Category Archives: Op-ed

Software Is Great; Software Has Bugs

By James Kwak

I’m not qualified to comment on the internals of Bitcoin; I’m neither a programmer (OK, Alex, not much of a programmer) nor a computer scientist. But I do know that Bitcoin exists because of software that people wrote, and every means by which we use Bitcoin also operates because of software that people wrote. The problem here is the “people” part—people make mistakes under the best of circumstances, and especially when they have an economic incentive to rush out products. That’s why, while we love what software can do for us, we also like having a safety net—like, say, the human pilots who can take over a plane if its computers crash. This is the subject of my latest column over at The Atlantic. Enjoy.

$100M for Eric Schmidt?

By James Kwak

Over on Twitter, Matt O’Brien wrote:

That inspired me to take a look at the article O’Brien referred to: a column by Steven Davidoff asking why JPMorgan gets pilloried for giving CEO Jamie Dimon $20 million while Google can give Chairman Eric Schmidt $106 million without incurring the wrath of the public.

I went into it thinking I would agree with O’Brien—that there is something worse about lavish Wall Street pay packages than lavish Silicon Valley pay packages. Part of that was home team bias: I spent most of my business career working for companies based in Mountain View, Sunnyvale, Menlo Park, San Mateo, and Foster City (that’s two companies and five office moves). But I ended up mainly agreeing with Davidoff.

I think O’Brien is right on the narrow question of why people are mad: JPMorgan has done a lot of bad things in recent years, while Google’s role in the world is more ambiguous. But at the end of the day, voting the chairman of the board enough money to buy a Gulfstream 650 and an entourage of 550s is not a good use of shareholder money. And it’s shockingly tone-deaf in this age of rising inequality and cuts to food stamps. That’s the topic of my latest Atlantic column.

Non-Lessons of the Financial Crisis

By James Kwak

As the fifth anniversary of the Lehman bankruptcy approaches, the Internet is filling up with reflections on the financial crisis and the ensuing years. My main feeling, as expressed in my latest Atlantic column, is amazement at how little we seem to have learned. Looking back, the period in late 2008 and early 2009, when it was obvious that the financial sector would have to change in important, structural ways, now seems like a naïve, youthful delusion. Sure, there are some new rules around the margins, but for the most part little has changed—not just in the financial sector itself, but more importantly in the political and ideological landscape that shapes regulatory policy.

Of course, this isn’t simply the product of collective amnesia. It’s the result of the fact that ideas are shaped by money and political power. And that’s where little has changed.

Yet Another Proposal To Raise My Own Taxes

By James Kwak

In chapter 7 of White House Burning, we proposed to eliminate or scale back a number of tax breaks that I benefit from directly, including the employer health care exclusion, the deduction for charitable contributions, and, most importantly, tax preferences for investment income. We did not, however, go after tax breaks for retirement savings, on the grounds that Americans already don’t save enough for retirement.

Well, in my latest Atlantic column, I’m going after that one, too. I changed my mind in part for the usual reason—the dollar value of tax expenditures is heavily skewed toward the rich. But the other reason is that the evidence indicates that this particular subsidy doesn’t even do what it’s supposed to do: increase retirement savings. Instead, we should take at least some of the money we currently waste on tax preferences for 401(k)s and IRAs and use to shore up Social Security, the one part of the retirement “system” that actually works for ordinary Americans.

Of course, this isn’t going to happen anytime soon. President Obama proposed capping tax-advantaged retirement accounts at $3.4 million, which is a step in the right direction. ($150,000 would be a better limit, since most people reach retirement with far less in their 401(k) accounts.)* But even that was attacked by the asset management industry as theft from the elderly.

* Yes, I know about the issue of small business owners who only set up accounts for their employees because they want to benefit from them themselves. It’s a red herring. First, if an employer doesn’t have a 401(k), employees can contribute $5,000 to an IRA—and $5,000 is a lot more than most middle-income, small business employees are currently contributing. Second, the right solution would be to default everyone into a retirement savings account instead of relying on employers to decide whether or not to set up 401(k) plans.

Incentive Effects of Higher Wages

By James Kwak

My Atlantic column this week is on a familiar theme: why don’t Barack Obama and Democrats provide an clear alternative vision to the Romney-Ryan state of nature, instead of slowly stumbling along in the Republicans’ wake? But it also brings up a question that I haven’t seen before.

The theoretical argument against higher tax rates is that it reduces the incentive to work because it changes the terms of the tradeoff between labor and leisure. That is, higher taxes reduce your effective returns from labor, while your returns from leisure remain constant, so you will substitute leisure for labor.

In the long term, however, real wages tend to go up; even in the past three decades, which have generally been bad for labor (and good for capital), they’ve gone up by about 11 percent. If tax rates remain constant, that should increase the effective returns to labor, causing people to substitute labor for leisure (i.e., work more). Put another way, you could increase tax rates and keep the tradeoff between labor and leisure constant.

I generally don’t buy these pure theoretical arguments, but my point is that if you believe that higher taxes reduce labor supply through the substitution effect, then you should acknowledge that the effect of higher taxes could be swamped by growth in real wages.

Why Raise Taxes on Poor People?

By James Kwak

My Atlantic column today is on the bizarre fixation that some conservatives have with taxing poor people, pointed out by Bruce Bartlett in his latest column. Here’s one explanation:

The other, even-more-disturbing explanation, is that Republicans see the rich as worthy members of society (the “producers”) and the poor as a drain on society (the “takers”). In this warped moral universe, it isn’t enough that someone with a gross income of $10 million takes home $8.1 million while someone with a gross income of $20,000 takes home $19,000. That’s called “punishing success,” so we should really increase taxes on the poor person so we can “reward success” by letting the rich person take home even more. This is why today’s conservatives have gone beyond the typical libertarian and supply-side arguments for lower taxes on the rich, and the campaign to transfer wealth from the poor to the rich has taken on such self-righteous tones.

Also, in some housekeeping news, I’ve switched to a personal Twitter account, @JamesYKwak. My blog posts should generate tweets in that account; Simon’s should generate tweets in the old account, @baselinescene. I’ll try to aggregate all the stuff I write in various places in my new Twitter stream.

The Baseline Scenario Facebook page should be aggregating both of our Twitter streams, but I had a little difficulty with it on Monday, so who knows. It seems like Facebook changes the way everything works every other Tuesday, so you never know when something will break.

What Do Companies Do with Their Political Spending?

By James Kwak

Whatever they’re doing, it doesn’t seem to be good for shareholders. That’s one conclusion of a new paper by John Coates, a Harvard law professor, which I discuss in today’s Atlantic column (which originally misdated the Citizens United decision, thanks to some faulty proof-reading by me). Coates compares firm valuations with levels of lobbying and contributions by corporate PACs and finds that, outside of heavily regulated industries where everyone lobbies heavily, political activity is associated with lower firm value—implying that it’s more like a CEO perk than like a good investment from the shareholder perspective.

Can We Afford Medicare?

By James Kwak

The conventional wisdom, repeated endlessly by the so-called serious people, is that we can’t afford traditional Medicare and hence it has to be radically overhauled (see Ryan-Wyden for the latest round). But I’ve never seen a convincing argument for why we can’t afford traditional Medicare. Yes, costs are rising as a share of GDP. But in principle, to make the case that we have to reform the program, you would have to argue that revenues can’t rise enough to keep pace—which in most cases, just shows that you don’t want revenues to rise enough.

More specifically, you have to know how big the Medicare deficit is and how fast it is rising. By my calculations, relying mainly on the 2011 Medicare Trustee’s report, the deficit was 1.7% of GDP in 2010 and will be 3.0% of GDP in 2040. So the argument that we can’t afford traditional Medicare relies on the proposition that this 1.3% of GDP is the straw that will break America’s fiscal back. Needless to say, this is nonsense, especially since other tax revenues not related to Medicare will be rising over the same time period, at least under current law. For all the details and sources, see my latest Atlantic column.

Medicare has its problems. But we have choices.

What Good Is the SEC?

By James Kwak

This week’s Atlantic column is my somewhat belated response to Judge Jed Rakoff’s latest SEC takedown, this time rejecting a proposed settlement with Citigroup over a CDO-squared that the bank’s structuring desk created solely so that its trading desk could short it. I think Rakoff has identified the heart of the issue (the SEC’s settlements are unlikely to change bank behavior, so what’s the point?) but he’s really pointing to a problem that someone else is going to have to fix: we need either a stronger SEC or stronger laws. I’d like to see an aggressive, powerful SEC that can deter banks from breaking the law, but we don’t have one now.

Who Wants Tax Cuts?

By James Kwak

Yesterday I wrote an Atlantic column about Republican presidential candidates’ fondness for tax plans that transfer massive amounts of money from the poor to the rich. The main question, to my mind, is why people like Herman Cain and Rick Perry talk about transferring massive amounts of money to the rich when polls show that even a majority of Republicans think the rich should pay more in taxes.

Many of the readers here could probably  have written that column themselves, but it does have a wonderful picture of Cain and Perry in all their well-dressed glory.

The Bush Tax Cuts and the 99 Percent

By James Kwak

I forgot to alert you to my latest Atlantic column, which went up on Monday. To my mind, Occupy Wall Street is a protest movement, and a valuable one, and the often-stated criticism that they should have concrete demands is kind of silly. (See Frank Pasquale’s response, point 5.) I have spent a fair amount of time reading the 99 Percent tumblr, however, and I think the kind of policies that would help the people who describe themselves there are pretty obvious. This is Mike Konczal’s summary:

“Upon reflection, it is very obvious where the problems are.  There’s no universal health care to handle the randomness of poor health.  There’s no free higher education to allow people to develop their skills outside the logic and relations of indentured servitude. Our bankruptcy code has been rewritten by the top 1% when instead, it needs to be a defense against their need to shove inequality-driven debt at populations. And finally, there’s no basic income guaranteed to each citizen to keep poverty and poor circumstances at bay.”

But in my opinion, the preliminary step to getting rich (and reasonably comfortable) people to pay for a better social safety net is to let the Bush tax cuts expire, as I argue in the column. Most importantly, it’s the only inequality-reducing policy I can think of that has any chance of happening in the next year—simply because it only requires doing nothing. How much would it reduce inequality? That’s just the reverse of what the tax cuts did in the first place. (If you can’t read the table, click on it for a larger version.)

Baseline Scenario Goes Glossy

By James Kwak

Simon and I wrote an article for the November issue of Vanity Fair about—well, about a lot of things. It’s about the eighteenth-century rivalry between Great Britain and France, the lessons of the American Revolutionary War, the Hamilton-Jefferson debates (again), and the War of 1812. It’s also about present-day fiscal policy and budgetary politics. The main question we take up is what the Founding Fathers (from the Constitutional Convention through their involvement in the War of 1812) thought about a strong central government, the national debt, and the taxes necessary to pay for them, and what that means for today. All that in less than 3,000 words, so there isn’t a lot of room for all the details.

You can read the article online here.

The Bad Old Days

By James Kwak

There was a time when the main purpose of this blog was to explain just how some government policy or other official action was designed to benefit some large bank under the cover of the public interest. In a bit of nostalgia, I wrote this week’s Atlantic column on the Freddie Mac–Bank of America story reported on by Gretchen Morgenson. It’s clear that Bank of America got a sweetheart deal from Freddie. The question is why. Did Freddie Mac’s people, some of the most knowledgeable people in the country when it comes to mortgages, not realize they were giving away money? (Hint: Probably not.) Did FHFA examiners, some more of the most knowledgeable people in the country when it comes to mortgages, not realize that Freddie was giving money away? (Hint: See above.)

It’s amazing that after three full years of our government trying to give Bank of America money at every possible opportunity, it’s still a basket case. Now it’s charging people $5 per month to use their debit cards. Yes, this is a predictable response to new Federal Reserve regulations limiting debit card fees. But it’s easily avoidable: just find another bank. (Neither of mine charges me debit card fees.) Not every bank out there is still trying to pay for the Countrywide acquisition.

Citizens United and Corporate Political Spending

By James Kwak

Today’s Atlantic column is about corporate political spending in the wake of Citizens United and what, if anything, can be done about it. A group of corporate and securities law professors has petitioned the SEC to write rules requiring companies to disclose their political spending, just like they have to disclose their executive compensation today. As usual, I’m not too optimistic about what disclosure can achieve, especially disclosure in SEC filings or proxy statements: who reads those things, anyway? But it’s better than nothing, and with the current makeup of the Supreme Court, nothing is just about what we’ve got now.

Steve Jobs and Me

By James Kwak

I took a short break from fiscal and monetary policy to write an Atlantic column about Steve Jobs’s retirement and what it means for the eternal debate over whether and when founder CEOs should be replaced by experienced outsiders. Along the way, I read some interesting papers on the relationship between founder CEOs and stock market returns or company valuations.

I should clarify that I’m no Apple fanboy. I use a MacBook Pro, which I consider almost a necessity given how much time I spend with my computer and the abominable state of Windows. But I don’t like the “my way or the highway approach” when it comes to hardware; I wish it had a Backspace key and a deeper keyboard, among other things.

I understand that controlling the hardware ensures a more consistent user experience and less customer dissatisfaction, but allowing hardware manufacturers to compete certainly has its advantages. Look at Android, for example: I use an Android phone, and even if the iPhone is still the best phone for the median customer (a highly debatable point), the proliferation of Android models means that for most people, there is an Android phone that is a better fit. Although I was an early iPad adopter, I’m generally disappointed with it. It’s great for playing Plants vs. Zombies, checking the weather, or watching a TV episode, but it’s too slow and the browser is too weak to do anything serious. And the fact that you can’t swap out the default Apple keyboard (as far as I know) is a classic example of the problem with the Apple approach: the thing doesn’t even have arrow keys (yes, I know how to use the magnifying glass), and every Android keyboard does a better job with special characters.

Still, there’s no question Steve Jobs is a genius, and nothing like the empty suits who parade through the Times‘s Corner Office column who talk about nothing but hiring, motivation, and teamwork.

Update: Sorry, I meant to say Delete key, not Backspace key.