February 07, 2020
Last week, Antonio Weiss, along with co-author Laura Kawano, released a paper advocating a financial transactions tax (FTT). I have long been an advocate of FTTs, so I’m always glad to see another paper making the case.
However, what made this paper especially noteworthy is Weiss’s background. Weiss had been a top Treasury official under President Obama, and previously a partner at the investment bank, Lazard, so he is not the sort of person who would typically be expected to support a FTT.
Even more striking is the fact that the paper was published by the Hamilton Project at the Brookings Institution. The founder and main funder of the Hamilton Project is Robert Rubin. Rubin has a long career in the financial sector, including top positions at both Goldman Sachs and Citigroup.
Between his jobs at these two Wall Street behemoths, Rubin held top positions in the Clinton administration, serving as both head of the National Economic Council and Treasury Secretary. There is probably no one who has been more visibly associated with the idea of giving the financial sector free rein than Mr. Rubin. For this reason, it is really remarkable that a paper advocating a FTT would come out of the Hamilton Project.
In the last quarter century, we have seen the idea of a FTT go from a concept being pushed by the radical fringe (Bernie Sanders was one of the few sponsors of a House bill in the early 1990s), to an idea very much in the center of the Democratic Party. In fact, all three of the leading contenders for the Democratic presidential nomination have come out in favor of a FTT.
We’re still far from seeing a FTT get enacted — the financial industry would probably kill to protect their profits — but it is now an idea that is treated seriously in mainstream political debates.
Federal Reserve Board Policy
FTTs are not the only area of economic debate where we have seen a large leftward shift over the last quarter century. As I have touted on prior occasions, the Federal Reserve Board has hugely shifted its attitude on the problem of unemployment. Federal Reserve Board Chair Jerome Powell now explicitly talks about the need to push the unemployment rate as low as possible in order to help the most disadvantaged groups in the labor market.
This follows several decades in which the Fed’s leadership was prepared to largely ignore its mandate to promote full employment. Many wanted to make containing inflation the Fed’s only goal.
This change in perspective, which the labor and community backed Fed Up Coalition did much to advance, has made a huge difference in the lives of millions of people. There were many economists, including many in leadership positions at the Fed, who argued that inflation would begin to spiral upward, if the unemployment rate was allowed to fall to 5.0 percent or lower. They advocated raising interest rates to slow the economy and reduce the rate of job creation.
Fortunately, then Chair Janet Yellen and Jerome Powell, her successor, chose to delay and then limit interest rate hikes, allowing the unemployment rate to continue to fall. With the unemployment rate now at 3.5 percent, and absolutely no evidence of increasing inflation, it’s clear that they made the right choice.
Not only has this drop in the unemployment rate allowed millions more to get jobs, it has hugely improved the labor market for African Americans, Hispanics, less-educated workers, and people with criminal records. In 2015, when the overall unemployment was falling to levels that worried inflation hawks, the unemployment rate for African Americans was near 10.0 percent. Today, it is under 6.0 percent. In 2015, the unemployment rate for African American teens was near 30.0 percent. It is now hovering near 20.0 percent. There would be similar stories for other disadvantaged groups.
While we can’t be satisfied with an African American unemployment rate that is near 6.0 percent, or a teen unemployment rate over 20 percent, this is still an enormously better situation than what we were seeing five years ago. This change in policy at the Fed made a huge difference.
Also, it is important to note that tighter labor markets have made a huge difference in the bargaining power for tens of millions of workers. Prior to 2015, wages for most workers had just been keeping pace with inflation. As the labor market tightened, and employers had to compete to find workers, wages for workers at the middle and the bottom of the wage distribution began to outpace inflation by a bit more than 1.0 percent annually.
Those at the bottom did even better due to hikes in the minimum wage in many states and cities. This wage growth is not great, but most workers have done much better over the last five years than would have been the case if the unemployment rate were still above 5.0 percent.
Back in the 1990s, the centrist Democratic positon was that Social Security needed to be cut. The Democrats did not want to cut as much as the Republicans, and most opposed the privatization of the program, but arguing that benefit levels should be sustained without cuts was seen as a far out position. As recently as 2012 President Obama was seeking a “grand bargain” with Republicans that would have included a change in the cost of living adjustment that would have reduced benefits for long-lived retirees by more than 9.0 percent.
Here too, there has been an enormous shift in the debate. The centrist position in the Democratic Party is now to increase benefits. The debate is over the size of the increase. For example, Senator Warren is proposing to raise benefits by $200 a month, a positon that would have been seen as outlandish back in the 1990s.
The Minimum Wage
Back in the 1980s, the minimum wage was so out of style that the New York Times once ran an editorial saying that the optimal minimum wage was zero. New research in the early 1990s showed that modest increases in the minimum wage did not lead to measurable job loss.
Since then, there has been much additional research showing that considerably larger increases in the minimum wage also do not lead to job loss. In addition, contrary to what many had previously thought (including me) it was possible to not only have substantial minimum wage hikes at the state level, but even at the local level. As a result of this research, many states and cities are now in the process of moving to a $15 an hour minimum wage even as the national minimum wage remains frozen at $7.25 an hour. In the case of Seattle, the minimum wage at large employers is already $16.39 an hour.
This higher wage makes an enormous difference in people’s lives. A full-time full year worker getting $16.39 an hour will make almost $33,000 a year. That compares to just $20,000 a year if they were working for $10 an hour.
Paid Leave and Severance Pay
Another aspect of the 1990s conventional wisdom was that we wanted to place as few restrictions as possible on employers. This precluded items like mandated family leave and sick pay, which had long been accepted practice in other wealthy countries.
Here too there has been enormous progress at the state and local level, even as the federal government has lagged behind. Many states, including California and New York, now require most employers to provide paid family leave and sick days. Cities have also moved ahead, with many progressive cities requiring paid leave in states without such mandates, or have more generous mandates than the ones set at the state level.
New York City is actually close to moving ahead with a statute that would require two weeks a year of paid vacation for most workers. This would be a first for the mainland of the United States, although Puerto Rico has mandated paid vacation for some time. And, just last month, New Jersey became the first state in the country to require severance pay when companies have mass layoffs of more than fifty workers.
In all of these areas we still have a long way to go to catch up with most European countries, however the point is that we are moving in the right direction. It is certainly reasonable to think that with a Democrat in the White House we would see some of these measures adopted at the national level. But even if there is no action at the national level, it is virtually certain that more state and local governments will adopt leave policies and severance pay requirements, when they see it did not result in economic disasters in their neighbors.
Bigger Changes in the Future?
I write pieces like this every few months or so in part to point out the progress that has been made, but also to convince myself that it is possible to move an economic consensus that often seems oblivious to facts and logic. It can be very depressing at times.
The view that the economy has an autonomous logic, independent of policy choices, is very deep. (See this column by E.J. Dionne, who is very decent person and certainly on the liberal side of the political spectrum.) The right, for obvious reasons, would like us to think that the enormous inequality generated by the market is just a natural outcome. The story goes that we can do some tinkering with tax and transfer policy, but we have to be very careful or we will upset the apple cart and destroy the economy’s ability to operate.
Unfortunately, much of the left seems to largely accept this view, with the difference being that they think we can do larger tinkering without upsetting the apple cart. The idea that we can change the workings of the machine itself, so that the market is not generating large amounts of inequality, seems to be off the table with the left as well.
This is one of the reasons I focus so much on patent and copyright monopolies. It should be pretty obvious that these are not natural outcomes of the market, but tools of the government to accomplish specific public purposes. There is also an enormous amount of money at stake. And, in the case of drugs and medical equipment, people’s lives.
It should be possible to get the mainstream of economists to acknowledge the obvious truth that government-granted patent and copyright monopolies are not the free market. I’m sure that one day an economist will be celebrated for discovering this fact in an important new book.
It should also be possible to get economists to accept that having far more doctors in the U.S, would mean lower pay for doctors (you know, supply and demand) and that paying corrupt and/or incompetent CEOs tens of millions of dollars is not in the interest of shareholders. (Yeah, this is my sales pitch for Rigged [it’s free].)
Anyhow, it is possible to change policy debates. It just isn’t easy and it takes a long time.