---------- Forwarded message ----------
From: "Targ, Harry R" <targ@purdue.edu>
Date: Feb 12, 2017 11:01 AM
Subject: [CCDS Members] The Political Economy of Indiana 2017
To: "members@lists.cc-ds.org" <members@lists.cc-ds.org>
Cc: "rpa_discussion@lists.riseup.net " <rpa_discussion@lists.riseup.net >
Diary of a Heartland Radical
Sunday, February 12, 2017
THE POLITICAL ECONOMY OF INDIANA 2017
Harry Targ
Social and Economic Wellbeing Survey Shows No Progress
A flurry of newspaper stories appeared the first week of February in The Wall Street Journal and several Indiana newspapers reporting on data from a "health and wellness" national survey about the performance of the 50 states. Indiana according to several measures was ranked as the fourth "worst state" in the country. The national survey consisted of data from 177,281 people interviewed by the Gallup and Healthways organizations. Data included responses to questions about feelings of community support and pride, physical health, and financial security.
According to the survey The Times of Northwest Indiana, (February 8, 2017) reported, "31.3 percent of Indiana residents are obese, 30.6 smoke, and 29.4 percent don't exercise at all." Only 24.9 percent of the population has a bachelor's degree (one of the lowest percentages of any state). The NWIT article indicated that median household income of Hoosiers was $5,000 less than the national median income.
As The Wall Street Journal put it: "Indiana is one of just a handful of states to rank worse in every category of well-being--sense of purpose, social life, financial health, community pride, and physical fitness--than most other states…" On all these measures combined Indiana's rank was only ahead of Oklahoma, Kentucky, and West Virginia.
Previous Data on the Indiana Economy
The centerpiece of Indiana public policy since 2004 has been corporate and individual tax cuts and reduced budgets for education, health care, and other public services. Indiana was one of the first states to begin the privatization of the public sector, including transferring educational funds from public to charter schools. It established a voucher system to encourage parents to send their children to private schools. Also Indiana sold public roads; privatized public services; and recruited controversial corporations such as Duke Power to support research at the state's flagship research universities. Meanwhile the manufacturing base of the state shifted from higher paying and unionized industrial labor (automobiles, steel, and durable goods) to lower paying service jobs and non-union work such as at the Amazon distribution center.
The narrative about Indiana economic growth presented by the former Governor Mike Pence varied greatly from data gathered between 2012 and 2014. For example, between 2013 and 2014, despite enticements to business, Indiana grew at a 0.4 percent pace while the nation at large experienced 2.2 percent growth.
Indiana's economy historically was based on manufacturing but has experienced declines since the 1980s (with only modest increases in recent years). However, newer manufacturing between 2014 and 2016 has been mostly in low-wage non-unionized sectors. For example, the Indiana Institute for Working Families reported on data from a study of work and poverty in Marion County, which includes the state's largest city, Indianapolis. Four of five of the largest growing industries in the county paid wages at or below family sustainability ($798 per week for a family of three) and individual and household wages declined significantly between 2008 and 2012 (Derek Thomas, "Inequality in Indy - A Rising Problem With Ready Solutions," August 13, 2014, (www.iiwf.blogspot.com).
Further, Thomas quoted a U.S. Conference of Mayors' report on wages and income: "…wage inequality grew twice as rapidly in the Indianapolis metro area as in the rest of the nation since the recession." This is so because new jobs created paid less on average than the jobs that were lost since the recession started.
Thomas pointed out that the mayors' report had several concrete proposals that could address declining real wages and stimulate job growth. These included "raising the minimum wage, strengthening the Earned Income Tax Credit, public programs to retrain displaced workers," and developing universal pre-kindergarten and programs to rebuild the state's crumbling infrastructure. They may have added that declining real wages also relates to attacks on unions in both the private and public sectors and the dramatic reduction in public sector employment.
Thomas recommended in 2012 that Indianapolis (and Indiana) should have taken these data seriously because in Marion County "poverty is still rising, the minimum wage is less than half of what it takes for a single-mother with an infant to be economically self-sufficient; 47 percent of workers do not have access to a paid sick day from work, and a full 32 percent are at or below 150 percent of the federal poverty guidelines ($29,685 for a family of three)."
More recently, November 10, 2014, the Indiana Association of United Ways issued a 250 page report on the state called the "Study of Financial Hardship." The study, parallel to similar studies in five other states and prepared by a research team at Rutgers University, introduced the concept of Asset Limited, Income Constrained, Employed or (ALICE). ALICE refers to households with incomes that are above the poverty rate but below "the basic cost of living." The startling data revealed that:
-a third of Hoosier households cannot afford adequate housing, food, health care, child care, and transportation.
-specifically, 14 percent of households are below the poverty line and 23 percent above poverty but below the threshold out of ALICE, or earning enough to provide for the basic cost of living.
-570,000 households are within the ALICE status and 353,000 below the poverty line.
-over 21 percent of households in every Indiana county are above poverty but below the capacity to provide for basic sustenance.
Referring to those within the ALICE category of wage earners who have struggled to survive but earn less than what it takes to meet basic needs, Kathy Ertel, Board Chairperson of Indiana Association of United Ways said: "ALICE is our child care worker, our retail clerk, the CAN who cares for our grandparents, and our delivery driver" (Roger L. Frick, "Groundbreaking Study Reveals 37% of Hoosier Households Struggle With the Basics," Indiana Association of United Ways, November 10, 2014, Roger.Frick@iauw.org).
Assessing these recent studies and the 2017 report cited at the outset leads to the conclusion that an evaluation of the current state of the Indiana economy depends upon where one is located in terms of economic, political, or professional position. Those Indiana men, women, and children who come from the 37 percent of households who earn less, at, or slightly above the poverty line probably have a negative view of their futures. For them, the tax breaks for the rich and the austerity policies for the poor are not positive.
Indiana Politics
Perhaps the starkest fact to note in reference to the growing economic insecurity in the state of Indiana over time is that in 1970 forty percent of Hoosier workers were in unions, then the state with the third highest union density. By the dawn of the second decade of the twenty-first century only 11 percent of workers were in trade unions. Recent legislation has disadvantaged Hoosier workers including passage of a Right to Work law and repeal of the state version of prevailing wage. The Mitch Daniels/Mike Pence administrations (2004-2016) have used charter schools and vouchers to weaken teachers unions. In addition, in his first day in office in January, 2004, newly elected Governor Mitch Daniels signed an executive order abolishing the right of state employees to form unions.
In 2005 the Indiana state government (legislature and governor) passed the first and most extreme voter identification law. Voters were required to secure voter identification photos. Michael Macdonald a University of Florida political scientist estimated that requiring voter IDs reduces voter participation by 4-5 percent, hitting the poor and elderly the hardest. In addition, Indiana law ended voter registration in the state one month before election day. And polls close at 6 p.m. election day, among the earliest closing times in the country. Finally, requests for absentee ballots require written excuses.
Republican control of the executive and both legislative branches led to redistricting which further empowered Republicans and weakened not only Democrats but the young and old and the African American community. Nine solidly Republican congressional districts were drawn in 2000. In 2014, of 125 state legislative seats up for election, 69 were uncontested. 2014 Indiana voter turnout was 28 percent, the lowest state turnout in the country. The Governor's office has been held by Republicans since 2004 and Republicans have had majorities in both legislative bodies since 2010, when statewide redistricting was implemented.
Traditionally when Democrats were in the Governor's mansion and/or controlled a branch of the legislature, they too tended to support neoliberal economic policies, but less draconian, and had been more moderate on social policy questions. In recent years, many legislators and the two most recent governors have been friends of or received support from the American Legislative Exchange Council (or ALEC) funded by major corporations and the Koch brothers.
With ALEC money, some active Tea Party organizations, the growth of rightwing Republican power, and centrist Democrats, Indiana government has been able to initiate some of the most regressive policies in reference to voting rights, education, taxing, and deregulation in the country. And as the data above suggests, the political economy of Indiana has increased the suffering of the vast majority of working families in the state. Other data suggests that the quality of health care, education, the environment, and transportation have declined as well.
The political picture is made more complicated by the fact that Indiana is really "three states." The Northwest corridor, including Gary and Hammond, are cities which have experienced extreme deindustrialization, white flight, and vastly increased poverty. Political activists from the area look to greater Chicago for their political inspiration and organizational involvement. Democratic parties are strong in these areas but voter participation is very low.
Central Indiana includes a broad swath of territory with small cities and towns and the largest city in the state, Indianapolis. Much of the area is Republican, many counties have significant numbers of families in poverty, and some smaller cities have pockets of relative wealth. Democrats hold some city offices but the area is predominantly Republican.
The southern part of the state, south of Indianapolis, in terms of income, political culture, and history resembles its southern neighbor Kentucky, more than the northern parts of the state. The state of Indiana was the northern home of the twentieth century version of the Ku Klux Klan. In the 1920s, the KKK controlled Indiana state government. That reality, the institutionalized presence of overt racism, remains an aspect of Hoosier history that may still affect state politics.
In sum, the working people of Indiana enter the coming period with little economic hope, a politics of red state dominance, and the number two person in the White House who bears some responsibility for the economics and politics left behind. Social change in Indiana, as with the nation at large, will require a vibrant, active progressive program in the electoral arena, the 2018 elections for example, at the same time that mass movements direct their attention to improving the lives of the 99 percent.
www.heartlandradical.blogspot.
com
_______________________________________________
CCDS Members mailing list
CCDS website: http://www.cc-ds.org
CCDS welcomes and encourages the full participation of our members in
this list serve. It is intended for discussion of issues of concern to
our organization and its members, for building our community, for
respectfully expressing our different points of view, all in keeping
with our commitment to building a democratic and socialist society. To
those ends, free and honest discussion of issues and ideas is
encouraged. However, personal attacks on named individuals, carrying on
old vendettas, excessive posts and, especially, statements that are
racist, sexist, homophobic, anti-semitic and/or anti-working class are not
appropriate.
Repeated failure to respect those principles of discussion
may result in exclusion from the list.
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Sunday, February 12, 2017
Re: Fwd: [CCDS Members] The Political Economy of Indiana 2017
Fwd: [CCDS Members] The Political Economy of Indiana 2017
From: "Targ, Harry R" <targ@purdue.edu>
Date: Feb 12, 2017 11:01 AM
Subject: [CCDS Members] The Political Economy of Indiana 2017
To: "members@lists.cc-ds.org" <members@lists.cc-ds.org>
Cc: "rpa_discussion@lists.riseup.net" <rpa_discussion@lists.riseup.net>
Diary of a Heartland Radical
Sunday, February 12, 2017
THE POLITICAL ECONOMY OF INDIANA 2017
Harry Targ
Social and Economic Wellbeing Survey Shows No Progress
A flurry of newspaper stories appeared the first week of February in The Wall Street Journal and several Indiana newspapers reporting on data from a "health and wellness" national survey about the performance of the 50 states. Indiana according to several measures was ranked as the fourth "worst state" in the country. The national survey consisted of data from 177,281 people interviewed by the Gallup and Healthways organizations. Data included responses to questions about feelings of community support and pride, physical health, and financial security.
According to the survey The Times of Northwest Indiana, (February 8, 2017) reported, "31.3 percent of Indiana residents are obese, 30.6 smoke, and 29.4 percent don't exercise at all." Only 24.9 percent of the population has a bachelor's degree (one of the lowest percentages of any state). The NWIT article indicated that median household income of Hoosiers was $5,000 less than the national median income.
As The Wall Street Journal put it: "Indiana is one of just a handful of states to rank worse in every category of well-being--sense of purpose, social life, financial health, community pride, and physical fitness--than most other states…" On all these measures combined Indiana's rank was only ahead of Oklahoma, Kentucky, and West Virginia.
Previous Data on the Indiana Economy
The centerpiece of Indiana public policy since 2004 has been corporate and individual tax cuts and reduced budgets for education, health care, and other public services. Indiana was one of the first states to begin the privatization of the public sector, including transferring educational funds from public to charter schools. It established a voucher system to encourage parents to send their children to private schools. Also Indiana sold public roads; privatized public services; and recruited controversial corporations such as Duke Power to support research at the state's flagship research universities. Meanwhile the manufacturing base of the state shifted from higher paying and unionized industrial labor (automobiles, steel, and durable goods) to lower paying service jobs and non-union work such as at the Amazon distribution center.
The narrative about Indiana economic growth presented by the former Governor Mike Pence varied greatly from data gathered between 2012 and 2014. For example, between 2013 and 2014, despite enticements to business, Indiana grew at a 0.4 percent pace while the nation at large experienced 2.2 percent growth.
Indiana's economy historically was based on manufacturing but has experienced declines since the 1980s (with only modest increases in recent years). However, newer manufacturing between 2014 and 2016 has been mostly in low-wage non-unionized sectors. For example, the Indiana Institute for Working Families reported on data from a study of work and poverty in Marion County, which includes the state's largest city, Indianapolis. Four of five of the largest growing industries in the county paid wages at or below family sustainability ($798 per week for a family of three) and individual and household wages declined significantly between 2008 and 2012 (Derek Thomas, "Inequality in Indy - A Rising Problem With Ready Solutions," August 13, 2014, (www.iiwf.blogspot.com).
Further, Thomas quoted a U.S. Conference of Mayors' report on wages and income: "…wage inequality grew twice as rapidly in the Indianapolis metro area as in the rest of the nation since the recession." This is so because new jobs created paid less on average than the jobs that were lost since the recession started.
Thomas pointed out that the mayors' report had several concrete proposals that could address declining real wages and stimulate job growth. These included "raising the minimum wage, strengthening the Earned Income Tax Credit, public programs to retrain displaced workers," and developing universal pre-kindergarten and programs to rebuild the state's crumbling infrastructure. They may have added that declining real wages also relates to attacks on unions in both the private and public sectors and the dramatic reduction in public sector employment.
Thomas recommended in 2012 that Indianapolis (and Indiana) should have taken these data seriously because in Marion County "poverty is still rising, the minimum wage is less than half of what it takes for a single-mother with an infant to be economically self-sufficient; 47 percent of workers do not have access to a paid sick day from work, and a full 32 percent are at or below 150 percent of the federal poverty guidelines ($29,685 for a family of three)."
More recently, November 10, 2014, the Indiana Association of United Ways issued a 250 page report on the state called the "Study of Financial Hardship." The study, parallel to similar studies in five other states and prepared by a research team at Rutgers University, introduced the concept of Asset Limited, Income Constrained, Employed or (ALICE). ALICE refers to households with incomes that are above the poverty rate but below "the basic cost of living." The startling data revealed that:
-a third of Hoosier households cannot afford adequate housing, food, health care, child care, and transportation.
-specifically, 14 percent of households are below the poverty line and 23 percent above poverty but below the threshold out of ALICE, or earning enough to provide for the basic cost of living.
-570,000 households are within the ALICE status and 353,000 below the poverty line.
-over 21 percent of households in every Indiana county are above poverty but below the capacity to provide for basic sustenance.
Referring to those within the ALICE category of wage earners who have struggled to survive but earn less than what it takes to meet basic needs, Kathy Ertel, Board Chairperson of Indiana Association of United Ways said: "ALICE is our child care worker, our retail clerk, the CAN who cares for our grandparents, and our delivery driver" (Roger L. Frick, "Groundbreaking Study Reveals 37% of Hoosier Households Struggle With the Basics," Indiana Association of United Ways, November 10, 2014, Roger.Frick@iauw.org).
Assessing these recent studies and the 2017 report cited at the outset leads to the conclusion that an evaluation of the current state of the Indiana economy depends upon where one is located in terms of economic, political, or professional position. Those Indiana men, women, and children who come from the 37 percent of households who earn less, at, or slightly above the poverty line probably have a negative view of their futures. For them, the tax breaks for the rich and the austerity policies for the poor are not positive.
Indiana Politics
Perhaps the starkest fact to note in reference to the growing economic insecurity in the state of Indiana over time is that in 1970 forty percent of Hoosier workers were in unions, then the state with the third highest union density. By the dawn of the second decade of the twenty-first century only 11 percent of workers were in trade unions. Recent legislation has disadvantaged Hoosier workers including passage of a Right to Work law and repeal of the state version of prevailing wage. The Mitch Daniels/Mike Pence administrations (2004-2016) have used charter schools and vouchers to weaken teachers unions. In addition, in his first day in office in January, 2004, newly elected Governor Mitch Daniels signed an executive order abolishing the right of state employees to form unions.
In 2005 the Indiana state government (legislature and governor) passed the first and most extreme voter identification law. Voters were required to secure voter identification photos. Michael Macdonald a University of Florida political scientist estimated that requiring voter IDs reduces voter participation by 4-5 percent, hitting the poor and elderly the hardest. In addition, Indiana law ended voter registration in the state one month before election day. And polls close at 6 p.m. election day, among the earliest closing times in the country. Finally, requests for absentee ballots require written excuses.
Republican control of the executive and both legislative branches led to redistricting which further empowered Republicans and weakened not only Democrats but the young and old and the African American community. Nine solidly Republican congressional districts were drawn in 2000. In 2014, of 125 state legislative seats up for election, 69 were uncontested. 2014 Indiana voter turnout was 28 percent, the lowest state turnout in the country. The Governor's office has been held by Republicans since 2004 and Republicans have had majorities in both legislative bodies since 2010, when statewide redistricting was implemented.
Traditionally when Democrats were in the Governor's mansion and/or controlled a branch of the legislature, they too tended to support neoliberal economic policies, but less draconian, and had been more moderate on social policy questions. In recent years, many legislators and the two most recent governors have been friends of or received support from the American Legislative Exchange Council (or ALEC) funded by major corporations and the Koch brothers.
With ALEC money, some active Tea Party organizations, the growth of rightwing Republican power, and centrist Democrats, Indiana government has been able to initiate some of the most regressive policies in reference to voting rights, education, taxing, and deregulation in the country. And as the data above suggests, the political economy of Indiana has increased the suffering of the vast majority of working families in the state. Other data suggests that the quality of health care, education, the environment, and transportation have declined as well.
The political picture is made more complicated by the fact that Indiana is really "three states." The Northwest corridor, including Gary and Hammond, are cities which have experienced extreme deindustrialization, white flight, and vastly increased poverty. Political activists from the area look to greater Chicago for their political inspiration and organizational involvement. Democratic parties are strong in these areas but voter participation is very low.
Central Indiana includes a broad swath of territory with small cities and towns and the largest city in the state, Indianapolis. Much of the area is Republican, many counties have significant numbers of families in poverty, and some smaller cities have pockets of relative wealth. Democrats hold some city offices but the area is predominantly Republican.
The southern part of the state, south of Indianapolis, in terms of income, political culture, and history resembles its southern neighbor Kentucky, more than the northern parts of the state. The state of Indiana was the northern home of the twentieth century version of the Ku Klux Klan. In the 1920s, the KKK controlled Indiana state government. That reality, the institutionalized presence of overt racism, remains an aspect of Hoosier history that may still affect state politics.
In sum, the working people of Indiana enter the coming period with little economic hope, a politics of red state dominance, and the number two person in the White House who bears some responsibility for the economics and politics left behind. Social change in Indiana, as with the nation at large, will require a vibrant, active progressive program in the electoral arena, the 2018 elections for example, at the same time that mass movements direct their attention to improving the lives of the 99 percent.
www.heartlandradical.blogspot.
______________________________
CCDS Members mailing list
CCDS website: http://www.cc-ds.org
CCDS welcomes and encourages the full participation of our members in
this list serve. It is intended for discussion of issues of concern to
our organization and its members, for building our community, for
respectfully expressing our different points of view, all in keeping
with our commitment to building a democratic and socialist society. To
those ends, free and honest discussion of issues and ideas is
encouraged. However, personal attacks on named individuals, carrying on
old vendettas, excessive posts and, especially, statements that are
racist, sexist, homophobic, anti-semitic and/or anti-working class are not
appropriate.
Repeated failure to respect those principles of discussion
may result in exclusion from the list.
Please respect each other and our organization.
Any member of the list who objects to a posting on the list or the
behavior of a particular member should send email describing his or her
concerns to members-owner@lists.cc-ds.org
Post: Members@lists.cc-ds.org
List info and archives: https://lists.mayfirst.org/
To Unsubscribe, send email to:
Members-unsubscribe@lists.cc-
To Unsubscribe, change your email address, your password or your preferences:
visit: https://lists.mayfirst.org/
You are subscribed as: jcase4218@gmail.com
Saturday, February 11, 2017
Eastern Panhandle Independent Community (EPIC) Radio:Sunday, Feb 12, on EPIC Radio -- Philosophy, Religion, Bluegrass
Blog: Eastern Panhandle Independent Community (EPIC) Radio
Post: Sunday, Feb 12, on EPIC Radio -- Philosophy, Religion, Bluegrass
Link: http://www.enlightenradio.org/2017/02/sunday-feb-12-on-epic-radio-philosophy.html
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Tim Taylor: The Middle Income Trap and Governancce Issues
The Middle Income Trap and Governance Issues
This figure illustrates the patterns of transition for economies between low-income, middle-income, and high-income status. On the horizontal axis, countries are plotted by their per capita income level in 1970; on the vertical axis, by their per capita income level in 2010.
To get a sense of how the graph works, look at the category of "lower-middle income" countries on the horizontal axis, with per capita GDP between 5 and 15% of the world leaders. Now run your eye up, and see how those countries are faring by 2010. A substantial share of them have fallen into the "low-income" category, although most remain in the same "lower middle" category as before. Only one of thee lower-middle countries from 1970, Korea, had emerged into the high-income category after 40 years. Similarly, if you start by looking at low-income countries in 1970, only two of them had risen as high as "upper middle income" by 2010: Equatorial Guinea (GNQ) and Botswana (BWA), which is a prosperity largely founded on oil and diamonds, respectively.
The World Bank researchers writing the WDR argue that a core problem is that the institutions and strategies that raise a country up to middle-income status are often different from the strategies that would allow taking the next step to high-income status--and entrenched interest groups can make the transition a difficult one. Here's some commentary from the WDR (citations and references to figuress omitted):
"Middle-income countries may face particular challenges because growth strategies that were successful while they were poor no longer suit their circumstances. For example, the reallocation of labor from agriculture to industry is a key driver of growth in low-income economies. But as this process matures, the gains from reallocating surplus labor begin to evaporate, wages begin to rise, and decreasing marginal returns to investment set in, implying a need for a new source of growth. Middle-income countries that become "trapped" fail to sustain total factor productivity (TFP) growth. ... Efficient resource allocation and industrial upgrading require a set of institutions that differs from those that enable growth through resource accumulation. ...
"The creation of these institutions may be stymied by vested interests. Creative destruction and competition create losers—and in particular may create losers of currently powerful business and political elites.This is a more politically challenging problem than spurring productivity growth through the adoption of foreign technologies, which tends to favor economic incumbents. These political challenges may be particularly great in middle-income countries because actors that gained during the transition from low to middle income may now be powerful enough to block changes that threaten their position. In this sense, the challenges that middle-income countries face go beyond policy choice to the challenge of power imbalances. ... Understanding the policy arena in which elites bargain is essential for explaining the political economy traps faced by middle-income countries.
"One such political economy trap is a persistent deals-based relationship between government and business. Deals-based, sometimes corrupt, interactions between firms and the state may not prevent growth at low income levels; indeed, such ties may actually be the "glue" necessary to ensure commitment and coordination among state and business actors. But they become more problematic for upper-middle-income countries. For example, theory suggests that as markets expand and supply networks become more complex, deals-based relationships can no longer act as a substitute for impersonal, rules-based contract enforcement. ... Combating entrenched corruption and creating aThe difficulties in moving toward types of governance that can offer a foundation for both representation and growth is an ongoing theme throughout the report. As another example, here are some facts about elections worldwide that raised my eyebrows. The share of countries holding elections is steadily rising, but the the share of elections rates as "free and fair" is steadily falling.
level playing field for firms imply a need for accountable institutions. At upper-middle-income levels, legislative, judicial, media, and civil society checks become increasingly important."
The number of elections is steadily rising (as shown by the bars) but voter turnout worldwide in those elections has been steadily falling.
As the report notes:
"Evidence from the last decade, however, suggests that the global trend may be a shrinking civic space (figure 8.10). Many governments are changing the institutional environment in which citizens engage, establishing legal barriers to restrict the functioning of media and civic society organizations, and reducing their autonomy from the state. For example, in the case of media, governments may award broadcast frequencies on the basis of political motivations, withdraw financial support of media organizations and activities, or enforce complex registration requirements that raise barriers to entry into a government-controlled media market. In the case of nongovernmental organizations (NGOs), governments might resort to legal measures to restrict public and private financing or pass stricter laws that restrain associational rights ..."In short, economic growth and development isn't just about pulling the right economic policy levers--government budgets, monetary policy, investment in education, foreign aid, and the like. It's also about the extent to which economic forces have flexibility to function within the political and legal institutions of that society.
For some earlier posts on the hurdles in the way of economic convergence, see
"Will Convergence Occur?" (November 25, 2015)
"Dani Rodrik on Economic Convergence: Jackson Hole I" (September 14, 2011)
Harpers Ferry, WV
SUNYAB: Four decades of evidence finds no link between immigration and increased crime
Four decades of evidence finds no link between immigration and increased crime
BUFFALO, N.Y. - Political discussions about immigrants often include the claim that there is a relationship between immigration patterns and increased crime. However, results of a University at Buffalo-led study find no links between the two. In fact, immigration actually appears to be linked to reductions in some types of crimes, according to the findings.
"Our research shows strong and stable evidence that, on average, across U.S. metropolitan areas crime and immigration are not linked," said Robert Adelman, an associate professor of sociology at UB and the paper's lead author. "The results show that immigration does not increase assaults and, in fact, robberies, burglaries, larceny, and murder are lower in places where immigration levels are higher.
"The results are very clear."
Adelman's study with Lesley Williams Reid, University of Alabama; Gail Markle, Kennesaw State University; Charles Jaret, Georgia State University; and Saskia Weiss, an independent scholar, is published in the latest issue of the Journal of Ethnicity in Criminal Justice.
"Facts are critical in the current political environment," said Adelman. "The empirical evidence in this study and other related research shows little support for the notion that more immigrants lead to more crime."
Previous research, based on arrest and offense data, has shown that, overall, foreign-born individuals are less likely to commit crimes than native-born Americans, according to Adelman.
For the current study, the authors stepped back from the study of individual immigrants and instead explored whether larger scale immigration patterns in communities could be tied to increases in crime due to changes in cities, such as fewer economic opportunities or the claim that immigrants displace domestic workers from jobs.
The authors drew a sample of 200 metropolitan areas as defined by the U.S. Census Bureau and used census data and uniform crime reporting data from the Federal Bureau of Investigation for a 40-year period from 1970 to 2010.
"This is a study across time and across place and the evidence is clear," said Adelman. "We are not claiming that immigrants are never involved in crime. What we are explaining is that communities experiencing demographic change driven by immigration patterns do not experience significant increases in any of the kinds of crime we examined. And in many cases, crime was either stable or actually declined in communities that incorporated many immigrants."
Adelman says the relationship between immigration and crime is complex and more research needs to be done, but this research supports other scholarly conclusions that immigrants, on the whole, have a positive effect on American social and economic life.
"It's important to base our public policies on facts and evidence rather than ideologies and baseless claims that demonize particular segments of the U.S. population without any facts to back them up," said Adelman.
Harpers Ferry, WV
Jota Ishikawa, Nori Tarui: The backhaul problem and trade policy
The backhaul problem and trade policy
Jota Ishikawa, Nori Tarui
11 February 2017In traditional models of international trade, such as the Ricardian model or the Heckscher-Ohlin model, transport costs are assumed away for simplicity. In the real world, however, we cannot ignore transport costs. As a rough estimate of representative trade costs for industrialised countries, Anderson and van Wincoop (2004) report that the ad valorem tax equivalent of transport costs (10.7%) is greater than the ad valorem tax equivalent of tariffs and non-tariff barriers (7.7%). Many studies have evaluated trade policies without due consideration of transportation, but taking it into account could fundamentally influence policy evaluations.
Backhaul problems in transportation
One of the conventional ways to model transport costs is 'iceberg specification': the cost of transporting a good is represented as a fraction of the good, where the fraction is given exogenously. This specification assumes that transport costs are exogenous and symmetric across countries. Trade facts indicate, however, that such assumptions are not ideal when studying the impact of transport costs on international trade. In particular, market power in the transport sector and the asymmetry of trade costs are key characteristics of international transport (Hummels et al. 2009).
Trade costs are asymmetric in several dimensions. First, developing countries pay substantially higher transport costs than developed countries (Hummels et al. 2009, Waugh 2010). Second, depending on the direction of travel, freight charges differ on the same route. For example, in 2009 the market average freight rate for shipping from Asia to the US was about 1.5 times of that from the US to Asia.
Asymmetric transport costs are also associated with the 'backhaul problem', a widely known issue in transportation. To understand this problem, note that ships, aircrafts, and other means of transport normally take on another cargo after they unload their original cargo at the destination. Shipping is thus constrained by the shipping capacity (that is, the number of ships), and transport firms need to commit to the maximum capacity required for a round trip. This implies that there is an opportunity cost associated with a trip (the backhaul trip) with cargo that is under capacity. To avoid the backhaul problem, carriers must have a balance in shipping volume in both directions. Therefore the carriers adjust shipping capacities and freight rates.
Backfiring effects of trade policies
In two recent papers (Ishikawa and Tarui 2015, 2016) we pointed out that the presence of the backhaul problem may have important implications for trade policies, which have been overlooked in the existing research. Suppose that domestic tariffs increase when transport firms carry a full load on both legs of a two-way journey. Obviously, domestic imports would decrease due to the tariffs. To keep full loads in both directions, carriers have an incentive to raise the freight rate of shipping goods from the domestic country to the foreign country. They also lower the freight rate of shipping goods in the opposite direction to mitigate the import reduction. Because of these changes in the freight rates, domestic exports decrease while the carriers adjust their shipping capacity. In principle, domestic tariffs reduce domestic exports as well as domestic imports when carriers try to avoid the backhaul problem.
As a result, domestic tariffs, which benefit the domestic import sector and harm the foreign export sector in standard models of international trade, can also harm the domestic export sector and benefit the foreign import sector. Imposing tariffs may not improve the country's welfare. This unconventional result occurs because carriers choose shipping capacity levels subject to backhaul problems, while the export sector cannot export beyond shipping capacity.
Enhancing exports by removing import restrictions
Trade policy research has investigated whether removing import restrictions (for example by reducing tariffs) may enhance exports. Previous studies have identified several channels through which an import tariff reduction may influence exports. Early studies indicated the negative effect of liberalising imports on exports. For example, restricting imports could enhance exports when the protected industry exhibits increasing returns to scale (Krugman 1984). In contrast, more recent studies have identified positive effects.
For example, a tariff reduction on intermediate goods may expand the sectors that use those goods as inputs, enabling them to increase their exports (Cruz and Bussalo 2015). This supply chain effect may work through the direct effects on production costs (they drop due to lower input costs) or the indirect effects through more intense import competition that cause productivity increases for the affected firms (Trefler 2004, Amiti and Konings 2007). Also, when the demand for final goods increases as trade barriers against final goods disappear, the demand for the intermediate inputs that go into those final goods also grows. If a country that imports final goods also produces intermediate inputs, it may be able to increase the exports of intermediate inputs as a result (Blanchard et al. 2016).
In our research, we have identified endogenous transport costs as another channel through which import liberalisation has a positive effect on the country's exports (Ishikawa and Tarui 2015, 2016). This channel could be an empirical question of important policy relevance.
Suggestive evidence
Which channels are present, or have larger effects than others? We need to be careful when answering this question empirically. In Ishikawa and Tarui (2016), we provide some suggestive evidence. India's trade liberalisation in the 1990s has been studied as an example of unilateral reductions in trade barriers (Topalova and Khandelwal 2011, among others), suggests that our theoretical result regarding the link between tariffs and transport costs may be empirically relevant. We asked if transport costs from India to the US decreased as India liberalised its imports.1
Figure 1 India's import tariffs and transport costs
Source: Average unit transport costs (in 1990 US dollars) for goods categorised in HS 62, 68, 71, and 73 are from OECD Maritime Transport Costs database (adjusted with US GDP deflator). Tariff rates refer to the weighted average of India's HS six-digit level MFN rates using total imports as a weight. The data on MFN rates and total imports are obtained from WITS database and UN Comtrade, respectively.
Figure 1 shows the relationship between India's import tariffs and the real transportation costs of the top exports from India to the US. It shows average unit transport costs for the two sectors with the highest export share in volume (HS68 'stone, plaster, cement, asbestos, mica, etc. articles', and HS73 'articles of iron or steel') and the two sectors with the highest export share in value (HS71 'pearls, precious stones, metals, coins, etc.' and HS62 'articles of apparel, accessories, not knit or crochet'). All values are normalised so that the 1991 values equal one. The downward trend in transportation costs is consistent with our theoretical prediction regarding the response of transport costs to changes in trade policy due to backhaul problems.
Subsidies on shipping capacity
A tax on shipping capacity could be equivalent to an import tariff on shipped goods. This implies that the subsidies on shipping capacity may work as a substitute for an export subsidy on shipped goods. If foreign countries hesitate to lower their tariffs, the domestic country could increase its exports by providing subsidies to carriers. The subsidies may also increase domestic imports (that is, foreign exports).
Further studies exploring the transport sector 'behind the iceberg' – evaluating other trade-related policies given the endogenous transport costs – would be useful to identify other consequences of the backhaul problem and the industrial structure of transport markets.
Editors' note: The main research on which this column is based appeared as a Discussion Paper of the Research Institute of Economy, Trade and Industry (RIETI) of Japan
Harpers Ferry, WV
Friday, February 10, 2017
David Dayen: Dismantling Dodd-Frank -- And More [feedly]
http://prospect.org/article/dismantling-dodd-frank-and-more
This article appears in the Winter 2017 issue of The American Prospect magazine. Subscribe here.
History teaches us that financial regulations die from a thousand cuts rather than a signifying event. As Cornell University law professor Saule Omarova puts it, "Financial reform is like a big onion. The more layers you peel off, the harder you cry."
For example, by the time the Gramm-Leach-Bliley law removed the Glass-Steagall firewall between commercial and investment banks in 1999, that separation was already effectively wiped out—by administrative waivers granted by regulators. The 1994 Riegle-Neal Act that formally allowed banks to open branches across state lines came after a decade of states altering rules to undermine local control of finance. Deregulation of mortgage rules that led to the housing bubble rolled out over a 20-year period, spanning Carter, Reagan, Bush, and Clinton. And even then, it took the George W. Bush administration's laissez-faire supervision to really supercharge predatory lending.
So while Donald Trump, populist rhetoric notwithstanding, promised on the campaign trail and on his transition website to "dismantle" Dodd-Frank financial reform, he probably won't do it in one shot. He won't even have to do it through Congress. Here's the likely blueprint.
The Dodd-Frank Act did not structurally alter the financial system, either by breaking up the big banks, or by restoring the Glass-Steagall wall between commercial and investment banking. But it did attempt to stabilize what failed in 2008 by using stronger oversight and adding stronger regulatory tools. It created the Consumer Financial Protection Bureau (CFPB), the first independent federal agency primarily focused on preventing consumer rip-offs. It instituted the Volcker Rule, a miniature version of Glass-Steagall that restricts depository banks from making many types of trades on their own accounts. It sent derivatives through central clearinghouses to increase transparency. It empowered regulators to more strongly supervise systemically significant financial institutions, and created an "orderly liquidation authority" for insolvent firms. Combined with international rules that increased various equity requirements, Dodd-Frank patched several weak points in the current system.
However, because reformers lacked the votes to lock clear rules into the legislation, much of the detailed rulemaking was left to the executive agencies. That provided the industry a second bite at the apple, on much more promising territory behind closed doors. Indeed, even under a sympathetic Democratic administration, Dodd-Frank has been at risk, and that was magnified by the election.
MANY OF THE DODD-FRANK rules remain incomplete. According to Davis Polk's most recent progress report in July, over one-quarter of Dodd-Frank's rulemaking requirements have not been finalized, and about one in five have not even been proposed. These include an important multi-agency rule on executive compensation, which would discourage excessive risk-taking and allow for more clawbacks of bonuses in the event of corporate misconduct.
The easiest way for Trump to wipe out a big chunk of Dodd-Frank, then, is to direct agencies to never finish those unfinished rules. Trump promised a moratorium on new regulations at the outset of his presidency, so this would align with his vow to voters.
While regulators are scrambling to finalize the executive compensation rule and others before Obama's term ends, Trump can take advantage of a tool the GOP Congress has used to express their dissent the past several years, known as the Congressional Review Act. Within 60 legislative days of a finalized executive branch rule, Congress can introduce a resolution to formally disapprove of it, and if the president signs the disapproval, the regulation is invalidated. That means any last-minute Dodd-Frank rulemaking not completed by this past May would be subject to Trump wiping them out with a stroke of a pen. This tactic can be used even if the regulation has already taken effect.
At Risk: Consumer Financial Protection Bureau Chair Richard Cordray, one of the right's prime targets.
Trump can also rely on personnel changes to nullify the practical effect of Dodd-Frank. Independent agencies like the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and the Commodity Futures Trading Commission (CFTC) get new majorities on their five-member boards based on the party of the president. Obama's SEC Chair, Mary Jo White, resigned the week after the election, but Trump is entitled to fill two vacancies on the five-member panel regardless of White's decision, enabling him to remake the agency.
On consumer protection, Trump could try to cripple the CFPB by having Congress pass a law returning its budget to the congressional appropriations process (currently it derives funds from the Federal Reserve), or changing the leadership structure from a single director to a five-member bipartisan commission. But it's much easier for him to just replace current Director Richard Cordray. A ruling this October from the D.C. Appeals Court allows a president to remove the director for any reason; the CFPB has appealed, but even if that's taken up, Trump could fire Cordray for some imagined cause or wait until Cordray's term expires in July 2018. With a loyalist installed, the Trump administration could render the CFPB ineffective.
The president-elect can also make a direct impact with cabinet appointments. For treasury secretary, he selected billionaire Steve Mnuchin, who was deeply implicated in foreclosure abuses in the aftermath of the subprime collapse that took down the economy. Mnuchin ran OneWest Bank, one of the more egregious practitioners of robo-signing and improper foreclosures, disproportionately in minority communities. Billionaire investor Wilbur Ross, Trump's nominee for commerce secretary, owned the notorious American Home Mortgage Servicing Inc., which multiple state attorneys general sued for deceptive practices. Ross later served on the board of Ocwen, which paid billions in fines to the CFPB for abusive activities. These are not choices homeowners should welcome.
Perhaps the most important personnel change is the vacant position of vice chair for supervision at the Federal Reserve, created by Dodd-Frank but never filled. The vice chair develops regulatory policy recommendations, oversees the supervision of banks, and reports to Congress on its progress. Daniel Tarullo has held the de facto role but was never formally put into the position. With two vacancies on the Board of Governors, Trump could immediately slide someone into the vice chair position, strip Tarullo (who may leave the Fed anyway) of authority, and pursue a deregulatory agenda at the most important financial regulator. The Fed staff, mostly holdovers from the laissez-faire Alan Greenspan days, would be all too happy to help.
When leadership changes at the top, the direction of regulatory enforcement usually follows suit. Regulators get slower to recognize unlawful activities, more trusting of financial lobbyists, and slightly more attuned to arguments about slowing down the economy if they uphold their mission. Furthermore, all of the new pro-bank leaders will sit on the same board: the Dodd-Frank–created Financial Stability Oversight Council, which monitors financial institutions for systemic risk and can impose more stringent regulations on the most dangerous firms. Overnight, this extra line of defense against systemic collapse would turn into a knitting circle.
This matches a dynamic that has periodically derailed aggressive regulation, regardless of the party in power. University of Colorado law professor Erik Gerding calls it the "Regulatory Instability Hypothesis." When markets are booming, banks and investors pressure agencies to deregulate, so more firms can participate in the success. A crisis sometimes shifts the pendulum back toward stronger supervision. "The cycle continues once memories of the crisis start to fade," Gerding says, leading to compliance rot.
In other words, with eight years behind us since the last financial crisis, regulators can be expected to take their eyes off the ball, even without the added prod of the Trump nominees. The Trump administration's likely priorities on backing off Wall Street will act as a force multiplier for a familiar cycle of regulatory drift.
But when your deregulatory strategy is based on agency interpretation and selective enforcement, it also gives you flexibility to jump back in with a regulatory hammer at your discretion. With Trump's appetite for vindictiveness, this strategy could be used not to obliterate financial regulation, but to weaponize it.
For example, Trump owes $364 million in commercial loans to Deutsche Bank, his biggest private lender. Deutsche Bank is simultaneously negotiating a fine with the Justice Department over bubble-era abuses in the mortgage-backed securities market. Trump's Justice Department could pursue a bigger fine and more punitive treatment of executives unless Deutsche Bank renegotiates the president-elect's debt. And Trump could unleash this kind of regulation-by-threat on any financial institution that crosses swords with him, through any agency, from the Fed to the SEC to the CFPB.
Another way to weaponize regulation is through federal preemption. Section 1041 of Dodd-Frank states that the CFPB cannot preempt stronger consumer protection laws in the states. If Congress eliminates that section—or if the agency just decides that certain state laws are inconsistent with their work—they can use the CFPB to nullify state efforts to boldly protect citizens. There's a history of this under conservative governments: In 2002, Georgia passed a strong anti–predatory lending law, but the Office of the Comptroller of the Currency, the national bank regulator, told its institutions that they were exempt, citing federal preemption. The CFPB has even stronger consumer protection authority, extending to all sorts of financial products where they could water down state law, or even create a chilling effect by threatening to do so.
Public Conscience: Senate Banking Committee member Elizabeth Warren grills Wells Fargo Chief Executive Officer John Stumpf (foreground) during a committee hearing on Capitol Hill in Washington, September 20, 2016.
OF COURSE, REPUBLICANS will likely also try to chip away at Dodd-Frank legislatively, piece by piece. The biggest effort to date comes from House Financial Services Committee Chair Jeb Hensarling, an early rumored choice for Treasury secretary. Hensarling has loudly complained that Dodd-Frank has destroyed consumer and small-business access to credit (it hasn't, according to the small businesses themselves) and created an impenetrable jumble of complicated rules (there he has a point).
Hensarling's Financial CHOICE Act offers financial institutions a bargain. If they maintain a ratio of liquid assets to overall debt—known as the leverage ratio—of 10 percent, they can shed many other Dodd-Frank capital requirements and enhanced regulations. The idea is that if banks have a sufficient leverage ratio, they can cover their own losses, negating the need for a heavy hand of supervision. And to get to this level of leverage, banks may have to shed some business lines, initiating the downsizing themselves rather than because of a government mandate.
It's interesting that a conservative like Hensarling would support higher leverage requirements, part of an intellectual sea change on the right that believes increased capital can counteract "too big to fail." And Hensarling is seizing on a complaint from the reform-minded left, that current regulation is too needlessly complex and easy to circumvent, and that simpler, easier-to-enforce rules should be the goal. "One benefit to doing something more structural is you can loosen some aspect of regulations today," says Gaurav Vasisht of the Volcker Alliance, a nonpartisan public policy organization.
The problem is that a 10 percent leverage ratio, while higher than the current 6 percent standard, is not worthy to the task. Anat Admati, a professor at Stanford and the leading commentator on the need for higher leverage requirements, wrote in a paper in May that it's rare for any healthy corporation to fund more than 70 percent of its assets with borrowing. That would equal a 30 percent leverage ratio, three times what Hensarling wants. Leverage is also not simple to calculate and can be gamed by stashing items off the balance sheet, especially if, as in Hensarling's approach, there's no actual penalty for violators. Banks would have a year to rewrite their capital plan if they fall out of compliance, an invitation to yo-yo in and out as it suits them.
But there's more to the CHOICE Act than leverage, and its smaller pieces could comprise a legislative à la carte menu to weaken financial regulation. Most of them have already passed the GOP-led House in some form.
Republicans want to repeal the "orderly liquidation authority" mechanism to unwind banks in a crisis, making enhanced bankruptcy the only available method. They would limit authority for the Federal Reserve and the FDIC to bail out financial institutions absent direct threats to overall stability. They would eliminate designations of "systemically important financial institutions" that confer heightened regulatory supervision on the riskiest firms, and weaken the independent judgment of members of the Financial Stability Oversight Council, the risk monitor that approves the designations. (For example, all members, who chair banking regulators, would need approval from their bipartisan boards before a vote.) They would impose regulatory relief for community banks and credit unions, exempting them from most Dodd-Frank rules and reporting requirements. They would prevent SEC registration for private equity firms and hedge funds, disband the Office of Financial Research, and force regulators to publicly disclose the frameworks of its stress tests, allowing banks to prepare for them in advance.
Some rules would be repealed, like the Volcker rule, which banned proprietary trading by deposit-taking banks, and the Department of Labor's fiduciary rule, which forces investment advisers to act in the best interest of their clients. Republicans support a cost-benefit analysis for all new financial regulations, a subjective standard that could easily be interpreted to find any rule too costly. They would pass the REINS Act, a radical piece of legislation that would give Congress a final vote on all major regulations from federal agencies, creating a bottleneck for rulemaking and essentially freezing the administrative state. They would overrule the Supreme Court's deference to federal agency interpretation of rules, giving industry even more of an upper hand in litigation. They would even kill the Franken amendment to remove conflicts of interest in the credit-rating agencies, which the SEC never even bothered to act upon.
DEMOCRATS HAVE 48 SENATORS and can use the filibuster to block these changes, and Republicans appear wary at this time of eliminating the 60-vote threshold for legislation. However, Democrats are unlikely to filibuster everything, and some of Trump's deregulatory ideas have bipartisan support. Five Senate Democrats up for re-election in 2018 come from states that gave Donald Trump double-digit victories (West Virginia, Missouri, Montana, Indiana, and North Dakota), and five others Trump carried by lesser margins (Florida, Ohio, Pennsylvania, Wisconsin, and Michigan); they'll be eager to compromise on some issues. A combination of them and a handful of business-friendly members of the caucus could support things like small-bank regulatory relief, which has been on the brink of passing for years.
Other planks of the GOP regulatory plan might get buy-in from even reform-minded Democrats, like a Government Accountability Office audit of the Federal Reserve's balance sheet. Some Republicans have vowed to increase SEC penalties on securities law violators, which could certainly get Democratic support, perhaps in a trade for accepting something more distasteful.
Furthermore, Republicans' traditional practice has been to stick items Democrats wouldn't support on their own into must-pass legislative vehicles like budget bills. This is how the Commodity Futures Modernization Act, which restricted derivatives regulation, passed in 2000, and it's how a Democratic Senate and President Obama signed into law the only major repeal of a provision of Dodd-Frank, the "swaps push-out" rule that would have forced derivatives trading desks to be separately capitalized from their parent company, protecting customer deposits. Citigroup lobbyists wrote that repeal provision. Placing deregulatory measures into must-pass bills makes them much more difficult for Senate Democrats to stop.
Then-President Barack Obama meets with Representative Barney Frank, Senator Dick Durbin, and Senator Chris Dodd, in the Green Room of the White House prior to a financial regulatory reform announcement June 17, 2009.
Finally, Republicans have plans to enrich Wall Street executives in all sorts of ways unrelated to financial regulation. They could reinstate the bank middlemen on federal student loans (a program recently converted to direct loans by the Obama administration), returning a lucrative profit center to lenders. They could weaken or lay off antitrust enforcement of mergers and acquisitions, an extremely profitable outlet for the banks that advise those deals. They could cut the corporate income tax, as well as the tax on pass-through income in corporate partnerships, a huge benefit for traders like hedge fund and private equity managers. They could recapitalize and release mortgage giants Fannie Mae and Freddie Mac, a top priority of hedge fund manager (and Trump adviser) John Paulson and other investors who bought up Fannie and Freddie stock cheaply, hoping for a financial windfall if they were spun back out to the private sector. They could allow banks to get rich from financing Trump's $1 trillion infrastructure program, which essentially sells off public assets in a privatization fire sale.
That bonanza, combined with the reduction of costs from lighter regulation, explains why the financial industry views the next four years with all the anticipation of a child on Christmas morning.
DEMOCRATS DO HAVE TOOLS to prevent the onslaught. The first is that the public still really dislikes the banking industry. And every time Wall Street hopes memories will fade and they can return to a deregulatory agenda, something like the 2016 Wells Fargo scandal drags the industry's culture of deceit back into the spotlight.
The Wells Fargo case, where the bank was found to have systemically created millions of customer accounts without authorization in a bid to show retail sales growth, was arguably the most damaging incident since the financial crisis, if only because it was so easily understood. "The American people got it hands down," says Senator Elizabeth Warren, Washington's biggest champion of consumer protection. "They understood the game is rigged, and no amount of fancy footwork by Republicans could dance back that this bank built a profit model out of cheating its own customers."
Even Republicans had harsh words in congressional testimony for Wells Fargo CEO John Stumpf, who stepped down from his position, a fairly unprecedented moment of accountability in the past eight years of scandals. The whole affair cemented the reform position that banks, left to their own devices, will take advantage of customers and shareholders. Even if you believe that these were 5,300 rogue operators issuing accounts on their own volition, "that indicates that these institutions are too big, too complex, too sprawling," says Robert Hockett, a law professor at Cornell University.
There are ways to apply the Wells case more broadly, too. The real villainy was using sales metrics to promote corporate growth. So investors were buying stock based on false numbers ginned up by low-level employees out of fear of termination. That indicates a short-term mind-set, a grab for profits at all costs. "The executives view themselves as working for the shareholders," says Hockett. This could spur interest in the credit union model, where the depositors are the owners. The National Credit Union Administration has been refining its requirements that could allow for significant expansion, which could trigger a large exodus away from the commercial banking industry. Wells Fargo account openings plummeted 30 percent just in the first month after the scandal was made public.
Any attempt to mess with the CFPB, for example, will be met with an invocation of Wells Fargo. More broadly, the preponderance of hedge fund moguls and bank lobbyists inside the Trump transition team is already being used to highlight the contradiction between Trump's "for the little guy" campaign rhetoric and the reality of his likely governing decisions. Like the Democrats, the GOP included a restoration of the Glass-Steagall firewall in their official 2016 platform. And Trump repeatedly attacked Hillary Clinton for her Wall Street ties, proclaiming himself beholden to nobody, least of all financial industry executives. That could be useful in denying Republicans a frontal assault on financial rules.
But those quiet backrooms where regulators and industry representatives congregate will provide refuge from the anti-bank rabble. The average Trump base voters, while still concerned that the financial industry is too big and too complex, will likely pay no attention to a rule interpretation at the CFTC, or an enforcement decision at the SEC. "It's too easy to get lost in the weeds around it," says Warren. "We win the fight when it's about basic principles. Once the principles are lost and you're down to fighting technical language, lobbyists and lawyers have the upper hand."
The imminent pummeling of Dodd-Frank should also raise questions about the future. Many experts believe that Dodd-Frank didn't go far enough to truly make the public safe from the financial system. It maintained the basic business model and structure of the industry, and assumed that alert regulators could tweak the system into compliance. There are compelling doubts that tools like orderly liquidation authority would even work in a crisis. And even structural prohibitions like the Volcker rule rely on whether regulators can figure out what represents proprietary trading and not market-making or hedging, two carve-outs in the rule.
"I used to work for Tim Geithner; he was a smart guy who knew a lot about the financial sector," says Morgan Ricks, former Treasury Department official and author of The Money Problem. "To think that he can turn the dials on the machines, there's no way anyone can do that. There's a technocratic conceit built into the way a lot of people think."
An endless race between more complex financial institutions and more complex rules to target them guarantees that regulators will always remain behind as financial firms construct more esoteric instruments to conceal risk, or use complexity as a cloak to get their way. Taking a step back, we could instead question whether expansive trading activity actually contributes anything productive to society. And if it doesn't, we could ask why we allow it to exist. "We can control the system much better but we need to gather up the will to do it," says Anat Admati, part of a team of thinkers who have worked separately on detailed structural reforms, which would be easier to police and more likely to return finance to its role as the facilitator of economic output, rather than the center of it.
Admati has focused on higher capital requirements, so financial institutions have their own funds at risk rather than the taxpayer's. Arthur Wilmarth of George Washington University believes in rigorously narrow banking, similar to the "ring-fencing" proposals put forward in Great Britain and the European Union. This eliminates subsidies that banks receive to fund trading activities, both from access to cheap deposits and expectations of bailouts. "You can take deposits inside a narrow bank that invests only in safe government securities," Wilmarth says. "Add a no-transfer rule, not one dollar transferred out to capital market affiliates. If you had that, rigorously implemented, these guys would break up quickly."
Swamp, Personified: Hedge fund billionaire, Goldman Sachs veteran, Trump finance chair, and Treasury Secretary-designate Steve Mnuchin meets with Senate Majority Leader Mitch McConnell in the Capitol.
Wallace Turbeville of the think tank Demos believes over-reliance on trading as a profit center is responsible for sclerotic economic growth. He would ban derivatives entirely. "There's a giant misconception that derivatives are a risk management tool," Turbeville says. "I was the CEO of a derivatives risk management company. It's not like I'm making this stuff up." Tossing out derivatives is part of a broader project of Turbeville's, to root out complexity and short-term thinking from the financial system, so that corporate profitability and growth are complementary rather than distinct.
Hockett and his Cornell associate Saule Omarova believe that money is a public resource, not a privately supplied product. The banks are just franchisees to the Federal Reserve's franchise generation of credit. "When you take that view, everything looks different," Hockett says. "If the federal government takes a more active role in allocating credit, that no longer looks like intervention or meddling, it looks like the sensible management of distribution of resources." This opens the door for a much more direct public role in who gets credit, along the lines of a public bank. "The public has a fundamental right to have a say in how the financial system works," says Omarova.
Morgan Ricks's contribution concerns the creation of money-like instruments in the short-term debt markets. The Federal Reserve and private banks are supposed to have a monopoly on money creation. But money markets or overnight repurchases (repo) are considered as safe as money for accounting purposes, despite being inherently unstable and prone to runs.
Under Ricks's plan, all short-term debt instruments (renewable in less than a year) would have to be issued by a chartered bank. So-called shadow banks like hedge funds or private equity firms could not generate short-term debt to fund their activities. They would lose a cheap funding tool and have to take on real risk. "We've defined deposits the wrong way. All these other entities create deposits," says Ricks. "They should be off limits."
All of these are pretty radical ideas, but they have a simple elegance to them. Separating bank business lines by activities, and banning harmful products, changes the system we have from a complex, interconnected agglomeration, where a failure in one area can cascade everywhere, to a more independent system where firms can fail without causing catastrophe. Combining these ideas would reduce trading volumes and channel capital toward only necessary activity.
Moreover, the very existence of a new set of ideas puts us well ahead of the curve relative to 2008. Liberals had no solutions to take off the shelf then, inevitably leading to a technocratic path of tweaks and dials. Instead of the parallel of the Great Depression, after which Roosevelt truly redesigned the financial system, the more apt parallel to the 2008 crisis may be the Panic of 1907, when we added a couple of important parts—most notably the Federal Reserve—but didn't truly upend the practice of banking. "As bad as it was, the Panic of 1907 was not enough for fundamental reform," says Arthur Wilmarth. "Until 1933, the public was mad but they didn't know what to be mad about."
Even though we're approaching a Dark Ages for reformers, Saule Omarova sees a ray of hope. She uses the example of regulatory relief for smaller banks. "That is actually a structural reform step. You're formally establishing two separate regulatory reform regimes," Omarova says. "After that, a bunch of regionals that may be just above $250 billion [in assets] but are engaged in traditional banking business, and don't deal with prop trading or derivatives—they might want relief. Once community banks are taken out of regulatory provisions, the next question will be activities. It's one way structural reform is already on the agenda."
The Republican reign of deregulation will likely hasten another crisis, though it's unclear where or when (though we are already seeing problems with commercial real estate, which contains a lot of exposure for banks). At that time, there will be renewed calls for wholesale reform, and renewed resistance from the industry to upsetting their business model. Having a demonstrable understanding of what to do when catastrophe strikes will be invaluable. Paradoxically, chipping away at the present jury-rigged system of financial reform keeps the issues alive for much bigger interventions down the road.
-- via my feedly newsfeed