Category Archives: Commentary

Connecticut Public Retirement Plan Passes, More or Less

By James Kwak

A couple of weeks go I wrote an op-ed about a proposal in Connecticut to create a new tax-preferred retirement plan that would, by default, include almost all workers who don’t currently have access to an employment-based plan (like a 401(k)). That proposal took some major steps forward when it was included in an end-of-session bill that was passed by the Connecticut legislature. As it stands, the bill authorizes a feasibility study and implementation plan for the new retirement option, which must contain a number of features (default enrollment, portability, default annuitization at retirement, a guaranteed return to be specified at the beginning of each year, etc.).

As I said in the op-ed, this is a decent step forward that will increase the amount of retirement saving by low- and middle-income workers, put those savings in a relatively low-cost, low-risk investment option, and spread some of the benefits of the retirement tax break to those workers (although you do have to pay income tax to benefit from the deduction). One of the claims made by the plan’s opponents is that it cannot be managed for less than the 1 percent of assets mandated by the bill, but that seems laughable to me: the State of Connecticut’s current retirement plans for its employees have administrative costs of 10 basis points, plus investment expense ratios as low as 2 basis points (for index funds from Vanguard). This is a slightly different animal, since the idea is to invest in low-risk securities and buy downside insurance, but still it doesn’t follow that you have to pay more than 1 percent for asset management is.

Connecticut is one of several states, most famously California, that are in the process of implementing these public retirement plans to cover people who are left out by the current “system,” which favors people who work for large companies.   They can solve several of the common problems with 401(k) plans: nonexistence (at many employers), low participation rates, investment risk, pre-retirement withdrawals, lump-sum distributions at retirement, to name a few.

But they can’t solve the underlying problem, which is that many people just don’t make enough for saving 3 percent of their salary each year to make much of a difference. A big constraint is that the Connecticut plan was designed to not cost taxpayers any money: administrative fees will come out of plan balances, and the insurance is there to limit the chance that the state will have to bail out the plan in the future. If we really want to protect people against retirement risk, we need to actually spread risk by making either the funding mechanism or the benefit formula progressive, which means we can’t regard the idea of the untouchable individual account as sacrosanct. (See my recent paper for more on this topic.) That’s what Social Security does, and it’s vastly popular. But in today’s political environment of me me me me me, and so we’re stuck with treating symptoms.

Tax Policy Revisionism

By James Kwak

In an otherwise unobjectionable article about The Piketty, the generally excellent David Leonhardt wrote this sentence: “In the 1950s, the top rate exceeded 90 percent. Today, it is 39.6 percent, and only because President Obama finally won a yearslong battle with Republicans in early 2013 to increase it from 35 percent.”

Is “yearslong” really a word?

But that’s not what I mean to quibble with. It’s that “yearslong battle with Republicans.”

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The “Chicken(expletive) Club”

By James Kwak

Update: See notes in bold below.

The only “Wall Street” “executive” to go to jail for the financial crisis was Kareem Serageldin, the head of a trading desk at Credit Suisse, according to Jesse Eisinger in a recent article. Serageldin pleaded guilty to—get this—holding mortgage-backed securities at artificially high marks in order to minimize reported losses on his trading portfolio.

Now if that’s a crime, there are a lot of other people who are guilty of it. In fact, a major premise of the federal government’s crisis response strategy was exactly that: allowing banks to keep assets at inflated marks in order to pretend they were solvent when they weren’t. FASB changed its rules in April 2009 in order to make it easier for banks to inflate their marks. And the Obama administration’s “homeowner relief program” was designed to allow banks to delay realizing losses on their mortgage loans by dragging out—but generally not preventing—foreclosures. (Remember “foam the runway”?)

Combine Serageldin’s story with the story of the vigorous prosecution of Abacus Federal Savings Bank—a little Chinatown bank that, if anything, was probably allowing its borrowers to underreport their income on loan applications—which Matt Taibbi tells in the first chapter of his latest book, and the picture you get isn’t pretty. It’s a picture of the immense resources of the American criminal justice system being deployed against bit players, with no consequences for the people responsible for the financial crisis. The judge in Serageldin’s case even called his conduct “a small piece of an overall evil climate within the bank and with many other banks.”

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The Conspiracy Behind the B of A “Mistake”

By James Kwak

Some very clever people deep in the bowels of Bank of America’s accounting and regulatory compliance departments came up with a clever strategy to show, once and for all, that their bank is too big to manage. On Monday, the bank admitted that it had misplaced $4 billion in regulatory capital because of an error in accounting for changes in the value of its own debts. Coming less than two months after Citigroup misplaced $400 million in cold, hard cash in its Mexican subsidiary, this latest mixup is clearly part of a concerted campaign by employees of the big banks to definitively prove that their top executives have no idea what is going on.

This shadow lobbying campaign can be traced back to its origins in the LIBOR scandal (“Let’s rig the world’s largest market and see if Vikram Pandit notices.”) and the London Whale trade (“Let’s make a colossal bet on the relative values of different corporate bond indexes and see if Jamie Dimon notices.”). The only possible explanation for this seemingly never-ending stream of embarrassing disclosures is the existence of a conspiracy, orchestrated by some of the smartest bankers in the world, designed to broadcast to the world the message that regulators and politicians somehow failed to take from the financial crisis: the Masters of the Universe can’t even figure out what’s going on four floors down in their own buildings. The Bank of America accomplices even managed to miscalculate the bank’s regulatory capital for five full years before tipping off their bosses, showing the premeditation behind their scheme.

Or, the other possibility is that the banks are both incompetent and unmanageable. But that can’t be true, can it?

I’m Shocked, Shocked!

By James Kwak

Technology-land is abuzz these days about net neutrality: the idea, supported by President Obama, (until recently) the Federal Communications Commission, and most of the technology industry, that all traffic should be able to travel across the Internet and into people’s homes on equal terms. In other words, broadband providers like Comcast shouldn’t be able to block (or charge a toll to, or degrade the quality of), say, Netflix, even if Netflix competes with Comcast’s own video-on-demand services.*

Yesterday, the Wall Street Journal reported that the FCC is about to release proposed regulations that would allow broadband providers to charge additional fees to content providers (like Netflix) in exchange for access to a faster tier of service, so long as those fees are “commercially reasonable.” To continue our example, since Comcast is certainly going to give its own video services the highest speed possible, Netflix would have to pay up to ensure equivalent video quality.

Jon Brodkin of Ars Technica has a fairly detailed yet readable explanation of why this is bad for the Internet—meaning bad for the choices available to ordinary consumers and bad for the pace of innovation in new types of content and services. Basically it’s a license to the cable providers to exploit a new revenue source, with no commitment to use those revenues to actually upgrade service. (With an effective monopoly in many metropolitan areas and speeds already faster than satellite, the local cable provider has no market pressure to upgrade service, at least not until fiber becomes more widespread.) The need to pay access fees will make it harder for new entrants on the content and services side; in the long run, these fees could actually be good for Netflix, since it won’t have to worry as much about competition. The ultimate result will be to lock in the current set of incumbents that control the Internet, ushering in the era of big, fat, incompetent monopolies.

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Where Do You Want to Be Born?

By James Kwak

That seems like a nonsensical question. Of course, each of us born where he or she was born, and we didn’t have much choice in the matter. But, philosopher John Rawls asked, if you lived behind a veil of ignorance, not knowing what position you would occupy in the socio-economic hierarchy, what rules would you choose to govern society?

Rawls was reasoning from a situation in which people could decide on any set of rules.* In the real world, the set of existing countries gives us a limited set of options to choose from; among those, if you didn’t know if you were going to be rich or poor, where would you choose to be born? On Friday, I was discussing this question with a scholar who is in the United States for a year, and one thing we noted was the instinctive tendency of many Americans to assume that we must be the best at everything and have the best of everything in the world (best health care, best Constitution, best hockey team, etc.).

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Rumsfeldian Journalism

By James Kwak

I still have Nate Silver in my Twitter feed, and I used to be a pretty avid basketball fan, so when I saw this I had to click through:

In the article, Benjamin Morris tries to analyze how “bad”* the Detroit Pistons of the late 1980s and early 1990s (Bill Laimbeer, Rick Mahorn, Dennis Rodman, etc.) were, with full 538 gusto: “That seems like just the kind of thing a data-driven operation might want to quantify.” But the attempt falls short in some telling ways.

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