Rediscovering Government

All Aboard the Pro-Government Bandwagon

Nov 13, 2012Jeff Madrick

Cracks are beginning to show in conservatives' opposition to government, but progressives still need to make the case for higher tax revenues.

So now everyone is climbing aboard the government-is-necessary bandwagon. I use as my litmus tests David Brooks and Ross Douthat, conservative op-ed columnists of The New York Times.

Cracks are beginning to show in conservatives' opposition to government, but progressives still need to make the case for higher tax revenues.

So now everyone is climbing aboard the government-is-necessary bandwagon. I use as my litmus tests David Brooks and Ross Douthat, conservative op-ed columnists of The New York Times.

To myself and my colleagues, who have been fighting this battle for some time, the Johnny-come-latelys, even among the Democrats, are welcome. I wrote a book called The Case for Big Government, published in 2008, based on lectures I gave back in 2006. A few years before that, I wrote a speech for Senator Ted Kennedy on this subject, largely with historical references about what government did for America in the preceding 200 years, that he gave to considerable notice from his own senatorial colleagues. I was writing a monthly column in The New York Times before that, which persistently sounded this theme. I can’t remember many of the editors being enthused. When I complained about education decline or lack of good wages, one reporter told me to look at how high a proportion of people now owned a home. Many, if not the vast majority, in the media who covered such matters believed in the new “American model,” not to mention the “Washington consensus" -- that is, deregulation, low taxes, and Wall street hegemony.

The financial crisis, Hurricane Sandy, foreclosures, and ultimately the lack of jobs in a Great Recession have changed some of that. We at the Roosevelt Institute started Rediscovering Government with enthusiastic support from Roosevelt’s management and similarly enthusiastic financial support from Bernard Schwartz and a couple of others. We plan to keep sounding the theme about restoring faith in government and take the program to a new level in 2013, bearing down in particular on government and jobs.

Meanwhile, some traditional Republican voices are sounding a bit more constructive about government than they used to. Make no mistake, they are still hesitant, but the language is changing.

David Brooks is now talking about how the big-government-versus-small-government argument is no longer that relevant. He suggests it’s because of the changing composition of the American voting public. “The Pew Research Center,” he writes, “does excellent research on Asian-American and Hispanic values. Two findings jump out. First, people in these groups have an awesome commitment to work. By most measures, members of these groups value industriousness more than whites. Second, they are also tremendously appreciative of government. In survey after survey, they embrace the idea that some government programs can incite hard work, not undermine it; enhance opportunity, not crush it.”

Now, don’t be surprised the Brooks twists American history into something so simplistic it is unrecognizable in order to make the Asian and Hispanic electorate sound like an unprecedented cultural shift in the nation. He says the old Protestant nation had disdain for government and now they are—so he implies—losing their influence. He of course does this kind of simplistic reading of American history from time to time. Who supported the great progressive revolution of the 1930s well before the Asian and Hispanic rise? This kind of idea—that culture explains so much—is generally dangerous.

But the point here is that Brooks is now saying Republicans have to get off the anti-government kick. He goes on: “Moreover, when they look at the things that undermine the work ethic and threaten their chances to succeed, it’s often not government. It’s a modern economy in which you can work more productively, but your wages still don’t rise. It’s a bloated financial sector that just sent the world into turmoil. It’s a university system that is indispensable but unaffordable. It’s chaotic neighborhoods that can’t be cured by withdrawing government programs. For these people, the Republican equation is irrelevant. When they hear Romney talk abstractly about Big Government vs. Small Government, they think: He doesn’t get me or people like me." 

Well, that’s a heck of a breakthrough, even if argued on spurious grounds about how more and more Americans don’t have old-fashioned American cultural roots. Let’s just get away from the cultural stuff. Who elected Teddy Roosevelt and Woodrow Wilson before Hispanics voted? Who backed the progressive income tax at the start of the 20th century?

Anyway, the conservative punditry is shifting. Ross Douthat, the other conservative regular on the Times op-ed page, has a firmer grasp of historical context than does Brooks. He only partly buys into the “demographic excuse,” as he puts it. As he says, “Republicans are also losing because today’s economic landscape is very different than in the days of Ronald Reagan’s landslides. The problems that middle-class Americans faced in the late 1970s are not the problems of today. Health care now takes a bigger bite than income taxes out of many paychecks. Wage stagnation is a bigger threat to blue-collar workers than inflation. Middle-income parents worry more about the cost of college than the crime rate. Americans are more likely to fret about Washington’s coziness with big business than about big government alone. “

And he recognizes that Hispanics are not a one-issue demographic group. A simple change in immigration policy won’t win them over to the Republicans. He importantly concedes that Latinos tend to see government more as an ally than a foe. And increasingly others in his political camp are talking that way. He notes, “As the American Enterprise Institute’s Henry Olsen writes, it should be possible for Republicans to oppose an overweening and intrusive state while still recognizing that 'government can give average people a hand up to achieve the American Dream.' It should be possible for the party to reform and streamline government while also addressing middle-class anxieties about wages, health care, education and more."

And now some conservatives are even saying the Republicans should give up their resistance to higher rates on upper income Americans. Bill Kristol of the Weekly Standard made headlines when he said just that the other day. 

Glenn Hubbard, a former Romney adviser, says we can raise taxes on the rich by putting caps on deductions like mortgage interest, charitable contributions, and business provided health insurance. This deduction cap is gaining adherents among Democrats. But the devil here is in the details, and when one reads more closely what Hubbard has to say, one sees the dangers if one thinks the battle is won. By no means.

One issue is the refusal to raise income tax rates themselves, say the top bracket to 42 or 43 percent. Hubbard claims this reduces incentives. This was the same argument Martin Feldstein made when he said Bill Clinton’s income tax rate increase on the rich would hurt the economy. The Clinton boom soon followed. There is no accepted evidence that higher rates on the rich would dampen economic growth. A research report to that effect was completed and about to to be published by the non-partisan Congressional Research Service, and it was suppressed by the Republicans.

The more important point Hubbard makes is that most deficit-cutting should be accomplished by reducing government spending, not tax increases. And to him this necessarily means cutting the safety net and, probably, public investment.

Hubbard makes the critical point, however, as much as he disagrees with it. If Americans wants a bigger government, most Americans, not just the rich, will have to pay. But a lot more of the taxes can come from the rich than he admits. There’s a lot of room to raise taxes in America compared to tax bites in other rich nations. 

The battle for an active, constructive use of government will remain a tough one, even as the conservatives start compromising modestly. And the fight should ultimately be over tax increases, once the economy starts growing rapidly again (and not until then!).

So, for those of us who believe in the constructive purpose of government, we have to show how higher tax revenues can be put to critical work. We can do that. 

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

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Voters Demand a Progressive Second Term Agenda

Nov 13, 2012Felicia Wong

As part of our series "A Rooseveltian Second Term Agenda," a call for progressives to seize the moment after Election Day.

As part of our series "A Rooseveltian Second Term Agenda," a call for progressives to seize the moment after Election Day.

Last week’s election results weren’t just a win for the president. Across the board, voters went to the polls and registered their support for progressive values, supporting needed tax increases, passing marriage equality for gay and lesbian Americans, and giving a candidate who ran on a platform of proactive government and a strong safety net a second term. The message was clear: despite an economy that continues to recover too slowly, the direction that progressives are taking the country in is the right one.

The polling we have done with Democracy Corps makes it plain – voters don’t want austerity or cuts in Medicare and Social Security. They want to fix the economy with long-term investments in infrastructure and a focus on jobs. And they want solutions – like raising taxes on the well-off and reforming the financial industry – that can raise the revenue to pay for it. As Hurricane Sandy made apparent, we need to update the country’s infrastructure, and we can put people back to work doing it.

So our job has just begun. Now is when we really have to roll up our sleeves and work to achieve an ambitious agenda. The politics won’t necessarily be much easier than they were over the last four years. But with a Democratic president, a Democratic majority in the Senate, and an electorate strongly behind us, progressives have an opportunity to seize over the next four years.

Over the next few weeks, Roosevelt Institute Fellows and staff will weigh in with their thoughts on what our national agenda should look like. While we might differ on some of the specifics, we all agree on basic values and goals: reducing inequality, creating jobs, kick-starting economic growth, building a community among the American people, and regaining trust in both the private sector through functioning markets and in the government and our political system.

On the eve of a second Obama term, and with some fundamental economic and political choices before us, we are proud to be in this historic moment together, Our goals are ambitious. We believe that our ideas can have real impact. As President Franklin Roosevelt put it 80 years ago, “The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation.” Nothing could be truer of our times. Progressives must lead the way.

Felicia Wong is President and CEO of the Roosevelt Institute.

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Three Election Thoughts: The Failed All-In Repeal Strategy, Warren, and Three-Strikes

Nov 7, 2012Mike Konczal

The Consequences of the Conservative All-In Repeal Strategy: The attacks on Nate Silver have been fun to watch, but David Frum took the most heat for calling how this would all play out back in 2010. I really hope his Waterloo post, which made the case, will be on the radar of academics studying this era decades from now. Frum:

The Consequences of the Conservative All-In Repeal Strategy: The attacks on Nate Silver have been fun to watch, but David Frum took the most heat for calling how this would all play out back in 2010. I really hope his Waterloo post, which made the case, will be on the radar of academics studying this era decades from now. Frum:

Conservatives and Republicans today suffered their most crushing legislative defeat since the 1960s. It’s hard to exaggerate the magnitude of the disaster...Legislative majorities come and go. This healthcare bill is forever. A win in November is very poor compensation for this debacle now...No illusions please: This bill will not be repealed. Even if Republicans scored a 1994 style landslide in November, how many votes could we muster to re-open the “doughnut hole” and charge seniors more for prescription drugs? How many votes to re-allow insurers to rescind policies when they discover a pre-existing condition? How many votes to banish 25 year olds from their parents’ insurance coverage? And even if the votes were there – would President Obama sign such a repeal?

What's interesting to me is how the conservative movement followed an "all-in repeal" strategy since summer 2010. The think tanks didn't prioritize the parts of Obamacare and Dodd-Frank that they wanted to see removed and replaced with something else, and political agents didn't try to force changes in exchange for concessions on other priorities.

It was almost as if they didn't accept that the laws were the actual laws of the land. The major conservative think tanks all focused on either the unconstitutionality of the bills, hoping the Supreme Court would save them (this goes for Dodd-Frank as well), or wrote only in terms of repeal. During the primaries, every Republican presidential candidate promised to repeal Dodd-Frank and repeal Obamacare, and almost nobody said anything about what would go in their places. Romney famously was vague about how he'd replace Dodd-Frank and Obamacare. As such, there's been no signaling or mobilization on priorities for how conservatives should try to change these laws.

Part of this is a function of how the movement has been mobilizing itself. If Obamacare is an Ayn Rand horror story of socialists nationalizing the health-care industry, well, 10 percent less socialist horror is still a nightmare. If Eric Cantor went and, say, offered Obama a debt ceiling raise or a second stimulus in exchange for putting the CFPB's budget under Congress's control or pulling back parts of Obamacare, he'd likely have his head ripped off by the base. This also might be because the conservative movement is out of ideas, something that has become painfully obvious in its responses to the Great Recession.

But either way, Obamacare and Dodd-Frank will be here for a generation now.

More Reasons to Celebrate Elizabeth Warren: Besides all the other reasons to be happy about Elizabeth Warren winning her Senate seat, there are two additional policy reasons to consider. Conservatives and lobbyists are focused on removing the CFPB's funding, single directorship, and sole focus on consumer financial protection. Republicans have explicitly stated that they'll block any director until these changes are made. Warren, who came up with the idea for the agency and fought for its creation, will understand how important the mission and the legal structure for how the agency is funded and organized are, and fight for that as well.

Another important financial reform issue is that people are still nervous about how resolution authority, or the FDIC forcing a major financial firm to fail, will work in practice. Warren is one of the major experts on bankruptcy law -- she's the third most cited scholar on bankruptcy law in the country -- and also would like to see Too Big To Fail ended, so I believe she can work productively with FDIC to implement a resolution regime best capable of handling the problem.

California Overwhlemingly Votes to Ease Three-Strikes Law, Other States Legalize Marijuana: 18 years after it was first passed, California looks to ease its three-strike law by a 20-point margin. When people study how the United States differs from the rest of the world in terms of incarceration policy and how we manage to have a significantly higher prison population than other countries, mandatory penalties for those who have a prior (recidivists) is a major driver.

As the University of San Francisco School of Law’s Center for Law and Global Justice wrote in their report, “Cruel and Unusual: U.S. Sentencing Practices in a Global Context,” all of the major policy differences between the United States and other countries -- "life without the possibility of parole, 'three strikes' laws, consecutive sentences, mandatory minimums, juvenile justice laws, dual sovereignty, and non-retroactive application of ameliorative law" -- are all anti-rehabilitation policies.

Let's go to the section of that report on three-strikes laws:

The most infamous example of a stringent habitual offender law is California’s three strikes law, which provides a sentence of 25 years to life for anyone convicted of a felony who has committed two prior serious or violent offenses. While the public pushes for “the worst of the worst” to be taken off the streets, the reality is that most third strike convictions are for non-violent felonies: fifty-four percent of third strike commitments under California’s three strikes law were for drug, property, and other non-violent crimes...

Virtually all of the countries surveyed for this report provided some type of increased penalty for recidivists. What distinguishes the United States from the rest of the world, however, is the lack of judicial discretion in sentencing schemes aimed at recidivists and the length of sentences that result...This leaves only 21% of countries, including the United States, that require a mandatory increased punishment for an offender with prior convictions.

For fun, what are those other countries that also have three-strike like laws?

Not the best company. Remember, these laws were designed to limit the power of judges and increase the power of prosecutors, a core part of the conservative assault on liberalism in the space of incarceration policy. This is a major change, likely to impact many other states for the better.

Meanwhile, Colorado and Washington voted to legalized and regulate marijuana use. As of right now, Attorney General Eric Holder has not publicly stated if the Feds will try to interfere with these new laws, like they threatened to do to California's proposal (which failed to pass). President Obama and Holder have a real opportunity to let states experiment with ending the failed War on Drugs as we know it, or an opportunity to keep a moral crime going indefinitely by federal preemption. Nicole Flatow has an excellent overview of the legal issues at Think Progress.

 

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Mitt Romney, Reactionary Keynesian

Nov 6, 2012Mike Konczal

I meant to develop this into a larger work on the Right and economic stimulus but it never happened, and with the election today favoring President Obama, it is likely I won't get a chance. So here's part of it for the blog.

I meant to develop this into a larger work on the Right and economic stimulus but it never happened, and with the election today favoring President Obama, it is likely I won't get a chance. So here's part of it for the blog.

In December 2008 Mitt Romney wrote "A Republican Stimulus Plan" at the National Review, announcing "this is surely the time for economic stimulus." What should be in a Republican stimulus plan? First up, tax cuts. Tax cuts for capital income and corporations, and tax cuts overalls. But tax cuts aren't sufficient to the task, and some sort of direct spending will be required. However, since most infrastructure takes too long to get off the ground, "[s]pending to refurbish and modernize our military equipment is urgently needed, and it has a more immediate impact on the economy."

In 2008 Mitt Romney wanted to stimulate the economy with tax cuts and military spending. It's worth noting that two of the central planks in Mitt Romney's currently underdeveloped economic policy are a series of tax cuts and a dramatic $2 trillion dollar increase in military spending. But don't call it stimulus! Mitt's National Defense Plan wants to "modernize and replace the aging inventories of the Air Force, Army, and Marines," as in the stimulus plan, but this is now to address "Obama's failure" in foreign policy.

Mitt Romney's tax plan is meant to offset tax cuts by cutting tax expenditures. But the tax plan currently looks like an unassembled game of Mousetrap where you know several of the pieces are missing. It could work, but it isn't clear how it would. But even if Mitt Romney did offset his tax cuts by cutting expenditures, those expenditure cuts would likely be put into place over a period of years, years where the deficit would balloon further. (The Ryan Plan also balloons the deficit in the short term dramatically.) This would still work as stimulus.

So Keynesianism through tax cuts and the military. The military stuff really does add to what John Kenneth Galbraith referred to as "a new and reactionary form of Keynesianism with which to contend" where "Tax reduction would then become a substitute for increased outlays on urgent social needs." Or as Michael Harrington wrote, in a 1966 Encounter article titled "Reactionary Keynesianism," "in the United States it is quite possible to envisage a conservative Keynesian policy which substitutes tax cuts for social investments, increases the maldistribution of income (the rich and the corporations gain more from tax cuts than the workers and the poor) and maintains a prosperity as that term would be defined by business."

Liberals like to point out the contradiction of Republicans attacking economic stimulus while arguing that defense cuts will tank the economy, and they are right to do that. But I'm still having difficulty thinking through where the distributional impact of various ways of managing the economy, the type of society it builds, connects into the political ideology. I imagine we'll have more opportunities to see this in the aftermath of the election.

 

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Guest Post: Heather Boushey on Inequality and Growth

Nov 6, 2012Mike Konczal

Mike here: Special guest post by Heather Boushey of the Center for American Progress, responding to a recent citation of her work with Adam Hersh on inequality and growth (work we discussed here). The launch of this post was delayed on my end as a result of Sandy-induced work/email chaos.

Mike here: Special guest post by Heather Boushey of the Center for American Progress, responding to a recent citation of her work with Adam Hersh on inequality and growth (work we discussed here). The launch of this post was delayed on my end as a result of Sandy-induced work/email chaos. Hope you check it out, as well as their excellent report that is discussed within.

Inequality does appear to affect economic growth

by Heather Boushey

It is now a well-known fact that the United States has the highest levels of inequality among developed countries. Increasingly, the economics profession is questioning how this affects our economy, not only in terms of what it means for those at the bottom of the income distribution, but in terms of how high inequality affects economic growth and stability.

The New York Times recently published a thoughtful piece on the relationship of rising U.S. inequality to long-term economic growth. In the wake of that article, they published a Room for Debate online forum on this topic and Scott Winship, a scholar a the Brooking’s Institution was among those participating. Mr. Winship cites our report on the topic to discuss what he argues is inadequate evidence linking inequality and growth.

We are grateful that Mr. Winship acknowledges CAP's central role in this debate, but grossly mischaracterizes our conclusions. The quote he pulled from our report gives the false impression that our research supports the conclusionthat inequality is not a problem for economic growth.

Our argument is that we need to look specifically at the channels through which inequality affects economic growth, specifically in the U.S. context. For example, there is evidence that documents how the rich don’t spend as much of their income as the non-rich. If inequality keeps rising and the rich pull in a larger and larger share of national income, this stunts demand, the lifeblood of the economy.

Another mechanism is through entrepreneurship, which is often portrayed as the dynamic force in a capitalist economy. Yet, most entrepreneurs come from the middle class. The middle class provides both the economic security and access to education and credit that entrepreneursneed.

If inequality is due to the top pulling far away from the rest of the economy,which creates a very wealthy elite, this is often associated with a well-known economic phenomenon of “rent-seeking.” The wealthy will tend to use their outsized resources to garner a bigger piece of the pie, rather than on investments that will increase productivity and make the whole pie bigger. And, there is growing evidence that this is exactly what is happening to our economy, threatening long-term growth. For example, economists have been finding that as money has flowed into the financial sector, that industry has increasingly used its resources to promote policies that benefit itself only.

In opposition to Mr. Winship’s claim, the preponderance of evidence does supports the conclusion that inequality can hamper economic growth. We conducted a thorough review of the literature and in the quote he took, we were highlighting methodological limitations in a specific class of empirical studies. We also pointed out that cross-country panel data studies look at reduced form equations for growth and we argue that we should be thinking instead about a structural model.

Others have found our report to be data-driven. Jim Tankersley, journalist with the National Journal encouraged his readers to consume the report “in its entirety,” describing is as a “The bulk of Boushey and Hersh's sources aren't partisan in any way - just detailed, data-driven analysis from top economists.” This blog called it “the best up-to-date arguments that progressives discussing inequality should understand inside out.” And in a lengthy discussion on the subject last month by Jared Bernstein, former chief economist to the vice president, our work was used to frame a summary of the latest research on this topic. 

We are typically pleased to have our research cited in the paper of record, the New York Times. However, it is no fun to have our work grossly misrepresented.

 

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Price Point

New Deal Numerology: Storm Watch

Nov 1, 2012Tim Price

This week's numbers: $50 billion; 6 million; 3; 73%; $878 million

$50 billion... is a disastrous number. That’s how much Hurricane Sandy is projected to cost due to property damage and lost economic activity. Rather than asking the federal government to get lost, local officials are begging it to make room under its umbrella.

This week's numbers: $50 billion; 6 million; 3; 73%; $878 million

$50 billion... is a disastrous number. That’s how much Hurricane Sandy is projected to cost due to property damage and lost economic activity. Rather than asking the federal government to get lost, local officials are begging it to make room under its umbrella.

6 million... is a darkened number. That’s how many households and businesses on the East Coast are still without power. Maybe it’s time we all stop depending on utility handouts and take individual responsibility with human-sized hamster wheels.

3... is a submerged number. That’s how many feet oceans are expected to rise this century, adding to the kinds of destructive surges created by Sandy. Scientists blame global warming, but conservatives aren’t ruling out alternate explanations, like Atlantean sabotage.

73%... is a responsive number. That’s how many voters say they approve of the federal government’s response to the hurricane. It seems like it’s much easier for Americans to stomach a big government bailout when it actually involves buckets of water.

$878 million... is an endangered number. That’s how much funding FEMA stands to lose from sequestration if policymakers don’t strike a deal to prevent cuts. Hopefully Congress isn't so jealous of natural disasters that it has to create some of its own.

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

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What Explains Wall Street's Shift Away From Obama: Fat Cat Comments or Dodd-Frank?

Nov 1, 2012Mike Konczal

In an interesting column on President Obama as the last of the "New Democrats" presidents, Michael Lind brings up the idea that the financial sector has permanently moved away from Democrats. "In 2012, most Wall Street donors, offended by Obama’s mild criticism and alarmed by the support shown by many Democrats for Occupy Wall Street, have swung their support away from the Democrats to the Republicans. It is unlikely that most of them will ever come back.

In an interesting column on President Obama as the last of the "New Democrats" presidents, Michael Lind brings up the idea that the financial sector has permanently moved away from Democrats. "In 2012, most Wall Street donors, offended by Obama’s mild criticism and alarmed by the support shown by many Democrats for Occupy Wall Street, have swung their support away from the Democrats to the Republicans. It is unlikely that most of them will ever come back. In the aftermath of the Great Recession, moderate as well as progressive Democrats are going to emphasize deficit reduction through tax increases far more than even moderate Republicans...Any such reform will cut deeply into the incomes of many Wall Street rentiers whose 'progressivism' extends only to cost-free support for gay rights and abortion rights."

It'll be interesting to see if the political coalitions permanently shift in this manner. One reason for a shift is if Wall Street is leaving President Obama less for rhetorical reasons and more for economic and regulatory ones, especially when it comes to Dodd-Frank, which Democrats will continue to defend and Republicans will look to overturn.

When people discuss why Wall Street has turned against President Obama, it is usually a story about personalities and ego. Obama once said, “I did not run for office to be helping out a bunch of fat cat bankers on Wall Street,” and that particularly stung them. Or maybe Obama is terrible with fundraising and managing the egos of rich donors. Or maybe it runs deeper psychologically. As an investor who voted for Obama in 2008 told Gayle Tzemach Lemmon, "There is just this feeling across the financial services community, across the business community, that this guy hates us."

There is a lot to the lost feeling of proper stewardship over the economy, but as Matt Yglesias points out, it likely goes beyond the fat cats line. These conversations almost always put Dodd-Frank in the far background, even though it is a major reform of the financial sector that will reduce Wall Street's power and profits. Let's look at a few reforms.

Derivatives. One of the goals of Dodd-Frank is to bring transparency and standardization to the derivatives markets by requiring derivatives to go through a clearinghouse with pricing transparency. According to the FT's Michael Mackenzie and Tracy Alloway in "Swaps profits threatened by Dodd-Frank," "Analysts at Standard & Poor’s expect an annual drop in revenues for large dealers of between $4bn and $4.5bn once rules that include...mandatory central clearing of OTC swaps are fully implemented... But for smaller broker dealers and others, the future looks brighter as competition potentially opens across the OTC arena."

In the article, CFTC chairman Gensler recognizes "all [the] benefit[s] from the lower costs and greater pricing information of a more transparent, accessible and competitive swaps market.” But not everybody actually does. Those who cornered the market pre-reform lose out on rents they were collecting from dominating the information in the market. Dodd-Frank is tackling the market in a way that expands access and transparency and reduces the pricing power of powerful incumbents. That's fantastic, unless you are one of those incumbents who will lose billions of dollars.

Interchange. Even the little things challenge the power of the financial sector over the real economy. Take interchange, the fees the financial sector charges to the real economy for using debit and credit cards. That now resembles a public utility after Dodd-Frank, which rationalizes the system in much the same way that personal checks were rationalized by the Federal Reserve in the early 20th century. S&P estimates that "the Durbin Amendment's immediate financial impact for the banking industry is a $6.5 billion to $7 billion annual reduction in debit card-related revenue... Bank of America, JPMorgan Chase, and Wells Fargo have absorbed the majority of these losses, considering the size of their debit card businesses relative to peers." This balances the playing field between the real economy and the financial sector while taking away a powerful set of contracts the banks were using to squeeze merchants.

CFPB. Meanwhile, consumer financial protection used to be the orphan mission of 10 different agencies, a number that encourages race-to-the-bottom regulatory arbitrage, none of which had the incentives to build expertise in this area or directly fight for consumers over other mission priorities. Now that mission is squarely placed in the CFPB, an agency whose funding and organizational structure is designed to prevent capture. The CFPB is already successfully going after illegal and deceptive practices at places like American Express, Discover, and Capital One, winning damages in the hundreds of millions of dollars. The financial sector is noticing that there is now an agency designed to enforce accountability.

(One might note that hedge funds don't fall under these requirements, yet they are very mad. Some of that is the result of the push to remove special tax breaks, which is a direct economic issue. Some might be the result of other financial regulations.)

These are just items with visible price tags, so it doesn't include things like the Volcker Rule, extra-prudential regulations of larger and riskier firms, trying to tackle the ratings agencies, the presumption that the FDIC will need to resolve and liquidate large firms and will require those firms to prepare for that event, and the other new regulations of the financial sector. With billions of dollars a year in profits on the line in repealing Dodd-Frank (and with those who benefit from regulation dispersed across the entire economy), it isn't surprising that we are seeing a lot of donations go to those saying they will substantially weaken reform. And the GOP is specifically targeting these kinds of reforms.

Notice that though these regulations have a large price tag, they aren't "soak the rich" or "let's get the fat cats" regulations. They are all designed to make the financial markets run better by bringing transparency, a level playing field, and accountability to the system. We haven't seen how they'll be fully implemented, and a lot is still at risk even without a Republican victory in the presidental election. But right now there are billions of reasons Wall Street should want to stop the Democratic Party and Dodd-Frank beyond hurt feelings.

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Transition Tasks: Commit to a New Model of Economic Growth

Oct 31, 2012Bo Cutter

The global economy is heading toward a huge transformation. Can America rise to the challenge?

Neither of our two major political parties have at their cores a commitment  to economic growth. In his second term, President Obama has an extraordinary opportunity to grab the golden ring, make a genuine commitment to sustainable, equitable growth, and follow that up with a credible, plausible entrepreneurial growth model.

The global economy is heading toward a huge transformation. Can America rise to the challenge?

Neither of our two major political parties have at their cores a commitment  to economic growth. In his second term, President Obama has an extraordinary opportunity to grab the golden ring, make a genuine commitment to sustainable, equitable growth, and follow that up with a credible, plausible entrepreneurial growth model.

But aren't both parties pro-growth in their platforms and their various position statements? Of course they are. It's a necessary ritual of political life. But for both the left and the right, growth is a residual - it's what you're for, after you get everything else you want. Moreover, both parties are wedded to whole sets of client groups whose agendas don't include economic growth at all.

The right wants austerity, low taxes, budget surpluses, preferably no government but at the most a small and passive government, no abortion, a Christian nation, and no immigrants - all before it wants growth. There will certainly be those who argue that some of these elements are essential aspects of an economic growth strategy, but I've yet to see a serious and specific growth model from the right and I've heard nothing about equitable and sustainable growth. In any case, the problem is that you can't just get elements of this list; holding today's right-wing coalition together requires that you get the whole package.

The left favors large active government almost as a principle, rather than a tool for something. By far it's highest priority is the current social safety net, unchanged forever. It does not regard debt or deficits as issues that matter. It is deeply contemptuous and dismissive of business, suspicious of markets, and is far more concerned about income distribution than about income expansion. It is very concerned - as it should be - about the short- and long-term effects of unemployment and it wants a sustainable and equitable world but sees no particular connection between these good things and economic growth. As with the right, one searches in vain for any useful theory or model of long run growth in the writings of the left.

The central attitude toward growth of both party philosophies is similar to the foreman on the loading dock who said, regarding his company's attitude toward quality, "It's in the slogan, and the vice president talks quality at least four times a year. But the assistant vice president talks shipping cases several times a day."

Other than playing whack-a-mole with each other over the short-term growth rate right now, the view of both the left and right is that the economy is a perpetual motion machine that will just keep rumbling along. But it isn't. Not ever and particularly not now. 

Economies have rhythms. They don't just march along forever at some preordained rate of growth. Big economies respond over decades, generations, to big impulses: revolutions in the cost of power, or transportation, or information; revolutions in the applications of these big cost shifts. These impulses spread throughout an economy, driving higher rates of economic growth, and then, as they become pervasive, lose their force. America has experienced such impulses, or waves, at least five times in the last 200 years. We are in the end phase of one such impulse and the very early stages of the next.

The "golden era" of the 20th century between roughly in 1950, and 1980 represented the full flourishing, the height of one such era and growth impulse. In these 30 years, the economy was dominated by large companies, managerial capitalism, and a financial system that evolved to meet those particular needs. The success of this era importantly shaped our expectations, our sense of how the world works, our institutions, and our politics. But as successful as this era was, the most important thing to know about it now is that it is over. Both parties - and both America's left and right - believe or at least act as though it is returning again, it's just around the corner. And it's the other guy's fault that it hasn't rearrived yet.

But it's not coming back. One reason among others is that we will never again see a world in which our economy dominates the world's economy. Beginning in the 1970s, as colonial empires collapsed and economic philosophies were revolutionized, major new nation states entered the same world economy we were in along with billions of new workers and households. At first that represented a boost to us, but as the economic sophistication of these economies evolved this new world meant vast and hard structural shifts for us. As Michael Spence makes clear in his book "The Next Convergence," much of the structural change we see and don't like comes from this changing shape of the world. Falling manufacturing employment, the 20-year slowdown in income growth, a large piece of income inequality, and the polarization of our labor force are all due in part to the changing shape of the global economy. (Just to be clear, the other major factor in all of these structural shifts is technological change.) 

We can't do anything about the shape of the world, but we can figure out how to change and thrive in this new environment. Which means we have to have a new growth model.

Fortunately, another technological revolution is occurring now and all of the elements of a new growth model are coming together. The model plays to American strengths and is there for us develop - unless we choose to be stupid. The model will require entrepreneurial capitalism, independent capital, high levels of private sector investment, equally high levels of infrastructure investment, mayors who see their cities as platforms for growth, and an educational revolution. It requires us to see that technological change can, uniquely, work for us. I've called it an era of mass specialization; it can be much more equitable and environmentally sustainable than the golden era.

And here lies President Obama's second transition task and a huge opportunity. He has to start immediately making this new growth model clear and comprehensible to Americans. He has to offer the hope that there is more to the future than just a repeat of the trends of the past. And he has to begin to propose the public policies that will allow the next growth era to be born. But above all, this will require that President Obama sees equitable, sustainable growth as the core of his governing philosophy for the second term.  Two good places to start with would be to put his endorsement of Simson-Rivlin-Dominici-Bowles in the context of a focus on growth and to make this the theme of his January 2013 State of the Union.

President Obama told me once at a very small breakfast in New York - long before he was president - that he wanted to be a transformational president. I believe him, but I don't think he's achieved that yet. Here's the chance. What could be more transformational, and more truly progressive, than to change America's governing political philosophy, wrench our politics away from its infatuation with wedge issues and a return to the 1950s, and usher in a new era of growth? As I started by saying, the golden ring is out there and the merry-go-round is heading toward it. 

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.

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Rediscovering Government

What Do We Get Out of Government?

Oct 25, 2012

"Let us not be afraid to help each other -- let us never forget that government is ourselves and not an alien power over us." FDR said those words in Marietta, Ohio in July 1938, but it's just as relevant today. As conservatives continue to deride every attempt to create progressive change through government as an oppressive socialist takeover, we need to remember that government is nothing more or less than an expression of common initative -- a forum through which we come together to build the things we need to make our country stronger.

"Let us not be afraid to help each other -- let us never forget that government is ourselves and not an alien power over us." FDR said those words in Marietta, Ohio in July 1938, but it's just as relevant today. As conservatives continue to deride every attempt to create progressive change through government as an oppressive socialist takeover, we need to remember that government is nothing more or less than an expression of common initative -- a forum through which we come together to build the things we need to make our country stronger. In the video below, the Roosevelt Institute's Rediscovering Government Initiative looks at the government's vital role in every facet of society, from encouraging innovation to defending our shores, and at what we can still achieve if we're willing to dream big.

Click here to find out how you can get involved in the Rediscovering Government Roadshow.

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Rediscovering Government

Mythbusters: The Rediscovering Government Edition

Oct 22, 2012

We all know the conservative talking points about government: Big government impedes growth. Social Security is going bankrupt. We need to balance the budget. We've had the idea that government is an economic albatross drilled into our heads through decades of repetition. The problem is, it's just not true.

We all know the conservative talking points about government: Big government impedes growth. Social Security is going bankrupt. We need to balance the budget. We've had the idea that government is an economic albatross drilled into our heads through decades of repetition. The problem is, it's just not true. Check out this new booklet from the Rediscovering Government Initiative to get the facts, plus an illustrated timeline of the government's role in shaping the economy and more information on how you can get involved in Rediscovering Government. Click here to view the booklet in magazine layout.

 

Capitol image via Shutterstock.com.

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