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Bankers Could Go To Jail Print
Wednesday, 25 June 2014 04:19

Morning Edition had a strange piece discussing how regulators can punish banks for breaking the law. The piece focused on the various fines and regulatory measures that can be imposed as penalties when banks are found to have broken the law. Remarkably it never considered the underlying logic of the punishment and the likely deterrent effect on criminal activity.

While banks are legal institutions, ultimately it is individuals that break the law. The question that any regulator should be asking is the extent to which the penalties being imposed will discourage future law breaking. As a practical matter, the immediate victims of the measures mentioned in the piece are banks' current shareholders. Since there is often a substantial period of time between when a crime is committed and when regulators discover it and succeed in imposing a penalty, the shareholders facing the sanction will be a different group from the shareholders who benefited from the original crime. This makes little sense either from the standpoint of justice or from the standpoint of deterring criminal activity by bankers.

The imposition of large fines may cause current shareholders to demand the executives who broke the law be fired, but in many cases they will have already moved on to other jobs or retired. In the case of the fraudulent loans that were passed on in mortgage backed securities (MBS) in the housing bubble years, most of the top executives had already left their banks by the time actions were brought by the Justice Department.

In this case, they made enormous amounts of money by breaking the law. The financial crisis may have caused them to retire or leave their banks somewhat sooner than they would have preferred, but almost all of them come out as net gainers from their actions. 

The one sanction that would clearly be effective in deterring bankers from breaking the law would be putting them in jail for breaking the law. It is likely that the prospect of spending several years in prison, along with fines taking away most of their monetary gains, would provide a serious disincentive to bankers who might otherwise break the law. The Justice Department could have pressed cases by showing that top officials in banks had good reason to believe that many of the mortgages they were passing along in MBS were fraudulent.

It is likely that top executives at major investment banks had some knowledge that many of the loans they were securitizing were fraudulent, since there were numerous accounts in the business press about bad loans. There were also widely circulated jokes about the quality of these loans. (It was common to talk about "NINJA" loans, referring to loans where the borrower had no income, no job, and no assets.) It is likely that the top officials at these banks had at least as much knowledge of the loans their banks were securitizing as the people writing about them in the business press. (Deliberately passing along fraudulent loans is fraud.)


The Inner Protectionist Comes Out for the Export-Import Bank Print
Tuesday, 24 June 2014 04:14

Suppose we proposed giving President Obama the option to put modest tariffs, say 2-3 percent, on imports of various categories of goods and services, if he felt it was important for the economy. Every right-thinking person would denounce this as crude protectionism. The argument for the export-import bank is essentially the same as the argument for selective tariffs.

The big difference is that all sorts of people who would be among the protectionist denouncers are making the case for the Ex-Im Bank. Today's effort comes from Joe Nocera.

His story begins, "In the real world, markets aren’t perfect." He then goes on to tell us that the Ex-Im Bank doesn't just help Boeing sell planes, it also helps thousands of small businesses export their goods.

Let's get out President Obama's selective tariffs. Suppose he imposes a 3 percent tariff on planes and aircraft parts. Defenders of the Obama tariffs will point out that this tariff is not only helping Boeing, but hundreds of small businesses that provides parts and services for these planes. See, in the real world, markets aren’t perfect.

We can point out that the government is actually making money off these tariffs, just like it does with the loans provided through the Ex-Im Bank, what's the problem?

At this point our free traders would jumping up and down yelling that we are paying higher prices for planes because of the tariffs. The government may be making money, but consumers are paying the price.

That's a good argument, but if our free traders have taken intro economics they would know that by diverting capital to the winners picked by the Ex-Im Bank, we are raising the price of capital for other firms. (Increased demand leads to higher prices.) This means that all the small businesses that are not privileged with subsidies from the Ex-Im Bank are now penalized by paying higher interest rates than would otherwise be the case.

In fact, we could actually treat interest rate subsidies and tariffs as interchangeable forms of protection. We can tell the plane and aircraft industry that it will have the option of either a 3 percent tariff on imports or a 3 percentage point reduction (this may not be the exact number) on the interest rate it pays on borrowing by getting loans through our protectionist bank. Is everybody happy now?

(In fairness, in the current economic environment of zero short-term interest rates and considerable unemployment, the impact of subsidized loans on borrowing costs for others would be essentially zero. However it is also easy to show that protectionist measures would increase output and employment in the current economy.)

Anyhow, it is possible to make an argument for the Ex-Im Bank, but it is an argument that people who like to boast about being free-traders should be embarrassed to make. See you at the Neanderthal dance.


Greg Mankiw Says We Need Rich People Because They Won't Spend Their Money Print
Monday, 23 June 2014 13:43

That's basically the punch line in a column telling us Thomas Piketty is wrong to worry about rising inequality. After a long digression on motivations for saving among the very rich, Mankiw tells readers:

"When a family saves for future generations, it provides resources to finance capital investments, like the start-up of new businesses and the expansion of old ones. Greater capital, in turn, affects the earnings of both existing capital and workers.

"Because capital is subject to diminishing returns, an increase in its supply causes each unit of capital to earn less. And because increased capital raises labor productivity, workers enjoy higher wages. In other words, by saving rather than spending, those who leave an estate to their heirs induce an unintended redistribution of income from other owners of capital toward workers."

To summarize, the story is that by saving rather than spending their money, rich people will make more capital available to firms to invest, thereby raising productivity and wages.

There are two important problems with this story. First, we are operating well below the economy's potential level of output and are likely to remain below potential for many years into the future according to most projections. This is the story of "secular stagnation" that even folks like Larry Summers have embraced in recent years.

In a context of secular stagnation, more saving is harmful. If people save rather than consume there will be less demand in the economy and less employment. If we think that secular stagnation is likely to be a persistent problem, then the fact the rich save more of their money than everyone is bad news for the economy. It will slow growth and make us all poorer.

The other point is that moderate income and middle income people did actually use to save a larger share of their income. Back in the days when wages were keeping pace with productivity growth, savings rates were considerably higher than they have been in the last two decades when the wealthy got most of the benefits of growth. It tends to be the case that people save a larger share of their income when their income is rising rapidly. This means that we don't need rich people to not spend. Moderate and middle income people will also save a substantial portion of their income during prosperous times.


Insurance Policies for Profit: Will Wall Street Boys Ever Be Able to Survive Without Taxpayer Handouts Print
Monday, 23 June 2014 09:45

We all know how hard it is for Wall Streeters to get by in a market economy, but can't we try a little bit of tough love to see if we can't wean them away from the public trough. The newest absurdity is the insurance policies that many large companies take out on their employees in order to game the tax system.

Many of us might have been led to believe that these "dead peasant" policies had been eliminated with a 2006 change in the tax law. But no, the NYT tells us that they are still there. Remarkably, the paper doesn't understand the issues involved at all. It tells readers:

"But critics say it is immoral for companies to profit from the death of employees, while employees themselves do not directly benefit."

Well some critics might be concerned about the morality of this practice, but the more obvious complaint is its economic absurdity. The article goes on:

"Companies and banks say earnings from the insurance policies are used to cover long-term health care, deferred compensation and pension obligations."

Okay, that's it -- everything we need to know is right there. Insurance companies don't give away money. Why are there "earnings" from these insurances policies that are available to "cover long-term health care, deferred compensation and pension obligations." The answer is that these policies are tax subsidized.

The question then is why are taxpayers subsidizing such absurd insurance policies? If we want to subsidize "long-term health care, deferred compensation and pension obligations," there is a very simple way to do it, subsidize long-term health care, deferred compensation and pension obligations. That way we would not waste money supporting the intermediaries who undoubtedly collect high fees and make high salaries and bonuses in the process.

Yes, but that would meet cutting out the insurance industry and we know the boys and girls in the industry can't be expected to make their way in a market economy without a big helping hand from the government. At least they aren't getting food stamps.

News for the Wall Street Journal, Countries Tend to Grow Faster When Coming Out of Recessions! Print
Monday, 23 June 2014 09:25

When economies have lots of excess capacity and idle workers, as is the case following a recession, they tend to grow very rapidly. When they are near their potential level of output growth tends to be slower.

This is why the United States economy was able to grow at a 5.6 percent rate in 1978 or a 7.3 percent rate in 1984. In both cases the economy was operating far below its potential so it had lots of room to grow simply to get back to potential. Once it reaches potential, an economy can only grow at the rate of labor force growth plus the rate of productivity growth.

If the Wall Street Journal understood this simple fact it might not have tried to imply that Japan faces some economic disaster because it is projected to have a lower rate of growth in 2015 than the other major western economies. Japan's economy is much closer to its potential than most of the other economies on the list.

Japan's unemployment rate is under 4.0 percent. And the percentage of prime age people (ages 25-54) who are employed is now 81.9 percent, 1.3 percentage points above the pre-recession level. By comparison in the United States employment among prime age workers is still down by 2.5 percentage points from pre-recession levels at 76.4 percent. Given this difference in where these economies are in relation to their potential output it would be very surprising if the U.S. economy were not growing more rapidly.

The piece also implies that a low growth rate is a major problem. Economists usually look at per capita GDP, that is why they generally think that Denmark is wealthier than Indonesia. Japan's population is shrinking at the rate of roughly 0.1 percent annually. By contrast, the U.S. population is growing at a rate of 0.8 percent annually. This means that, on a per capita basis, the 1.0 percent growth projected for Japan is equivalent to 1.9 percent growth in the United States. That is roughly the long-run potential growth rate that many analysts now project for the United States.

Putting Big Numbers in Context: It's Not Hard Print
Monday, 23 June 2014 04:38

The Washington Post had a piece discussing a proposal to increase access to child care. The piece told readers the proposal would cost $20 billion a year. It then added this could:

"be financed through a 0.2 percentage-point increase in payroll taxes, which advocates say equals $72.04 a year for the average female worker."

While the $20 billion figure likely would mean little to most Post readers since few have much sense of how large this is relative to the budget or their tax bill, most readers likely have a clear idea of what a 0.2 percentage point increase in the payroll tax means. This simple addition to the article conveyed essential information to readers that would have been missed if the article had only reported the $20 billion figure.

Now why can't news stories do this all the time?


Addendum: I see from comments that the calculation here almost certainly refers to the earnings of the median female worker and not the average. Thanks for catching this.

Patent Monopolies Cause Corruption: #56,897 Print
Monday, 23 June 2014 04:25

Every economist knows that when you put a 20 percent tariff on imported clothes it leads to inefficiency and corruption. For some reason they don't seem to know that when you give out patent monopolies that can raise prices by 2000 percent or more above the free market price that it leads to big-time inefficiency and corruption.

Reality is working hard to teach economists. Today the Washington Post had an article reporting on how many hospitals appear to be profiting from a program that allows them to buy drugs at a discount from the patent protected price. The program is ostensibly designed to provide drugs to low-income people.

This sort of program would of course be unnecessary if drugs were sold in a free market. There would be no reason to establish complicated discount systems if drugs were selling for $5-$10 per prescription, as is generally the case for generic drugs. This would require an alternative mechanism for financing drug research, but folks who have heard of the National Institutes of Health know that alternative mechanisms exist. (Yes, NIH mostly does basic research, but that it a policy choice not a fact of nature.)

Coal Mining Is Responsible for 0.6 Percent of Employment In Kentucky Print
Sunday, 22 June 2014 08:32

The Washington Post noted Kentucky Senator Mitch McConnell's efforts to block President Obama's new proposal for reducing carbon dioxide emissions by closing coal plants. It told readers:

"coal is a major source of energy and jobs in McConnell’s state and in several others represented by Democratic senators who are seeking reelection this year."

According to data from the Bureau of Labor Statistics Current Employment Situation survey, the coal industry employs 11,600 workers in Kentucky. This is equal to 0.6 percent of total employment (1,862,000). This puts Kentucky in second place to the 4.2 percent share in West Virginia, but in every other state represented by Democratic senators who are seeking reelection this year the share of employment in the coal industry is considerably less than in Kentucky.


Note: The share in West Virginia was corrected. The post originally said 1.6 percent.

Robots and Productivity Growth Print
Sunday, 22 June 2014 08:05

Steve Rattner has a column in the NYT in which he correctly argues that robots should not provide any reason for concern about future labor market prospects. As Rattner correctly points out, robots are just another form of productivity growth. As a general rule, productivity growth allows for rising living standards and more leisure. Rattner is also right to point out that productivity growth has actually been unusually slow in recent years, the opposite of the concern about robots destroying jobs.

Where Rattner goes wrong is in arguing that the gainers and losers in terms of labor market prospects have been determined by technology and globalization, as opposed to policies that have been designed to make some groups winners and some groups losers. This is very clear from examining the list of winning occupations on his chart. The highest, with median pay of $187,200 in 2012, is physicians. (Most other sources put the median pay of doctors at well over $200,000.) Our doctors are paid close to twice as much as their counterparts in other wealthy countries. This is primarily because we have a government policy of protecting them from both foreign and domestic competition.

Similarly people in finance can get enormous pay because the government grants large banks too-big-to-fail insurance, meaning it bails them out when their incompetence puts them into bankruptcy. (The I.M.F. recently estimated the size of this subsidy at $50 billion a year.) The government also subsidizes the industry by taxing other sectors more so that the financial sector can largely escape taxation.

Anyhow, Rattner is right that we need not fear productivity growth but he is wrong to claim that the winners and losers have been determined by the natural course of economic development as opposed to deliberate government policy.


If We Stopped Coddling Doctors Would the Kids Still Be at Home? Print
Sunday, 22 June 2014 07:56

Adam Davidson has an interesting piece in the NYT Magazine noting the rapid growth in the percentage of young adults who continue to live in their parents’ home well into their 20s. The main explanation for this shift is the deteriorating labor market prospects for young people. While the piece does note this fact and has some discussion of the causes, it would be worth going into the latter in a bit more detail.

The country has pursued a set of policies over the last three decades that have the effect of redistributing income upwards. The most important of these at the moment is the high unemployment policy being pursued by Congress. Congress decided that it wanted to rapidly reduce the budget deficit after the 2009 stimulus. This has slowed growth and prevented millions of workers from getting jobs. It has also meant that many workers with jobs are working fewer hours than they would like.

Perhaps most importantly, high unemployment substantially weakens the bargaining power of workers in the bottom half of the wage distribution (these are disproportionately younger workers), so that they end up with lower wages. (See my book with Jared Bernstein, Getting Back to Full Employment.) In short, the decision by Congress to run lower budget deficits has forced millions of young people to move back with their parents.

There are many other policy decisions that have also hurt the wages and job prospects of young people. The decision of the Clinton Administration to have a highly valued dollar back in the late 1990s led to a large trade deficit which is another major cause of high unemployment. The protection of doctors and other highly paid professionals from international competition raises the costs of health care and other services, thereby reducing the real wages of most workers.

And of course the massive government support of the financial sector, in the form of too big to fail services, bailouts, and tax subsidies (other industries are taxed more so that the financial industry can be taxed less), has come at the expense of the rest of the economy which might otherwise be better situated to employ young workers.

Anyhow, the tales in this piece are striking, as many young people continue to need substantial support from their parents at ages where they would have been on their own in prior decades. It is important to recognize the policies that led to this outcome.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.