Pat Garofalo

 

Recent Posts by Pat Garofalo

  • The Senate's Push To Cut Paris Hilton's Taxes

    Jun 1, 2010Pat Garofalo

    golden-coffer-150Should tax breaks be given to the richest percentile while unemployment continues?

    golden-coffer-150Should tax breaks be given to the richest percentile while unemployment continues?

    Unemployment is near 10 percent. Long-term unemployment is at a record high. Teachers are being laid off across the country and state governments are slashing services to the bone. $80 billion could do a lot of good addressing any of these problems.

    However, the U.S. Senate is considering spending that much money on something else: cutting taxes for the richest 0.2 percent of households in the country.

    For months, Sens. Jon Kyl (R-AZ) and Blanche Lincoln (D-AR) have been on a quest to cut the estate tax, or the tax that the federal government levies on inheritance. And despite its serious impact on the budget and negligible effect on the electorate at large, their proposal is being taken seriously.

    Before getting into the merits of their proposal, here's some background. The 2003 Bush tax cut included a gradual phase-out of the estate tax, from its 2001 level of 55 percent with a $1 million exemption to its complete repeal this year. However, to make the long-term cost of the cut seem less severe, the legislation stipulated that the tax come back in 2011 at the 2001 level. At the time, Bush's team believed that Congress would never reinstate the tax, after having lived for at least one year without it.

    Proving Bush's strategy at least partially incorrect, the House of Representatives has already passed a bill permanently setting the estate tax at the 2009 level, which is a 45 percent rate with a $3.5 million exemption. But Kyl and Lincoln want to cut this to 35 percent with a $5 million exemption. Their cut costs $80 billion more than the House bill and $440 billion more than the budget baseline.

    And all of that money would go to cut a tax that 99.8 percent of households in the U.S. will never pay. In fact, 62.5 percent of estate tax revenue comes from estates worth more than $20 million. Another 35 percent of the revenue comes from estates worth between $5 million and $20 million. The simple fact is that only the ultra-wealthy -- the Paris Hiltons of the world -- are subject to the estate tax.

    The estate tax receives so much attention because there is a significant amount of misinformation circulating about it. This is due to a concerted effort by conservatives and wealthy corporate families to re-label it the "death tax," with the intent of fooling everyone into thinking that the IRS will be looming over them on their death bed, demanding payment. One organization in particular, the Policy and Taxation Group, has fueled this campaign, funded by money from the Gallo and Mars family fortunes.

    Even Lincoln herself helped spread this tall tale, saying "I don't think there's any American out there who believes you should work all of your life to find that when you die, 55 percent of [your estate] has got to go to the government."

    I bet she's right that no one believes that. But no one is trying to make it the law either.

    Because the estate tax is levied on marginal income, it is only paid on the amount in excess of the exemption. To put it plainly, if the exemption is $3.5 million, the first $3.5 million of the estate is passed on entirely tax free. Tax is only paid on the first dollar above that amount. So an estate worth $3,500,001 would have a tax bill of .45 cents under 2009 law.

    The average effective rate -- the amount paid as a percentage of the entire estate -- for those subject to the estate tax is about 14 percent. There isn't a mass of grieving widows who have to hand over half of everything they own to the government.

    Critics of the estate tax also contend that it adversely affects small businesses and family farms. This, too, is untrue. If 2009 law were made permanent, only 140 estates that could be considered farms or small businesses will owe any tax at all, and "all but a handful would have sufficient liquid assets on hand (such as bank accounts, stocks, and bonds) to pay the tax without having to touch the farm or business," according to the Center on Budget and Policy Priorities. The Lincoln-Kyl plan would spend tens of billions to cut this already small number down to 40.

    Kyl and Lincoln have said that they plan to find spending offsets for the $80 billion difference between their cut and the 2009 law, raising the prospect that Congress will actually increase revenues -- which could be spent on any number of things -- in order to cut taxes for the richest of the rich. It's an absurd notion, but it garnered the attention of Sens. Max Baucus (D-MT) and Charles Grassley (R-IA), the chairman and ranking member, respectively, of the Senate Finance Committee.

    Fortunately, some progressive lawmakers have started to push back against Lincoln and Kyl, with Sen. Bernie Sanders (I-VT) saying "the idea that we would make significant exemptions within the estate tax to give more tax breaks to the top three-tenths of 1 percent is nauseating." And he's absolutely right. Adopting the Lincoln-Kyl cut would be a sad indication of where Congress' priorities truly are.

    Pat Garofalo is the Economics Researcher and Blogger for WonkRoom.org at the Center for American Progress Action Fund. His writing has also appeared in The Nation, the Guardian, the Washington Examiner, and at AOL News.

     

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  • Obama's New Initiatives: Help for Homeowners or Banks?

    Mar 30, 2010Pat Garofalo

    house-in-hands-150Will new initiatives help sinking home owner get above water? Or are they just a boon for banks? Pat Garofalo investigates.

    house-in-hands-150Will new initiatives help sinking home owner get above water? Or are they just a boon for banks? Pat Garofalo investigates.

    Last week, after months of dropping hints and offering assurances that existing programs were doing just fine, the Obama administration finally released a set of initiatives aimed at helping homeowners who are "underwater," meaning that they owe more on their mortgage than their house is worth. According to the Treasury Department, "these changes will help the Administration meet its goal of stabilizing housing markets by offering a second chance to up to 3 to 4 million struggling homeowners through the end of 2012."

    On one level, it's encouraging that the administration has finally acknowledged that negative home equity is a problem deserving of its own distinct set of policy prescriptions. Almost one in four homeowners in the country (about 11 million borrowers) is underwater on his mortgage, particularly in the parts of the country that were hardest hit by the housing crisis. By June, 5.1 million borrowers are expected to have home values that are below 75 percent of their outstanding mortgage balances, which research suggests is when owners start to seriously consider walking away, even if they have the money available to pay.

    Up to this point, the administration's response to the housing crisis has been, to put it mildly, lackluster. The Home Affordable Modification Program (HAMP), which was supposed to keep 3 to 4 million borrowers in their homes via lower monthly mortgage payments, has so far resulted in just 168,000 permanent mortgage modifications. Last week, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) issued a scathing report criticizing HAMP as a program "that merely kicks the proverbial foreclosure can down the road."

    The SIGTARP report included the startling statistic that the average borrower in HAMP is underwater, even though HAMP was not designed with underwater homeowners in mind. According to the most optimistic estimates cited, the average HAMP borrower owes $1.14 in mortgage payments for every $1 in home equity. This means that the lower monthly payments which HAMP was designed to facilitate will often end up simply delaying a foreclosure, instead of preventing it.

    SIGTARP's conclusion was that more had to be done to address negative equity, and the "primary method" of doing that is cutting mortgage principal (the total amount owed on the mortgage). And SIGTARP is by no means alone in this assessment. Nobel Laureate and Roosevelt Institute Chief Economist Joseph Stiglitz has said that a government priority should be figuring out how to write down loan principal, while Mark Pearce, North Carolina Chief Deputy Commissioner of Banks, said that those not addressing principal reduction as a means of reducing foreclosures are "close to being in denial."

    Even within the federal government, there have been those advocating for principal reductions. These include Federal Deposit Insurance Corp. Chairman Sheila Bair, who has said that such a move "could help reduce defaults, keep people in their homes, avoid costly foreclosures, and enhance the value of these loans." Unfortunately, as the Huffington Post's Shahien Nasiripour pointed out, HAMP was so reliant on reducing monthly payments that it actually discouraged principal reductions, which less than two percent of borrowers in HAMP received.

    So at least the administration is finally trying to tackle negative equity with its two new initiatives. The first allows borrowers who are current on their mortgage, but who are underwater, to refinance into a Federal House Administration (FHA) loan for 97 percent of the property's current value. $14 billion in TARP money will be used to fund this program, and losses on the refinanced FHA loans will be born by the government.

    The second program will allow HAMP eligible borrowers to receive a principal cut if that would save them more money than the standard HAMP modification. But like HAMP, under this program, the lender would have to agree to the principal cut for it to move forward, and the lender will receive financial incentives for doing so.

    And this is where the new initiatives may run aground. Just like HAMP, the program only works if the lenders agree to principal cuts. If they feel that foreclosing is a better bet for their bottom lines, then they don't have to play along. HAMP's fatal flaw was that it relied on carrots for the lenders, but had no sticks if they chose to either string borrowers along for months or simply refuse to pull them into HAMP in the first place.

    This program could suffer from the same fate. As John Taylor, the head of the National Community Reinvestment Coalition, said, "I'm not optimistic that the incentives will be enough to entice servicers and investors to reduce loan principals. Will they help seven million people who are at risk of foreclosure? I will be pleasantly shocked if investors step up for half a million borrowers."

    There is some evidence that banks are coming to the conclusion that principal cuts may be beneficial to them. Bank of America, for instance, instituted a principal reduction program (with a bit of cajoling from the Massachusetts prosecutor's office). But at the end of the day, the administration seems to still be hoping that lenders themselves step up and do the right thing, with a little federal money sent along to sweeten the pot. Given the way in which the banking industry has responded to the financial crisis so far, I'm not sure I'll be holding my breath.

    Pat Garofalo is the Economics Researcher/Blogger for WonkRoom.org at the Center for American Progress Action Fund. His work has also appeared in The Nation, The Guardian, the Washington Examiner, and AOL News.

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  • Treasury's Home Affordable Mortgage Program relies on banks to volunteer modifications. Good luck with that.

    Oct 15, 2009Pat Garofalo

    good-luck-150Pat Garofalo reveals the fatal flaw in the Treasury's HAMP program: Banks still have little incentive to modify mortgages.

    good-luck-150Pat Garofalo reveals the fatal flaw in the Treasury's HAMP program: Banks still have little incentive to modify mortgages.

    Last week, the Treasury Department proudly stated that its Home Affordable Mortgage Program (HAMP) - the mortgage modification portion of the larger Making Home Affordable initiative - has resulted in 500,000 successful modifications. "That's an important shift," Treasury Secretary Timothy Geithner said.  "Half a million families are participating in loan modifications that are substantially decreasing their housing costs."

    Surely, half a million mortgage modifications are welcome, but they hardly put a dent in the devastating number of foreclosures occurring around the country. As Mark Zandi of Moody's Economy.com said, "it's a help on the margin...but it's not going to end the foreclosure crisis."  More than three million foreclosures were filed in 2008, and in the third quarter of this year 937,840 homes received a foreclosure letter. These numbers reveals just how minimal HAMP's effect has really been.

    And buried in the Treasury Department's data is the crux of the problem: some banks are not doing anywhere near enough to help people keep their homes. Take Bank of America, which has thus far modified only 11 percent of the eligible mortgages in its portfolio. Other banks have even shoddier stats, like National City with nine percent of eligible mortgages modified, or US Bank and Wachovia, each with three percent.  Only one bank, in fact, has gotten to more than 40 percent of its eligible borrowers.

    When it comes to permanent loan modifications (HAMP modifications start on a trial basis), the problem looks even worse, as one company - Ocwen Financial - is responsible for nearly half of them . Ocwen declared that it holds 45 percent of the 1,711 permanent modifications, while literally all the other servicers in the program are responsible for just 948 permanent modifications, combined.

    The administration has been justifying the program's slow start by saying that the banks haven't had enough time to get their act together. As the Washington Post reported, BofA "has been hamstrung by a staff shortage and by adapting its computer systems and even fax machines to the scale of the program."

    Any program of this size and scope will be difficult for an institution to get its arms around, particularly a national one as large as BofA. But as BusinessWeek's Theo Francis noted, "mortgage servicers actually signed up fewer homeowners in September than they did in August -- 100,216 last month, down from 133,192 the month before. That was even below the 110,397 signed up in July."  So the program is actually slowing down, not speeding up, as once would assume if Treasury's claims are correct. Six months after the program began, excusing the banks' performance by saying they haven't had enough time is starting to wear thin.

    The banks' apparent inability or indifference to modifying mortgages reveals the fatal flaw in HAMP: Treasury is counting on incentives to entice banks into making modifications without enacting any consequences when those modifications don't occur. And it doesn't help that many mortgage servicers receive what the New York Times called "lucrative fees on delinquent loans," potentially giving them a financial incentive to not pursue a modification, and instead follow through on a foreclosure.

    Of course, it's not fair to put HAMP's design failures entirely on the administration or Treasury. As originally envisioned, HAMP was complemented by a change in bankruptcy law that would have allowed judges to "cram-down" mortgage payments for borrowers. In theory, banks would be more willing to pursue modifications if they faced the threat of having payments unilaterally altered by a judge in bankruptcy.

    But the financial services industry put $42 million into an intense three-month lobbying campaign to defeat the cram-down provision (which prompted cram-down's chief proponent, Sen. Dick Durbin (D-IL), to proclaim that the banks "frankly, own the place" ). In the months since cram-down's defeat, nothing else has been put in place that would put any fear of a loss into a bank dragging its feet on a modification, and Treasury was unwilling to get behind a push for cram-downs when interest them was renewed by Durbin and Rep. Barney Frank (D-MA).

    So at the end of the day, HAMP is stuck in neutral, reaching some borrowers, but not nearly enough to make a difference in the macroeconomic sense. And unless the banks voluntarily pick up the pace - or real consequences are put in place for failing to provide modifications - the foreclosure crisis will not abate.

    Pat Garofalo is an Economics Researcher/Blogger for The Wonk Room and The Progress Report at the Center for American Progress Action Fund.

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  • The new financial future needs to cut young workers a break

    Sep 18, 2009Pat Garofalo

    shackles-200Pat Garofalo points out the perils of financially-stressed young workers getting buried in debt -- before they even enter the work force.

    shackles-200Pat Garofalo points out the perils of financially-stressed young workers getting buried in debt -- before they even enter the work force.

    Last week, Johnathan Shafter wrote here that progressives must “undertake a wide, integrated rethinking of our institutions for long-term household savings and social insurance. Families must be given an option whereby they can reasonably plan on a secure, adequate retirement if they do the right thing and responsibly save over their working lives.” This is a key topic to tackle going forward, as we pick up the pieces of a business expansion that was built largely on debt, and as many families begin to rebuild savings destroyed by a market plunge, if not by outright financial chicanery.

    But in order to build a country in which savings and a secure retirement are taken seriously, we need to have a system that puts young workers onto a savings-based path early, which our current system certainly does not. According to a new study by Peter Hart Associates, more than half of young workers (those under 35) do not have a retirement plan at work. This is a ten-point increase over ten years ago.

    In addition, more than two-thirds of young workers do not make enough money to both pay their bills and put some money aside. Due to a combination of rising costs, deteriorating wages, and the economic recession, one in three young workers is now living at home.

    In addition to lacking a viable path toward savings, young people are burying themselves in debt before they even enter the workforce, particularly to pay for a college education -- an education that increasingly means less and less in terms of wages. As Michael Mandel at Economics Unbound pointed out, “College costs are up by 23 percent since 2000. But real pay for young college grads is down 11% over the same period."

    Two-thirds of today’s college students borrow to pay for tuition, and their average debt load is $23,186, according to an analysis of the government's National Postsecondary Student Aid Study. Twelve years ago, 58 percent of students borrowed to pay for college, and the average amount borrowed was $13,172.

    And it’s not only loans that are saddling young people with debt. Graduates in 2008 carried an average of $4,100 in credit card debt in 2008, up from $2,900 four years earlier. Meanwhile, young workers have been hit harder than any other age group by the great recession, and companies expect to hire 22 percent fewer people from the class of 2009 than they hired from the class of 2008.

    This set of facts leads down two different paths, both of which are critical to ensuring that today’s young workers can build up savings and get on a fiscally sustainable path. The first is controlling the rising cost of education and ensuring that young people don’t have to bury themselves in debt before they even set out into the workforce. The Obama administration has proposed some common sense student loan reforms that will lower the cost of borrowing and expand access to Pell Grants, but that won’t amount to much unless colleges administrators themselves can find a way to contain tuition that consistently increases faster than the rate of inflation, which they have not been able to do with any degree of success.

    The second is ensuring a path to a fair retirement plan for young workers, and the best way to do that is to guarantee that they have representation in the workplace. As the Center for Economic and Policy Research found, young workers with union representation are about 24 percentage points more likely to have a pension plan than similar non-union workers. In low-income occupations, young unionized workers are 26 percent more likely to have a pension. And it should come as no surprise that wages have been stagnant for three decades, when only seven and a half percent of the private-sector workforce is unionized, down from 40 percent in the 1950s.

    Wall Street malfeasance played an outsized role in the financial crash, but a small modicum of responsibility does fall on households that used their homes as ATMs, banking on a bubble that few were willing to acknowledge, lest their exuberance be reined in. As we cobble the pieces of the economy back together, building a more sustainable system that encourages safe, fruitful methods of saving will help to gird families against the next Wall Street bust.

    Pat Garofalo is an Economics Researcher/Blogger for The Wonk Room and The Progress Report at the Center for American Progress Action Fund.

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  • Two key reforms getting big pushback from Big Business

    Aug 28, 2009Pat Garofalo

    money-and-greed-150How do we address the mind-boggling sums paid to corporate executives? Pat Garofalo of the The Wonk Room investigates say-on-pay and proxy access, two reforms that are getting big pushback from Big Business.

    money-and-greed-150How do we address the mind-boggling sums paid to corporate executives? Pat Garofalo of the The Wonk Room investigates say-on-pay and proxy access, two reforms that are getting big pushback from Big Business.

    Say-on-pay and proxy access seem like sensible enough concepts. Giving shareholders (who are the owners of the company, after all) the ability to determine their company's executive compensation practices and board composition logically align with free-market principles. But judging by the business community's reaction to both reforms -- which congressional Democrats and the SEC, respectively, want to implement -- one would think capitalism itself was under assault.

    Gross management incompetence, and, at times, malfeasance played serious roles in America's last two business booms (and subsequent busts). During both the dot-com and mortgage bubbles, corporate management failed to rein in excessive risk-taking and irrational speculation, or resorted to accounting gimmicks to hide massive losses, leaving corporate implosions and economic wreckage in their wake. Enron, WorldCom, Citigroup, and AIG come to mind as some of the largest culprits, but the problem by no means ends with them.

    The current structure of corporate governance in America discourages transparency and accountability and encourages static boards that don't have to answer to their shareholders. The upshot: Shareholders find it exceedingly difficult to exert any pressure on management to curtail the perverse risks that they encourage to boost short-term corporate profits and hefty annual bonuses.

    Take proxy access. Currently, during an election for a corporate board of directors, a company sends out a "proxy" (ballot) with its preferred slate of candidates, with the cost billed to the company. In contrast, "dissenting shareholders [must] pay up for mailing and publicity costs, sometimes in the millions of dollars," to send out their own, separate ballot.  As the New York Times' Gretchen Morgensen put it, "only those shareholders with millions to spend on hard-fought proxy wars could hope to influence a board's makeup."

    The SEC wants to mandate that shareholders who hold 1 to 5 percent of a company's shares (depending on the company's size) for more than one year be allowed to put their candidates for a limited number of board seats on the main ballot.  But the business lobby, spearheaded by the Chamber of Commerce, is intensely lobbying against the change.  The Chamber, in fact, has promised an "all-out lobbying effort with lawmakers that it plans to ramp up after Labor Day." 

    Never mind that studies have shown that boards with members elected by activist shareholders perform better in both the long- and short-term. The non-profit Investor Responsibility Research Center Institute and the proxy advisory firm Proxy Governance found that companies' total returns were 19.1 percent, "or 16.6 percentage points better than peers'" during the run-up to and first year following a successful activist board campaign.  And total share price performance for the first three years under hybrid boards averaged 21.5 percent, almost 18 percentage points higher than their peers. 

    The Chamber claims that proxy access would prevent companies from focusing on long-term growth. But this is a false argument because, as we've seen, management is not looking at the long-term, but is trying to maximize short-term gains, even if it means taking on absurd amounts of risk.

    "The objections to the SEC proposal are weak," agrees Harvard Law Professor Lucian Bebchuk. "The case for comprehensive reform of corporate elections is supported by a significant body of empirical evidence. Arrangements that insulate directors from removal are associated with lower firm value and worse performance." 

    Big Business' objections to say-on-pay are no better than those it uses to discourage proxy access, and again, it is the Chamber leading the opposition by claiming that the measure is simply a way for unions to wedge their way into corporate pay discussions. But say-on-pay would mandate the most minimal of intrusions into business activity, simply requiring that companies allow a non-binding shareholder vote on a companies' executive pay packages.

    As Treasury Secretary Tim Geithner points out, "[say on pay] has already become the norm for several of our major trading partners."  In two of those countries - Great Britain and Australia - CEO pay "grew 2.4 percent and 25.3 percent, respectively, from 2002 through 2006, while pay in the United States soared 59.9 percent in the same period," according to data compiled by Compliance Week.  In fact, some criticize the say-on-pay measure for not going far enough, as it counts on managers being shamed into holding down pay, and the shareholders' recommendations can ultimately be ignored.

    Would more shareholder input have prevented the subprime crash or the tech bubble? At first glance, the answer would seem to be ‘probably not.' Most shareholders were just as captivated by surging profits as the managers themselves, and probably would have been loath to pull back the curtain and examine what was happening. But if better corporate governance had been in place and more shareholder say over pay packages allowed, then the widespread shenanigans might have been mitigated, the pay that incentivized bankers to take wild risks could have been pared back, and the managers that failed to adequately police risk could have had at least some small reason to fear for their jobs.

    Going forward, both say-on-pay and proxy access would be useful checks on corporate power to have as we try to rebuild the economy. Let's hope that Congress and the SEC finally take a stand against a big business community that it staunchly defending the status quo.

    Pat Garofalo is an Economics Researcher/Blogger for The Wonk Room and The Progress Report at the Center for American Progress Action Fund.

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