New Rule: Your Financial Advisor Should Actually Work for You

Aug 21, 2013Rachel Goldfarb

The DoL and SEC should implement their proposed changes to the ethical standards of the financial services industry that would ensure consumers get the best possible financial advice.

The DoL and SEC should implement their proposed changes to the ethical standards of the financial services industry that would ensure consumers get the best possible financial advice.

A long-discussed but never implemented policy change surrounding ethical standards for the financial services industry is hitting the news again. Both the Department of Labor and the Securities and Exchange Commission are considering new rules that would require stockbrokers and financial services providers to act as fiduciaries, which would make them required by law to act in the best interest of their client and to avoid conflicts of interest.

It would be nice if the people we trust to invest our money put us first, but that’s not always the case. With the exception of certified financial planners and Registered Investment Advisors, who are already fiduciaries, financial services providers are only required to steer clients into “suitable” products. The suitability standard doesn’t prevent advisors from pushing the products with the highest fees and kickbacks.  When financial advisors tie their financial success to the products they push, consumers aren’t likely to get the best advice.

A group of House Democrats recently signed on to a letter to the Department of Labor opposing this new rule. Erika Eichelberger reported that a financial industry lobbyist wrote the letter. She also noted that these 32 members of Congress, who include 28 members of the Congressional Black Caucus and 15 members of the Congressional Progressive Caucus, received $88,000 from the securities and investment industry. These members of Congress claim that the rules will limit access to low-cost investment advice in the communities they represent. Brokers agree that fiduciary status would reduce revenue to the point where they wouldn’t be able to service small accounts.

The possibility of reduced services isn’t a good enough reason to sacrifice standards. American workers aren’t saving enough for retirement as is: more than half of households have less than $25,000 in investments and savings, excluding their homes. High fee funds only make the matter worse. These households can’t afford financial services that cut into their savings. Our retirement systems have enough problems. Individuals should at least be able trust that their plans for retirement security aren’t being undermined by their advisor’s own interests.

Rachel Goldfarb is the Roosevelt Institute Communications Associate.

 

Financial advisor image via Shutterstock.com

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Why Carried Interest Reform Should Be a No-Brainer

Aug 19, 2013Lydia Austin

Carried interest, the share of profits that private equity fund managers receive, is currently taxed at the capital gains rate, but it should be treated as standard compensation.

Carried interest, the share of profits that private equity fund managers receive, is currently taxed at the capital gains rate, but it should be treated as standard compensation.

In recent months, there has been a growing consensus that the tax code is broken and must be reformed or overhauled. Unfortunately, that’s where the consensus ends. Politicians are loath to eliminate provisions that garner them support, and the result is that the tax code is riddled with small loopholes that end up costing big bucks. One of the failures of the tax code is the unequal treatment of similar activities, such as the tax treatment of carried interest. Although only a few people even know what carried interest is, this provision costs the government around $1.3 billion annually. That’s a big break for just a few people. The fault lies not with the individuals who take advantage of these provisions, but rather with the legislators who enacted them and today, fail to eliminate them.

Taxation of carried interest has been around since the implementation of subchapter K of the Internal Revenue Code, which governs the taxation of partnerships, in 1954. Though part of the tax code for over half a century, the taxation of carried interest only became a hot-button subject recently, when private equity firms and hedge funds rose in prominence in the financial sector.

Private equity and hedge funds manage an estimated $1 trillion each, and private equity raised around $240 billion in capital in 2006. With such a large amount of assets under management, legislators and policymakers have taken a closer look at the taxation of their earnings.

Carried interest (or profits interest) arises as part of a partnership arrangement. When a private investment fund is formed, it usually comprises two types of partners. Limited Partners (LPs) contribute capital to the investment fund. General Partners contribute knowledge of investments, some capital (usually 1-5 percent of the firm's assets) and manage the funds on a day-to-day basis. It is important to note that partnerships are pass-through entities, meaning profits are not taxed at the partnership level, but rather each partner is taxed individually.

General Partners are paid a management fee, usually around 2 percent of the fund's assets, for the day-to-day operations they oversee. This management fee is taxed at the ordinary income tax rate. When the fund turns a profit, LPs usually receive 80 percent of the profits (called capital interest), and GPs receive around 20 percent of the profits, sometimes not until a profit threshold (say, 7 or 8 percent) is reached. The share of the profits that the GP receives is called carried (or profits) interest, and is currently taxed at the capital gains tax rate.

Most private equity funds have a lifespan of 5-7 years, so the income gained during this time is applicable for favorable long-term capital gains tax treatment, as opposed to hedge funds profits, which usually constitute short-term capital gains. Both long- and short-term capital gains rates are lower than traditional income rates.

Many consider carried interest an unfair tax expenditure because it is taxed at the more favorable capital gains rate, instead of the usual income rate. The underlying issue is whether carried interest represents an investment in the partnership by the GP (in which case carried interest would be treated like capital interest), or if it constitutes compensation for services performed by the GP in managing the fund.

Those who believe carried interest represents compensation for management state that GPs play a fundamentally different economic role than LPs, since they are responsible for managing the funds. Further, they argue that carried interest is compensation that is not principally based on a return to the GP's own financial assets as risk. Compensation supporters argue that GPs act in the same manner as an investment bank, whose employees are taxed at ordinary income rates.

The alternate view is that GPs are being paid their share of the profits as a partner whose main activities are raising capital and investing it. In addition to contributing some financial equity to the firm, GPs contribute "sweat equity" - namely their management expertise. Supporters of this view argue that GPs act like entrepreneurs whose businesses are financed by third parties, and whose returns are taxed at capital gains rates. This is the position taken by current law.

It is interesting to note that there is no consensus as to the character of carried interest in countries around the world. Some tax carried interest as capital gain, some ordinary income, and some as an alternate form of income.

Currently, most view the grant of carried interest as a nontaxable event, as it may be difficult to value and thus cannot be considered "ordinary income" under the law. One option for reform would be to tax carried interest at the time of the grant. Under this scenario, when the GP receives carried interest, he would be taxed at ordinary income rates. Any further accumulation of profit would then be taxed at capital gains rates. This approach would require a trustworthy valuation system, and would be susceptible to large changes in taxable income as the assumptions behind the valuation system changed.

One of the most commonly suggested options is to tax carried interest at ordinary income rates when it is realized. This approach would recognize carried interest as compensation for services performed in managing the fund, and would be similar to the taxation of non-qualified stock options. Senator Levin has introduced legislation that would tax carried interest as ordinary income.

Finally, the "middle option" would be to tax the imputed interest on an implied loan the GP makes to the LPs. This option would tax part of the carried interest as capital gains and part of it as ordinary income. This option is a compromise, recognizing that GPs' returns are a mix of capital and labor inputs. It is, additionally, the most complex option.

As it stands now, the favorable tax treatment for carried interest serves as a giveaway to wealthy hedge fund and private equity managers. There is no doubt that a GP’s role in the fund is fundamentally different from an LP’s, yet they are given similar tax treatment. Additionally, some GPs manage to reduce their management fee (and thus reduce the amount that is taxed at ordinary income rates) and increase their share of capital gains compensation. And there is no reason they should not do so, given the tax provisions governing partnerships.

In treating carried interest as capital gains, the current tax code costs the government over $1 billion. Fortunately, legislators still have the ability to reform this provisio, and take a stand against giveaways to the wealthiest among us. By taxing carried interest at the ordinary income rate, the tax code would recognize the growth of the financial services industry and the role of professional fund managers. With tax reform on the horizon, this should be a no-brainer.

Lydia Austin is an alumna of the Roosevelt Institute | Campus Network and was the Campus Network's Senior Fellow for Economic Development for the 2012-13 academic year. Lydia recently co-wrote a white paper, "Fixing a Hole," with Roosevelt Institute Director of Research Susan Holmberg.

 

Happy man with money image via Shutterstock.com

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Daily Digest - August 16: Even Federal Jobs Aren't Always Good Jobs

Aug 16, 2013Rachel Goldfarb

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How President Obama Could Move Millions Into The Middle Class (Our Future)

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How President Obama Could Move Millions Into The Middle Class (Our Future)

Roosevelt Institute Senior Fellow Richard Kirsch presents a simple solution for shifting over two million workers into living wage jobs. By executive order, the President could require that workers on federal contracts get better wages and paid sick days.

The Light And Dark of Social Entrepreneurship (CSRwire)

Francesca Rheannon interviews Roosevelt Institute Fellow Georgia Levenson Keohane about the challenges of using private money for social needs. Georgia is concerned with scale, and whether a social mission can stay in the forefront as an enterprise grows.

ALEC Convention Met With Protests in Chicago (The Nation)

Micah Uetricht reports on protests against the ALEC convention, organized by a coalition of labor, community, and environmental groups. They hope that the protesters will shine a brighter light on ALEC's far-right austerity agenda and influence on legislators.

New Conservative Plan: Repeal Obamacare or We'll Default on the National Debt (Slate)

Matt Yglesias looks at the various ways the GOP has created debt ceiling crises in recent years. He doesn't think there's much to worry about in the current threat, but won't dismiss the possibility of this debt ceiling crisis turning into something nasty.

Dems Defy Obama on Mortgage Protections (MoJo)

Erika Eichelberger critiques the thirteen Democrats who joined Republicans to cosponsor bills that would demolish new Consumer Financial Protection Bureau mortgage rules, but cannot explain why they want to allow sub-prime mortgages to continue.

Houston Rockets Pre-K to Top of the Priority List (TAP)

Abby Rapoport examines a new plan in Houston to expand early childhood education. Proponents are pushing a ballot initiative to increase property taxes by one hundredth of one percent to fund daycare teacher training and they're finding broad support.

The Many, Many Jobs That Won't Earn You Enough to Live in Your City (The Atlantic Cities)

Emily Badger thinks that many of these jobs are necessary for a city's function, including bank tellers, fire fighters, janitors, and school bus drivers. If these workers can't afford rent in their cities, who is going to do these jobs?

Why Are Walmart Stores Underperforming? Blame Their Terrible Wages. (The Daily Beast)

Daniel Gross questions why Walmart's same-store sales fell this quarter. He suggests that Walmart pays such low wages that their employees can't afford to shop there as much, and recent protests against Walmart and other low-wage employers can't help.

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Delaware Welcomes Corporations That Put People Ahead of Profits

Jul 22, 2013Suzanna Fritzberg

By enacting legislation creating public benefit corporations in Delaware, the state has the potential to push this form of social entrepreneurship to new heights. 

By enacting legislation creating public benefit corporations in Delaware, the state has the potential to push this form of social entrepreneurship to new heights. 

Social entrepreneurship made a huge step forward this month, as Delaware Governor Jack Markell signed legislation creating a new corporate form, the public benefit corporation, that enables companies to “do well while doing good.” Although 18 other states have already enacted similar legislation, Delaware’s status as home to more than one million American companies, including 64 percent of the Fortune 500, bodes well for the accelerating benefit corporation movement.

The benefit corporation, the brainchild of the nonprofit B Lab, is predicated on a simple idea: use the power of business to solve social problems. Companies incorporated under legal frameworks like the one passed in Delaware strive to maximize profits, but can do so while also pursuing a broad range of social and environmental goals, from low carbon emissions to generous employee benefits and transparency in governance. Under traditional corporate law, a firm’s fiduciary responsibility to its shareholders to maximize profits is privileged over other commitments to social or environmental responsibility. The benefit corporation amends this, legally enshrining the interests of stakeholders, including employees, customers, the community and the environment, alongside those of shareholders. Among other things, benefit corporation status shields a company’s social and environmental objectives when it is up for sale. Today, there are at least 200 legally registered benefit corporations (and likely many more, as some states don’t currently track their incorporation), including large companies like Patagonia and many smaller ones like Vermont-based WomenLead and New York-based Clay Marketing. The “shared value” created by these companies is heralded by benefit corporation enthusiasts as a radical refashioning of contemporary capitalism.

The B Lab cofounders Jay Coen Gilbert, Bart Houlahan, and Andrew Kassoy have enthusiastically welcomed Delaware’s adoption of the public benefit corporation form, calling it a “tipping point in the evolution of capitalism” that creates a path to scale for businesses seeking to be a force for good. Social enterprises traditionally have difficulty securing capital for expansion. Access to Delaware’s corporate infrastructure may enable them to become a larger share of the market, on both the consumer and investor side.

While legal incorporation can help benefit corporations become more widespread, it also suggests a more streamlined and transparent future for the fragmented U.S. social business sector, and perhaps a way to channel the demand for responsibly produced goods and services. It is not lost on investors that consumers, particularly Millennials, have demonstrated a willingness to pay for socially responsible products; the socially responsible investing market now represents approximately 10 percent of U.S. assets under management.

Benefit corporations aren’t the only innovation in social business; in the U.S. alone, two other corporate forms have recently emerged that similarly focus on social benefit, transparency, and attracting for-profit investment. Flexible purpose corporations and low-profit limited liability companies haven’t gained as much attention as benefit corporations, but they further underscore the growing appetite for socially conscious business forms. This is a global trend as well – countries like Canada and the UK have unveiled their own frameworks for purpose-driven business in recent years.

In addition to legal efforts, B Lab has pioneered an independent certification system (in the style of LEED or FairTrade) for socially responsible businesses. To date over 700 corporations in the United States and abroad have undergone the company’s rigorous evaluation process to gain “certified B Corp” status. These are not new corporate forms, although they do represent a significant commitment on the part of many companies to examine and improve their business models when it comes to a broad range of social and environmentally responsible practices, and the financial and non-financial value they are creating for a range of stakeholders. As these innovations in market infrastructure continue to evolve, they demonstrate strong demand for socially conscious reforms to capitalism on the part of businesses, customers, and hopefully investors as well.

Despite this global popularity, benefit corporations (both legally and independently certified) are not without their critics. Most vocally, many argue that benefit corporation status is little more than a window dressing technique – similar to the deceptive environmentally-friendly marketing campaigns known as greenwashing – for companies hoping to increase revenue through a superficial commitment to social and environmental issues. And even if the benefit corporation legal form proves able to hold businesses accountable to social purposes, the fact is that benefit corporations and other social business forms remain a fraction of the market share. Small, private companies in 19 states are beginning to take advantage of legal incorporation, but overall impact remains uncertain and nascent, suggesting that the so-called “social business revolution” may be more an optimistic projection than a contemporary reality.

The limited success of benefit corporations is all the more reason, then, that incorporation in Delaware appears to be a crucial watershed, as it will allow access to larger companies and more capital than the movement has seen to date. While legal benefit corporations may not be a panacea for the social ills of capitalism, Delaware’s legislation is an important step advancing the understanding that business has responsibility to a broader set of stakeholders than just shareholders, and that meeting that responsibility can help realize a more equitable, prosperous future. 

Suzanna Fritzberg is a Research Intern at the Roosevelt Institute, working with Roosevelt Institute Fellow Georgia Levenson Keohane; a rising junior at Yale; and an Arthur Liman Public Interest Fellow.

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Fixing a Hole: CEO Pay Tax Loophole That Puts Economy at Risk

Jul 22, 2013

Download the paper (PDF) by Susan Holmberg and Lydia Austin

In an effort to curb excessive pay for corporate executives, when President Clinton signed his first budget into law in 1993, he created Section 162(m) of the Federal tax code, which limited the corporate tax deductibility for executive compensation to $1 million. It included, however, an exception from any limit in deductibility for “performance pay.” This white paper presents the key economic research on the broad impacts of the performance pay provision of Section 162(m) in the I.R.S. tax code.

Download the paper (PDF) by Susan Holmberg and Lydia Austin

In an effort to curb excessive pay for corporate executives, when President Clinton signed his first budget into law in 1993, he created Section 162(m) of the Federal tax code, which limited the corporate tax deductibility for executive compensation to $1 million. It included, however, an exception from any limit in deductibility for “performance pay.” This white paper presents the key economic research on the broad impacts of the performance pay provision of Section 162(m) in the I.R.S. tax code. Based on this existing body of evidence, we argue that it is time to reform this tax law by closing the performance pay loophole and expanding the $1 million deductibility limit to total compensation for corporate executives.

Key Findings:

  • Average CEO pay has continued its robust growth post-Section 162(m), but performance pay, especially stock options, now drives a significant part of that growth.
  • Many economists argue that current executive compensation structures, a large proportion of which are stock options, can lessen executives’ exposure to risk and thereby create risks in the financial system; encourage fraudulent behavior, including illegal backdating; and potentially minimize incentives to make long-term investments in research and innovation.
  • The performance pay deduction significantly decreases the marginal tax rates that corporations face. Furthermore, taxpayers have subsidized over $30 billion to corporations for the performance pay loophole between 2007 and 2010 alone.

Read "Fixing a Hole: How the Tax Code for Executive Pay Distorts Economic Incentives and Burdens Taxpayers," by Dr. Susan Holmberg and Lydia Austin.

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Daily Digest - July 22: CEO Pay Problems Aren't Just in Dollars

Jul 21, 2013Rachel Goldfarb

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Fixing A Hole: How the Tax Code for Executive Pay Distorts Economic Incentives and Burdens Taxpayers (Roosevelt Institute)

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Fixing A Hole: How the Tax Code for Executive Pay Distorts Economic Incentives and Burdens Taxpayers (Roosevelt Institute)

Roosevelt Institute Director of Research Susan Holmberg and Roosevelt Institute | Campus Network Senior Fellow in Economic Development Lydia Austin analyze the ways the performance pay loophole harms taxpayers, companies, and the economy.

If Dodd-Frank Doesn’t Work, Here are Four Things That Could (WaPo)

Roosevelt Institute Fellow Mike Konczal outlines some ideas that were rejected during the debates over Dodd-Frank. He suggests that if aspects of Dodd-Frank aren't working, we should remember these proposals, which favored strong lines over regulatory micromanagement.

Coming Home for the Recession (TAP)

Roosevelt Institute | Pipeline Fellow Nona Willis Aronowitz continues her series on Millennials and the new economy, this time focusing on young women of color for whom the recession has enforced traditional living patterns, because living with family is cheaper.

Detroit, and the Bankruptcy of America’s Social Contract (Robert Reich)

Robert Reich suggests that Detroit's bankruptcy is an indication of the problems that come from increased class segregation. By fleeing to the suburbs, Detroit's middle and upper classes untied themselves from the needs of the city.

In Climbing Income Ladder, Location Matters (NYT)

David Leonhardt reports on a new study that looks at income mobility across regional lines. One of the most interesting findings is that mixed income neighborhoods, where many classes live together, are a strong indication of better income mobility for children.

Deception in Counting the Unemployed (The Atlantic)

Steve Clemons looks at the work of Leo Hindery, Jr., a former CEO who has fought for better deals for workers for many years. Hindery's focus is on "real unemployment," and he claims the government's use of the U-3 numbers obscures the facts facing workers.

Mapping the Sequester's Impact on Low-Income Housing (The Nation)

Greg Kaufmann discusses the ways that sequestration is affecting the people who rely on Section 8 housing vouchers. He maps out story after story of cuts that the Center on Budget and Policy Priorities says will lead to a rise in homelessness.

A Shuffle of Aluminum, but to Banks, Pure Gold (NYT)

David Kocieniewski explains how banks have started buying physical commodity trading assets, like aluminum, to gain market intelligence for that commodity. This translates to miniscule increases in the cost of products, and billions in profits to the banks.

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Daily Digest - July 18: Welcoming the Regulators

Jul 18, 2013Rachel Goldfarb

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Finally, Bank Regulators Have Had Enough (ProPublica)

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Finally, Bank Regulators Have Had Enough (ProPublica)

Jesse Eisinger looks at the new rules regulators are finally pushing through, which place more stringent capital ratio requirements on U.S. banks. He argues that this higher standard will advantage U.S. banks in the international market, because it will protect them from crises.

Elizabeth Warren’s New Fight: Why Even the Tea Party Backs It! (Salon)

David Dayen explains why Senator Warren's 21st Century Glass-Steagal Act is drawing such broad bipartisan support. Everyone, left and right, is tired of seeing big finance put people's money at risk for the sake of profit.

High Profits Signal Danger for Big Banks (NYT)

Simon Johnson argues that it's hard to accept the notion that regulation will harm the financial industry's business model when banks continue to report such high profits. That's encouraging to reformers as further regulations come down the pipe.

A New Season for Reform (The Nation)

William Greider sees the possibilities of real financial reform emerging in the current Congress. No one has ended too big to fail yet, but a coalition is forming that might be willing to fight back against Wall Street.

Bernanke Builds In Leeway on Bond Buying (WSJ)

Jon Hilsenrath and Victoria McGrane report that in his first of two days of congressional testimony, Ben Bernanke stated that the Fed's timeline for tapering its bond-buying program is flexible and will change if growth, inflation, and the markets call for it.

Sorry, Deficit Hawks: The Debt Crisis Ended Before It Could Begin (The Atlantic)

Matthew O'Brien points out that the deficit no longer needs fixing, much to the dismay of those pushing austerity policies. New Congressional Budget Office figures cut short-term concerns, and he argues that the long-term changes needed can wait.

Will Immigration Reform Protect Workers? (Reuters)

Josh Eidelson questions whether immigration reform might have the side effect of protecting workers whose employers have used their immigration status against them when they try to organize. Comprehensive reform should reduce some of the risks of retaliation.

New on Next New Deal

Brooks’s Recovery Gender Swap

Roosevelt Institute Fellow Mike Konczal looks at how men and women are doing in the search for employment in the weak recovery. He finds that men are not suffering in the manner David Brooks suggested in his recent column.

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Comcast Profits from the Poor with Internet Essentials Deal

Jul 9, 2013John Randall

The cable giant's program for low-income customers is touted as a solution to the digital divide, but it only distracts from the need for more regulation and competition.

The cable giant's program for low-income customers is touted as a solution to the digital divide, but it only distracts from the need for more regulation and competition.

Regulatory failures and telecommunications market consolidation have left most Americans with few options when it comes to a high-speed Internet access connection at home. There is a lack of market pressure to keep prices low or encourage the investment needed to expand networks, or to upgrade them for higher speeds or better service. This has exacerbated our digital divide. And while Comcast’s highly publicized Internet Essentials program is supposed to address this problem, a deeper look shows that it is more effective as a customer acquisition program for Comcast than anything else.

The digital divide is an equity issue, an education issue, and an economic issue. Over 100 million Americans, about one-third of us, don't subscribe to fixed high-speed Internet access at home. For many, the problem is price. Internet adoption rates for American households are lower, on average, in counties with the lowest median household income and outside of urban areas. Some have no options at all: 19 million Americans (6 percent of the population) cannot buy a connection where they live at any price.

How can children with no Internet connection at home compete with peers who are lucky enough to live in households that can afford access? There are more online educational opportunities than ever before, but a good Internet connection is needed to take advantage of many of them. Which kid will be able to learn to program, work with online tutors, rip through Khan Academy lessons, or participate in a Massive Open Online Course (MOOC)? Students with home access to the Internet are 8 percent more likely to graduate. And the divide doesn’t disappear once they’ve graduated: Eighty percent of Fortune 500 companies require that job applications be submitted online. Can we afford to leave a third of Americans out of the new economy?

Against this backdrop, the public relations department at Comcast has been hard at work over the past 16 months, talking about the successes of the Comcast “Internet Essentials” program, which has been credited with providing 150,000 low-income households with a $9.95-per-month “high-speed” Internet connection. To be eligible for the program, a household must include a student who currently receives a “free” or “reduced price” lunch through the Department of Agriculture’s National School Lunch Program (NSLP), live in an area where Comcast currently offers Internet access, have not subscribed to Comcast Internet access within the last 90 days, and not have an overdue Comcast bill or unreturned equipment.

While the program may sound like a noble effort to combat the digital divide, it is deeply flawed in practice. Its so-called high-speed connections are painfully slow: 3Mbps downstream and 768Kbps upstream. This is equivalent to Comcast’s bottom-tier service, normally billed at $39.95, and is slower than 89 percent of cable connections in the U.S. These connections may not even be fast enough for modern web applications, especially if multiple users in the house are sharing the same connection at the same time. (The Internet Essentials program originally offered only 1.5Mbps, but Comcast raised the speed cap in the second year in response to criticism and a protest outside of Comcast’s headquarters.)

The program is also ineffective because it is not serving enough low-income households. Comcast estimates that 2.6 million households are eligible for Internet Essentials. Of that 2.6 million, the program serves only 150,000 households (5.8 percent of those eligible). In the Philadelphia region, the heart of “Comcast Country” and the location of Comcast’s corporate headquarters, only 3,250 families are participating (3.3 percent of those eligible). Even the number of eligible households is extraordinarily low, as the limits to participation noted above allow Comcast to capture new customers without cannibalizing its existing low-income subscriber base. Comcast's approach provides no relief to families on a tight budget that have already purchased a plan. For low-income NLSP families (at or below 130 percent of the poverty rate), affording the “market” rate for these packages can be quite challenging. The program will have zero effect on our national communications failings.

These limits aren’t the result of cost concerns. Within its footprint (which spans 50 million households in 39 states– 45 percent of the US population), the cost for Comcast to connect additional households is vanishingly low. With no additional network build needed, Internet Essentials represents almost pure profit for Comcast.

Comcast Internet Essentials is a customer acquisition program in disguise. Because it is limited to non-subscribers in Comcast’s existing footprint, the program allows Comcast to acquire additional customers without needing to invest in expanding or upgrading its network. Gross profit margins for cable Internet access in areas where the network is already built are about 95 percent. Even at Comcast's “reduced” $9.95 rate, every Internet Essentials customer represents additional profit for Comcast, and those 150,000 Internet Essentials subscriptions represent almost $18 million a year in income.

But that isn’t all. When the program ends, many of these newly acquired customers will become highly profitable full-price customers. Comcast reserves the right to bill Internet Essentials subscribers at the full-price rates if they are dropped from the program. A household can be deemed ineligible if it fails to submit the right paperwork, fails to maintain its Comcast account in good standing, moves and changes its address, or decides to upgrade its access (which many will feel the need to do because of the slow speeds offered). Comcast plans to stop accepting new signups at the end of the 2013-2014 school year, and though it claims those receiving service through Internet Essentials will remain enrolled in the discount service plan as long as they meet the program's requirements, it will be telling to see how many families have been able to run the gauntlet.

When the dust settles, Comcast will have profited greatly from the Internet Essentials program, even without taking into account Comcast’s gains in the government and public relations sphere. While most observers might assume that the program is an act of corporate generosity, it was originally conceived in the fall of 2009 as a way to turn a profit by offering slower connections to certain low-income households. These plans were temporarily tabled at the direction of Comcast lobbyist David Cohen, who knew that this type of program would be attractive to the FCC and thus useful as a bargaining chip. When the time came for negotiations over Comcast's $13.75 billion takeover of NBC Universal, Comcast was able to offer something it was planning on doing anyway. In the end, the FCC was able to claim credit for forcing Comcast to implement a program to combat the digital divide, while in reality no arm-twisting was needed.

Comcast routinely points to the Internet Essentials program in response to calls for regulation aimed at reliably easing the digital divide. This distracts the press and regulators from the real issues: local monopolies, the lack of competition for high-speed Internet access, and the need for regulatory attention. As of June 21, 2012, Comcast had delivered the Internet Essentials message to over 100 members of Congress and more than 2,000 state and local officials. To broaden its outreach effort, Comcast also engaged leading intergovernmental associations at the state and local level such as the National Governors Association, National Conference of State Legislatures, U.S. Conference of Mayors, and various other organizations of elected officials. On top of that, Comcast say that the impressions generated by media coverage of Internet Essentials launch events earned it “millions of dollars” worth of media.

Comcast's Internet Essentials program does more to benefit Comcast's customer acquisition, public relations, and lobbying departments than to help people in America who need high-speed Internet access at a reasonable price. The reality is that the program is a cleverly designed customer acquisition program that benefits Comcast's bottom line. The program is ineffective: the connections are not “high-speed,” the program assists very few people, and the the program does nothing for those who can’t get a connection at all where they live. More importantly, the program does nothing to address the fundamental reason for the lack of ubiquitous, affordable high-speed Internet access in this country – the lack of competition. It earns Comcast good press while distracting regulators and public officials into thinking that changes in policy aren't needed and that digital divide problems will somehow work themselves out on their own as a result of corporate generosity. In the long run, Comcast Internet Essentials will do no more than contribute to the delay of much-needed regulation.

John Randall is a Program Manager at the Roosevelt Institute who provides legal, technical, and policy research assistance and strategic direction for the Telecommunications Equality Project.

 

Banner image of woman with Internet connection problems via Shutterstock.com

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What’s New in the New Surveillance State?

Jun 11, 2013Mike Konczal

I had a post at Wonkblog over the weekend, “Is a democratic surveillance state possible?”

In some sense, the issue of the government spying and collecting data on its citizens isn’t a new problem. One of my favorite tweets of the past week was Brooke Jarvis noting "Collapsing bridges alongside massive spy networks... Ah, the Jeffersonian ideal of government."

The United States has been tracking, observing, and surveilling its citizens for centuries. That includes that long-standing form of communication, the mail. As Senator Lindsey Graham just said, “In World War II... you wrote a letter overseas, it got censored...If I thought censoring the mail was necessary, I would suggest it.”

From the Census in the Constitution to the Cold War spy network (including the NSA, founded in 1952 through the Executive Branch), maybe this should be seen as a continuation of an old issue rather than a brand new one. But I think there are genuinely new and interesting problems with the 21st century Surveillance State and the brand new digital technologies that create the foundations for it. What’s new about the new surveillance state?

1. It’s always on and always has been. Old acts of surveillance had to be triggered and were forward-looking. However, we now spend so much of our lives online, and that is always being recorded. As the leaker Edward Snowden said in his interview, “they can use this system to go back in time and scrutinize every decision you've ever made, every friend you've ever discussed something with. And attack you on that basis to sort to derive suspicion from an innocent life and paint anyone in the context of a wrongdoer."

To the extent that old surveillance was capable of going back, it was by checking old records or interrogating old sources. And there the concept of amnesia comes into play.

2. It will never forget. “Amnesia” is a normal front line of defense. People forget things. Clear memories, stories, and ideas become grey. Photos and documents get lost with time. Trying to piece together history will necessarily involve a lot of missing gaps and poor recollection.

Not with the surveillance state. Cheap digital storage means that clear, easily replicable data will exist for the foreseeable future.

3. It scales easily. If the FBI was keeping records on 100 people in the 1950s, and it then wanted to monitor 1,000 people, it would probably need 10 times as many resources. Certainly it wouldn’t be effortless to scale up that level of surveillance.

As we can see in the age of Big Data and fast computing, this is no longer the case. The resource costs of accessing your phone’s metadata history versus all phones’ metadata history is going to be (somewhat) trivial. And the fact that there’s no amnesia means that you’ll always have access to that extra data.

4. It’s designed to be accessible. As Orin Kerr emphasizes, digital data here isn’t collected or surveilled via the human senses. A person can’t simply “peek” into your email the way they could peek at your physical mail. Instead devices need to be installed to access and make sense of this data. Private sector agents will do this, because it is part of their business model to make this information accessible. These access points will also be accessible to government agents under certain conditions - part of the major debate over the PRISM program is under what conditions the government can actually access these devices.

5. It’s primarily driven by the private sector. Broadly speaking, measures of democratic accountability and constitutional protections do not extend to the private sector. More on this soon, but things like the Freedom of Information Act to the Administrative Procedure Act to our whole regime of transparency laws do not apply to outside businesses. The government has worked with private groups before on surveillance, but here it is in large part driven by private agents, both for contractors and information gathering.

6. It predicts the future for individuals using mass data. Surveillance has generally used mass data to either predict or determine future courses of action on a mass scale. For instance, Census data is used to allocate federal money, or predict population growth. Alternatively, it uses individual data to analyze individual behavior - asking around and snooping to dig up dirt on someone, for instance.

The surveillance state, however, allows for using mass data to predict the actions of individuals and groups of individuals. This is what generates your Netflix and Amazon suggestions, but it is also now providing the basis for government actions. As Kieran Healy notes, this would have been interesting back in the American Revolution.

This is distinct from the normal Seeing Like a State (SLS) critique of how states see their citizens. Some think states produce “a logic of homogenization and the virtual elimination of local knowledge...an agency of homogenization, uniformity, grids and heroic simplification” (SLS 302, 8). But rather than flatten or homogenize its citizens when observed under bulk conditions, it actually creates a remarkably individualized image of what its citizens are up to.

What else is missing, or shouldn't have been listed? You could view these as a technological evolution of what was already in place, and in some ways that would make sense. But the technology has opened a brand new field. This existed before the War on Terror, and will likely exist afterwards; dealing with the laws and institutions behind this new state is crucial. As the technology has changed, so must our laws.

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I had a post at Wonkblog over the weekend, “Is a democratic surveillance state possible?”

In some sense, the issue of the government spying and collecting data on its citizens isn’t a new problem. One of my favorite tweets of the past week was Brooke Jarvis noting "Collapsing bridges alongside massive spy networks... Ah, the Jeffersonian ideal of government."

The United States has been tracking, observing, and surveilling its citizens for centuries. That includes that long-standing form of communication, the mail. As Senator Lindsey Graham just said, “In World War II... you wrote a letter overseas, it got censored...If I thought censoring the mail was necessary, I would suggest it.”

From the Census in the Constitution to the Cold War spy network (including the NSA, founded in 1952 through the Executive Branch), maybe this should be seen as a continuation of an old issue rather than a brand new one. But I think there are genuinely new and interesting problems with the 21st century Surveillance State and the brand new digital technologies that create the foundations for it. What’s new about the new surveillance state?

1. It’s always on and always has been. Old acts of surveillance had to be triggered and were forward-looking. However, we now spend so much of our lives online, and that is always being recorded. As the leaker Edward Snowden said in his interview, “they can use this system to go back in time and scrutinize every decision you've ever made, every friend you've ever discussed something with. And attack you on that basis to sort to derive suspicion from an innocent life and paint anyone in the context of a wrongdoer."

To the extent that old surveillance was capable of going back, it was by checking old records or interrogating old sources. And there the concept of amnesia comes into play.

2. It will never forget. “Amnesia” is a normal front line of defense. People forget things. Clear memories, stories, and ideas become grey. Photos and documents get lost with time. Trying to piece together history will necessarily involve a lot of missing gaps and poor recollection.

Not with the surveillance state. Cheap digital storage means that clear, easily replicable data will exist for the foreseeable future.

3. It scales easily. If the FBI was keeping records on 100 people in the 1950s, and it then wanted to monitor 1,000 people, it would probably need 10 times as many resources. Certainly it wouldn’t be effortless to scale up that level of surveillance.

As we can see in the age of Big Data and fast computing, this is no longer the case. The resource costs of accessing your phone’s metadata history versus all phones’ metadata history is going to be (somewhat) trivial. And the fact that there’s no amnesia means that you’ll always have access to that extra data.

4. It’s designed to be accessible. As Orin Kerr emphasizes, digital data here isn’t collected or surveilled via the human senses. A person can’t simply “peek” into your email the way they could peek at your physical mail. Instead devices need to be installed to access and make sense of this data. Private sector agents will do this, because it is part of their business model to make this information accessible. These access points will also be accessible to government agents under certain conditions - part of the major debate over the PRISM program is under what conditions the government can actually access these devices.

5. It’s primarily driven by the private sector. Broadly speaking, measures of democratic accountability and constitutional protections do not extend to the private sector. More on this soon, but things like the Freedom of Information Act to the Administrative Procedure Act to our whole regime of transparency laws do not apply to outside businesses. The government has worked with private groups before on surveillance, but here it is in large part driven by private agents, both for contractors and information gathering.

6. It predicts the future for individuals using mass data. Surveillance has generally used mass data to either predict or determine future courses of action on a mass scale. For instance, Census data is used to allocate federal money, or predict population growth. Alternatively, it uses individual data to analyze individual behavior - asking around and snooping to dig up dirt on someone, for instance.

The surveillance state, however, allows for using mass data to predict the actions of individuals and groups of individuals. This is what generates your Netflix and Amazon suggestions, but it is also now providing the basis for government actions. As Kieran Healy notes, this would have been interesting back in the American Revolution.

This is distinct from the normal Seeing Like a State (SLS) critique of how states see their citizens. Some think states produce “a logic of homogenization and the virtual elimination of local knowledge...an agency of homogenization, uniformity, grids and heroic simplification” (SLS 302, 8). But rather than flatten or homogenize its citizens when observed under bulk conditions, it actually creates a remarkably individualized image of what its citizens are up to.

What else is missing, or shouldn't have been listed? You could view these as a technological evolution of what was already in place, and in some ways that would make sense. But the technology has opened a brand new field. This existed before the War on Terror, and will likely exist afterwards; dealing with the laws and institutions behind this new state is crucial. As the technology has changed, so must our laws.

Follow or contact the Rortybomb blog:

  

 

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The Time is Right to Create a 21st Century Infrastructure Bank

Feb 20, 2013Georgia Levenson Keohane

President Obama has called for the creation of an infrastructure bank. Congress must follow his lead.

“It's not a bigger government we need,” President Obama said in the State of the Union address, “but a smarter government that sets priorities and invests in broad-based growth.” The creation of a national infrastructure bank is a “smarter government” idea whose time has come.

President Obama has called for the creation of an infrastructure bank. Congress must follow his lead.

“It's not a bigger government we need,” President Obama said in the State of the Union address, “but a smarter government that sets priorities and invests in broad-based growth.” The creation of a national infrastructure bank is a “smarter government” idea whose time has come.

Plans for a national infrastructure bank – one that uses federal funds to incent or leverage even greater investment, public and private, in large-scale public purpose projects – have been percolating since the 1990s. President Obama has long been a champion, and the idea has enjoyed bipartisan support in Congress and backing from the likes of the AFL-CIO and U.S. Chamber of Commerce. Yet we remain stalled in enacting this kind of finance facility, despite the weight of evidence of its potential efficacy and the urgency of the infrastructure (and financing) need. It is time, as the president urged, to put the nation’s interest before party, and to use this kind of public-private partnership to make the investments vital to our economic prosperity.

Arguments in favor of the I-Bank are premised on simple logic. Investments in the infrastructure we require to remain economically competitive – improved roads and bridges, high-speed rail, a new power grid, universal broadband access, renewable energy – will also put people to work. “Smart” use of some of our public dollars via grants, loans, loan guarantees, and other risk-mitigating instruments can encourage or stimulate substantially greater investment in these projects by states, municipalities, and private sector actors. Senators John Kerry, Kay Bailey Hutchison, and Mark Warner estimated that their proposed $10 billion American Infrastructure Financing Authority could unleash an additional $640 billion in infrastructure spending over the course of a decade.

With all this win-win, what explains the delay in actually establishing such a bank? First, given current fiscal constraints, every dollar counts, and even a few budgetary billions that promise significant return on investment may not deliver those returns in this election cycle. Instead, many in Congress prefer to retain prerogative over on what and where investments are made (preferably in their districts) rather than cede allocation decisions to an independent authority. Second, despite the endorsements from pro-business groups like the Chamber of Congress, a number of conservative Republicans have voiced predictable remonstrations: concerns over project selection process (“picking winners”), fear that the investment needs of metropolitan areas will be privileged over those of rural states, and a general (and congenital) preference for state-level decision making.

In fact, states have already taken the lead on creating infrastructure banks, as necessity has bred all kinds of invention. In the U.S., approximately 75 to 85 percent of infrastructure spending is financed by state and local governments, an unsustainable burden for states whose budgets and borrowing capacity have been eviscerated by the global financial crisis. According to the Federal Highway Administration, 32 states have infrastructure banks, and many new entities are taking shape, from Alaska to Virginia. Last year, the New York Works Task Force, headed by Felix Rohatyn (who helped save New York City from bankruptcy in the 1970s) called for the creation of a multibillion-dollar infrastructure bank for the Empire State.

In Chicago, Mayor Rahm Emmanuel, who as President Obama’s chief of staff was actively involved in the White House push for a national infrastructure bank, has created the Chicago Infrastructure Trust (CIT), designed to spur private capital investment in a range of infrastructure projects, including transportation, alternative energy technologies, and telecommunications and broadband access. The CIT will be capitalized by the likes of Citibank and JP Morgan and will fund projects with both debt and equity. The first local I-Bank of its kind, the CIT lies at the heart of Chicago’s new economic growth strategy.

A national infrastructure bank could learn from these local experiments. Private sector investment is not a panacea; it only lends itself to projects that can generate sufficient revenue, often in the form of user fees, like tolls on roads, to attract commercial capital. Sometimes, particularly when municipalities sell off assets, there can be unintended consequences to privatization. In 2008, Chicago Mayor Richard Daley famously leased the city’s parking meters to a private consortium for a handsome up-front fee of $1.15 billion. However, subsequent valuations of the future parking meter revenues put them at approximately $11.6 billion over 75 years – money that will accrue to the private investors, not to the city for things like education, libraries, or transportation.

A number of important new studies draw on these local experiments and best practices from around the world, including those of the European Investment Bank, which was established in 1958 and attracts a wide range of investors. Emilia Istrate and Robert Puentes note that 30 countries have specialized public-private partnership (PPP) units within their governments to promote this kind of cross-sector work. They suggest that, in addition to a national I-Bank, such an office could be housed within the Office of Management and Budget and could support state and local governments with their infrastructure investments. The idea is not to supplant or crowd out state or local investment efforts. As William Galston and Korin Davis point out, a national I-Bank would facilitate regional projects that span multiple states or those that promote goals that are truly national in scope, such as renewable energy development, a seamless power grid, or multimodal freight transport.

This would not be the first time we have looked to public-private partnership for massive infrastructure modernization and job creation. Franklin Delano Roosevelt’s New Deal included public-private ventures like the Tennessee Valley Authority, which FDR described as “a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise.” Obama’s New Deal – Keynes meets leveraged finance – would draw on this tradition of cross-sector collaboration with an eye toward our 21st century economic needs.

Calls for greater infrastructure investment have been amplified in recent months by events like hurricane Sandy, which underscore the urgency – and often regional and national nature – of the need. Polls from Lazard and the Rockefeller Foundation, among others, show that the vast majority of Americans, despite valid privatization concerns, are supportive of a mix of infrastructure finance that includes private sector capital, particularly if it is in lieu of further budget cuts or tax increases. The president and Congress must seize the moment: the time is right for a significant public-private investment in our nation’s future.

Georgia Levenson Keohane is a Fellow at the Roosevelt Institute and the author of Social Entrepreneurship for the 21st Century: Innovation Across the Nonprofit, Private, and Public Sectors.

 

Infrastructure image via Shutterstock.com.

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