Why Do New York Times Columnists Keep Swooning for Paul Ryan?

By James Kwak

After David Brooks last year, now it’s James Stewart who has fallen for Paul Ryan’s rugged good looks. He attempts to defend Ryan’s tax proposals against charges that they favor the rich:

“To me it sounds like a proposal to raise [the wealthy’s] taxes by depriving them of cherished ‘loopholes,’ to use the proposal’s word. . . .

“There’s no getting around the fact that a 25 percent rate on the top earners would nearly double Mr. Romney’s effective rate and more than double it for the 101 of the top 400 taxpayers who pay less than 10 percent, assuming the loopholes are indeed closed.”

Continue reading “Why Do New York Times Columnists Keep Swooning for Paul Ryan?” →

Last Ditch Attempt To Save A Little Bit Of Investor Protection In The United States

By Simon Johnson

As it currently stands, the “JOBS” bill now before the Senate would gut investor protection in the United States. The title of the bill is a complete misnomer – anything that weakens investor protection makes it more risky to invest in companies and increases the cost of capital to honest entrepreneurs. (For more background on the bill and links, see this piece.)

Much of the 1930s-era Securities legislation, which served us well for more than 70 years, is about to be repealed in a moment of bipartisan madness.

Almost all attempts to amend the House version of this legislation – and to make it more favorable to investors – have now failed in the Senate, and the “cloture motion” received more than 60 votes (so the bill cannot be filibustered). But Senator Jack Reed (D., Rhode Island) is leading one last charge to make the Senate version more reasonable. Continue reading “Last Ditch Attempt To Save A Little Bit Of Investor Protection In The United States” →

“JOBS” Disaster Looms

By Simon Johnson

The House “JOBS” bill is a thinly disguised repeal of investor protection in the United States. This legislation would help unscrupulous people in the securities industry but it would be bad for nonfinancial businesses – by raising the risks to investors, it would push up the cost of capital for honest entrepreneurs. Investment professionals belonging to the CFA Institute have expressed their serious concerns and strong opposition. Attempts to amend this legislation – and to make it more sensible – failed in the Senate yesterday.

The Senate will vote today on whether to adopt the main provisions of the House bill. Passing this bill would be a major public policy mistake – akin to the disastrous (and bipartisan) deregulation of the financial sector in the 1990s. This kind of excessive deregulation leads to disaster – and to fiscal crisis. (For more background and the historical comparison, see this piece.) Continue reading ““JOBS” Disaster Looms” →

CFA Institute Against the “JOBS” bill

By Simon Johnson

The Senate is due to vote today on the so-called “JOBS” bill – a piece of legislation, originating in the House, which aims to reduce disclosure and other securities law protections for investors (see my review yesterday; a link to HR3606 is here).

Supporters of the law claim that it will greatly increase the number of companies going public – and that this will boost economic growth and job creation. Opponents argue that by weakening investor protection, the risks of investing in start-up companies will increase – there will be more frauds and scams – and this will increase the cost of capital for honest entrepreneurs.

Members of the CFA Institute have an interest in getting this right – this is the “global association of investment professionals” and they make their living by figuring out what is a good investment and what is likely to become a losing proposition. These people also have a lot of expertise on the key issue – which is better for business, weakening investor protections or keeping them in place? Which way are these experts voting?

Overwhelmingly, members of the CFA Institute are against the “JOBs” bill as it currently stands. Continue reading “CFA Institute Against the “JOBS” bill” →

How Long Can We Finance the Debt?

By James Kwak

Everyone should know by now that the Treasury Department can borrow money at historically low rates. That is a major reason why some very smart economists think that the federal government should borrow more money in the short term (i.e., this year and next) and use that money to boost economic growth.

In the medium term (say, the next decade), however, the big question is how long we will be able to finance new government borrowing at such low rates. Today’s low rates are a product of several factors. One is certainly the slow rate of economic growth, in particular the depressed housing market, which has reduced demand for credit. But another factor is the Federal Reserve’s aggressive moves to keep long-term interest rates down; another is foreign central banks’ appetite for Treasuries.

Continue reading “How Long Can We Finance the Debt?” →

A Colossal Mistake of Historic Proportions: The “JOBS” bill

By Simon Johnson, co-author of White House Burning: The Founding Fathers, Our National Debt, And Why It Matters To You

From the 1970s until recently, Congress allowed and encouraged a great deal of financial market deregulation – allowing big banks to become larger, to expand their scope, and to take on more risks. This legislative agenda was largely bipartisan, up to and including the effective repeal of the Glass-Steagall Act at the end of the 1990s. After due legislative consideration, the way was cleared for megabanks to combine commercial and investment banking on a complex global scale. The scene was set for the 2008 financial crisis – and the awful recession from which we are only now beginning to emerge.

With the so-called JOBS bill, on which the Senate is due to vote Tuesday, Congress is about to make the same kind of mistake again – this time abandoning much of the 1930s-era securities legislation that both served investors well and helped make the US one of the best places in the world to raise capital. We find ourselves again on a bipartisan route to disaster. Continue reading “A Colossal Mistake of Historic Proportions: The “JOBS” bill” →

The Fetishization of Balance

By James Kwak

I generally don’t bother reading Thomas Friedman. A good friend gave me a copy of The World Is Flat, and I started reading it. Somewhere in the first one hundred pages Friedman has an extended discussion of workflow software (as a key enabler of globalization) and I realized that he knew absolutely nothing about workflow software, so I stopped reading it and gave it away.

Another friend pointed out Friedman’s op-ed in the Times earlier this week in which he argues for “grand bargains” and “balanced” solutions to, well, all of our problems. For example, he says, “We need a proper balance between government spending on nursing homes and nursery schools — on the last six months of life and the first six months of life.” Despite the nice ring, that’s about as empty a statement as you can make about public policy.

But this is the one that really confused me (and my friend):

“The first is a grand bargain to fix our long-term structural deficit by phasing in $1 in tax increases, via tax reform, for every $3 to $4 in cuts to entitlements and defense over the next decade.”

Continue reading “The Fetishization of Balance” →

Responsible Populism

By Simon Johnson

“Populism” is a loaded term in modern American politics. On the one hand, it conveys the idea that someone represents (or claims to represent) the broad mass of society against a privileged elite. This is a theme that plays well on the right as well as the left – although they sometimes have different ideas about who is in that troublesome “elite.”

At the same time, populism is often used in a pejorative way – as a putdown, implying “the people” want irresponsible things that would undermine the fabric of society or the smooth functioning of the economy.

In Latin America, for example, there is a long tradition of populists falling into bed with a corrupt political elite, and the results invariably include irresponsible macroeconomic policies and various kinds of financial disaster (see “The Macroeconomics of Populism in Latin America,” edited by Rudiger Dornbush and Sebastian Edwards).

In North America, however, the populist tradition has proved much more constructive. More than 100 years ago, hot-button issues included direct election of senators and a federal income tax. None of these demands seem irresponsible today, and achieving those goals through constitutional amendments in the run-up to 1914 in no way jeopardized American prosperity. Continue reading “Responsible Populism” →

Americans Like Regulation

By James Kwak

It’s a well-known fact that Americans oppose government spending in the abstract yet favor virtually every government spending program. For example, last April Gallup reported that 73 percent of Americans blame the deficit on excessive spending and 48 percent wanted to reduce the deficit mainly through spending cuts (and 37 percent equally with spending cuts and tax increases). Only a few months before, however, Gallup also reported majorities opposed to cutting spending on anything—even “funding for the arts and sciences”—except foreign aid.* (This is not an isolated poll; see, for example, Washington Post-ABC News, April 2011, questions 14 and 17.)

Most government spending does go to popular programs like Social Security, Medicare, and Medicaid. I suspected, however, that most Americans would want to cut spending on federal regulatory agencies; I thought that they just overestimated the amount of spending on regulation, which is tiny compared to the large mandatory spending programs. (The Consumer Financial Protection Bureau, for example, last year put in a budget request of around $300 million—less than one-one-hundredth of a percent of total federal spending.)

Continue reading “Americans Like Regulation” →

The Politics of Medicare

By James Kwak

The politics of Medicare were aptly summed up by Brad DeLong last May:

“The political lesson of the past two years is now that you win elections by denouncing the other party’s plans to control Medicare spending in the long run–whether those plans are smart like the Affordable Care Act or profoundly stupid like the replacement of Medicare by RyanCare for the aged–sitting back, and waiting for the voters to reward you.”

This is one manifestation of an important political dynamic, which is an important theme of White House Burning: the smart political bet is to accuse the other side of fiscal irresponsibility while being as irresponsible as possible yourself.

Continue reading “The Politics of Medicare” →

The Koch Brothers, The Cato Institute, And Why Nations Fail

By Simon Johnson

A dispute has broken out between the Cato Institute, a leading libertarian think tank, and two of its longtime backers – David and Charles Koch. The institute is not the usual form of nonprofit but actually a company with shares; the Koch brothers own two of the four shares and are arguing that they have the right to acquire additional shares and thus presumably exert more control. The institute and some of its senior staff are pushing back.

According to Edward H. Crane, the president and co-founder of Cato, “This is an effort by the Kochs to turn the Cato Institute into some sort of auxiliary for the G.O.P.” Bob Levy, chairman of the Cato board, told The Washington Post: “We would take closer marching orders. That’s totally contrary to what we perceive the function of Cato be.”

Far from being just an unseemly row between prominent personalities on the right, this showdown reflects a much deeper set of concerns for American politics and society. And it raises what I regard as the central question of an important book, “Why Nations Fail: The Origins of Power, Prosperity and Poverty,” by Daron Acemoglu and James Robinson that will be published on March 20. Continue reading “The Koch Brothers, The Cato Institute, And Why Nations Fail” →

Greg Mankiw’s Contorted Defense of Mitt Romney

By James Kwak

It’s really hard to defend the carried interest exemption (the one that allows private equity and venture capital partners to pay tax on their share of fund profits at capital gains rather than ordinary income rates). You have to give Greg Mankiw a hand: he sure gave it a good shot in the Times this weekend.

Mankiw’s general point makes a lot of sense. He argues that it’s sometimes hard to distinguish returns from labor and returns from investment, using five examples of people who buy a house for $800,000 and later sell it for $1,000,000. For example:

“Carl is a real estate investor and a carpenter. He buys a dilapidated house for $800,000. After spending his weekends fixing it up, he sells it a couple of years later for $1 million. Once again, the profit is $200,000.”

In this case, although some of Carl’s profit is due to his labor, all of it gets treated as capital gains by the tax code. In a perfect theoretical tax world, you would divide Carl into two people, the investor and the carpenter, and the investor would pay the carpenter some amount for his labor; the carpenter would pay ordinary income tax on that amount (and the investor would deduct it from his taxable profits). But that’s not how we do things.

Continue reading “Greg Mankiw’s Contorted Defense of Mitt Romney” →

Invisible Handouts and Anti-Government Conservatives

By James Kwak

Ezra Klein wrote a column for Bloomberg discussing research by political scientist Suzanne Mettler and some of her collaborators. Mettler studies what she calls the “submerged state”—the growing tendency of government programs to provide benefits in ways that mask the fact that they come from the government—and its implications for perceptions of government and ultimately for democracy.

There are several important lessons to draw from Mettler’s work. The most obvious, which was highlighted by Bruce Bartlett a year ago (and that I wrote about here), is that Americans are hypocrites: many people benefit from government programs, ranging from the mortgage interest deduction to Medicare, yet deny receiving help from any “government social programs.”*

Continue reading “Invisible Handouts and Anti-Government Conservatives” →

Thanks To “Tax Notes”

By Simon Johnson

In my post this morning on dynamic scoring and how to turn the United States into something closer to Greece, I requested that the publication Tax Notes bring an article by John Buckley out from behind their paywall (“Dynamic Scoring: Will S&P Have Company?,” published February 28, 2012.)

The publishers have now done so, for which I would like to thank them – this is a public service that is greatly appreciated. I don’t know how long the article will remain in the open access part of their website, so I strongly advise anyone who cares about the fiscal future of this country to read it now (and tell your friends).

“Dynamic scoring” of U.S. budget proposals would be a disaster. Continue reading “Thanks To “Tax Notes”” →