Writing recently in The Financial Times, the renowned novelist Margaret Atwood nailed the lasting effects of the recent – and some would say continuing – global financial crisis. “Those at the top were irresponsible and greedy,” she wrote; consequently and with good reason, very few people now trust our banking elite or the system they operate. Even Cam Fine, president of Independent Community Bankers of America, is now calling for the country’s largest banks to be broken up.
But the distrust goes deeper and further, just as Ms. Atwood implies. Many people understand perfectly well that the government let the bankers take excessive risk. There was a high degree of group think among prominent officials in the United States and top banking executives in the run-up to the crisis of 2008. As chief economist at the International Monetary Fund from March 2007 through August 2008, I observed some of this first hand.
And politicians are also tarnished. They appointed the officials who failed to regulate effectively. And in 2007-8 the politicians decided to save the big banks – and most of their managers, boards of directors and shareholders – both under President George W. Bush and under President Obama. Now attention turns toward the federal government’s fiscal problems, including the complicated mess that is our tax system. Politicians say they want “tax reform,” but can you trust them to do this in a responsible manner, without falling captive to particular special interests or to otherwise undermine the general social interest?
The latest indications from Mitt Romney are not encouraging. Mr. Romney is proposing to implement a tax overhaul that he says would be revenue neutral. But his actual plans amount to cutting tax rates, particularly for high-income people, while not closing enough loopholes to make any difference (see this assessment by my colleague and co-author James Kwak, or this take by Matthew O’Brien of The Atlantic).
At the same time, President Obama is focused on increasing taxes for relatively well-off Americans. Mr. Obama wants to make the Bush-era tax cuts permanent for people earning less than $250,000, while not extending them for people with income above that level. What exactly will control the trajectory of deficits and debt in that scenario?
Perhaps we should trust our politicians to control future health-care spending, even though none of them can specify exactly how this should be done. But what is really likely to happen given that health-care providers – hospitals and doctors — are a powerful lobby, while insurance companies may be even stronger.
All significant loopholes, including the tax exemption of employer-provided health benefits and the tax deductibility of mortgage interest payments, will be defended fiercely by powerful special interests.
Top military officials seem willing to curtail spending, but members of Congress frequently resist base closings and the cancellation of weapons programs. President Eisenhower famously warned against the military-industrial complex; perhaps we should update that to acknowledge that it’s the industrial-political complex that’s the danger.
The financial crisis blew a giant hole in our budget and, with good reason, greatly undermined confidence in our political elite. Gridlock in Washington has reached a new peak – President Obama proposed the Buffett Rule, which would have raised a very small amount of additional revenue by creating a minimum tax rate of 30 percent on all income over $1 million, and the Republicans immediately blocked consideration of it in the Senate.
Most of what poses as “tax reform” in Washington today is actually tax reduction. With our public finances in their current state, this is the last thing we need. The idea that reducing taxes “pays for itself” through higher growth is just wishful thinking; in our new book, James Kwak and I debunk this in part by citing the research of Greg Mankiw, former chairman of the Council of Economic Advisers under George W. Bush and a key adviser to Mr. Romney. Yet Mr. Romney and Mr. Obama are likely to compete in November partly on the basis of their tax reduction proposals.
May we hope that there are ways to bring our national debt under control? Prospects are not so gloomy, for two reasons.
First, if true gridlock prevails, the Bush-era tax cuts will expire at the end of this year. Whatever happens in the November general election, the Democrats and the Republicans would need to agree in order for these tax cuts to be extended. It is quite possible that this will not happen.
That’s a big fiscal adjustment, to be sure. But it could well be buffered by a temporary payroll tax cut, linked to employment relative to population. As employment recovers, the payroll tax cut would fade away.
Second, one day soon the private sector will wake up to the fact that rising health-care costs are undermining the American economy, and making it much harder to earn a profit.
With money-driven politics, the only way to fight a lobby is with a bigger lobby. American businesses are typically reluctant to trespass into someone else’s sector. But they will do it when their own bottom line is at stake – as, for example, when they resist various forms of protectionism.
Health-care costs are not under control; we pay more for the same or less-good services over time; this is like the worst kind of taxation. In 20 years, the adverse impact of health-care costs of businesses will be much worse than any negative effects of taxes.
But don’t wait for the politicians to take this on. The problem is far too important and that route will take too long. Talk instead to private-sector executives and entrepreneurs. Persuade them that health-care costs need to be brought under control, and force them to think about how they can push the health-care industry in this direction.
Don’t leave banking regulation to be decided by the banks. And don’t let the health-care industry control the discussion on what needs to be changed in cost of the delivering medical services.
Cam Fine is now willing to take on the big banks – he should be commended and supported more broadly on this basis. By working on this issue at the highest political level, he can help restore grass roots confidence in community banking.
Who within the private sector is willing to take on the healthcare lobby? Who will take the lead on restoring trust in our market-based economy more broadly?
An edited version of this post appeared this morning on the NYT.com’s Economix blog; it is used here with permission. If you would like to reproduce the entire post, please contact the New York Times.
The Baseline Scenario 
Its been proved that humans have a inner greed which only expands as their perceived wealth increases. What needs to be done is to have the free mkt choose winners and losers, rather than everyone picking on the free mkt. This will eventually be offset by the time police, but replaced with an even speed dier set of greed mongers, not yeilding until the puppet master thanks them for the all the work they did to help build the place, but when their services are no longer needed they fall to the ground as the almighty one, cuts their strings. Make no mistake about it, the requirements which must be displayed to convince politicians of the difference between doing good and making money, are far beyond what the public can offer. This keeps mr./mrs politician in the driver seat, and in full control of your trust.
‘Don’t leave banking regulation to be decided by the banks. And don’t let the health-care industry control the discussion on what needs to be changed in cost of the delivering medical services.’
I thought you were a Stiglerian and understood regulatory capture.
Historically, we have seen many gridlocks of this kind, in which powerful interests defeat what seems like obvious need for reforms. Yes, financial engineers and pols are tarnished, but the entire social structure is also tarnished by exploding inequality (of both income and wealth, which are different), which the data says is getting worse. Historically, such gridlocks get worse and worse until they resolve with blood in the streets.
“Top military officials seem willing to curtail spending, but members of Congress frequently resist base closings and the cancellation of weapons programs. President Eisenhower famously warned against the military-industrial complex; perhaps we should update that to acknowledge that it’s the industrial-political complex that’s the danger.”
The story is that when Eisenhower prepared the speech, which he delivered as his parting address after eight years in the White House, the text read “military-industrial-Congressional complex.” He decided to cross out the word Congressional, as it apparently was too controversial.
So the update for which you call has a long pedigree, if you look to the shadows surrounding Eisenhower’s speech, and I should think it greatly overdue for reinclusion in our public rhetoric.
Oh for the innocence of that day when implying something so disheartening about our elected federal officials was considered so controversial that the public would be crestfallen if told of it.
I have to go back to the question of why do we even have taxation when the relationship between the Federal Reserve Board and the USA Treasury is such as it is – FIAT $$$$ and fractional reserve banking.
It is crystal clear that the tax code is nothing more or less than social engineering. And it is a clear extraction of wealth from the individual human being who DID raise themselves up by their boot straps!
Taxes are a way to take it ALL from everybody – a Ponzi scheme to fund perpetual war. It’s sadistic to release just enough $$$$ into the system to manufacture what you want manufactured and then yank it all back – am I missing something in the big picture here?
Simon wrote: “Who will take the lead on restoring trust in our market-based economy more broadly?”
Trust is key to both taxation and health care, I think. Once this precious attribute has gone missing from perfidy, malfeasance, corruption, and criminality, only a quantum shift in ELITE-behavior, and resultant attitude adjustments can begin to restore it.
I fail to see this happening anytime soon, so it is reasonable to expect further erosional degradations, which spells more unhappiness and legitimate grievance among WE THE PEOPLE…..a quaint notion now, at best.
3 interesting stories, I think very worthy of our good blog hosts, Misters Kwak and Johnson, taking their time to read.
Medicare: http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2012/04/18/national/w074845D58.DTL
Healthcare generally: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2012/04/18/BAVD1O4OEB.DTL
5 percenters “tax us” rally:
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2012/04/18/BU551O4NV8.DTL&tsp=1
@woop – We The People need to keep rattling our war sabers, so to speak.
It IS working. You can tell by how many deniers are going hysterical – claiming power over others that they absolutely no longer have!
So rattle and hum and keep doing that along with embedding the ENORMOUS list of ways that We The People have compiled that shows the BETTER way to do it – ALL of it.
Unions, those that are left, should crunch their own numbers. There is PROOF in that MATH that the rise in CRIMINAL global gangs embedded in USA corps is proportionate to the decrease in HONEST LABOR Unions.
And R&D scientists need to Unionize themselves now, before the election, and back the Third Party Candidate.
@ Annie, correct….we “squeaky wheelers” are an implacable bunch and make for indomitable foes……and I for one am not going down without a fight.
“Hysteria is the residual of evil machinations”, a new quotation from Chairperson Woo.
In my opinion, remaining Nazis (OP Paperclip. among several definitions) following the end of WW 2 should never been allowed to rise in leadership positions in government and industry here, but incarcerated accordingly for their collective crimes against humanity. It seems, although I can’t empirically demonstrate this, that such actions only lends to spread toxicity, throughout. We’re still paying for this strategic error, and lapse of moral judgment.
That criminal global gangs are completely out of control is so apparent, you have to be naive or dumb not to see it. Private yachts retailing for $300 million USD $$$$ come with a heavy human price tag.
As for unionization, collective bargaining, labor contracts, the rights of workers, including R & D Scientists such as yourself, I am completely
for this, and this won’t ever change.
Simon, I had no idea you were so down on the AMA, big pharma, and that entire layer of HMO and hospital bureaucracy. The last time I heard you on NPR, you were very careful to not make any of the tough choices, but instead to frame the questions in ways that precluded political side-stepping. That is, force the politicians to make a few tough choices.
Of course I jest, but you are coming alarmingly close to a lack of tact, at least in some circles, most especially in the Department of Propaganda.
Competition only keeps prices low when the supply of healthcare is not artificially restricted through such anti-competitive practices as limited medical school admissions, preventing the negotiation of better prescription drug prices for various govt entities. Ultimately, however, health care is something we all need eventually (except for those that pass abruptly by disappearing into crevasses, being abducted by aliens, drowning at sea, etc.), and so the provider has the sick client in an untenable position once sufficient urgency presents itself. By that I mean that if you are sick enough, you’ll pay whatever you can to get better. Warren Buffet’s billions may not save him from prostate cancer, for example.
We are too far along to avoid some type of collapse in coverage for a great many. I wonder if devaluing the dollar was the price to be paid for undoing the New Deal? (several leaps involved in this elliptical conclusion)
@Annie: “Taxes are a way to take it ALL from everybody – a Ponzi scheme to fund perpetual war. It’s sadistic to release just enough $$$$ into the system to manufacture what you want manufactured and then yank it all back – am I missing something in the big picture here?”
Annie do you have a blog of your own? If so, I’d like to know the link. The issues you raise need a far deeper conversation; such a conversation is not setup to happen here.
@Dan – if I had a blog, it would be hacked in less than a NYC minute :-)
If you are brave enough to give me your contact info on this blog, I’ll definitely be in touch.
Annie: do you have a website?
@Dan – no website :-)
No tapatalk, tweet account, internet TV, and no supersized phone connected stuff….I connect at a time and place of my choosing – which is defintely not all the time! As The Who sing, “….it’s only teenage wasteland…they’re all wasted….”.
Every email account I have is full of spam – can’t shake the Nigerians from my AOL account telling me that the FBI has millions of dollars in customs at JFK for me and other equally ridiculous stuff, got tired of forwarding those emalis to the FBI, Hotmail account is Swiss and Chinese monitored, and recent gmail account is ad city – I type in a word like “skirt” in an email and new ads appear across the top for buying a skirt…
Wasted teenagers doing math for the world, what could go wrong there?
Everything would be hacked in seconds – I picked up internet poltergeists back in the 1990s – long story about CIA and *religion*….
I see you are reticent, also :-) How about this , Per Kurowski and I are friends on Facebook :-)
Annie: That sounds okay. I don’t use facebook, though I do have something there, because I say okay to friends and family when asked to be a friend. I also use Skype as danpalanza, which the world already knows.
re: FaceBook and the entire “Matrix” for that matter, seems like the *evil* that was being discussed in this Bill Moyers conversation is more than just alive and well, the *theory* is FUNDED while the rest of *reality* is not:
“WIESEL: Not even an animal, but an object. Because what they tried to do- you know, I believe, in general, they had a theory. They really wanted to create a universe parallel to our own. They wanted to reinvent creation. And in that universe, in that creation, a new language was invented, a new attitude towards human being, a new God. An S.S. man was God. We had no right to look at an S.S. man in the face, because you cannot look into God’s face and remain alive. And therefore, in their concept of the universe, we were subhuman, unworthy of living. So what did they do? They shrank everything. Let’s say, from the universe, we went to a country and a country to a town, from a town to a street, from a street to an apartment, apartment to a room, from the room to the cellar, from the cellar to the train. It’s always smaller and smaller — from the train to the gas chamber. And then the person, who was first a person, became a prisoner, and the prisoner became a number.
MOYERS: And the number became an ash.”
Still can’t figure out why the CEO of FaceBook is on the top 10 global billionaires list – back in 1991 when the two were having this conversation – the “parallel universe” was just another *theory*…another *ism*…
As The Who song goes, “…meet the new boss, same as the old boss….” The victim becoming the abuser….