Daily Archives: April 17, 2012

Ezra Klein on House Machinations

Happy tax day!

But perhaps you hate tax day. Perhaps you want much lower taxes. Well, then you better be willing to face up to choices like the one the House GOP made on Monday.

House Republicans think the Pentagon is in trouble. Under current law — which includes the “sequester” that Democrats and Republicans agreed to in the debt-ceiling deal — it’s scheduled to take more than $500 billion in cuts over the next 10 years. Republicans are desperately trying to find alternative savings. And, on Monday, they named one of them: Cuts to food stamps.

“An average family of four would face an 11 percent cut in monthly benefits after Sept. 1 and, even more important, tighter enforcement of rules would require that households exhaust most of their liquid assets before qualifying for help,” reports David Rogers. “This hits hardest among the long-term unemployed, who would be forced off the rolls until they have spent down their savings to less than $2,000 in many cases.”

Republicans argue that the food stamp program has been expanded in recent years, and they’re just cutting President Obama’s hammock back down to a safety net. Democrats reply that the food stamp program has been expanded because the economy crashed, and, by the way, the Pentagon’s budget has grown by far more than the food stamp program in recent decades.

Wherever you come down, the fight is a reminder that there are few easy cuts in the budget. This argument, after all, isn’t even over further deficit reduction. It’s how to replace one year of the sequester’s proposed spending cuts with different spending cuts. But Republicans are already having to target programs, like food stamps, that people actually care about, and that will actually hurt low-income Americans if they’re cut. To achieve the spending paths envisioned in Rep. Paul Ryan’s budget, Republicans will have to find cuts that are many orders of magnitude larger.

Which brings us back to tax day. In the end, we pay taxes, or we’re supposed to pay taxes, because we prefer those taxes to the cuts in government services that would be required in their absence. If we don’t prefer the taxes to the cuts, we should be making the cuts. Unfortunately, those choices are rarely spelled out, or they’re put off by deficits. And, in any given year, we don’t really see where our taxes go (which is why I’ve always liked the idea of a tax receipt).

But on Monday, the House gave us a look. In the coming years, the alternative to higher taxes is savage cuts to the Pentagon, and to food stamps, and to Medicaid, and to Medicare. Indeed, the reality is that even with higher taxes, all those programs are going to come in for cuts. Without taxes, the required cuts to government services will be far beyond anything either party has dared to specifically propose.

Oh, and one more thing: We do all pay taxes. Or, at least, the vast majority of us pay taxes. There’s a line you occasionally hear about how 60 percent of Americans pay no federal income taxes. And that line is true, so far as it goes. But those Americans do pay payroll taxes, and state sales taxes, and local taxes. Indeed, when you look only at federal income taxes, you exclude most of the taxes that most Americans actually pay. So here, in two graphs, is the total tax burden, once all taxes are taken into account.

Another way of looking at the data is to look at the total share of taxes different groups pay in relation to their total share of national income. And here, again, it’s mostly even, with the rich paying a smidge more, and the poor paying a tad less:

Endemic Fraud and Looting

Romney’s Lead Economist Urges Policies that will Cause the Next Financial Crisis

Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives.

Presidential nominees of either U.S. party can secure economic advice from any economist in the world. This makes it all the more amazing and sad that they choose economists with track records of disastrous policy advice.  Bill Clinton chose Robert Rubin, George W. Bush chose Gregory Mankiw, Obama chose Lawrence Summers, and Mitt Romney chose Mankiw.  Rubin and Summers led the Clinton administration’s efforts to gut financial regulation.  Mankiw led the efforts under Bush.  Collectively, these efforts created the criminogenic environment that produced endemic financial fraud (“green slime”).

Mankiw Morality

I have often emphasized the importance of George Akerlof and Paul Romer’s 1993 article (“Looting: the Economic Underworld of Bankruptcy for Profit”) to understand the economics of why we suffer epidemics of accounting control fraud and recurrent, intensifying financial crises.  Mankiw was the “discussant” when they formally presented their paper.  I was also present at their invitation.  Mankiw was unconcerned about looting.  It was my first introduction to Mankiw morality:  “it would be irrational for savings and loans [CEOs] not to loot.”  I was appalled, but my outrage at Mankiw paled when I observed that the members of the audience, professional economists, were not even made visibly uncomfortable by such a depraved response to elite fraud.  CEOs owe fiduciary duties to the shareholders.  Mankiw’s response to the findings that CEOs were looting their shareholders was to praise the rationality of the fraudulent CEOs (if you don’t loot you aren’t moral – you’re insane).  One cannot compete with theoclassical economists’ unintentional self-parody.

Mankiw Still Loves the Regulatory Race to the Bottom that Breeds Endemic Green Slime

Mankiw wrote a column in the New York Times praising competition among governments.

I start with a historical note that falsifies Mankiw’s claim that competition among governments is desirable.  Mankiw makes an historical argument for his claim that competition among governments is desirable and notes that the “founding fathers were no fools.”  In an odd way, we can thank our immensely successful Constitution to the demonstrated disaster produced by governmental competition engendered by the Articles of Confederation.  The States competed vigorously – to aid their merchants at the expense of “foreign” States (their neighboring States).  They competed to impose more destructive internal tariffs (and other trade barriers) so aggressively that they crippled commerce.  This is one of the principal defects that led the committee appointed to reform the Articles to instead junk them and adopt our Constitution.  The Constitution created a nation instead of a confederation.  The interstate commerce and supremacy clauses were key provisions of the new Constitution because the framers knew that competition among the States and the new federal government could threaten our nation’s survival.

In the context of public finance and financial regulation Mankiw’s praise for such competition demonstrates that he has learned nothing useful from our recurrent crises.  This column discusses why competition among governments in financial regulation leads to the criminogenic financial deregulation that produces the epidemics of green slime that drive our financial crises.  I have recently explained, in the context of opposing the JOBS Act, why the “regulatory race to the bottom” is an oxymoron designed by regular morons.

Mankiw read these words 19 years ago, but he has never understood what Akerlof and Romer were saying, even though they ended their article with this paragraph in order to emphasize their key policy message.

“Neither the public nor economists foresaw that [S&L deregulation was] bound to produce looting.  Nor, unaware of the concept, could they have known how serious it would be.  Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better.  If we learn from experience, history need not repeat itself” (George Akerlof & Paul Romer.1993: 60).

Competition among governments in the financial deregulation context leads to a “race to the bottom” that produces devastating financial deregulation.  The resultant financial deregulation is “bound to produce looting.”  An economist should have no difficulty understanding this point, for classical economists stressed hundreds of years ago that the government’s central function is to prevent crime of force and fraud.  Even Ayn Rand called for the government to prevent fraud.  Because, as Akerlof and Romer stressed, accounting fraud produces a “sure thing” creditors do not exercise effective “private market discipline” against such frauds.  Instead, they rush to fund the frauds’ rapid growth.

Worse, as executive and professional compensation has become far larger and more perverse, creditors and purchasers can grow wealthy by adopting a “don’t ask; don’t tell” policy designed to ignore even endemic fraud.  Charles Calomiris, who is as culpable as any economists for spreading financial deregulatory dogma globally, suggests that the perpetrators may have deliberately created “plausible deniability.”

“asset managers were placing someone else’s money at risk, and earning huge salaries, bonuses and management fees for being willing to pretend that these were reasonable investments. [T]hey may have reasoned that other competi[tors] were behaving similarly, and that they would be able to blame the collapse (when it inevitably came) on an unexpected shock.”

“Who knew?”

In combination, deregulation and perverse compensation are so criminogenic that they can produce green slime in such massive amounts that slime dominates massive aspects of finance.

Mankiw tries to dress up the question of whether governments should compete as a philosophical dispute about the proper role of government.  That is incorrect in the financial regulatory context.  The regulators have to serve as the “cops on the beat” – and economics has emphasized for centuries the essential need for the government to provide such a rule of law and limit fraud and violence.

We know objectively that Mankiw, Bush, and Romney do not actually favor competition in financial regulation – for none of them opposed the OCC and OTS’ scorched earth campaign to preempt state efforts to regulate predatory lending and seek to reduce mortgage fraud.  The states attempted to offer a competitive alternative to Mankiw, Greenspan, Bernake, and Bush’s indifference to fraud by elites.  That competition could have led to vastly better outcomes for the citizens of the States that wished to be most vigorous against fraud and the nation.  Mankiw was Chairman of Bush’s Council of Economic Advisors during the worst excesses of the federal agencies efforts to prevent the states from regulating entities (e.g., bank holding company affiliates not subject to federal regulation) that spread the green slime through the financial system.  He did not oppose preemption.  Mankiw and his political patrons do not favor competition in financial regulation – they favor regulation so weak that it will be ineffective.  They hate financial regulations that are successful because such regulations challenge their world view that denigrates democratic government and government regulators.

Romney’s choice of Mankiw, one of the leading architects of and apologists for the crisis, as his leading economic advisor would be a superb issue for Obama to use in his reelection campaign but for one tiny problem.  The Obama administration’s policies on financial regulation are created by the likes of Rubin, Summers, Geithner, and Bernanke.  They differ only on the margins from Mankiw.  The entire crew of leading economists for the last three Presidents and Romney has proven catastrophically wrong about financial regulation.  The remarkable thing is that they do not drop their dogmas even after they engineer multiple crises over the course of three decades.  We will soon experience the 30th anniversary of the Garn-St Germain Act of 1982, which set off a renewed “competition in laxity” among the States (principally California and Texas; whose S&Ls, collectively, caused roughly two-thirds of all S&L losses) and produced the criminogenic environment that led to the second phase of the S&L debacle.

There are economists and scholars from other fields that have track records of success as financial regulators.  Note to Obama and Romney:  there is no rule requiring you to choose as your leading advisors the purveyors of green slime and crisis.  A significant number of Mankiw’s students walked out of his class to protest his presentation of failed dogma in the guise of economics.  It is time for all of us as citizens to walk out on politicians who choose ethical and economics failures like Mankiw and Geithner as their advisors.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

The Borowitz Report

Fox News Wins Pulitzer for Fiction

Prize Committee Praises Imagination, Inventiveness

NEW YORK (The Borowitz Report) – In an unprecedented honor for the Rupert Murdoch-led network, the Fox News Channel today won the Pulitzer Prize for fiction.

In its official statement, the prize committee praised Fox for exhibiting “an imagination and inventiveness that rival the best of Charles Dickens and J.R.R. Tolkien.”

In hailing Fox, the committee singled out the network’s fourteen-part story about President Obama’s birth in a mud-hut in Kenya.

For Mr. Murdoch, the stunning Pulitzer Prize win was a rare bright spot in what he acknowledged had been “a difficult year.”

“When I first heard about the Pulitzer committee’s decision, I didn’t believe it,” he said.  “I had to listen to their voicemails to hear it for myself.”