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.

Share This

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

Jul 21, 2013Rachel Goldfarb

Click here to receive the Daily Digest via email.

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

Click here to receive the Daily Digest via email.

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.

Share This

Daily Digest - July 18: Welcoming the Regulators

Jul 18, 2013Rachel Goldfarb

Click here to receive the Daily Digest via email.

Finally, Bank Regulators Have Had Enough (ProPublica)

Click here to receive the Daily Digest via email.

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.

Share This

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

Share This

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.

Follow or contact the Rortybomb blog:

  

 

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:

  

 

Share This

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.

Share This

The Path to the Next American Economy: The Cult of Scale

Jan 22, 2013Bo Cutter

An obsession with the largest economic players distracts us from the smaller companies that should drive our future economy.

An obsession with the largest economic players distracts us from the smaller companies that should drive our future economy.

Both Richard Fisher, the president of the Dallas Federal Reserve Bank, and Alan Blinder, arch-economist and former vice-chair of the Federal Reserve Board, had fascinating commentaries last week on "too big to fail," the big banks, and financial stability. Fisher's was a reform proposal; Blinder's a set of lessons to remember. Both dealt explicitly or implicitly with our cult of scale. 

The business, popular, political, think tank, and NGO cultures of America are all infatuated with big enterprise and its leaders. As a society, we pay ritual and theoretical attention to small business and entrepreneurs, but with a very few exceptions we court big company CEOs almost exclusively. Every presidential economic statement or study has its requisite CEO centerpiece. When presidents (of all political persuasions) want to show that they are really, really serious about the economy, they have pictures taken of themselves with big company CEOs. The most frequently quoted business organization, the one whose policy pronouncements are taken as the last word in economic wisdom, is the Business Roundtable -- the insiders club for big business CEOs. The big news talk shows always have big business CEOs as their private sector representatives. The lobbyists whom congresses and governments pay attention to are from the biggest businesses. The same set of CEOs are always invited to presidential state dinners for visiting heads of state. The board development committees of think tanks, NGOs, and foundations covet the same set of CEOs. 

Why? 

Certainly not because big businesses play an actual dominant and dynamic role in our economy. Essentially 100 percent of all new jobs in America are created by new medium and small businesses. Even though large companies dominate R&D spending, revolutionary breakthroughs come almost exclusively from small entrepreneurial companies. If you look back just at the business history of the last 20 years, the pathbreaking innovations were always driven by small and medium companies -- never by the giant incumbents of an industry. 

So what benefits does scale bring us? Richard Fisher raises this question dramatically in the case of banking. Banks with less than $10 billion in assets -- 98 percent of all banks -- held only 12 percent of total bank assets in America but they made 51 percent of all small and medium business loans. Banks with less than $10 billion in assets continued lending to these businesses during the financial debacle; the big banks stopped. Lending, I'll remind you, is basically what banks are supposed to do.

And of course big banks are the riskiest and most costly part of the banking sector. Their failures or near failures nearly cratered our economy, they received the vast bulk of the bailout money, and they continue to hold the riskiest assets. The five largest banks in America hold $4 trillion in non-deposit liabilities, 26 percent of U.S. GDP. Among other problems posed by these liabilities -- for example, that virtually no one understands them -- they are the reason for the excess leverage of the big banks.

Blinder usefully underlines 10 commandments for avoiding the next financial crisis. They all make sense. But when you look closely at his commandments, at least eight out of 10 are directly linked to unavoidable problems of scale and complexity. Consider this: the five biggest banks operated through over 19,000 subsidiaries in a minimum of 50 countries each. The simple fact is that Blinder's very intelligent commandments can't work in this world. I begin with a prejudice: compared to the directors of the five giants (and these are highly sought after and highly compensated directorships), directors of America's smaller community banks are every bit as smart,  know more about the banks they direct, hold the CEOs of their banks in far less awe, are much more likely to discipline their management effectively, and are closer to the customers. None of this is just a role of the dice. According to Richard Fisher, J.P.Morgan Chase has about 5,000 subsidiaries. I'll grant that many of these are meaningless. But no set of directors on earth can really understand or guide well an entity with thousands of subsidiaries. In these circumstances, the amount of arbitrary, mostly unchecked authority given to senior management and the CEO is enormous. A single director is rarely going to risk either losing his or her directorship or simply being humiliated in the club by challenging the CEO on anything.

Which gets me back to the general problems of mega scale in business. While the biggest banks pose particular problems and the biggest dangers, all the evidence seems to say that as businesses get very, very big, four developments are inevitable. The businesses become sclerotic and bureaucratic. The businesses lose the creativity and dynamism that initially drove them. The businesses become extraordinarily complex. The businesses become less market-driven and more dominated by CEOs with a fair amount of arbitrary power. Some businesses and some extraordinary leaders -- Steve Jobs -- delay all of this, but the trends are inevitable. 

So once again, why the fascination with big companies and their chiefs? Awe, power, and money. The heads of the biggest companies are the real masters of our universe. They are treated like heads of sovereign states. A lot of them think of themselves that way and, in fact, a heck of a lot of big company CEOs have more actual power than the heads of government of all but 30 to 50 countries. And within a range the power is fairly arbitrary. The biggest companies have the widest range of  choices about products, locations, suppliers, public and community relations money, and foundation money. There is lots of economic "rent" buried among all those choices and everyone wants a little bit of it. I think the resources most big companies allocate through these choices mostly do an enormous amount of good and have a significant function in our strange society, but that's not the same thing as believing these companies are the future of our economy.

To be clear, big companies play big, real, valuable roles in our economy. We need a mix. But the balance has gone too far in our infatuation with bigness. The true path to the Next American Economy does not go in that direction. We will not grow as fast as we must with an increasingly big company economy. Equity and social mobility won't increase that way. We will need more breakthrough innovation, more new companies creating good jobs, more highly specialized value-added products and services, and more diversity and localization of businesses. The dream should be an economy driven by thousands of companies growing from dozens of very different urban platforms, not by a few dozen giants. But achieving that dream will be much harder if our political and intellectual culture is perpetually fascinated and seduced by the non-economic glamor of the wrong part of the private sector. 

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents.

Share This

Paying Taxes to Your Boss: Another Step Toward 21st Century Feudalism

Oct 26, 2012Tim Price

Employers are already treating their workers like their subjects. Now some of them get to collect taxes, too.

Employers are already treating their workers like their subjects. Now some of them get to collect taxes, too.

Though a lot of Americans really (really, really) hate paying taxes, most of us can at least justify it as our contribution to some greater good, whether it’s the broad range of social programs favored by progressives or a libertarian night watchman state. But what if the government instead told us, “We don’t want your money, but we would like to make friends with some rich guys, so just give it to them and let them have fun with it”? That could soon be the law of the land in Pennsylvania, where the state legislature has passed a bill that would, as Philadelphia City Paper blogger Daniel Denvir describes it, “allow companies that hire at least 250 new workers in the state to keep 95-percent of the workers' withheld income tax.” These workers will essentially be paying their employers for the privilege of having a job. Some have called this “corporate socialism,” but it also calls to mind an even older economic model that was once popular in Europe – except back then, the bosses were called lords. It’s a more modern innovation in the U.S., but combined with increased political pressure from employers and a crackdown on workers’ rights, it all adds up to feudalism, American-style.

The Pennsylvania bill is just the most recent example of state income taxes being turned into employer subsidies. It’s already the law of the land in one form or another in 19 states, and according to Good Jobs First, it’s taking $684 million a year out of the public coffers. The theory is that this will boost job creation. But the authors of the Good Jobs First report note, “payments often go to firms that simply move existing jobs from one state to another, or to ones that threaten to move unless they get paid to stay put.” In other words, it’s more like extortion than stimulus. With state governments facing a projected $4 trillion budget shortfall and continuing to cut social services and public sector jobs, they can hardly afford to be wasting money on companies that already have plenty and have no intention of putting it to good use. And the more governments turn over their privileges to businesses, the more the distinction between the two becomes blurred.

But if corporations have state governments over a barrel, they have their employees stuffed inside the barrel and ready to plunge down the waterfall. As I’ve noted before, some conservatives view all taxation as theft, but there’s surely no better term for what happens when employers promise their workers a certain wage or salary and then pocket some of the money for themselves. When you pay taxes to the government, you get something in return, whether it’s a school for your kids or a road to drive on or a firefighter to rescue you from a burning building. When you pay taxes to your boss, you… well, you give your boss your money. Your only reward is that you get to continue to “work the land,” so to speak. The lords didn’t consult with the peasants on which tapestries they should buy with the money they collected from them.

Did I forget to mention that these employers aren’t even required to tell their workers that this is how their “income taxes” are being used? Journalist David Cay Johnston, who covers this issue in his new book, The Fine Print: How Big Companies Use ‘Plain English’ to Rob You Blind, writes that this bait-and-switch is “stealthy by design.” Of course it is; if these workers were important enough to know where their money is going, it wouldn’t be legal to steal it.

Employers may be able to exert pressure, but they can’t actually control who you support, right? Well, they might not be able to accompany you to the voting booth (yet), but if you work in a state that allows your employer to confiscate your tax withholdings and donate them to a pro-Romney Super PAC, they can turn you into a Romney supporter whether you like it or not. It’s not enough that our current campaign finance system gives wealthy executives nearly unchecked power to support the candidate of their choice; subsidizing them with income taxes allows them to choose for everyone in their fiefdom.

If employers were always secretive about their exploitation, the comparison to feudalism might not seem apt – after all, serfs were pretty clear on what the score was. But there’s nothing subtle about the way some employers have begun to apply political pressure in the workplace. From forcing workers to attend Romney rallies without pay to outright threatening their jobs if President Obama is reelected, employers in the post-Citizens United era are feeling emboldened to conscript their employees as bannermen for the candidates of their choice. Suddenly, a job is not just a job, but an oath of allegiance. And Republicans, at least, are all for it. Mike Elk reports that Mitt Romney himself urged business owners to lobby their employees on his behalf, assuring them that there is “Nothing illegal about you talking to your employees about what you believe is best for the business.” And as we all know, if you can’t technically be arrested or fined for doing something, that means it’s totally okay to do it. Q.E.D., coal miners.

This lopsided power dynamic is reflected more generally in the shoddy state of modern labor law. In most states employers can fire their workers whenever they want for pretty much any reason, forcing them to fall in line with even the pettiest demands. When your boss is trying to tell you when you can and can’t go to the bathroom, forcing you to hide your Obama bumper sticker seems like an almost trifling concern in comparison. This lack of employee agency has led Roosevelt Institute Fellow Dorian Warren to describe today’s employers as “mini-dictators,” and as more public funds are diverted to private business owners, that comparison is only becoming more literal.

If conservative policymakers succeed in their nationwide effort to eliminate collective bargaining rights and neutralize already weakened unions, conditions aren’t likely to get better for workers anytime soon. Business owners and corporate execs will continue to assert more and more authority, bending their workers’ will to their own while using those workers’ paychecks to solidify their power. But there’s still hope of turning things around and restoring a more balanced playing field. If more American workers take note of the fact that two of their least favorite people, the tax collector and their boss, are being combined into one entity, it might just spark enough anger for them to fight back. As the feudal lords eventually learned, the peasants were the ones holding the pitchforks.

Tim Price is Deputy Editor of Next New Deal. Follow him on Twitter @txprice.

 

Businessman with crown image via Shutterstock.com.

Share This

Bryce Covert: How Do We Make the Economic Case for Care Work?

Oct 19, 2012

On the latest episode of the Roosevelt Institute's Bloggingheads series, Fireside Chats, NND Editor Bryce Covert talks to Nancy Folbre, economist at the University of Massachusetts Amherst and editor of For Love and Money: Care Provision in the United States.

On the latest episode of the Roosevelt Institute's Bloggingheads series, Fireside Chats, NND Editor Bryce Covert talks to Nancy Folbre, economist at the University of Massachusetts Amherst and editor of For Love and Money: Care Provision in the United States. In the clip below, they discuss Bryce's main takeaway from the book, which is that there is a value to domestic care work "to everyone, to the economy, to individuals, and there's a cost when we're not valuing this care."

Bryce notes that the high-profile defeat of the Domestic Workers' Bill of Rights in California and the continued obstruction of a bill to provide paid sick days in New York City are both the result of Democrats giving in to pressure from business lobbyists. Given the challenge of taking on these powerful interests, Bryce wonders if there's a way "to make the economic case, to bring business in or at least to be able to combat their claims that, 'Oh, well, it's too much of a cost burden on us to do these things.'" She also points out research that shows that although these worker-friendly regulations are often met with initial resistance from employers, they've proven to be harmless or even beneficial once they're in place. This suggests that "maybe there's this disconnect between what small business owners or regular business owners think and their represented interests like the Chamber of Commerce, which tends to be very conservative even in policies that might actually benefit small businesses."

For more, including a discussion of how coalitions can be built to push for better working conditions and why men share away from traditionally female-oriented care work, check out the full video below:

 

Childcare worker image via Shutterstock.com.

Share This

The GOP's Zombie Dodd-Frank Would Lose the Core Logic of Financial Reform

Sep 20, 2012Mike Konczal

Republicans might not repeal Dodd-Frank outright, but they'd eliminate the system of rules that make it work.

Republicans might not repeal Dodd-Frank outright, but they'd eliminate the system of rules that make it work.

It was just announced that Tim Pawlenty will become the head of the bank lobbying group Financial Services Roundtable. The powerful financial lobbying group, which represents groups like JP Morgan and Bank of America among other big financial sector players, appears to be aligning itself more closely with the Republican Party and betting on the idea that Republicans will control at least part of Congress. But what do they want? Earlier in the year, I argued in Washington Monthly that they'd like to repeal the core parts of financial reform.

Recently, Phil Mattingly had an article at Bloomberg Businessweek about how the GOP and Mitt Romney would approach Dodd-Frank. This is with a hat-tip to Reihan Salam who notes that this article "has confirmed something I’ve heard from well-informed insiders" and makes additional arguments [1]. So it seems well-sourced.

Mattingly's argument is that it is unlikely that the Republicans will outright repeal Dodd-Frank. "Instead, President Romney would likely try to give the financial industry something it wants more: a diluted financial reform law that would relax restrictions on some of its most profitable—and riskiest—investments but maintain enough government oversight to give the banks cover."

So what would the Republicans try to dilute and remove? Mattingly:

"Wall Street wants to loosen rules governing the swaps market, which generated $7 billion in revenue in the first quarter of 2012, according to government records. The banks would also get rid of restrictions on bank investment in private equity and hedge funds, pare back the power of the new federal consumer protection agency, and block the Volcker Rule, which bars banks from trading with money from their own accounts, a practice that can put customer deposits at risk. [...]

Wall Street doesn’t oppose everything in the law. Banks support the “resolution authority” that spells out how and when the government can seize and wind down struggling banks before they catastrophically fail."

So they want to go after derivatives rules (swaps), the Volcker Rule and the related law on restrictions on hedge fund investments, and also the CFPB. It's important to understand this isn't like removing random parts of the bill, as strict as they may be, but is instead gutting the core logic of the law. It's the equivalent of Republicans saying they'd keep the Obamacare bill, but stop the exchanges, remove the individual mandate, and lose the ban on pre-existing conditions while getting rid of the means-tested subsidies and Medicaid expansion. We'd understand that all of the parts of this system are interconnected and inseparable; the ban requires everyone to be in the market, which requires subsidies and well-developed markets.

Let's make sure we understand how derivatives, the Volcker Rule, and the CFPB all work together. Imagine that we're car engineers, and we want to design a car and road system so that if the car crashes, it does so as safely as possible. There are four things we can do. We can put airbags and seatbelts in the car and other cars so that when it does crash the damage is limited and controlled. We can design the car with things like a brake override system so that if it hits a rough patch the driver can keep control of it and make it less likely to crash.  We can put some speed limits on the road, as well as clear traffic signals to guide cars from running into each other. And we can have some protection for pedestrians, like cops watching for DUIs or barriers to prevent cars from driving into crowds of people. Easy, right?

Now let's think of Dodd-Frank. There are the legal powers that deploy to resolve a firm if it fails, like an airbag, which are called resolution authority. This allows the FDIC to take down a failed financial firm as if it were a bank, subject to serious rules and restrictions.  And, like requiring certain car features, there are specific policies for large, systemically risky financial firms, like enhanced capital requirements, limits to investments in risky hedge-funds, and the Volcker Rule, which are designed to make it less likely for a firm to crash.

Dodd-Frank also introduces speed limits and rules of the road in the financial sector, designed to make the system as a whole less likely to crash or spiral out of control when a panic does happen. One primary place it does that is through derivatives regulations. And "cops on the beat" is the metaphor for the Consumer Financial Protection Bureau.

So there's Dodd-Frank law to allow a firm to fail, law to make it less likely a financial firm fails, laws to prevent the interconnected financial markets from going into crisis if a firm does fail, and law to gives consumers a representative in dealing with the regulatory field. This is like thinking of Dodd-Frank as a system of deterrance, detection, and resolutiion, a related model we've developed elsewhere.

If Wall Street and the Republicans are looking to seriously gut the Volcker Rule, derivatives, and the CFPB, then they're looking to gut the entire logic of the bill. Interestingly, they are less interested in "resolution authority," the legal process to fail a financial firm. This is evidently no problem with everything else removed, perhaps because they believe congressional bailouts will then happen. This should remind us that resolution authority is strengthened and made more credible by other strong regulations, including things not in Dodd-Frank, like size caps or Glass-Steagall. Preventing these diluations is crucial to building a regulatory system for the financial sector that works in the 21st century.

[1] Reihan notes that banks "also understand that [Dodd-Frank] favors incumbents over new entrants, particularly incumbents with the legal acumen and lobbying resources to shape the emerging regulatory regime. My strong preference, very much in line with conservative and libertarian sensibilities, would be for a financial reform that would aim to facilitate rather than stymie entry."

I'd like to see more on how Dodd-Frank as blocking new firm entry works. While this is a generic complaint of regulations in general, I'm not sure in what ways it applies to Dodd-Frank. Parts of Dodd-Frank actually are designed to scale up with size and risk, e.g. Sec. 171 requires capital requirements to scale with "concentrations in market share for any activity that would substantially disrupt financial markets if the institution is forced to unexpectedly cease the activity," which is not for new entries. The idea is to hold larger and riskier firms to tougher standards and higher capital, which is regulation that scales with size.

Follow or contact the Rortybomb blog:

  

Share This

Pages