The 2003 Dividend Tax Cut Did Nothing to Help the Real Economy

Jan 20, 2015Mike Konczal

President Obama is going big on capital taxation in the State of the Union tonight, including a proposal to raise dividend taxes on the rich to 28 percent. The President is probably not going to frame this as a move away from the George W. Bush economy, but Bush’s radical cuts to capital taxes are part of his legacy that we are still living with. And it’s a part that the latest evidence tells us did a lot to help the rich without helping the overall economy at all.

In the response to Obama’s proposal, you are going to hear a lot about how lower dividend rates increase investment and help the real economy. Indeed, lowering capital tax rates has been a consistent goal of conservatives. As a result, one of the biggest capital taxation changes in history happened in 2003, when George W. Bush reduced the dividend tax rate from 38.6 percent to 15 percent as part of his rapid and expansive tax cut agenda.

There’s been a lot of research about the effect of this massive dividend tax cut on payouts to shareholders (kicked off by an important 2005 Chetty-Saez paper), but very little on its effect on the real economy. Did slashing the dividend tax rate boost corporate investments, perhaps because it made funding projects easier? We don’t know, and it’s not because economists aren’t interested; it’s because it’s very difficult to construct a control group with which to compare the results. Investments increased after 2003, but they likely would have to some degree independent of the dividend tax cut, as we were coming out of a recession. So did the tax cut make a difference?

This is where UC Berkeley economist Danny Yagan’s fantastic new paper, “Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut,” (pdf, slides) comes in. He uses a large amount of IRS data on corporate tax returns to compare S-corporations with C-corporations. Without getting deep into tax law, C-corporations are publicly-traded firms, while S-corporations are closely held ones without institutional investors. But they are largely comparable in the range Yagan looks at (between $1 million and $1 billion dollars in size), as they are competing in the same industries and locations.

Crucially, though, S-corporations don’t pay a dividend tax and thus didn’t benefit from the big 2003 dividend tax cut, while C-corporations do pay them and did benefit. So that allows Yagan to set up S-corporations as a control group and see what the effect of the massive dividend tax cut on C-corporations has been. Here’s what he finds:

The blue line is the C-corporations, which should diverge from the red-line if the dividend tax cut caused a real change. But there’s no statistical difference between the two paths at all. (Note how their paths are the same before the cut, so it’s a real trend in the business cycle.) There’s no difference in either investment or adjusted net investment. There’s also no difference when it comes to employee compensation. The firms that got a massive capital tax cut did not make any different choices about things that boost the real economy. This is true across a crazy-robust number of controls, measures, and coding of outliers.

The one thing that does increase for C-corporations, of course, is the disgorgement of cash to shareholders. Cutting dividend taxes leads to an increase in dividends and share buybacks. This shows that these corporations are in fact making decisions in response to the tax cut; they just happen to be decisions that benefit, well, probably not you. If right now you are worried that too much cash is leaving firms to benefit a handful of investors while the real economy stagnates, suddenly Clinton-era levels of dividend taxation don’t look so bad.

This is interesting for people interested more specifically in corporate finance theory. Because this is evidence against the theory that firms use the stock market to raise funding, and toward a “pecking order” theory that internal funds and riskless debt are far above equity in a hierarchy of corporate funding choices. In models like the latter, taxation of dividends does very little to impact the cost of capital for firms, because equity isn’t the binding constraint on marginal investment options.

President Obama will likely focus his pitch for the dividend tax increase on the future, when, in his argument, globalization and technology will cause compensation to stagnate while investor payouts skyrocket and the economy becomes more focused on the top 1 percent. But it’s worth noting that while capital taxes are a solution to that problem, the radical slashing conservatives have brought to them are also partly responsible for our current malaise.

Follow or contact the Rortybomb blog:
 
  

 

President Obama is going big on capital taxation in the State of the Union tonight, including a proposal to raise dividend taxes on the rich to 28 percent. The President is probably not going to frame this as a move away from the George W. Bush economy, but Bush’s radical cuts to capital taxes are part of his legacy that we are still living with. And it’s a part that the latest evidence tells us did a lot to help the rich without helping the overall economy at all.

In the response to Obama’s proposal, you are going to hear a lot about how lower dividend rates increase investment and help the real economy. Indeed, lowering capital tax rates has been a consistent goal of conservatives. As a result, one of the biggest capital taxation changes in history happened in 2003, when George W. Bush reduced the dividend tax rate from 38.6 percent to 15 percent as part of his rapid and expansive tax cut agenda.

There’s been a lot of research about the effect of this massive dividend tax cut on payouts to shareholders (kicked off by an important 2005 Chetty-Saez paper), but very little on its effect on the real economy. Did slashing the dividend tax rate boost corporate investments, perhaps because it made funding projects easier? We don’t know, and it’s not because economists aren’t interested; it’s because it’s very difficult to construct a control group with which to compare the results. Investments increased after 2003, but they likely would have to some degree independent of the dividend tax cut, as we were coming out of a recession. So did the tax cut make a difference?

This is where UC Berkeley economist Danny Yagan’s fantastic new paper, “Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut,” (pdf, slides) comes in. He uses a large amount of IRS data on corporate tax returns to compare S-corporations with C-corporations. Without getting deep into tax law, C-corporations are publicly-traded firms, while S-corporations are closely held ones without institutional investors. But they are largely comparable in the range Yagan looks at (between $1 million and $1 billion dollars in size), as they are competing in the same industries and locations.

Crucially, though, S-corporations don’t pay a dividend tax and thus didn’t benefit from the big 2003 dividend tax cut, while C-corporations do pay them and did benefit. So that allows Yagan to set up S-corporations as a control group and see what the effect of the massive dividend tax cut on C-corporations has been. Here’s what he finds:

The blue line is the C-corporations, which should diverge from the red-line if the dividend tax cut caused a real change. But there’s no statistical difference between the two paths at all. (Note how their paths are the same before the cut, so it’s a real trend in the business cycle.) There’s no difference in either investment or adjusted net investment. There’s also no difference when it comes to employee compensation. The firms that got a massive capital tax cut did not make any different choices about things that boost the real economy. This is true across a crazy-robust number of controls, measures, and coding of outliers.

The one thing that does increase for C-corporations, of course, is the disgorgement of cash to shareholders. Cutting dividend taxes leads to an increase in dividends and share buybacks. This shows that these corporations are in fact making decisions in response to the tax cut; they just happen to be decisions that benefit, well, probably not you. If right now you are worried that too much cash is leaving firms to benefit a handful of investors while the real economy stagnates, suddenly Clinton-era levels of dividend taxation don’t look so bad.

This is interesting for people interested more specifically in corporate finance theory. Because this is evidence against the theory that firms use the stock market to raise funding, and toward a “pecking order” theory that internal funds and riskless debt are far above equity in a hierarchy of corporate funding choices. In models like the latter, taxation of dividends does very little to impact the cost of capital for firms, because equity isn’t the binding constraint on marginal investment options.

President Obama will likely focus his pitch for the dividend tax increase on the future, when, in his argument, globalization and technology will cause compensation to stagnate while investor payouts skyrocket and the economy becomes more focused on the top 1 percent. But it’s worth noting that while capital taxes are a solution to that problem, the radical slashing conservatives have brought to them are also partly responsible for our current malaise.

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Daily Digest - January 16: Internet Access is the Next Tennessee Valley Authority

Jan 16, 2015Rachel Goldfarb

There will be no new Daily Digest on Monday, January 19 in observance of Martin Luther King, Jr. Day. The Daily Digest will return on Tuesday, January 20.

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Barack Obama: The FDR of Internet Access? (Moyers & Company)

There will be no new Daily Digest on Monday, January 19 in observance of Martin Luther King, Jr. Day. The Daily Digest will return on Tuesday, January 20.

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Barack Obama: The FDR of Internet Access? (Moyers & Company)

Roosevelt Institute Fellow Susan Crawford compares the president's recent push for fiber-optic Internet access to FDR's work on electricity during the New Deal.

Obama Tells Agencies to Advance Sick Leave For Feds’ New Children (WaPo)

Joe Davidson reports that the sick leave would be paired with paid administrative leave, so that federal employees with a new child could have parental leave as well as sick time to follow.

Trying to Solve the Great Wage Slowdown (NYT)

David Leonhardt looks at a new report that considers what could get wages rising again. It focuses in particular on Canada and Australia, countries similar to the U.S. that have seen wage growth.

How Elizabeth Warren Is Yanking Hillary Clinton to the Left (TIME)

Rana Foroohar says that Senator Warren is already shifting the conversation on economics, citing a new report on wages and the middle class from relatively centrist Larry Summers as proof.

Home Care Workers Denied the Right to Make Minimum Wage and Overtime (ThinkProgress)

Bryce Covert reports on a ruling that has overturned a 2013 Department of Labor rule change on the "companionship exception," which allows home care workers to be paid sub-minimum wages.

New on Next New Deal

A Battle Map for the Republican War Against Dodd-Frank

Roosevelt Institute Fellow Mike Konczal looks at the three fronts in this surprisingly sophisticated GOP war: guerilla deregulation, administrative siege, and reactionary rhetoric.

The Van Hollen Plan Takes on Soaring CEO Pay: A Debate We Need to Have

Roosevelt Institute Fellow Susan Holmberg points out that Rep. Van Hollen's plan has great political messaging around CEO pay, though it doesn't fully close the performance pay loophole.

For Now, Excitement of Free Community College Program Raises Lots of Questions

David Bevevino, a Campus Network alumnus who now researches community college best practices, poses questions about how schools will implement this program, and what extraneous costs it might have.

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A Battle Map for the Republican War Against Dodd-Frank

Jan 15, 2015Mike Konczal

The Republicans have declared war against Dodd-Frank. But what kind of war is it, and on what fronts are they waging this war? I think there are at least three campaigns, each with its own strategic goals and tactics. Distinguishing these campaigns from each other will help us understand what Republicans are trying to do and how to keep them in check.

First, to understand the Republican campaigns, it’s useful go over what Dodd-Frank does. Dodd-Frank can be analogized to the way we regulate driving. First, there are simple rules of the road, like speed limits and stop signs, designed as outright prevention against accidents. Then there are efforts to help with stabilization if the driver gets in trouble, such as anti-lock brakes or road design. And then there are regulations for the resolution of accidents that do occur, like seat belts and airbags, designed to avoids worst-case scenarios.

These three goals map onto Dodd-Frank pretty well. Dodd-Frank also puts rules upfront to prevent certain actions, requires additional regulations to create stability within large financial firms, and lays out plans to allow for a successful resolution of a firm once it fails. Let’s graph that out:

Prevention: Dodd-Frank created a Consumer Financial Protection Bureau (CFPB), reforming consumer protection from being an “orphan mission” spread across 11 agencies by establishing one dedicated agency for it. The act also requires that derivatives trade with clearinghouses and through exchanges or else face additional capital requirements, which brought price transparency and additional capital to the market that brought down AIG. Another piece is the Volcker Rule, which separates the proprietary trading that can cause rapid losses from our commercial banking and payment systems.

Stabilization: Dodd-Frank also provides for the expansion of capital requirements across the financial sector, including higher requirements for the biggest firms relative to smaller ones, as well as higher requirements for those who use short-term funding in the “shadow” banking sector relative to traditional banks. These firms are designed by the Financial Stability Oversight Council (FSOC).

Resolution:  The firms FSOC designates as systemically risky have to prepare themselves for a rapid resolution for when they do fail. They have to prove that they can survive bankruptcy without bringing down the entire system (an effort currently being fought). The FDIC has prepared a second line of defense, a special “resolution authority” (OLA) to use if bankruptcy isn’t a viable option in a crisis.

These elements of the law all flow naturally from the financial crisis of 2008. It would have been very helpful in the crisis for there to be more clarity in the derivatives market, more capital in shadow banks, and a process to resolve Lehman Brothers. Maybe these are great ways to approach the problem or maybe they aren’t, but to suggest they have no basis in the crisis, as the American Enterprise Institute comically does, is pure ideology.

But ignore the more ridiculous arguments. The actual war against Dodd-Frank is much more sophisticated, and it’s being waged on numerous fronts. Let’s make a map of the battlefield:

There are three distinct campaigns being waged:

Guerrilla Deregulation. The goal here is to undermine as much of the efforts of derivatives regulation, the Volcker Rule, and the CFPB as possible through quick, surprise attacks. This, in turn, has a chilling effect across regulators and throws the regulatory process into chaos.

The main tactic, as in any good guerrilla campaign, is to do hit-and-run ambushes of key, important targets vulnerable to raids. David Dayen had a helpful list of some key bills that must pass in 2015, bills likely to be perfect targets for a good guerrilla raid. The guerrilla campaign had a major victory in weakening the Section 716 “push-out” rule in the Cromnibus bill. And that will probably be a model going forward for these tactics, replicated in the recent attacks we’ve seen, down to counting the small handful of Democrats signing on as some sort of concession of bipartisanship.

Another guerrilla element will be the focus on victory through attrition. It’s not like the House Republicans have their own theory of how to regulate the derivatives market, or that they are making the full case against the Volcker Rule or the CFPB, or even proposing their own anything. They are winning simply through weakening both the rules and the resolve of reformers.

Administrative Siege: Aside from the guerrilla war of deregulation, the GOP is also waging war on another front, through a long-term siege of the regulatory agencies. This includes blockading them from resources like funding and personnel, consistent harassment, discrediting them in the eyes of the broader public, and weakening their power to act. This is a long-term battle, going back to the beginning of Dodd-Frank, and their terms are unconditional surrender.

The seriousness of this campaign became clear when the GOP first refused to appoint any director of the CFPB unless there was a complete overhaul to weaken it. This campaign has continued against the CFTC, and now extends to the FSOC trying to designate firms as systemically risky. The recent House bill to extend cost-benefit analysis to financial regulations, where it has little history, unclear analytical benefit, and could easily lead to worse rules, is also part of this siege.

One key argument the GOP is pushing is that the regulators are historically too powerful and out of control. As House Financial Services Committee chairman Jeb Hensarling said to the Wall Street Journal, the CFPB is “the single most unaccountable agency in the history of America.” This is just silly agitprop. The structure -- independent budgets and a single director -- looks exactly like their counterparts in the OCC. It’s not only subject to the same rule-making process as other regulators, but other regulators can in fact veto the CFPB, making it significantly more accountable compared to any other agency.

The same is being said about FSOC. Note that there’s always room for improvement; Americans for Financial Reform (AFR) have some ways to improve the transparency of FSOC here. But as AFR’s Marcus Stanley notes, the House’s recent FSOC bill “appears better calculated to hinder FSOC operations than to improve its transparency.” Indeed, as Better Markets notes, this FSOC battle is in large part over the regulation of money market funds, a crucial reform in fixing shadow banking. But making government work better isn’t the goal of the siege; this campaign’s goal is to break these agencies and their ability to regulate the financial system.

Reactionary Rhetoric: The goal of this ideological programming campaign is to push the argument that Dodd-Frank simply reinforces the worst part of the bailouts and does nothing productive toward reform. Instead of a series of methods to check and reduce Too Big To Fail, this campaign argues that Dodd-Frank does worse than fail. Following the rhetoric of reaction, reform simply makes the problem far worse. The point here is to remove the FDIC’s ability to put systemically risky firms into a receivership while also preparing the ground for a full repeal.

Advancing the argument that Dodd-Frank has made the bailouts of 2008-2009 permanent and serves only to benefit the biggest financial firms has become a marching order for the movement right. It was basically the entire GOP argument against Dodd-Frank in 2012 (Mitt Romney calling the act "the biggest kiss" to Wall Street), and it still dominates their talking points. If this were the case, the largest banks would receive a large Too Big To Fail subsidy, and we’d subsequently see a reduction in their borrowing costs.

Major studies tells us that the opposite is the case; since 2010 Too Big To Fail subsidies have fallen instead of stabilized or increased. This doesn’t mean the work is done - we could still see a major failure cause systemic risk, and just “avoiding catastrophic collapses” isn’t really a headline goal for a functioning financial system. There’s also little evidence that Dodd-Frank enriches the biggest banks; firms go out of their way to avoid a SIFI designation, which they wouldn’t if there were a benefit to them, and Wall Street analysts take it for granted that capital requirements and other regulations are more binding for the largest firms.

There could be a productive discussion here about finding a way to reform the bankruptcy code to help combat Too Big To Fail while keeping resolution authority as a backup option. That backup option is key though. Unlike OLA, bankruptcy is slow and deliberate, isn't designed to preserve ongoing firm business, doesn't have guaranteed funding available, can’t prevent runs from short-term creditors, and has trouble internationally. But again, the point for Republicans isn’t to try to come up with the best regime; it’s to discredit the effort at reform entirely so the other campaigns, and the overall campaign for repeal, can be that much easier.

Why do Republicans want all this? The answer you will normally hear is that they are in the pocket of Wall Street or in the thrall of free-market fundamentalism. And there’s truth to that. But they’ve also created a whole institutionally enforced counter-narrative where there was no real crisis and Wall Street committed no bad behavior except for when ACORN made them. This narrative is, bluntly, dumb. But it is the narrative their movement has chosen, and movements have a way of forcing well-meaning people who’d otherwise want to find good solutions to fall in line.

2015 will require reformers to wage their own campaigns to push additional reform (here’s a start), push for stronger action from regulators, and make the public understand the progress that has been made. But first we need to understand that while conservatives may look like they are running a smash-and-grab operation when it comes to Dodd-Frank, it’s actually a quite sophisticated series of campaigns, and they are already winning battles.

Follow or contact the Rortybomb blog:
 
  

 

The Republicans have declared war against Dodd-Frank. But what kind of war is it, and on what fronts are they waging this war? I think there are at least three campaigns, each with its own strategic goals and tactics. Distinguishing these campaigns from each other will help us understand what Republicans are trying to do and how to keep them in check.

First, to understand the Republican campaigns, it’s useful go over what Dodd-Frank does. Dodd-Frank can be analogized to the way we regulate driving. First, there are simple rules of the road, like speed limits and stop signs, designed as outright prevention against accidents. Then there are efforts to help with stabilization if the driver gets in trouble, such as anti-lock brakes or road design. And then there are regulations for the resolution of accidents that do occur, like seat belts and airbags, designed to avoids worst-case scenarios.

These three goals map onto Dodd-Frank pretty well. Dodd-Frank also puts rules upfront to prevent certain actions, requires additional regulations to create stability within large financial firms, and lays out plans to allow for a successful resolution of a firm once it fails. Let’s graph that out:

Prevention: Dodd-Frank created a Consumer Financial Protection Bureau (CFPB), reforming consumer protection from being an “orphan mission” spread across 11 agencies by establishing one dedicated agency for it. The act also requires that derivatives trade with clearinghouses and through exchanges or else face additional capital requirements, which brought price transparency and additional capital to the market that brought down AIG. Another piece is the Volcker Rule, which separates the proprietary trading that can cause rapid losses from our commercial banking and payment systems.

Stabilization: Dodd-Frank also provides for the expansion of capital requirements across the financial sector, including higher requirements for the biggest firms relative to smaller ones, as well as higher requirements for those who use short-term funding in the “shadow” banking sector relative to traditional banks. These firms are designed by the Financial Stability Oversight Council (FSOC).

Resolution:  The firms FSOC designates as systemically risky have to prepare themselves for a rapid resolution for when they do fail. They have to prove that they can survive bankruptcy without bringing down the entire system (an effort currently being fought). The FDIC has prepared a second line of defense, a special “resolution authority” (OLA) to use if bankruptcy isn’t a viable option in a crisis.

These elements of the law all flow naturally from the financial crisis of 2008. It would have been very helpful in the crisis for there to be more clarity in the derivatives market, more capital in shadow banks, and a process to resolve Lehman Brothers. Maybe these are great ways to approach the problem or maybe they aren’t, but to suggest they have no basis in the crisis, as the American Enterprise Institute comically does, is pure ideology.

But ignore the more ridiculous arguments. The actual war against Dodd-Frank is much more sophisticated, and it’s being waged on numerous fronts. Let’s make a map of the battlefield:

There are three distinct campaigns being waged:

Guerrilla Deregulation. The goal here is to undermine as much of the efforts of derivatives regulation, the Volcker Rule, and the CFPB as possible through quick, surprise attacks. This, in turn, has a chilling effect across regulators and throws the regulatory process into chaos.

The main tactic, as in any good guerrilla campaign, is to do hit-and-run ambushes of key, important targets vulnerable to raids. David Dayen had a helpful list of some key bills that must pass in 2015, bills likely to be perfect targets for a good guerrilla raid. The guerrilla campaign had a major victory in weakening the Section 716 “push-out” rule in the Cromnibus bill. And that will probably be a model going forward for these tactics, replicated in the recent attacks we’ve seen, down to counting the small handful of Democrats signing on as some sort of concession of bipartisanship.

Another guerrilla element will be the focus on victory through attrition. It’s not like the House Republicans have their own theory of how to regulate the derivatives market, or that they are making the full case against the Volcker Rule or the CFPB, or even proposing their own anything. They are winning simply through weakening both the rules and the resolve of reformers.

Administrative Siege: Aside from the guerrilla war of deregulation, the GOP is also waging war on another front, through a long-term siege of the regulatory agencies. This includes blockading them from resources like funding and personnel, consistent harassment, discrediting them in the eyes of the broader public, and weakening their power to act. This is a long-term battle, going back to the beginning of Dodd-Frank, and their terms are unconditional surrender.

The seriousness of this campaign became clear when the GOP first refused to appoint any director of the CFPB unless there was a complete overhaul to weaken it. This campaign has continued against the CFTC, and now extends to the FSOC trying to designate firms as systemically risky. The recent House bill to extend cost-benefit analysis to financial regulations, where it has little history, unclear analytical benefit, and could easily lead to worse rules, is also part of this siege.

One key argument the GOP is pushing is that the regulators are historically too powerful and out of control. As House Financial Services Committee chairman Jeb Hensarling said to the Wall Street Journal, the CFPB is “the single most unaccountable agency in the history of America.” This is just silly agitprop. The structure -- independent budgets and a single director -- looks exactly like their counterparts in the OCC. It’s not only subject to the same rule-making process as other regulators, but other regulators can in fact veto the CFPB, making it significantly more accountable compared to any other agency.

The same is being said about FSOC. Note that there’s always room for improvement; Americans for Financial Reform (AFR) have some ways to improve the transparency of FSOC here. But as AFR’s Marcus Stanley notes, the House’s recent FSOC bill “appears better calculated to hinder FSOC operations than to improve its transparency.” Indeed, as Better Markets notes, this FSOC battle is in large part over the regulation of money market funds, a crucial reform in fixing shadow banking. But making government work better isn’t the goal of the siege; this campaign’s goal is to break these agencies and their ability to regulate the financial system.

Reactionary Rhetoric: The goal of this ideological programming campaign is to push the argument that Dodd-Frank simply reinforces the worst part of the bailouts and does nothing productive toward reform. Instead of a series of methods to check and reduce Too Big To Fail, this campaign argues that Dodd-Frank does worse than fail. Following the rhetoric of reaction, reform simply makes the problem far worse. The point here is to remove the FDIC’s ability to put systemically risky firms into a receivership while also preparing the ground for a full repeal.

Advancing the argument that Dodd-Frank has made the bailouts of 2008-2009 permanent and serves only to benefit the biggest financial firms has become a marching order for the movement right. It was basically the entire GOP argument against Dodd-Frank in 2012 (Mitt Romney calling the act "the biggest kiss" to Wall Street), and it still dominates their talking points. If this were the case, the largest banks would receive a large Too Big To Fail subsidy, and we’d subsequently see a reduction in their borrowing costs.

Major studies tells us that the opposite is the case; since 2010 Too Big To Fail subsidies have fallen instead of stabilized or increased. This doesn’t mean the work is done - we could still see a major failure cause systemic risk, and just “avoiding catastrophic collapses” isn’t really a headline goal for a functioning financial system. There’s also little evidence that Dodd-Frank enriches the biggest banks; firms go out of their way to avoid a SIFI designation, which they wouldn’t if there were a benefit to them, and Wall Street analysts take it for granted that capital requirements and other regulations are more binding for the largest firms.

There could be a productive discussion here about finding a way to reform the bankruptcy code to help combat Too Big To Fail while keeping resolution authority as a backup option. That backup option is key though. Unlike OLA, bankruptcy is slow and deliberate, isn't designed to preserve ongoing firm business, doesn't have guaranteed funding available, can’t prevent runs from short-term creditors, and has trouble internationally. But again, the point for Republicans isn’t to try to come up with the best regime; it’s to discredit the effort at reform entirely so the other campaigns, and the overall campaign for repeal, can be that much easier.

Why do Republicans want all this? The answer you will normally hear is that they are in the pocket of Wall Street or in the thrall of free-market fundamentalism. And there’s truth to that. But they’ve also created a whole institutionally enforced counter-narrative where there was no real crisis and Wall Street committed no bad behavior except for when ACORN made them. This narrative is, bluntly, dumb. But it is the narrative their movement has chosen, and movements have a way of forcing well-meaning people who’d otherwise want to find good solutions to fall in line.

2015 will require reformers to wage their own campaigns to push additional reform (here’s a start), push for stronger action from regulators, and make the public understand the progress that has been made. But first we need to understand that while conservatives may look like they are running a smash-and-grab operation when it comes to Dodd-Frank, it’s actually a quite sophisticated series of campaigns, and they are already winning battles.

Follow or contact the Rortybomb blog:
 
  

 

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Daily Digest - January 15: Free Community College Is "A Better Way" For Financial Aid

Jan 15, 2015Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Daily Report (AM950 Radio)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Daily Report (AM950 Radio)

Roosevelt Institute Fellow Mike Konczal discusses his recent article about the benefits of the president's free community college plan. Mike's segment begins at 28:00.

How Congress is Crippling Our Tax Collection System, in Charts (WaPo)

Catherine Rampell breaks down a report explaining how cuts to the IRS budget are impacting its ability to actually collect the taxes that are owed, with fewer staff to investigate tax evasion.

Republicans Use 'Death by a Thousand Cuts' Strategy to Deregulate Wall Street (The Guardian)

Republicans in the House have passed their first bill to weaken Dodd-Frank, and David Dayen says there are more to come as the GOP attaches deregulation to all kinds of unrelated must-pass bills.

Obama Stands At Crossroads On Financial Reform (ProPublica)

Jesse Eisinger says that with Republicans in control of Congress, it's time for the Obama administration to go big to protect the modest reforms created by Dodd-Frank.

As Profits Fall, JPMorgan Rejects Calls To Break Up The Megabank (Buzzfeed)

Matthew Zeitlin reports on recent suggestions that JPMorgan could be more profitable if it were split up. CEO Jamie Dimon instead blames regulators for drops in profits.

We Don’t Just Need ‘More Jobs’—We Need Higher Wages (In These Times)

Leo Gerard, President of United Steelworkers, says that the new jobs showing up on the jobs report aren't enough without higher wages for workers whose wages have been nearly stagnant for 35 years.

New on Next New Deal

Is Inequality Killing U.S. Mothers?

Roosevelt Institute Fellow Andrea Flynn ties the United States' embarrassingly high maternal mortality rates to economic inequality's broader impact on health and mortality.

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Daily Digest - January 13: A Tax Plan to Fight Inequality

Jan 13, 2015Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Democrats, in a Stark Shift in Messaging, to Make Big Tax-Break Pitch for Middle Class (WaPo)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Democrats, in a Stark Shift in Messaging, to Make Big Tax-Break Pitch for Middle Class (WaPo)

Lori Montgomery and Paul Kane explain Rep. Chris Van Hollen's proposal, which is being pitched as the Democrats' "action plan" for fighting income inequality.

  • Roosevelt Take: Roosevelt Institute Chief Economist Joseph Stiglitz also promotes tax reform as a way reach broadly shared prosperity in this white paper.

Congress's Financial Plan for 2015: Curb Your Enthusiasm (The Guardian)

Siri Srinivas looks at the legislation that is likely to reach the House floor in 2015, and explains how Republican control of the Senate will impact this year's agenda.

Elizabeth Warren Wins on Antonio Weiss Nomination (Politico)

Ben White reports that Weiss has asked the president not to resubmit his nomination, instead accepting a position in Treasury that doesn't require Senate confirmation and carries less authority.

  • Roosevelt Take: Roosevelt Institute Senior Fellow Brad Miller argued that Weiss's nomination was indicative of a larger anti-democratic approach to economic policy.

The House Is Set to Pass a GOP Bill Wiping Out Wall Street Reforms (MoJo)

Erika Eichelberger explains how the legislation, expected to pass this week, would weaken key provisions of Dodd-Frank, including delaying the Volcker Rule and weakening transparency rules.

Labor at a Crossroads: Can Broadened Civil Rights Law Offer Workers a True Right to Organize? (TAP)

Richard D. Kahlenberg and Moshe Z. Marvit explain why individual-focused civil rights law can and should be used on behalf of union organizing to promote the collective welfare of all workers.

Investors Shift Bets on Fed Rate Increase (WSJ)

Min Zeng writes that current market patterns indicate that investors think the Federal Reserve is going to hold off on increasing interest rates for longer than was initially planned.

New on Next New Deal

Van Hollen Tax Proposal An Economic and Political Home Run

Roosevelt Institute Senior Fellow Richard Kirsch praises Van Hollen's plan for forcing Republicans to admit that they are supporting Wall Street over working-class families.

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Van Hollen Tax Proposal An Economic and Political Home Run

Jan 12, 2015Richard Kirsch

By forcing Republicans to admit their support for Wall Street over working families, Van Hollen's proposal opens the economic debate the Democrats need.

By forcing Republicans to admit their support for Wall Street over working families, Van Hollen's proposal opens the economic debate the Democrats need.

Rep. Chris Van Hollen’s (D-MD) proposal to tax Wall Street speculators and CEO millionaires to put money in the pockets of working families and the middle class, the engines of our economy, is a political and economic home run. It allows Democrats to focus on economic growth and fairness at the same time, sharply defining the debate on the key question voters ask: “Which side are you on?”

Leading politicians from both parties are all expressing sympathy for the stagnant prospects of the middle class. If you need evidence, here is Jeb Bush sounding like Elizabeth Warren: “Millions of our fellow citizens across the broad middle class feel as if the American Dream is now out of their reach … that the playing field is no longer fair or level.”

Where the two parties split – and where the core debate that will define the next two years and the 2016 election lies – is on who is to blame and what to do about it.

Americans believe we need economic growth, but they are more likely to place the blame for stagnant wages on the super-rich and powerful who game the system at their expense. That is why they told pollsters they prefer “an economy that works for all of us, not just the wealthy” over “growing the economy” by 22 points.

Van Hollen claims both grounds – growth and fairness. As he says, “What our country needs is a growing economy that works for all Americans, not just the wealthy few.”

The heart of the plan is providing a $1,000 tax credit for workers, phased out as income rises, along with an additional $250 tax credit when workers save. He would pay for that by taxing Wall Street speculation (with a tiny financial transactions tax) and closing loopholes that allow millionaires to pay lower taxes than average people.

It’s clear that this is great politics: taxing Wall Street gambling and the super-rich to put more money in the pockets of working families and the middle class.

Republicans tell another story, placing the blame for middle-class woes on government and focusing on lowering taxes and cutting government regulation to grow the economy. In opposing the Van Hollen proposal, they are forced to defend the wealthy and deny tax breaks to the middle-class, as we saw from Speaker John Boehner’s spokesperson's comment opposing the Van Hollen plan.

This is the economic argument Democrats want to have. Republicans say we grow the economy by taking the side of the Wall Street banks that wrecked the economy and the corporate CEOs who cut our wages and shipped our jobs overseas. Democrats say we move the economy forward by putting more money in the pockets of working families and the middle class.

Van Hollen adds another proposal, which is also brilliant politics and sharp economics. He would not allow corporations to get tax breaks for million-dollar executive pay unless they shared the rewards of soaring corporate profits with their workers. Van Hollen accomplishes this by proposing to end corporate tax deductions for executive compensation of over $1 million, unless the corporation’s wages are raised enough to keep up with worker productivity and the cost of living. Another way that corporations could deduct higher executive pay is by providing employees with ownership and profit-sharing opportunities.

With this proposal, Van Hollen puts the focus squarely on the corporate behavior that has driven down wages and crushed middle-class aspirations. His proposal would boost worker income, which drives the economy forward. When Republicans oppose this, the choice will again be clear to Americans: CEO millionaires or working families.

As Van Hollen recognizes, his proposal is not the complete solution to creating an economy of broadly shared, sustainable prosperity. He recognizes the need to raise wages and job standards, which directly turn today’s low-wage, economy busting jobs into economy boosting jobs. He reinforces the necessity of investment in infrastructure, research and education.

It will be important to do all these things. We need to raise wage standards and strengthen the ability of workers to organize, to make sure that every job pays enough to care and support a family in dignity. It is essential that we make huge investments in transportation, clean energy, communications, and research to build a powerful economic foundation for the future. That investment will take revenues, which can be raised from closing corporate loopholes, raising tax rates on the wealthy, or other progressive tax measures. We can also discuss whether some of the revenues Van Hollen raises would be better spent on infrastructure rather than tax breaks for upper-middle income people.

Simplicity is key to political communication. In its simplest terms, Van Hollen is saying that we drive the economy forward by putting money in the pockets of working families and the middle-class, not Wall Street and the super wealthy. And then his proposal invites Americans to ask their elected officials: “which side are you on?”

If Democrats around the country are willing to stand up to their big campaign contributors and ask that question with such a powerful proposal in 2016, they will triumph. And in triumphing, they will move the country toward an America that works for all of us, not just the wealthy. 

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, a Senior Adviser to USAction, and the author of Fighting for Our Health. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform.

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Daily Digest - January 12: Free Community College is Simpler Than Financial Aid

Jan 12, 2015Rachel Goldfarb

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Did Obama Just Introduce a ‘Public Option’ for Higher Education? (The Nation)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Did Obama Just Introduce a ‘Public Option’ for Higher Education? (The Nation)

Roosevelt Institute Fellow Mike Konczal says free community college for all would be easier to run and more popular than means-tested financial aid models like Pell Grants.

Why Is the Financial Industry So Afraid of This Man? (Salon)

Sean McElwee and Lenore Palladino say blocking Roosevelt Institute Chief Economist Joseph Stiglitz from an advisory panel is just one sign of the financial industry's influence over its regulators.

December Caps Off a Year of Strong Job Growth But Stagnant Wages (Working Economics)

Elise Gould looks at the 2014 data and says that while the numbers are mostly positive, it's concerning that at this rate, we won't reach pre-recession labor market health until August 2017.

There's An Awful Side to the Jobs Report (Business Insider)

Shane Ferro says that while the December jobs report was largely good, the drop in average hourly earnings is a sign of trouble, especially with basically flat wage growth since early 2010.

Kicking Dodd-Frank in the Teeth (NYT)

Gretchen Morgenson breaks down the details of a Republican bill that claims to make "technical corrections" to Dodd-Frank, but would actually seriously weaken financial reform.

As White House Defends Unions, States Go on the Attack (AJAM)

Republican midterm victories at the state level will mean more anti-union "right to work" laws and other policies that weaken the labor movement, writes Ned Resnikoff.

New on Next New Deal

Can Community College Systems and Infrastructure Handle Free Tuition?

Rachel Kanakaole, New Chapters Coordinator for the Western Region of the Campus Network, questions whether community colleges can handle the increased enrollment that will come with free tuition.

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Daily Digest - January 9: Charity and Government Are Not Interchangeable

Jan 9, 2015Rachel Goldfarb

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Mike Konczal and David Beito Debate Charity vs. Government (Stossel)

Roosevelt Institute Fellow Mike Konczal counters right-wing arguments that charity can take the place of government in protecting social welfare.

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Mike Konczal and David Beito Debate Charity vs. Government (Stossel)

Roosevelt Institute Fellow Mike Konczal counters right-wing arguments that charity can take the place of government in protecting social welfare.

  • Roosevelt Take: Mike explained his argument on the "voluntarism fantasy" in greater depth in Democracy last year.

Europe’s Lapse of Reason (Project Syndicate)

Roosevelt Institute Chief Economist Joseph Stiglitz says that even as Europeans elect new leaders in their countries, their governments continue on a failed path of austerity, which must change.

House Democrats Swiftly Kill a Quiet Republican Plot to Protect Wall Street (The Guardian)

David Dayen says the work to stop this Republican anti-financial reform bill package demonstrates the Democratic strategy of making these economic fights very public.

Obama Plan Would Help Many Go to Community College Free (NYT)

The president's proposal would cover tuition for full- and half-time students who maintain a 2.5 GPA, report Julie Hirschfeld Davis and Tamar Lewin. It's a hard sell with a Republican Congress.

This Boehner/McConnell Obamacare 'Fix' Could Hurt Millions of Americans (LA Times)

Michael Hiltzik says readers shouldn't believe a GOP-authored op-ed's claims about changing the definition of full-time work under Obamacare. It's really a handout to employers.

America’s Workplaces Are Hostile to Families (The Nation)

Michelle Chen explores the ways that American employers make it difficult for workers to have children, as well as policy proposals that could fill the gaps.

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Guest Post: Will Wall Street Win Again with Antonio Weiss Nomination?

Jan 7, 2015Brad Miller

Mike here. This post is from my colleague Brad Miller over the important debate on the Antonio Weiss nomination. Brad is a former U.S. Representative who recently joined the Roosevelt Institute as a Senior Fellow, so he has firsthand knowledge of the internal negotiations around financial reform. Check it out below.

The opposition to the nomination of another investment banker, Antonio Weiss, to a top position in the U.S. Treasury is not just a demagogic appeal to anti-Wall Street prejudices, as his supporters argue.

Weiss’s actual experience appears to be a poor match for the specific duties of the position in question, and may be less laudable than his supporters claim. Weiss’s principal credential appears to be that he is a product of the same culture that produced our other recent economic policymakers.

And that is the real problem for opponents, who believe that economic policies should be subject to democratic debate and require the consent of the governed.

The response to the financial crisis was the most consequential economic policy in generations. Wall Street and Washington insiders alike argue that those policies, endlessly indulgent of banks and pitiless to homeowners, were technocratic decisions that required the recondite knowledge of Wall Street professionals.

To Weiss’s supporters, disregard for public opinion is a virtue. “Making economic policy isn’t a popularity contest,” David Ignatius wrote in The Washington Post, “especially when financial markets are in a panic.” “Our job was to fix it,“ former Treasury Secretary Timothy Geithner said, “not make people like us.”

Criticism did not just come from politicians pandering to the great unwashed, however.

Most economists argued that the lesson of past financial crises was to take economic pain quickly, recognize losses on distressed debt, and take insolvent banks through an orderly receivership. The standard playbook” for financial crises since the 1870s was to “shut down insolvent institutions so executives and shareholders in the future do not think they will escape the consequences of the moral hazard they created.” “Zombie” banks, economists argued, only delay recovery.

The Bush and Obama Administrations instead helped too-big-to-fail banks pretend to be solvent and provided subsidies and other dispensations until the banks became profitable, an effort that continues.

Unfortunately, any effective effort to reduce foreclosures required banks to recognize losses on mortgages. Insiders regarded foreclosures as a lesser concern. Geithner said that even if the government used federal funds “to wipe out every dollar of negative equity in the U.S. housing market…it would have increased annual consumption by just 0.1 to 0.2 percent.”

According to Atif Mian and Amir Sufi, two prominent economists, “that is dead wrong.” Household wealth fell by $9 trillion after the housing bubble burst in 2006, which greatly reduced consumer demand. “The evidence,” Amir and Sufi said, “is pretty clear: an aggressive bold attack on household debt would have significantly reduced the horrible impact of the Great Recession on Americans.”

Wall Street’s critics did not lose that debate. There was no debate.

Senator Obama endorsed legislation in his presidential campaign to allow the judicial modification of mortgages in bankruptcy. President Obama never publicly wavered from that position, but Treasury officials privately lobbied against the legislation in the Senate, where the legislation died. The determination by economic policymakers to protect their immaculate policies from tawdry politics may extend to attempts by the President to intrude.

Meddling by Members of Congress was certainly unwelcome. In a private meeting between Administration officials and disgruntled House Democrats, I said that foreclosure relief efforts appeared designed to help banks absorb losses gradually, not to help homeowners. Geithner was offended—indignant—at the suggestion. Neil Barofsky, then the Special Inspector General for the Troubled Asset Recovery Program, later confirmed that was exactly the purpose of the programs—in Geithner’s words, to “foam the runway” for the banks.

The success of policies that are unacknowledged or even denied is difficult to measure. Since the financial crisis, however, the financial sector, from whence our unguarded platonic guardians came and soon will return, has prospered. Others fared less well. Wealth and income inequality widened dramatically.

Weiss has not served in government, so opposition to his nomination may punish him for the sins of others, perhaps unfairly. There is nothing to indicate, however, that Weiss questions the assumption that the North Star of economic policy should be the prosperity of the financial sector, or that policies should be freely debated unless there’s money involved.

The presidential campaign in 2016 will undoubtedly largely be about economic policy. Voters may assume that the election of one candidate or another will result in implementation of that candidate’s economic policies.

If the culture of economic policymakers remains unchanged, the public positions of candidates and the votes of citizens may not matter much.

Brad Miller is a Senior Fellow at the Roosevelt Institute. Previously, he served for a decade in the U.S. House of Representatives.

Mike here. This post is from my colleague Brad Miller over the important debate on the Antonio Weiss nomination. Brad is a former U.S. Representative who recently joined the Roosevelt Institute as a Senior Fellow, so he has firsthand knowledge of the internal negotiations around financial reform. Check it out below.

The opposition to the nomination of another investment banker, Antonio Weiss, to a top position in the U.S. Treasury is not just a demagogic appeal to anti-Wall Street prejudices, as his supporters argue.

Weiss’s actual experience appears to be a poor match for the specific duties of the position in question, and may be less laudable than his supporters claim. Weiss’s principal credential appears to be that he is a product of the same culture that produced our other recent economic policymakers.

And that is the real problem for opponents, who believe that economic policies should be subject to democratic debate and require the consent of the governed.

The response to the financial crisis was the most consequential economic policy in generations. Wall Street and Washington insiders alike argue that those policies, endlessly indulgent of banks and pitiless to homeowners, were technocratic decisions that required the recondite knowledge of Wall Street professionals.

To Weiss’s supporters, disregard for public opinion is a virtue. “Making economic policy isn’t a popularity contest,” David Ignatius wrote in The Washington Post, “especially when financial markets are in a panic.” “Our job was to fix it,“ former Treasury Secretary Timothy Geithner said, “not make people like us.”

Criticism did not just come from politicians pandering to the great unwashed, however.

Most economists argued that the lesson of past financial crises was to take economic pain quickly, recognize losses on distressed debt, and take insolvent banks through an orderly receivership. The standard playbook” for financial crises since the 1870s was to “shut down insolvent institutions so executives and shareholders in the future do not think they will escape the consequences of the moral hazard they created.” “Zombie” banks, economists argued, only delay recovery.

The Bush and Obama Administrations instead helped too-big-to-fail banks pretend to be solvent and provided subsidies and other dispensations until the banks became profitable, an effort that continues.

Unfortunately, any effective effort to reduce foreclosures required banks to recognize losses on mortgages. Insiders regarded foreclosures as a lesser concern. Geithner said that even if the government used federal funds “to wipe out every dollar of negative equity in the U.S. housing market…it would have increased annual consumption by just 0.1 to 0.2 percent.”

According to Atif Mian and Amir Sufi, two prominent economists, “that is dead wrong.” Household wealth fell by $9 trillion after the housing bubble burst in 2006, which greatly reduced consumer demand. “The evidence,” Amir and Sufi said, “is pretty clear: an aggressive bold attack on household debt would have significantly reduced the horrible impact of the Great Recession on Americans.”

Wall Street’s critics did not lose that debate. There was no debate.

Senator Obama endorsed legislation in his presidential campaign to allow the judicial modification of mortgages in bankruptcy. President Obama never publicly wavered from that position, but Treasury officials privately lobbied against the legislation in the Senate, where the legislation died. The determination by economic policymakers to protect their immaculate policies from tawdry politics may extend to attempts by the President to intrude.

Meddling by Members of Congress was certainly unwelcome. In a private meeting between Administration officials and disgruntled House Democrats, I said that foreclosure relief efforts appeared designed to help banks absorb losses gradually, not to help homeowners. Geithner was offended—indignant—at the suggestion. Neil Barofsky, then the Special Inspector General for the Troubled Asset Recovery Program, later confirmed that was exactly the purpose of the programs—in Geithner’s words, to “foam the runway” for the banks.

The success of policies that are unacknowledged or even denied is difficult to measure. Since the financial crisis, however, the financial sector, from whence our unguarded platonic guardians came and soon will return, has prospered. Others fared less well. Wealth and income inequality widened dramatically.

Weiss has not served in government, so opposition to his nomination may punish him for the sins of others, perhaps unfairly. There is nothing to indicate, however, that Weiss questions the assumption that the North Star of economic policy should be the prosperity of the financial sector, or that policies should be freely debated unless there’s money involved.

The presidential campaign in 2016 will undoubtedly largely be about economic policy. Voters may assume that the election of one candidate or another will result in implementation of that candidate’s economic policies.

If the culture of economic policymakers remains unchanged, the public positions of candidates and the votes of citizens may not matter much.

Brad Miller is a Senior Fellow at the Roosevelt Institute. Previously, he served for a decade in the U.S. House of Representatives.

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Daily Digest - January 6: Who Needs Independent-Minded Advisors at the SEC?

Jan 6, 2015Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Nobel Laureate Stiglitz Blocked From SEC Panel After Faulting High-Speed Traders (Bloomberg News)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Nobel Laureate Stiglitz Blocked From SEC Panel After Faulting High-Speed Traders (Bloomberg News)

Dave Michaels reports that Roosevelt Institute Chief Economist Joseph Stiglitz believes he was blocked from the advisory panel because he is not "owned" by the industry in any way.

Fossil Free AU (WKOK)

Mark Lawrence interviews Katie Kirchner, president of the American University chapter of the Campus Network, about the campaign to get her university to divest from fossil fuels.

Poverty Leads to Death for More Black Americans Than Whites (The Guardian)

Jana Kasperkevic speaks to the study's lead researcher, who explains possible reasons that increases in income inequality would reduce mortality rates for whites and increase them for Blacks.

Cities Set to Take Minimum-Wage Stage (WSJ)

Eric Morath looks at the trend of cities raising their own minimum wage, in the face of state and federal GOP resistance. Federal action is seen as particularly unlikely with the current Congress.

The Mortal Threat to Medicaid -- and How to Fix It (LA Times)

On January 1, a short-term raise in Medicaid reimbursement rates expired, and Michael Hiltzik says that unless that raise is restored, Medicaid enrollees will struggle to find doctors.

American Consumers are More Upbeat (WaPo)

Catherine Rampell suggests that Americans' renewed confidence in the economy could be due to small improvements in wages and jobs – or because even mediocrity looks good today.

New on Next New Deal

Wall Street's Choice: Antonio Weiss Nomination Illustrates What's Wrong With Economic Policy

Roosevelt Institute Senior Fellow Brad Miller argues that Weiss's nomination is part of a larger anti-democratic pattern of prioritizing the financial sector's prosperity above all else in economic policy.

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