of respects since then though - at the time we failed to get the exemption we were lobbying for.

Incidentally the Tax Reform Act of 1986 was the fourth major tax "reform" legislation of the Reagan Administration, following the Economic Recovery TAx Act of 1981, the Tax Equity and Fiscal Responsibility Act of 1982, and the Deficit Reduction Act of 1984.  Except for legislation passed in 1993, which raised tax rates slightly did little more but a little tinkering around the edges, there was no major changes to the tax laws governing corporations and business during the entire Clinton Administration.  So why is it that Democrats have this reputation for creating business "uncertaintly?"  Every time I think of this charge I think of the Reagan tax bills - nobody knew from one year to then next what the tax law was going to look like.  Talk about uncertainty!

One more point:  one provision of the 1986 law was to change the name "Internal Revenue Code of 1954" to "Internal Revenue Code of 1986."  They didn't re-codify the tax laws - the basic structure of the Internal Revenue Code wasn't changed and the basic rules remained the same.  All that was different was they added a whole bunch of special rules and exemptions layered on top of the original code.   But the Republican leadership thought so much of their work that they decided to remind everyone what a wonderful thing they had accomplished.  Even at the time I remember thinking that this was a major act of hubris on their part.

"Technocrats"

Headline in today's New York Times:

"Greece and Italy Seek a Solution from Technocrats"

OMG.

Newsflash:  there is no such thing as an economic technician who makes his decisions free of political prejudices.  Everyone has political views, and attempts to characterize a particular policy decision as "nonpartisan" is just bullshit. It's public relations by an entrenched elite seeking to protect themselves while imposing painful austerity on everyone else.

 It's a cover for imposing an unpopular decision on an unwilling electorate.

More on the technocrats:  Atrios, Krugman I, Crooked Timber and Krugman II

Debt and Equity

Martin Wolf makes an interesting point in his column this morning - one you never hear talked about but which is a major factor in how we found ourselves in the economic mess we are in.  The gist of the column is that banks protestations that they are mending their ways aren't believable until they put their weight behind real reforms that address the real issues, including:

Third, banks should join with other businesses in a campaign to end the distortions in corporate taxation in favour of debt. There is too much debt in the economy. The consequences have been dire.

For many people this requires an explanation.  As I stated in an earlier post, corporations are basically mechanisms for owners of capital to act collectively to make a profit.  When a corporation needs to raise capital, it can do it in one of two ways - it can issues shares of stock, or it can borrow.

Well - really, there are all kinds of ways it can raise capital, and they all have various fancy names, but from an corporate income tax perspective - and this is true under the tax laws of virtually every country in the world - any instrument a company uses to raise capital has to fall within one of these two classes - it is either equity capital (shares of stock) or it is indebtedness.

The character of the instrument is extremely important for tax purposes - because when an owner of "shares" receives a payment on his investment in the company, it is called a dividend and when an owner of "debt" receives a payment on his investment in the company it is called interest.  And in determining the company's income subject to tax, interest is considered a deductible expense, and dividends are not.  [In many countries - including the US - the recipient of a "dividend" is also treated differently from the recipient of "interest".  In the US, dividends are taxed at the capital gains rate, while interest is taxed as ordinary income.]

The result is that there is a huge tax benefit for a company, when raising capital, to have the instrument characterized as debt, and payments on the instrument to be treated as interest.  But, of course, there is a downside to having so much debt.  If a company's income declines, its shareholders just have to sit there and suffer - but if the creditors aren't paid they can sue to be paid and, ultimately, force the company into bankruptcy.

So when a company needs to raise capital to, say, build a factory, it can either issue stock or borrow.  Now there are clearly other considerations that go into the decision, but there is little doubt that the tax consequences of choosing debt or equity is a major one.

And of course, the rules for determining whether an instrument is equity or debt are hugely complex.  You don't think they could come up with a simple rule for what is a debt instrument and what is equity, do you?  Too many tax lawyers are reaping exhorbitant fees delivering legal opinions on the issue.  Years ago - before I graduated from law school - Congress passed a directive to the IRS to issue regulations setting forth rules for determining whether an instrument issued by a corporation was stock or debt.  Several years later the IRS issued a draft set of rules, which set forth such a hue and cry that the draft was withdrawn and they never tried again.

As a former money center tax lawyer I can tell you that most of their time is spent on two basic issues - whether an instrument is debt or equity, and whether a payment is ordinary income or capital gain.  It is a huge issue for corporations everywhere.

It is also, of course, a huge issue for banks.  After all, a traditional bank is allowed to make loans but is not allowed to make stock investments.  Addressing the adverse consequences of tax incentives to borrow will result in an huge decline in demand for their main product - loans.

Martin Wolf is right.  The difference between a share of stock and a bond from a tax perspective creates huge distortions in corporate decision-making.

But any serious attempt to address this issue would have to be undertaken in the context of comprehensive corporate tax reform.  Good luck there.

De-Rigging the Labor Market?

Michael Lind has an excellent article in Salon today entitled "How the Rich Rig the System."  I agree with virtually all of it.  But I had to blink twice when I read this:

Between the 1930s, the New Deal raised the wages of working-class Americans by rigging labor markets in their favor. 

WTF?

What is a corporation?  It is essentially a group of investors (stockholders) pooling their capital to produce a product for sale in the marketplace and electing representatives (officers and directors) to represent their interests in producing and selling that product.  It is the essence of a collective enterprise.

What is a union?  It is a group of workers electing representatives to collectively bargain the terms upon which they offer their "product" - their services - in the marketplace.

New Deal laws protecting the rights of labor to collectively bargain did not "rig" the labor markets.  They leveled the playing field.

Weather

After enduring what has been a horrible year weatherwise, including the horrendous snowstorm that cause, for my household, our longest power outage since we moved here 16 years ago, I have been telling everyone I can that I am convinced that our climate is changing for the worse, and that this is only the beginning.  On the first point, at least, it appears that I'm correct:

Fourteen U.S. Billion Dollar Weather Disasters in 2011: A New Record

It's time to add another billion-dollar weather disaster to the growing 2011 total of these costly disasters: the extraordinary early-season Northeast U.S. snowstorm of October 29, which dumped up to 32 inches of snow, brought winds gusts of 70 mph to the coast, and killed at least 22 people. Not since the infamous snow hurricane of 1804 have such prodigious amounts of October snow been recorded in New England and, to a lesser extent, in the mid-Atlantic states. Trees that had not yet lost their leaves suffered tremendous damage from the wet, heavy snow. Snapped branches and falling trees brought down numerous power lines, leaving at least 3 million people without electricity. The damage estimate in Connecticut alone is $3 billion, far more than the damage Hurricane Irene did to the state. Hundreds of thousands still remain without power a week after the storm, with full electricity not expected to be restored until Monday.

The October 29 snow storm brings the 2011 tally of U.S. billion-dollar weather disasters to fourteen, thoroughly smashing the previous record of nine such disasters, set in 2008. Between 1980 - 2010, the U.S. averaged 3.5 of these weather disasters per year. Through August, the National Climatic Data Center (NCDC) estimated that ten weather disasters costing at least $1 billion had hit the U.S., at total cost of up to $45 billion. However, the October 29 snow storm brings us up to eleven billion-dollar disasters, and a new disaster analysis done by global reinsurance company AON Benfield adds three more. Flood damage from the remnants of Tropical Storm Lee in the Northeast on September 8 is now estimated at more than $1 billion, and two outbreaks of severe thunderstorms and tornadoes--one in April and one in June--now have damage estimates exceeding $1 billion. A remarkable seven severe thunderstorm/tornado outbreaks did more than $1 billion each in damage in 2011, and an eighth outbreak July 10 - 14 came close, with damages of $900 million. In total, the fourteen billion-dollar disasters killed 675 people. Tornadoes, hurricanes, and floods in these fourteen disasters killed over 600 people, putting 2011 into fourth place since 1940 for most deaths by severe storms. Only 2005, with over 1,000 deaths caused by Katrina, 1969, with over 700 hurricane and flood-related deaths, and 1972, with 676 hurricane and flood-related deaths, were deadlier years for storms, according to NOAA. The fourteen billion-dollar weather disasters of 2011 caused $53 billion in damage, putting 2011 in fifth place for most damages from billion-dollar weather disasters. The top damage years, according to NCDC in adjusted 2011 dollars, were 2005 (the year of Hurricanes Katrina, Rita and Wilma), 2008 (Hurricane Ike), 1988 (Midwest drought), and 1980 (Midwest drought). With nearly two months remaining in 2011, the potential exists for more billion-dollar weather disasters this year. Our first opportunity comes Tuesday, when the NOAA Storm Prediction Center is forecasting the possibility of a severe weather outbreak centered over Arkansas and Missouri.

Joe Romm at Think Progress comments:

No, not all of those events can be attributable to climate change, but climate change almost certainly made most of them worse (see “Tornadoes, extreme weather, and climate change“).  As climatologist Kevin Trenberth always reminds us:

One of the opening statements, which I’m sure you’ve probably heard is “Well you can’t attribute a single event to climate change.” But there is a systematic influence on all of these weather events now-a-days because of the fact that there is this extra water vapor lurking around in the atmosphere than there used to be say 30 years ago. It’s about a 4% extra amount, it invigorates the storms, it provides plenty of moisture for these storms and it’s unfortunate that the public is not associating these with the fact that this is one manifestation of climate change. And the prospects are that these kinds of things will only get bigger and worse in the future.

This statement was made in the context of criticizing the media for failing to associate these storms with global warming when reporting them.  And frankly, I have seen lots of reports on the October blizzard (having lived through it), but nothing that mentioned even a possible connection to global warming.

I'm no scientist, but the fact is we have been hearing about this for over 30 years and doing nothing to address it.  Last week I heard that carbon emissions increased 6% from 2009 to 2010, meaning not only have we still done little to address the issue, but in fact things are continuing to get worse.

Now the scientists' predictions are starting to come true, and we are still ignoring what is going on.

Wall Street Profits

From the Washington Post this past Sunday:

President Obama has called people who work on Wall Street “fat-cat bankers,” and his reelection campaign has sought to harness public frustration with Wall Street. Financial executives retort that the president’s pursuit of financial regulations is punitive and that new rules may be “holding us back.”

But both sides face an inconvenient fact: During Obama’s tenure, Wall Street has roared back, even as the broader economy has struggled.

The largest banks are larger than they were when Obama took office and are nearing the level of profits they were making before the depths of the financial crisis in 2008, according to government data.  Wall Street firms — independent companies and the securities-trading arms of banks — are doing even better. They earned more in the first 2-1/2 years of the Obama administration than they did during the eight years of the George W. Bush administration, industry data show.

Behind this turnaround, in significant measure, are government policies that helped the financial sector avert collapse and then gave financial firms huge benefits on the path to recovery. For example, the federal government invested hundreds of billions of taxpayer dollars in banks — low-cost money that the firms used for high-yielding investments on which they made big profits.

Stabilizing the financial system was considered necessary to prevent an even deeper economic recession. But some critics say the Bush administration, which first moved to bail out Wall Street, and the Obama administration, which ultimately stabilized it, took a far less aggressive approach to helping the American people.

…        

Banks’ profits up

Profits have also rebounded. The largest banks, including Bank of America, Citigroup and Wells Fargo, earned $34 billion in profit in the first half of the year, nearly matching what they earned in the same period in 2007 and more than in the same period of any other year.

Securities firms — the trading arms of big banks and hundreds of other independent firms — have fared even better. They’ve generated at least $83 billion in profit during the past 21 / 2 years, compared with $77 billion during the entire Bush administration, according to data from the Securities Industry and Financial Markets Association.

Compensation at these firms also has bounced back. Financial firms paid about $20.8 billion in bonuses for work done in 2010, according to research by the New York state comptroller. In New York City, the average Wall Street salary last year grew 16.1 percent, to $361,330, which is more than five times the average salary of a private-sector worker in the city.

By contrast, millions of Americans continue to face economic difficulties.

The title of the article is refers to the fact that Wall Street's resurgence muddies Obama's message.  Ya think?

ht/Kevin Drum

Doubling Down

Atrios has a running joke on his blog that no matter how bad economies are, the answer of the elite class is always more austerity.

Today in France:

French Prime Minister Francois Fillon Monday unveiled the country's second austerity package in under three months including increases in sales taxes, an acceleration of pension reform and a levy on big business. 

The austerity package comes a growth prospects have dwindled with the euro-zone debt crisis, and after France, the currency bloc's second largest economy, was warned last month that the outlook on its prized triple-A credit rating is under pressure.

Europe is heading for recession and yet they adopt policies like this that will only make it worse.

Atrios calls them lunatics.  I think that's being charitable.

The Crisis in the NCAA

There have been several bloggers that I follow (see here and here) that have referred to this Taylor Branch article in the Atlantic magazine about the NCAA.  I must say that this is not something the I have focused on in quite some time, but it is clear that the NCAA's viability as an institution appears on the wane.

It will be interesting to see how this shakes out.  My personal view of this is that exploitation of athletes is just too much to go on, and that the NCAA should abandon the "amateur" status and just formally recognize college athletics for what it truly is - player development ("minor leagues") for professional sports.  But once that happens, then what?  Running a sports business seems to me a completely different business from educating students, and I'm not sure the two should be housed under the same organization.

Of course, as time goes on, it seems more and more that the business of our colleges and universities is business - not educating our students.  But that's a topic for another day....

What the Future Holds

I am no Luddite, but I do find this article on the pace of technological change and its impact on the workplace to be disturbing.

The conventional explanation for America's current plight is that, at an annualised 2.5% for the most recent quarter (compared with an historical average of 3.3%), the economy is simply not expanding fast enough to put all the people who lost their jobs back to work. Consumer demand, say economists like Dr Tyson, is evidently not there for companies to start hiring again. Clearly, too many chastened Americans are continuing to pay off their debts and save for rainy days, rather than splurging on things they may fancy but can easily manage without.  

There is a good deal of truth in that. But it misses a crucial change that economists are loth to accept, though technologists have been concerned about it for several years. This is the disturbing thought that, sluggish business cycles aside, America's current employment woes stem from a precipitous and permanent change caused by not too little technological progress, but too much. The evidence is irrefutable that computerised automation, networks and artificial intelligence (AI)—including machine-learning, language-translation, and speech- and pattern-recognition software—are beginning to render many jobs simply obsolete.

This is unlike the job destruction and creation that has taken place continuously since the beginning of the Industrial Revolution, as machines gradually replaced the muscle-power of human labourers and horses. Today, automation is having an impact not just on routine work, but on cognitive and even creative tasks as well. A tipping point seems to have been reached, at which AI-based automation threatens to supplant the brain-power of large swathes of middle-income employees.

That makes a huge, disruptive difference. Not only is AI software much cheaper than mechanical automation to install and operate, there is a far greater incentive to adopt it—given the significantly higher cost of knowledge workers compared with their blue-collar brothers and sisters in the workshop, on the production line, at the check-out and in the field. 

In many ways, the white-collar employees who man the cubicles of business today share the plight of agricultural workers a century ago. In 1900, nearly half of the adult population worked on the land. Thanks to tractors, combine harvesters, crop-picking machines and other forms of mechanisation, agriculture now accounts for little more than 2% of the working population. 

Displaced agricultural workers then, though, could migrate from fields to factories and earn higher wages in the process. What is in store for the Dilberts of today? Media theorist Douglas Rushkoff (“Program or Be Programmed” and “Life Inc”) would argue "nothing in particular." Put bluntly, few new white-collar jobs, as people know them, are going to be created to replace those now being lost—despite the hopes many place in technology, innovation and better education. 

The argument against the Luddite Fallacy rests on two assumptions: one is that machines are tools used by workers to increase their productivity; the other is that the majority of workers are capable of becoming machine operators. What happens when these assumptions cease to apply—when machines are smart enough to become workers? In other words, when capital becomes labour. At that point, the Luddite Fallacy looks rather less fallacious.

Read the whole thing - including the comments.  Lots to chew on, including the idea that there is a lot in the way of potential demand for goods and services in the world - particularly in the developing world - that could keep everyone productive for a long time.

I remember watching the new Star Trek movie last year - where the first 10-15 minutes or so takes place on Earth some 300 years from now.  The world as depicted in that movie looks idyllic.  In light of this article, you have to ask yourself - how many people live on that world and what do they all do?

ht/Paul Krugman

Rubber Checks

Matt Goldstein has a story about how MF Global investors got screwed because they received their withdrawals by check delivered via snail mail rather than by wire transfer.

One thing though - I have made a number of withdrawals from mutual funds that I have investments in and they have always been paid to me via snail mail.  An alternative was for me to pay $25 to have them sent by Federal Express, but every time I asked I was told wire transfer was not available.

I guess that's the rule for us peons.

Because They Are Thieves

To rephrase Atrios, I'll never understand why, in the midst of a crisis where millions of homeowners found themselves underwater and unable to pay their mortgages, our government responded by providing trillions of assistance to the creditors and nothing to the debtors.  I mean, wouldn't making it easier for debtors to pay their debts relieve the creditors' problems as well?

As time goes by, the best answer I can come up with is the Shock Doctrine theory.  They saw an opportunity to screw the masses in the guise of avoiding a calamity, and they took it.  And the calamity continues....

Greece and Italy

I found this post by Kevin Drum last Tuesday to be a great explanation of what is going on in Greece that even my 13 year-old could understand (after explaining to him what "austerity" means).  As you probably know, Papandreou reversed himself on the referendum on Thursday and survived a no confidence vote on Friday, but it is still unclear whether the Greek Parliament will approve the terms of the rescue deal and pass the legislation necessary to implement it.  At this point, it seems Papandreou is trying to negotiation deal to broaden to coalition in order to insure that support, but it appears he is getting nowhere.

Here is the latest from Yves Smith.

And it seems that almost every day I am reading things (such as this and this) about Italy that makes me think it's teetering on the edge as well.  This passage was particularly troubling:

Undermined by market mistrust of Prime Minister Silvio Berlusconi's government, Italy's 10-year bonds yields soared to a euro era high of 6.4 percent last week. 

That is close to levels that made the debt-service burdens of Greece, Ireland and Portugal unsustainably onerous and triggered bailouts by the euro zone and the International Monetary Fund. But Italy, with 1.9 trillion euros in public debt, is simply too large to bail out. 

Yikes!

Story of the Week

I don't get to watch Rachel Maddow much.  Our basic cable package here doesn't include any of the all-news networks, including MSNBC (not sure how I feel about this - certainly it helps me avoid much of the crap that passes for news these days).  But I try to make it a point to listen to the podcast of her program the next morning.  Yesterday I heard this and couldn't stop laughing:


Hilarious!

But at the time really scary.

When will people realize that this is nothing but a big joke?