Andrew Ross Sorkin seems to be very proud of himself for having figured out that Glass-Steagall would not have prevented the economic crisis that hit the economy in 2007 and is still causing tens of millions of people to be out of work or underemployed today. He is of course right, except most of us knew this 4 years ago.
The crisis, which is an “economic crisis” not a “financial crisis” was caused by the collapse of an $8 trillion housing bubble. This bubble was driving the economy by sparking both a construction boom and a consumption boom. When house prices came back down to earth, these sources of demand evaporated and there was nothing to replace them. It’s a fairly simple story for those of us who learned arithmetic back in third grade.
Glass-Steagall played no direct role in the crisis or the buildup to it. Nonetheless, it does get to heart of one of the big unnecessary freebies that the government gives to the financial sector. The point of the law was that if you held government-guaranteed deposits then there should be restraints on the sort of risks you can take.
It is understandable that the spoiled brats who run big banks on Wall Street think that they should be able to get handouts from the government with no strings attached, but that is not the way a market economy is supposed to work. If the banks don’t want the government’s guarantees for its deposits, no one is forcing them to take the guarantee. But, if they take the guarantee, then they don’t get to take big risks like Jamie Dimon’s big bet.
This tradeoff is pretty straightforward. Even an NYT business columnist should be able to figure it out.
Andrew Ross Sorkin seems to be very proud of himself for having figured out that Glass-Steagall would not have prevented the economic crisis that hit the economy in 2007 and is still causing tens of millions of people to be out of work or underemployed today. He is of course right, except most of us knew this 4 years ago.
The crisis, which is an “economic crisis” not a “financial crisis” was caused by the collapse of an $8 trillion housing bubble. This bubble was driving the economy by sparking both a construction boom and a consumption boom. When house prices came back down to earth, these sources of demand evaporated and there was nothing to replace them. It’s a fairly simple story for those of us who learned arithmetic back in third grade.
Glass-Steagall played no direct role in the crisis or the buildup to it. Nonetheless, it does get to heart of one of the big unnecessary freebies that the government gives to the financial sector. The point of the law was that if you held government-guaranteed deposits then there should be restraints on the sort of risks you can take.
It is understandable that the spoiled brats who run big banks on Wall Street think that they should be able to get handouts from the government with no strings attached, but that is not the way a market economy is supposed to work. If the banks don’t want the government’s guarantees for its deposits, no one is forcing them to take the guarantee. But, if they take the guarantee, then they don’t get to take big risks like Jamie Dimon’s big bet.
This tradeoff is pretty straightforward. Even an NYT business columnist should be able to figure it out.
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It’s clear that the impact of private equity on the economy is going to be one of the central issues in the presidential race given Mitt Romney’s boasts about his performance as one of the partners in Bain Capital. President Obama and others have pointed out that private equity firms often leave large numbers of laid-off workers and bankrupt companies in their wake.
To counter this image, David Brooks picked up the cause. He used his column to tell readers that private equity firms turned around the economy, getting inefficient firms up to speed and raising overall growth.
At the most basic level, the facts don’t fit Brooks’ story. If he wants to credit private equity with turning around the economy then we should have seen the turnaround in productivity growth in the 80s (or at least the beginning) when leveraged buyouts first became a major feature of the U.S. economy. Instead, we had to wait until the mid-90s, long after private equity was well established.
As a practical matter, turning around failing firms is only one way in which private equity companies make money. The most common way they make money is by gaming the tax system. This is done first and foremost by loading companies up with debt. Interest payments on debt, unlike interest payments to shareholders, are tax deductible. By reducing target companies’ tax liabilities, private equity firms can make large profits even if they don’t do anything to turn around the company.
Private equity companies can also benefit from other forms of financial engineering. They may also be effective at the Facebook trick, over-hyping companies when they issue IPOs, selling them off to suckered investors at an above-market price. While there are undoubtedly cases where private equity actually does turn around failing companies, this seems to be the exception as my colleague Eileen Appelbaum is discovering.
If Governor Romney’s record at Bain in turning around companies is better than the record for the industry as a whole then presumably he could release a full list of the companies taken over under his watch and indicate what happened to them subsequent to their takeover. If he opts not to make this information public, then it is likely that the record is not a good one.
It’s clear that the impact of private equity on the economy is going to be one of the central issues in the presidential race given Mitt Romney’s boasts about his performance as one of the partners in Bain Capital. President Obama and others have pointed out that private equity firms often leave large numbers of laid-off workers and bankrupt companies in their wake.
To counter this image, David Brooks picked up the cause. He used his column to tell readers that private equity firms turned around the economy, getting inefficient firms up to speed and raising overall growth.
At the most basic level, the facts don’t fit Brooks’ story. If he wants to credit private equity with turning around the economy then we should have seen the turnaround in productivity growth in the 80s (or at least the beginning) when leveraged buyouts first became a major feature of the U.S. economy. Instead, we had to wait until the mid-90s, long after private equity was well established.
As a practical matter, turning around failing firms is only one way in which private equity companies make money. The most common way they make money is by gaming the tax system. This is done first and foremost by loading companies up with debt. Interest payments on debt, unlike interest payments to shareholders, are tax deductible. By reducing target companies’ tax liabilities, private equity firms can make large profits even if they don’t do anything to turn around the company.
Private equity companies can also benefit from other forms of financial engineering. They may also be effective at the Facebook trick, over-hyping companies when they issue IPOs, selling them off to suckered investors at an above-market price. While there are undoubtedly cases where private equity actually does turn around failing companies, this seems to be the exception as my colleague Eileen Appelbaum is discovering.
If Governor Romney’s record at Bain in turning around companies is better than the record for the industry as a whole then presumably he could release a full list of the companies taken over under his watch and indicate what happened to them subsequent to their takeover. If he opts not to make this information public, then it is likely that the record is not a good one.
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It’s vacation time, folks. Beat the Press will be on vacation until Monday, June 4. Until then, don’t believe anything you read in the newspaper.
It’s vacation time, folks. Beat the Press will be on vacation until Monday, June 4. Until then, don’t believe anything you read in the newspaper.
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The NYT had an article on efforts to raise the minimum wage in New York state. At one point the piece gives the views of Russell Sykes, a senior fellow at the Empire Center for New York State Policy, who is identified as an opponent of a higher minimum wage. According to the article, Sykes argued that:
“raising the minimum wage would not be helpful to most poor families. The earned-income tax credit was more beneficial to them, he said, and an increase in the minimum wage could make some families ineligible for the credit.”
If a higher minimum wage makes a low-income family ineligible for the earned income tax credit (EITC) it is due to the fact that it has raised their income above the level where they qualify for the EITC. It seems a bit strange to argue that low-income family is hurt by raising their income. The highest EITC rate is 45 percent, meaning that a worker at below the peak (in 2010, $12,549 for a single parent with three children) would get an additional 45 cents for each additional dollar of earnings. If a higher minimum wage raises a worker’s income from a point below this level, it is actually increasing the amount of money they get through the EITC, possibly by as much as 45 percent of the increase in the minimum wage.
The EITC then plateaus, meaning that additional earnings neither add to or subtract from the size of the tax credit. For income above $16,450 the EITC is phased out at the rate of 21 cents on the dollar. This means that in a worst case scenario, a worker may lose 21 cents from the EITC for every dollar in additional pay they get as a result of a minimum wage hike.
[This is corrected from an earlier version. Thanks to Robert Salzberg for calling attention to my error.]
The NYT had an article on efforts to raise the minimum wage in New York state. At one point the piece gives the views of Russell Sykes, a senior fellow at the Empire Center for New York State Policy, who is identified as an opponent of a higher minimum wage. According to the article, Sykes argued that:
“raising the minimum wage would not be helpful to most poor families. The earned-income tax credit was more beneficial to them, he said, and an increase in the minimum wage could make some families ineligible for the credit.”
If a higher minimum wage makes a low-income family ineligible for the earned income tax credit (EITC) it is due to the fact that it has raised their income above the level where they qualify for the EITC. It seems a bit strange to argue that low-income family is hurt by raising their income. The highest EITC rate is 45 percent, meaning that a worker at below the peak (in 2010, $12,549 for a single parent with three children) would get an additional 45 cents for each additional dollar of earnings. If a higher minimum wage raises a worker’s income from a point below this level, it is actually increasing the amount of money they get through the EITC, possibly by as much as 45 percent of the increase in the minimum wage.
The EITC then plateaus, meaning that additional earnings neither add to or subtract from the size of the tax credit. For income above $16,450 the EITC is phased out at the rate of 21 cents on the dollar. This means that in a worst case scenario, a worker may lose 21 cents from the EITC for every dollar in additional pay they get as a result of a minimum wage hike.
[This is corrected from an earlier version. Thanks to Robert Salzberg for calling attention to my error.]
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That is what he told us in his New York Times column that was ostensibly about out of control Social Security and Medicare spending. Emmanuel begins by telling readers:
“If nothing is done about entitlement spending, and if our current tax breaks continue, then by 2025, tax revenue will be able to pay for Medicare, Medicaid, Social Security, interest on the debt and nothing else.”
There are two big problems with this story. First there is the old trick of conflating Social Security with Medicare and Medicaid. This is a great trick for those who want to deceive people into believing the budget problem is primarily a demographic story. However, it is highly misleading. The retirement of baby boomers is projected to increase Social Security spending by 0.9 percentage points of GDP or roughly 20 percent between now and 2025.
By comparison, military spending increased by more than 1 percentage point of GDP between 2000 and 2005. In other words, the projected increase in Social Security spending over the next 13 years is relatively modest and easily affordable. It also is fully covered by projected Social Security revenue and assets in the trust fund.
The projected increase in health care spending is considerably larger, however this depends on using the Congressional Budget Office’s “alternative fiscal scenario” rather than the baseline projection. The difference is that the baseline projection assumes substantial cost controls that were in the Affordable Care Act. These cost controls, if left in place, would substantially reduce the rate of growth of Medicare costs.
This point is important for two reasons. First it shows directly that the issue is not primarily one of demographics but rather one of exploding health care costs. Second, it is in principle possible to control these costs if the political power of health care providers can be held in check.
Per person health care costs in the United States are hugely out of line with costs anywhere else in the world. If our costs were comparable to those in any other wealthy country we would be looking at long-term budget surpluses rather than deficits. If it is too difficult politically to directly fix the U.S. system we could achieve enormous savings simply by allowing more trade in health care services. We will only see the explosive growth in health care costs described in the alternative fiscal scenario if health care providers and insurance companies are both powerful enough to prevent domestic reform and to maintain protectionist barriers that prevent people in the United States from taking advantage of lower cost care elsewhere.
It is also worth noting that Emanuel’s proposed cuts in these programs would hit people with average lifetime earnings of $40,000 and above. It might make more sense to place more burden on people earning $250,000 and above by raising their taxes.
That is what he told us in his New York Times column that was ostensibly about out of control Social Security and Medicare spending. Emmanuel begins by telling readers:
“If nothing is done about entitlement spending, and if our current tax breaks continue, then by 2025, tax revenue will be able to pay for Medicare, Medicaid, Social Security, interest on the debt and nothing else.”
There are two big problems with this story. First there is the old trick of conflating Social Security with Medicare and Medicaid. This is a great trick for those who want to deceive people into believing the budget problem is primarily a demographic story. However, it is highly misleading. The retirement of baby boomers is projected to increase Social Security spending by 0.9 percentage points of GDP or roughly 20 percent between now and 2025.
By comparison, military spending increased by more than 1 percentage point of GDP between 2000 and 2005. In other words, the projected increase in Social Security spending over the next 13 years is relatively modest and easily affordable. It also is fully covered by projected Social Security revenue and assets in the trust fund.
The projected increase in health care spending is considerably larger, however this depends on using the Congressional Budget Office’s “alternative fiscal scenario” rather than the baseline projection. The difference is that the baseline projection assumes substantial cost controls that were in the Affordable Care Act. These cost controls, if left in place, would substantially reduce the rate of growth of Medicare costs.
This point is important for two reasons. First it shows directly that the issue is not primarily one of demographics but rather one of exploding health care costs. Second, it is in principle possible to control these costs if the political power of health care providers can be held in check.
Per person health care costs in the United States are hugely out of line with costs anywhere else in the world. If our costs were comparable to those in any other wealthy country we would be looking at long-term budget surpluses rather than deficits. If it is too difficult politically to directly fix the U.S. system we could achieve enormous savings simply by allowing more trade in health care services. We will only see the explosive growth in health care costs described in the alternative fiscal scenario if health care providers and insurance companies are both powerful enough to prevent domestic reform and to maintain protectionist barriers that prevent people in the United States from taking advantage of lower cost care elsewhere.
It is also worth noting that Emanuel’s proposed cuts in these programs would hit people with average lifetime earnings of $40,000 and above. It might make more sense to place more burden on people earning $250,000 and above by raising their taxes.
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In a blogpost discussing the push by many groups to get a financial transactions tax the Post told readers:
“The White House believes it would be easy to evade, could hamper economic growth, and might make markets more volatile, not less so. Instead, Obama has proposed a new ‘financial crisis responsibility fee’ on big banks, which would raise about $61 billion. “
While it is not clear how the Post knows what the White House really believes, what we know is that financial transactions taxes are apparently not that easy to evade. The tax in the UK, which applies only to stocks (not derivative instruments like credit default swaps, options, and futures) raises between 0.2 and 0.3 percent of GDP annually. This would be between $30-$45 billion a year in the United States. Unless we assume that the Obama administration thinks our tax collectors are much less competent than those in the UK, then they presumably do not really “believe” that the tax will be easy to evade.
The reference to economic growth refers to outdated research by the European Commission (EC). The most recent study by the EC shows that a tax would lead to somewhat more rapid growth if the money was used either to reduce other taxes or finance public investment.
If the White House has any evidence that the tax would increase volatility they are keeping it secret from the world. The tax would simply raise transactions costs back to where they were 10-15 years ago. Financial markets were not obviously more volatile in 1995 than they are today.
Finally, the “financial crisis responsibility fee” proposed by the Obama administration would raise an order of magnitude less tax revenue than the financial transactions taxes of the size generally being proposed. The Obama administration surely understands that they are pushing a tax that will have much less impact on the financial sector and will raise much less revenue than a financial transactions taxes.
The Post does not know what the White House “believes” about financial transactions taxes. It knows what it says about financial transactions taxes. While what it says may reflect what it believes, it may also reflect the fact that the administration is hoping to raise money for its re-election campaign from Wall Street. Also, many officials in the administration may hope to work on Wall Street after leaving the administration. These are the facts that we know.
In a blogpost discussing the push by many groups to get a financial transactions tax the Post told readers:
“The White House believes it would be easy to evade, could hamper economic growth, and might make markets more volatile, not less so. Instead, Obama has proposed a new ‘financial crisis responsibility fee’ on big banks, which would raise about $61 billion. “
While it is not clear how the Post knows what the White House really believes, what we know is that financial transactions taxes are apparently not that easy to evade. The tax in the UK, which applies only to stocks (not derivative instruments like credit default swaps, options, and futures) raises between 0.2 and 0.3 percent of GDP annually. This would be between $30-$45 billion a year in the United States. Unless we assume that the Obama administration thinks our tax collectors are much less competent than those in the UK, then they presumably do not really “believe” that the tax will be easy to evade.
The reference to economic growth refers to outdated research by the European Commission (EC). The most recent study by the EC shows that a tax would lead to somewhat more rapid growth if the money was used either to reduce other taxes or finance public investment.
If the White House has any evidence that the tax would increase volatility they are keeping it secret from the world. The tax would simply raise transactions costs back to where they were 10-15 years ago. Financial markets were not obviously more volatile in 1995 than they are today.
Finally, the “financial crisis responsibility fee” proposed by the Obama administration would raise an order of magnitude less tax revenue than the financial transactions taxes of the size generally being proposed. The Obama administration surely understands that they are pushing a tax that will have much less impact on the financial sector and will raise much less revenue than a financial transactions taxes.
The Post does not know what the White House “believes” about financial transactions taxes. It knows what it says about financial transactions taxes. While what it says may reflect what it believes, it may also reflect the fact that the administration is hoping to raise money for its re-election campaign from Wall Street. Also, many officials in the administration may hope to work on Wall Street after leaving the administration. These are the facts that we know.
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I hate to be picky, but this seems like a rather bizarre term to include in this Washington Post piece on the G-8 meeting on Saturday. The full sentence is:
“Obama, who has pushed for additional fiscal stimulus in the United States, said the new agreement affirmed the course his administration pursued during the financial recession at home.”
It is difficult to see what is added by including the word “financial.” The point is that we are still suffering from the effects of the recession that officially began in December 2007. If the concern is that the recession officially ended in June of 2009 so that it is improper to refer to the current period as a “recession,” then the word “downturn” should do the trick.
It is hard to see what including “financial” in the description does except confuse people. We have a downturn in the real economy, not just a few problems in the financial sector.
I hate to be picky, but this seems like a rather bizarre term to include in this Washington Post piece on the G-8 meeting on Saturday. The full sentence is:
“Obama, who has pushed for additional fiscal stimulus in the United States, said the new agreement affirmed the course his administration pursued during the financial recession at home.”
It is difficult to see what is added by including the word “financial.” The point is that we are still suffering from the effects of the recession that officially began in December 2007. If the concern is that the recession officially ended in June of 2009 so that it is improper to refer to the current period as a “recession,” then the word “downturn” should do the trick.
It is hard to see what including “financial” in the description does except confuse people. We have a downturn in the real economy, not just a few problems in the financial sector.
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It wasn’t quite that bad, but it was pretty close. A front page Washington Post story told readers that:
“The overpayments, discovered in an inspector general’s audit, boosted the annual pay of some of the employees [some of four employees] by as much as $64,000.”
I will be the last person to defend people ripping off the government, but we do need some context here. Assuming a worst case scenario, the amount of overpayments to these government employees amounted to less than $200,000 a year. That comes to less than 0.000006 percent of federal spending. Is this worth a front page story in the Washington Post?
My guess is that if we looked at any major defense contractor (e.g. Lockheed Martin, Boeing, Northrup Grumman) we could probably find overpayments that are at least ten times as large with a careful examination of every major contract. Such stories can rarely be found on the front page of the Washington Post.
Readers might ask why the Post thinks it is so important to highlight overpayments to a small number of government employees that, for all practical purposes, have zero consequence for the budget while neglecting much larger abuses by government contractors.
It wasn’t quite that bad, but it was pretty close. A front page Washington Post story told readers that:
“The overpayments, discovered in an inspector general’s audit, boosted the annual pay of some of the employees [some of four employees] by as much as $64,000.”
I will be the last person to defend people ripping off the government, but we do need some context here. Assuming a worst case scenario, the amount of overpayments to these government employees amounted to less than $200,000 a year. That comes to less than 0.000006 percent of federal spending. Is this worth a front page story in the Washington Post?
My guess is that if we looked at any major defense contractor (e.g. Lockheed Martin, Boeing, Northrup Grumman) we could probably find overpayments that are at least ten times as large with a careful examination of every major contract. Such stories can rarely be found on the front page of the Washington Post.
Readers might ask why the Post thinks it is so important to highlight overpayments to a small number of government employees that, for all practical purposes, have zero consequence for the budget while neglecting much larger abuses by government contractors.
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