What Could Romney's Secret Housing Plan Look Like?

Aug 24, 2012Mike Konczal

Josh Barro, writing from his new column at Bloomberg, wonders if Mitt Romney has a secret economic plan to fix housing: "But where I think a big improvement from Romney is likely is on housing policy. While Romney has been conspicuously silent on housing, one of his top advisers, Glenn Hubbard, advocates an aggressive plan to restructure mortgages.

Josh Barro, writing from his new column at Bloomberg, wonders if Mitt Romney has a secret economic plan to fix housing: "But where I think a big improvement from Romney is likely is on housing policy. While Romney has been conspicuously silent on housing, one of his top advisers, Glenn Hubbard, advocates an aggressive plan to restructure mortgages. The Hubbard plan would lower mortgage rates and reduce principal for underwater borrowers, both of which would stimulate the economy. That's a tough sell to Republicans in Congress -- but they would be much more open to it under a Republican president than a Democratic one."

As David Dayen noted in a great, comprehensive Salon piece, none of this matters if Congress doesn't extend a special law put into place during the crisis that keeps principal reduction, even reduction from a short sale, from being treated as income, and thus requiring it to be taxed. The law is set to expire on Dec. 31, 2012. Extending it has bipartisan support in the Senate, but none in the House so far. I can't emphasize how much this matters - homeowners would get a giant tax bill under any relief program, making them difficult to do. It isn't clear what Romney would do about this.

It's worth noting that the Hubbard plan is very similar to the ongoing Home Affordable Refinance Program (HARP) in that it uses the GSEs to refinance underwater mortgages. HARP was revamped earlier this year to HARP 2.0, which removed a 125 percent loan-to-value limit and waived certain representations and warranties for lenders. It's still early, but it looks like there is a big increase in the number of underwater mortgages refinancing (FHFA data). Over 40 percent of the HARP refinances in July were from mortgages with an LTV over 125 percent. As will become relevant in this post, their proposal is GSE driven and avoids bankruptcy reform, as "moving mortgage debt into bankruptcy courts could well reduce future credit availability and hamper long-run economic growth and homeownership."
 
(The original Hubbard plan from 2008 featured mandatory principal writedowns for negative equity, with the losses shared equally by the lender and the government. In exchange, the government gets a lien on the home worth 20 percent of any increase in value. This is much different than current HARP policy and constitutes a really bold approach. However, this negative equity and shared appreciation part is entirely missing from the current 2011 version of the proposal. I'm not sure why Hubbard dropped that section; certainly it's not because the housing market has done better than expected.)
 
How can we analyize what potential solutions a Romney presidency could embrace? There's normally one dimension we think of in terms of housing crisis policy, and that is how aggressive we are in dealing with underwater debt and foreclosures. Should we refinance underwater mortgages to create lower monthly payments and take advantage of low interest rates? Should we go further and reduce principal debt, either outright or in exchange for some form of equity claim?
 
But there's another, equally important dimension, and that's the mechanism through which these policies are enacted. What is the vehicle that will be used to execute policy? There are four general cases that can be put into play.
 
The first policy mechanism tries to go through the financial sector and the mortgage servicing system as it currently exists. This takes the market as it is and tries to nudge agents to act a different way with various incentives. The Home Affordable Modification Program (HAMP) program does this by trying to nudge the industry with payments to make modifications that lower interest rates and payments. HAMP was consciously not designed to do principal reductions, though it does have a very small, limited program now. 
 
There's a second policy vehicle driven by the fact that the GSEs are in conservatorship under the FHFA. The FHFA's mission is to "Provide effective supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market," which can support a variety of policy ideas. As mentioned above, HARP is responsible for refinancing GSE loans, and the Hubbard plan focuses on refinancing through the GSEs. Timothy Geithner's recent effort to get the FHFA to support principal reduction through a program called Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA) was recently rejected by FHFA acting director Ed DeMarco. Several progressives responded by calling for DeMarco to be fired.
 
There's a third policy vehicle designed to change the basic legal framework for how bankruptcy works. Bankruptcy law could be modified, even temporarily, to deal with the consequences of the housing bust. The mass modification program (also see here at Slate) proposed by Eric Posner and Luigi Zingales, for instance, worked through bankruptcy law. The failed effort to pass a "cramdown" or lien-stripping amendment was entirely about letting judges write down mortgage debt in bankruptcy.
 
And then there's the fourth mechanism of direct government policy. Here the government actively goes out and purchases and manages mortgages. The New Deal created the Home Owners' Loan Corporation (HOLC) to directly purchase mortgages; we could recreate such a mechanism today. Both John McCain and Hillary Clinton argued for such programs during the 2008 campaign. Senator Merkley's recent plan would do this for refinancing; eminent domain proposals would do this for principal reduction.

Let's grid out those two dimensions:

With this grid in mind, let's re-examine the high-level critique of the Obama administration's housing policy. During the debate over the second round of TARP, the then-incoming Obama administration promised to take action on bankruptcy reform and hinted toward direct government action, or the top two rows in the grid. Larry Summers wrote to Harry Reid promising action on "reforming our bankruptcy laws." Donna Edwards wrote that she "appreciate[d] the personal commitment that Senator Obama" would look "at a program such as one that existed in the 1930s to 1950s to work directly with homeowners."

This did not happen. Timothy Geithner was against direct government action from the beginning, as this letter he wrote to Brad Miller shows. The administration was publicly silent and privately pushed against reforming bankruptcy. The administration also seemed asleep at the wheel when it came to pushing for big action through the GSEs, making no recess appointments and only updating HARP and pushing for principal writedowns this year.

Their main effort was to work through the already existing mortgage framework. This effort has largely been seen as a failure. This isn't surprising, as there are well-documented problems with our current mortgage servicing system. The same problems with Wall Street slicing and dicing mortgages that were present when the housing bubble was inflating are still there now that it has collapsed.

We often don't get second chances in life, but the Obama administration had a second chance at a serious reform of this broken system when news of the scandals surrounding financial fraud started breaking. Though there's still a taskforce out there somewhere, I think it is safe to say the administration wanted to remove these problems rather than take them on directly, which would have opened up a space to reform the current system. They succeeded. This only leaves working through the system.

Maybe your eyes roll when you read the term "neoliberal hegemony," but there's something to the idea that the Obama administration simply felt that the only legimate way to try and deal with the foreclosure crisis was by nudging the incentives of various markets this or that way. The market is the ultimate, efficient arbiter of value, and policy should only seek to adjust some incentives here and there. Measures to intervene directly by the government, or measures to change the way property is regulated through bankruptcy, were ignored right away. Those actions require the government to act as a force in the marketplace directly, or to acknowledge that the economy is created through law and can be adjusted accordingly, both of which are taboo under neoliberal economic ideology.

Working within a system, no matter how aggressive your actions are, means you don't ultimately have to challenge that system. As Harper's wrote back in 2009, in a great essay on President Obama as Hoover, "The common thread running through all of Obama’s major proposals right now is that they are labyrinthine solutions designed mainly to avoid conflict." In a practical sense, for Romney to go bigger than Obama on housing would require either adjusting the bankruptcy code, running a government program that directly intervenes in the marketplace in a big way, or firing DeMarco. In the theoretical sense, it would likely require challenging the reigning paradigm in political economy as well as challenging the current financial system. Are these actions realistic for Romney?

Mike Konczal is a Fellow at the Roosevelt Institute. Follow or contact the Rortybomb blog:

  

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Social Security’s Enduring Legacy: Adaptability

Aug 14, 2012Mark Schmitt

On the 77th anniversary of Social Security, we're celebrating what has made the program so important and why it continues to be vital today. Mark Schmitt lauds it for its ability to provide security throughout tectonic shifts in our economy and society. Read the rest of our coverage here.

On the 77th anniversary of Social Security, we're celebrating what has made the program so important and why it continues to be vital today. Mark Schmitt lauds it for its ability to provide security throughout tectonic shifts in our economy and society. Read the rest of our coverage here.

If Franklin D. Roosevelt rejoined the living tomorrow, he probably wouldn't recognize Social Security, his greatest domestic legacy. That might sound like something a critic or skeptic of the program would say, as if it had broken faith with Roosevelt's vision or expanded far beyond its original intent.

But, in fact, what Roosevelt would see would be Social Security's greatest virtue: its adaptability to changing circumstances. Social Security has survived, thrived, and continued to provide a base level of economic security not only through big macroeconomic shifts (such as the inflation of the 1970s) but also the transformations and uncertainties in our individual and family lives. That adaptability and continuous reexamination and improvement is the quality most in keeping with the experimental, pragmatic nature of the New Deal.

Between 1935 and 2000, there were 30 major legislative changes to Social Security, roughly one every two years, under Republican and Democratic administrations. In 1939, it expanded its focus from the individual worker to the family, adding benefits for surviving spouses and young children. In 1950, it expanded to cover domestic and farm workers, whose omission was the atrocious compromise FDR had made to secure the support of Southern conservatives. In successive changes from 1954 through 1960, a disability program was created, and in the 1970s, benefits were indexed to inflation. Changes in 1977 and 1983 adjusted the financing of the program, changing the formula for benefits to reduce costs and build up more of a reserve (the Trust Fund) so that future retirees financed some of their own benefits. In 2000, the earnings test for Social Security recipients was eliminated. And while Social Security was created with the assumption of a male breadwinner, over 77 years it has been adjusted to account for the changing role of women in the workforce and the family.

The point of this history is a reminder that Social Security is not a fixed, unchanging thing, a jewel of the New Deal to be worshipped. Rather, it is an incredibly adaptive, responsive structure on which we've been able to build several different forms of economic and family security and adjust to radical changes in the economy, family, industry, education, and expectations over the years.

It's become routine to say that Social Security is an industrial age program that's ill suited, or at least needs to be modernized, to deal with information age challenges, but it's telling that this cliché never gets to specifics. It's true that the current era presents dramatic new challenges to economic security: household debt far larger than in the 1930s, 1950s, or even the 1980s (when most households didn't even have access to consumer credit); the rapid decline since 1979 in the number of defined-benefit pension plans; the disappearance of lifetime employment at a single employer; and, most recently, the high rates of long-term unemployment among people in their late 50s and early 60s. But for almost every one of these changes, there's an answer within Social Security that's as good as any other. We could address the insecurity around pensions by creating a universal 401(k) account, but we could do exactly the same thing, with far less complexity and hassle, simply by expanding Social Security. We could construct some new form of economic security for those who have lost their jobs in their late 50s and may never work again – or, as James K. Galbraith has proposed, we could make it less costly for people to take Social Security at age 62 (which a majority of recipients do anyway) and open up opportunities for younger workers.

There are also liberals who hold the position “never touch Social Security.” They, too, should recognize the record of adaptability and change throughout the history of the program. There are bad changes to the program (such as an abrupt increase in the eligibility age) and less bad ones. But one way or another, it's worth putting Social Security on a path that won't require a significant cut in benefits, or hike in payroll taxes, in 15 or 20 years. I'm not endorsing any specific plan here, but just pointing out that resisting any and all changes to Social Security is really a betrayal of the program's greatest strength.

There are programs that really are locked into a particular era and model of employment. Unemployment Insurance, for example, reflects some of the assumptions of the industrial era economy, such as a business cycle in which dips last about 26 weeks and workers return to their previous employer. But Social Security has a seamless versatility that has made it adaptable to all the massive shifts in the economy and our society since 1935. That, rather than any specific component of the program, is its greatest virtue and the reason that Social Security will endure. 

Mark Schmitt is a Senior Fellow at the Roosevelt Institute.

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The Return of the "Hear-Nothing, See-Nothing, Do-Nothing" Congress

Aug 2, 2012David Woolner

As the 112th Congress prepares to go on recess, its record pales in comparison to what the 74th Congress achieved in the 1930s.

For twelve years this Nation was afflicted with hear-nothing, see-nothing, do-nothing Government. The Nation looked to Government but the Government looked away... Powerful influences strive today to restore that kind of government with its doctrine that that Government is best which is most indifferent. - Franklin D. Roosevelt, 1936

As the 112th Congress prepares to go on recess, its record pales in comparison to what the 74th Congress achieved in the 1930s.

For twelve years this Nation was afflicted with hear-nothing, see-nothing, do-nothing Government. The Nation looked to Government but the Government looked away... Powerful influences strive today to restore that kind of government with its doctrine that that Government is best which is most indifferent. - Franklin D. Roosevelt, 1936

A number of recent articles have pointed out that by most measures, the 112th Congress is not merely the most unpopular Congress in history; it is also the least productive. As both the New York Times and the Washington Post have pointed out of late, this Congress would much rather engage in political posturing and ideological brinkmanship than in passing laws that address the current economic crisis.

What a contrast the 112th Congress represents when its record is placed against the 74th, the Congress that was in session at the close of FDR’s first term. It was the 74th Congress that was largely responsible for what historians call the Second New Deal. This included the Emergency Relief Appropriation Act, which provided the funding needed to establish the Works Progress Administration (WPA) that would provide millions of Americans with skilled jobs building the nation’s economic infrastructure; the Soil Conservation and Domestic Allotment Act, which encouraged farmers to preserve one of our nation’s most precious resources, our topsoil, in the midst of one of the worst droughts in history; the Rural Electrification Act, which provided jobs to thousands and “wired” the country by bringing the benefits of electric power to millions of rural Americans; the Public Utility Act, which was designed to reduce the cost of electric power by regulating the utility industry and forcing the break-up of large-scale power monopolies; the National Labor Relations Act, which enshrined the right of workers to form unions and engage in collective bargaining and established the National Labor Relations Board, which helps us settle labor disputes to this day; and finally, the Social Security Act, which gave us not only Social Security but also unemployment insurance.

What many Americans may not be aware of is the long-term impact that these congressional acts have had on future generations. As I pointed out last week, the drought we are experiencing today would no doubt be much worse, and may have even resulted in the rise of a new Dust Bowl, had Congress and the government not moved so aggressively in the 1930s to reduce soil erosion and plant millions of trees. The jobs provided by the WPA helped preserve the critical skills of our workforce and vastly expanded the infrastructure needed to grow the U.S. economy. When the Rural Electrification Act was passed, roughly 90 percent of all the farms in the United States were without power; by the end of the New Deal that number was cut to 10 percent. The passage of the National Labor Relations Act had a profound impact on the level of union membership and wages in the years to come and helped establish the post-war middle class. And it boggles the mind to think of where we might be today, in the midst of the current economic crisis, had we not had Social Security or unemployment insurance. It is also important to remember that many of these acts were initiated by members of Congress in response to the crisis the country faced in the 1930s and that each of these laws received significant support from members of both political parties.

As we approach the 77th anniversary of the passage of the Social Security Act on August 14, perhaps instead of going on recess, the members of Congress should call themselves back into session. With the economy sputtering and millions of Americans still suffering the agony of unemployment, why not take a chance and pass President Obama’s jobs bill, or at the very least establish the long-term funding needed to rebuild and expand our nation’s crumbling economic infrastructure?

After all, more than three-quarters of a century ago while running for office in the midst of a similar crisis, Franklin Roosevelt was bold enough to recognize that in the face of such an economic calamity the country was ready to try “bold, persistent experimentation.” That it was perfectly acceptable to “take a method and try it: if it fails, admit it frankly and try another. But above all try something” for the “millions who are in want will not stand by silently forever while the things to satisfy their needs are in easy reach.”

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

 

Congress image via Shutterstock.com.

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Is the Drought a New Dust Bowl? No, Thanks to the New Deal

Jul 26, 2012David Woolner

When FDR tackled an environmental crisis, he didn't just put people to work to fix it in the short-term -- he solved it for the long-run.

When FDR tackled an environmental crisis, he didn't just put people to work to fix it in the short-term -- he solved it for the long-run.

The severe drought that has afflicted more than half of the country this summer has led some commentators to wonder whether the country might be headed for another Dust Bowl. The consensus among most experts is that the answer is no – and the reasons for this stem in part from the lessons learned and the actions taken by the Roosevelt administration in response to the unprecedented environmental crisis that the nation suffered in the early to mid-1930s.

As those who lived through it will attest, the Dust Bowl was unlike any previous environmental catastrophe the United States had ever experienced. The dust storms it generated buried homes and farm equipment, killed livestock, and on some occasions even darkened cities on the East Coast. The dust storms also represented a serious health risk to humans. At the height of the crisis, for example, physicians across the Midwest reported thousands of cases of what came to be known as “dust pneumonia,” which sometimes resulted in the death of the patient. The Dust Bowl laid bare millions of acres of farmland, left roughly half a million Americans homeless, and forced hundreds of thousands of people off the land. Indeed, between 1932 and 1940 it is estimated that 2.5 million people abandoned the plains for other regions of the country, with an estimated three to four hundred thousand heading to California alone.

In response to this unprecedented social and environmental catastrophe, the Roosevelt administration established a number of programs, such as the Resettlement Administration, that were designed to help those who had been driven off the land by the disaster. But it also recognized that the only way to deal with the crisis over the long term was to attack the root causes. In other words, it had to address the environmental degradation that led to the conditions that helped give rise to the Dust Bowl in the first place. Foremost among these was the state of the soil, which, thanks to over-plowing and grazing, the planting of inappropriate crops, and poor husbandry, was in abysmal shape.

Thanks in part to his experience as an amateur farmer and forester, FDR recognized that the key issue was soil conservation, and he established the Soil Erosion Service within his first six months in office. This initiative, which in 1935 became the Soil Conservation Service and later the Natural Resources Conservation Service, marked the first major federal commitment to the preservation of privately held natural resources. Under the auspices of this program, farmers learned new agricultural techniques, such as contour plowing, that helped preserve and protect the fertility of the soil. Equally significant was FDR’s initiation of the Prairie States Forestry Project in 1935. Here the goal was to create a “shelter belt” from the Texas Panhandle to the Canadian border. This program literally changed the face of the nation. Over the course of the next seven years, the U.S Forestry Service, working in conjunction with the Civilian Conservation Corps (CCC), the newly established Works Progress Administration (WPA), and local farmers, planted roughly 220 million trees, creating 18,000 miles of windbreaks on some 30,000 farms.

It is thanks to the New Deal’s establishment of the Soil Conservation Service and the planting of the Great Plains Shelter Belt that we have not experienced another Dust Bowl—even in the face of such severe conditions as this summer’s dry spell or the even more extensive drought the nation experienced in 1956. As was typical of most New Deal infrastructure projects, the programs the government designed to combat this unprecedented environmental disaster were not developed merely as a means to provide jobs and short-term work relief to those who were suffering unemployment. Rather, they were part of a large-scale effort to bring about a long-term solution to a very difficult environmental problem. This emphasis on long-term environmental planning, which recognizes the need create a balance between stewardship and managed exploitation and which sees the federal government as playing a crucial role in establishing the parameters of that balance, is now referred to as sustainable development.

In confronting the terrible conditions of the Dust Bowl, FDR once urged the American people to be ready “to fit and not fight the ways of nature.” Today, as we face the consequences of what the vast majority of scientific opinion recognizes as climate change—whatever its immediate causes—we would do well build on this lesson. If nothing else, this summer’s drought should remind us of our responsibility to ourselves and to our children to protect and preserve both our environment and our natural resources. With the right vision and political will, we too could turn the onset of the Great Drought of 2012 into an opportunity to provide millions of unemployed Americans work in developing green energy while at the same time building a cleaner, more secure future for our children. 

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

 

Drought land image via Shutterstock.com.

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What Policy Agenda Follows From "You Didn't Build That?"

Jul 20, 2012Mike Konczal

(Note: There's a previous post on this subject of "you didn't build that," taking apart the conservative agenda around "job creators," which you can read here.)

(Note: There's a previous post on this subject of "you didn't build that," taking apart the conservative agenda around "job creators," which you can read here.)

The right is freaking out about President Obama's "you didn't build that" comment. Well, let's hope the conservatives in the audience have their fainting couches nearby and pearls sufficiently clutched, because I am going to start by kicking out two jams by my man, Franklin Delano Roosevelt, from back from when he was on the campaign trail:

"Our Republican leaders tell us economic laws--sacred, inviolable, unchangeable--cause panics which no one could prevent. But while they prate of economic laws, men and women are starving. We must lay hold of the fact that economic laws are not made by nature. They are made by human beings." (Nomination Address, July 2nd, 1932, Chicago, IL)

"To insure the first set of rights, a Government must so order its functions as not to interfere with the individual. But even Jefferson realized that the exercise of the property rights might so interfere with the rights of the individual that the Government, without whose assistance the property rights could not exist, must intervene, not to destroy individualism, but to protect it." (Commonwealth Club Address, September 23, 1932, San Francisco, CA)

Now as long as people are guessing as to what the true, deeper, esoteric meaning is of President Obama saying, "Somebody invested in roads and bridges. If you’ve got a business—you didn’t build that," let throw something out there. It may be less a legal argument for how all property is the creation of the state - or as Roosvelt said, "the Government, without whose assistance...property rights could not exist" - and more a genuine call for actually building roads and bridges, something Congress is no longer capable of doing in these times. The current House went to war over whether or not to fund transportation infrastructure. It barely passed in a last-minute bill that left many issues still on the table. Former Republican congressman and now Transportation Secretary Ray LaHood told Politico that the original proposal was “the worst transportation bill I’ve ever seen during 35 years of public service.” Given that capital markets are willing to lose money to loan to us for 20 years and there's lots of unemployed people around, this should be a no-brainer.

There's two responses I've seen on the right to this topic that I'd like to address on the "you didn't build that" point, and both come up in Julian Sanchez's post "What Follows from 'You Didn't Build That'?" One is that President Obama is addressing a strawman, and that unless you are speaking to an anarcho-capitalist nobody would disagree with this. "Even we minarchist libertarians are already on board with" basic public goods, he writes, and President Obama's vision of the role of the state is much more expansive than that. I disagree that there is no disagreement. I think that the current vision animating conservatism broadly and GOP policy narrowly is one of an economy in which value is created top-down by "job creators," which I outlined at length here. Rather than "Social Darwinist," as the president refers to it, I think it is clearer to say that the current GOP policy, centered around the Ryan Budget, is "Randian." Now, that doesn't mean the opposition believes every part of Ayn Rand's theories; it just means that their political compass is orientated towards her vision, and if you step in that direction you are getting closer to your goal.

The other response is that what Obama says is largely true, but there's no actual politics that falls out of it. Sanchez writes, "It’s not that the 'you didn’t build that' argument is wrong as a factual matter—it’s that it’s true about everything, and therefore doesn’t get you much of anything."

That's a good point. What does a "you didn't build that" agenda look like? Here's what I think it should include broadly, and what matters it should be concerned with, at least on all things related to economics. (Noting in advance that I'm pretty sure the mainstream Democratic Party and President Obama aren't going to sign up for most of this.)

The first step is what President Obama was calling for in the speech, which is progressive taxation. This doesn't require the state to do more than what it does now, or less than what it does now, but instead changes how we pay for those things. And here the idea would be that those who have benefitted the most have an obligation to contribute the most. This has historically been a controversial policy - when the French economist and statesman Turgot was presented with a project for progressive taxation he responded "we must execute the author, not the project" - and I think it is useful to consider the Ryan Plan as ending progressive taxation. There's a lot of ways to argue for progressive taxation, including shared sacrifice of marginal utility, and this is another.

Another would be emphasizing that public goods are actually that: publically provided and shared. There's been a move to both privatize large parts of the government and to emphasize putting costs for the use of publically provided infrastructure directly on end users instead of making them paid for broadly. Higher education, for instance, is now less a conscious set of planning the government does to make sure all who need education can receive it, which is paid for broadly through taxes, but instead of a series of coupons -- grants, loans, tax subsidies -- to subsidize individuals purchasing a self-investment by and for themselves, with the assumption that the "for-profit" sector and innovation broadly will expand in size and quality to pick up the slack of decreasing public provisioning. A broader question is what is treated as a commodity, and under what terms. Fighting back against both of these issues would be part of the agenda.

Continuing the inter-generational pact of the welfare state is another part. David Frum recently described the current GOP as "a going-out-of-business sale for the baby-boom generation." Not wrecking the entire social safety net and the mechanisms of the goverment on the way out the door, and instead thinking of the government as a pact through time, is another important point to emphasize.

Now for property. Conn Carroll at the Washington Examiner brings up Robert Hale and the progressive, legal realist attack on laissez faire, and Sanchez brings up the similar arguments of the Nagel/Murphy book “Myth of Ownership.” These arguments are partially inherited from people like Jeremy Bentham, who argued that “property is entirely the creature of the law.”

One of the critiques that comes out of these arguments is that the picture of property rights as a vertical relationship between a person and an object, one where the issue at play is whether the person's right over the object is “deserved all the way down,” is flawed, or at least insufficient. Property is really a horizontal set of relationships between people; it isn't just your control of an object but your control over others with respect to that object. The fundamental right of private property, of course, has always been the power to exclude others. But in the 1910s, a law professor named Wesley Hohfeld formalized property "rights" into a series of four capacities: "right," "privilege," "power," and "immunity." They contrast with four incapacities: "duty," "no-right," "liability," and "disability" (see here or here for more). Each type of property right is predicated on being able to force others to respond a certain way -- you have certain immunities while others have disabilities in response, certain powers while others have liabilities, and so on.

And so "liberty" for one comes at an expense of "liberty" for another. Since there's no neutral way for the government to set these rules, certainly no abstraction like "economic liberty" to guide the path, the question over social control of property, as Leonard Trelawny Hobhouse put it, is "not of increasing or diminishing, but of reorganizing, restraints." The issue here isn't that everything is up for grabs - it's that there is no "neutral," and appealing to higher abstractions as "rights" or "ownership" don't get you anywhere.

Perhaps you find that objectionable or maybe you don't, so let's build out the You Didn't Build That Agenda in regards to property. The first stop is that there needs to be a democratic element and accountability in setting up these rules. If only because trying to back out a system of rules from vague appeals to "liberty" (especially as interpreted by courts) don't actually get us anywhere. The second issue would be acknowledging and confronting the issue that the current set up of the rules of property and economic exchange are important in creating our current economic inequality, from the runaway wealth of the top 1% to the stagnating wages of everyone else.

The way we set up the rules creates a lot of winners. The top 1% consists mostly of corporate CEOs and financial wealth. The former are influenced by the way we structure corporations through law -- read Demos' Anthony Kammer on "Reimagining the Corporate Form: Toward a More Democratic System of Corporate Governance" -- and compensation packages through tax law. The latter has a clear link with financial deregulation and much of the system exists in a way where finance's failure can pose huge externalities on other market actors and the macroeconomy as a whole. Another example is patent law which, as many note, provides large windfalls for owners. Over half of the windfall that comes from the fact that we privledge income from capital over income from labor in taxation goes to the top 0.1%. Dean Baker’s e-book, "The End of Loser Liberalism: Making Markets Progressive," is great on these points.

The way we set up the rules also creates a lot of losers. Bankruptcy law has become tougher on regular people while corporations do fine under it, something Robert Kuttner writes about as an important double standard. It is harder to unionize, and simple measures to allow for card check have failed in Congress. Inequality at the low end can be largely attributed to decreased unionization (for men) and a stagnant minimum wage (for women), both of which reduce bargaining power for their respective parties.

There's also macroeconomic policy, something the government does (or doesn't do) that has significant impact on economic outcomes but that impacts all kinds of claims to property. As Ryan Avent notes, commenting on the You Didn't Build That issue, the "operating monetary principle over the past generation—price and financial stability at all costs, help for the unemployed if we get around to it and only to the extent that the first priorities aren't endangered—has facilitated the creation of an enormous amount of financial wealth," as well as stagnating wages for everyone else. Full employment for all is a great start, though there's no way to appeal to it by referencing abstractions of economic liberty.

What else needs to be part of the agenda?

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Engineering image via Shutterstock.com.

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Is Obama Using FDR's Playbook in Attacking Mitt Romney With Bain Capital?

Jul 16, 2012David Woolner

Obama's attacks on Bain follow in FDR's 1936 re-election footsteps except for one key aspect: a full-throated case for government.

Yes, there are still determined groups…[who would]…steal the livery of great national constitutional ideals to serve discredited special interests. As guardians and trustees for great groups of individual stockholders they wrongfully seek to carry the property and the interests entrusted to them into the arena of partisan politics…

Obama's attacks on Bain follow in FDR's 1936 re-election footsteps except for one key aspect: a full-throated case for government.

Yes, there are still determined groups…[who would]…steal the livery of great national constitutional ideals to serve discredited special interests. As guardians and trustees for great groups of individual stockholders they wrongfully seek to carry the property and the interests entrusted to them into the arena of partisan politics…

The principle that they would instill into government if they succeed in seizing power is well shown by the principles which many of them have instilled into their own affairs: autocracy toward labor, toward stockholders, toward consumers, toward public sentiment. Autocrats in smaller things, they seek autocracy in bigger things. “By their fruits ye shall know them.” - Franklin D. Roosevelt, 1936

In seeking to identify Republican presidential hopeful Mitt Romney as an unfeeling member of the nation’s wealthy elite, President Obama is using tactics reminiscent of those used by Franklin Roosevelt in his own bid for re-election in 1936. In that campaign, FDR sought to draw a clear distinction between what he and his Democratic colleagues represented—the interests of the average working American—versus what he saw as the Republican promotion of a return to the economic status quo. But unlike FDR, President Obama is shying away the argument that government must be the countervailing force against entrenched financial interests.

By 1936, conservative critics of the New Deal had launched a persistent and hard-hitting campaign against FDR's policies, labeling them un-American and contrary to the Constitution. At the forefront of this effort was the American Liberty League, a privately funded anti-government organization that ruthlessly attacked his economic policies as little more than a drive to usurp the constitution and take the United States down the path toward socialism. But thanks to the fact that the Liberty League was never a truly populist movement (although it tried to portray itself as such), as well as the fact that it was financed by some of the most powerful business interests in the county, including the leaders of the DuPont Company, Chase National Bank, Standard Oil, and a number of other wealthy individuals and corporations, FDR was able to discredit its efforts as little more than a poorly concealed attempt to restore the country to the laissez-faire economic policies of the past.

In doing so, FDR reminded the American people again and again that the rightwing drive to restore these policies was not based on the elite’s desire to protect and promote free enterprise, but rather based on their unabashed desire to protect and promote their own wealth and power. Under such an economic system, which had been in place during the 1920s, the “savings of the average family, the capital of the small-businessmen, the investments set aside for old age,” what FDR rightly called “other people’s money,” were the tools with which the economic elite dug itself in. Indeed, as he went on in perhaps his most famous 1936 campaign address, it was critical not to forget how:

Throughout the nation, opportunity was limited by monopoly. Individual initiative was crushed in the cogs of a great machine. The field open for free business was more and more restricted. Private enterprise, indeed, became too private. It became privileged enterprise, not free enterprise.

In our own era marked by declining wages, the outsourcing of jobs, and an ever-increasing share of the nation’s wealth residing in the hands of the financial barons of Wall Street—whose willingness to risk “other people’s money” has hardly diminished—FDR’s assault on what he identified as “the privileged princes of these new economic dynasties” rings as true today as it did in the mid 1930s.

It is for this reason that President Obama’s attacks on Mitt Romney’s record as the head of Bain Capital have proven so effective. Having been burned in the 2007-2008 financial collapse that led to the worst economic crisis since the Great Depression, the American people still harbor a good deal of hostility towards the bonus- and bailout-receiving bank executives whose reckless behavior brought the nation and the rest of the world to the brink of economic ruin. Based on the response to the president’s efforts to paint Romney as one of these elite, it also appears that they remain skeptical of the financial titans' ability to pull us out of the Great Recession. What is missing from the president's attacks, however, is the one key element that FDR used in convincing the American people that they should support his re-election in 1936: the clear and unequivocal case for government.

In the wake of the more than 30-year assault on government launched by Ronald Reagan in 1980, President Obama and the Democratic Party may be loath to use the case for government as part of their strategy to win the 2012 election. But as FDR pointed out in the mid 1930s, we have now reached a point like the 1920s where for too many of us “the political equality we once had won” has become “meaningless in the face of economic inequality.” Why? Because, as was the case in America’s gilded age, “a small group” has “concentrated into their own hands an almost complete control over other people's property, other people's money, other  people's labor—other people's lives.”  As a consequence, we also find, as FDR did, that “for too many of us life…[is] no longer free; liberty no longer real; men…[can] no longer follow the pursuit of happiness.”

To counter such entrenched economic interests, FDR insisted that “the American citizen could appeal only to the organized power of government,” and he urged his fellow citizens to vote for him and his party as the best means to ensure that government by, of, and for the people would continue to flourish. For, as he often noted, what was really at stake in this struggle between the average citizen and the interests of the wealthy was the state of democracy itself. In the same election speech, for example, he also observed:

Unhappy events abroad have re-taught us two simple truths about the liberty of a democratic people. The first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic State itself.

The second truth is that the liberty of a democracy is not safe if its business system does not provide employment and produce and distribute goods in such a way as to sustain an acceptable standard of living.

FDR’s belief in the need for government to serve as an active instrument of social and economic justice won him the greatest electoral landslide in American history. It also helped preserve American democracy in an age when democratic government was under siege worldwide. Surely these are two lessons the Obama administration might turn to as it struggles to win the hearts and minds of the American people at this critical moment in our history.

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

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38 Million Missing Quits, the Battle to Quit and Replacing Government with a UBI: Three Points on Workplace Coercion

Jul 7, 2012Mike Konczal

There's a lot of discussion on the workplace as a site for private coercion building out of the epic Crooked Timber post Let It Bleed: Libertarianism and the Workplace, by Chris Bertram, Corey Robin and Alex Gourevitch (BRG). They are responding to the worldview of the Bleeding Heart Libertarians (BHL).

There's a lot of discussion on the workplace as a site for private coercion building out of the epic Crooked Timber post Let It Bleed: Libertarianism and the Workplace, by Chris Bertram, Corey Robin and Alex Gourevitch (BRG). They are responding to the worldview of the Bleeding Heart Libertarians (BHL). Corey has two posts (I, II) collecting a wide variety of great responses. I'd like to make three quick points I haven't seen others mention.

I - Over 38 Million Quits Missing

If we view individuals quitting their job as a check on private coercion, which I believe the BHL crew thinks, then there's been a massive increase in private forms of coercion in the past several years. Here's JOLTS data from the Bureau of Labor Statistics on the number of quits that are happening in the labor force:

There are, roughly, 38.4 million quits that should have occurred that didn't since the economy went into recession. I'm assuming nobody believes that employers decided to become very nice all of a sudden in December 2007, but that instead the economy went into a deep recession. As a result of this recession, where the number of unemployed versus job openings has skyrocketed (because both the unemployed have increased and job openings shrunk), it is very difficult to find a job. This translates into declining labor share of income, as workers are left with little bargaining power in the Great Recession. If one assumes that labor management techniques are sticky, or that hysteresis creates the conditions where people who have lived through bad economic times have weaker bargaining power, this coercion is likely to cement and be long-lasting.

The academic unemployment literature goes far beyond the Economics 101 idea that wages are simply equal to contribution (marginal product). That literature now looks to bargaining over surpluses/rents that come out of the labor contract as the crucial issue for how wages are determined. If you look to Chris Pissarides' Equilibrium Unemployment Theory (a textbook summarizing the work that just won him the Nobel Prize), you see arguments such as, "We assume that the monopoly rent is shared according to the Nash solution to a bargaining problem...The way that market tightness enters the wage equation in our model is through the bargaining power that each party has...The worker's bargaining strength is then higher and the firm's lower, and this leads to a higher wage rate." Tight labor markets mean more of the surplus is captured by labor through wages. If you view workplace conditions as an extension of the wage equation, then full employment makes a giant difference even under neoclassical economic assumptions.

BHL is not an economics blog, but I find it weird that they aren't ringing the alarm as much as possible on this. They should be willing to go to some great lengths to keep the labor market at full employment as a "free market" way of mitigating abuses, which would involve accepting mass job creation programs, larger government deficits, unorthodox monetary policy, putting losses on creditors instead of debtors, and so on. For many libertarians these solutions are the real "abuses."

Macroeconomic stability, everyone having a right to employment, and labor capturing their fair share of the pie aren't the passive results of "economic liberty" or of economic contracting. They are the result of an interventionist government focused on managing the macroeconomy, one whose political compass is set by groups organized to protect the interests of workers, of which organized labor are the leaders.

II - Freedom to Quit Was Forged in Political Battle, Not Markets

Alex Tabarrok at Marginal Revolutions wrote this: "If you think that the freedom to quit is without value bear in mind that under feudalism and into the early 19th century in the U.S. and a bit later in Britain employers and even potential employers could prevent workers from quitting and from moving. The freedom to quit was hard won. We should not disparage the liberation brought by a free market in labor."

Early 19th century? British Master and Servant law made employee contract breach a criminal offense until 1875. Anti-enticement laws, where employers would be fined if they hired someone who was currently under contract, were popular in the sharecropping American south into the early 20th century, and upheld in courts as late as 1923.

Tabarrok draws on Robert Steinfeld's excellent work in that link, but a crucial thing to draw from that literature is that laissez-faire "economic liberty" and "freedom of contract" movements were the enemies to building the modern freedom to quit one's job. Employees faced criminal penalties for quitting and the loss of back pay if they did quit, and the common law of the time made it impossible for workers to end this. Laissez-faire advocates fought for this and against organized labor's efforts to dismantle it.

It seems like people are discussing the right to quit as if was something that just emerged out of our rich society, and something that "naturally" came out of extensive, individual, economic bargaining, when that couldn't be further from the truth. Only through the concentrated efforts of organized labor, a bloody, ugly fight, was this modern freedom able to be built. Karen Orren's book Belated Feudalism places the end of this old regime Tabarrok alludes to at the New Deal's 1935 Wagner Act, which comes after decades of union organizing and battling. Who will build the next set of contractual labor frameworks we'll take for granted, given that the freedom to quit was a political battle that never emerged from the labor market on its own?

III - How Much Does a UBI Cost, and Should We Replace the Government With Cash?

There's also a question of how much a Universal Basic Income (UBI) would cost. BRG suggested it would be 20 percent of GDP, added to the roughly 20 percent baseline of taxation that already exists to provide current government services, for a total of 40 percent. This is correct. Our GDP per capita is roughly $50,000. If you want to give everyone $10,000, that will require taxing 20 percent of GDP.

A lot of people suggested that was too high. Those people are usually, almost by definition, doing one of a few things. They are excluding some populations from the UBI (such as giving children nothing or much less), they are really discussing a negative income tax (a means-tested UBI done through the tax code), they are also removing current government services (such as unemployment insurance, or food stamps), or they are redefining "cost" to just focus on the redistribution element (associated with the negative income tax). Changing those numbers would change the final result.

Some means-test the UBI as a negative income tax, which would have significantly less cost. This has the normal "submerged state" problems any tax code program has, where people wouldn't see it as a government program. The means-tested part makes it not universal in basic sense. The negative income tax wouldn't avoid stigmatization as not everyone would receive it, and could still create poverty traps, two issues the UBI is meant to overcome. Indeed a negative income tax with a work requirement, the EITC, is ground zero for the accusation that too many people pay nothing in taxes but receive government services.

Charles Murray essentially dismantles the welfare state and the government and replaces it with a UBI in his argument. He segments 30 percent or so of the UBI to be mandated (!) for purchasing catastrophic health insurance though.

If one is going to dismantle the government to provide a UBI what parts will be left should be discussed. As many have pointed out (Anderson, Scanlon), just because you would prefer X over something Y that we believe everyone should have doesn't obligate us to provide X. If you are a rational person who would prefer to trade in your right to a fair trial for $100 to buy a fancy hat, that doesn't mean society owes you the hat over the trial, even if that right to a fair trial costs society over $100.

There are also goods where the needs are disproportionately varied and we actually need the insurance component of social insurance for risk-sharing (e.g. health care). And there are also a variety of functions through which the government can make sure a baseline of demand is met for all who need them, if the private market is unable to provide or will insufficiently allocate them (e.g. education). It's not clear that disbanding these functions and giving away a coupon is a smart idea.

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President Obama and FDR: Rumors of Political Demise at the Hands of the Supreme Court Greatly Exaggerated

Jun 28, 2012David Woolner

Despite the handwringing, neither president suffered a huge political blow at the hands of the Supreme Court.

Despite the handwringing, neither president suffered a huge political blow at the hands of the Supreme Court.

There is no question that the Supreme Court’s decision to uphold the Patient Protection and Affordable Health Care Act represents a major victory for Barak Obama’s presidency. Struggling in the polls thanks to the continued sluggish performance of the economy, a defeat on the constitutionality of this signature piece of legislation had led many analysts to predict that, had the decision gone the other way, President Obama’s ability to effect further change would be finished. Others argued that a ruling striking down the health care law would have meant the end of President Obama’s political career. But if history is any guide, these dire predictions may have been too severe.

Roughly 75 years ago, when Franklin Roosevelt was engaged in his own struggle with the Supreme Court, it appeared for a time as if the fate of his presidency—and the New Deal—also hung in the balance. In May of 1935, for example, the Court struck down the National Industrial Recovery Act and the Agricultural Adjustment Act, two key provisions of the New Deal. FDR was livid and, fearing for the fate of such landmark pieces of legislation as the 1935 National Labor Relations Act and Social Security Act, he eventually decided to take on the Supreme Court by unleashing his famous “Court Packing Plan” in February 1937. The plan argued that the president should be allowed to add up to six new judges to the bench in cases where a sitting justice who had served at least ten years on the bench refused to retire after reaching his seventieth birthday.

The president was perfectly within his legal bounds to request a change in the make-up of the Court, and he certainly was not alone in his call for judicial reform. But given the widespread support for the make-up at the time and the means by which the president unveiled his proposal—it was launched without warning and without any effort to secure congressional support before it was put forward—the plan soon ran into fierce opposition, even from some members of Roosevelt’s own party. As time went on, what congressional support there was for the plan eroded, and after some months the bill was quietly allowed to die in the Senate before it ever came to a vote.

Most historians agree that the launch and demise of FDR’s court packing scheme was a major political blow which, when coupled with the Roosevelt recession of 1937, resulted in the strengthening of the anti-New Deal coalition in Congress in the midterm elections of 1938. This certainly made it harder for FDR to push further New Deal reforms in the coming years, but it did not bring about the judicial reversals that FDR feared. On the contrary, from that moment forward the Court upheld every New Deal statute that came before it, launching a new era of jurisprudence that fundamentally altered its character and the nature of its decisions.

The setbacks that President Roosevelt experienced at the hands of the Court in the mid 1930s, then, did not result in the undermining of the New Deal. Thanks to a shift in attitude in the Court about the role of government in the maintenance of the social and economic health of the nation, we still enjoy Social Security, unemployment insurance, a federal minimum wage, and a host of other New Deal provisions. Nor did the Court’s action’s result in the political demise of Franklin Roosevelt, who would go on to win reelection to an unprecedented third and fourth terms.

In the decades since Roosevelt’s showdown with the Supreme Court, a debate has raged about how much his decision to confront the Court may have led to the change in attitude among the justices regarding the constitutionality of the New Deal. A number of historians—and Roosevelt himself—have claimed that the president may have lost the battle but won the war. In other words, it was the pressure from the president that led to the shift in the Court’s outlook.

But more recent scholarship tends to support the idea that the Court’s about-face reflects the slow evolution of 20th century constitutional law that predates the New Deal. The court, in essence, was heading toward supporting greater federal intervention in the economy, but had not quite reached this point when FDR launched his flurry of programs and reforms. One strong argument in favor of this view stems from the fact that in early 1937—before FDR announced his court reform proposal—the court reversed itself and ruled in favor of two other New Deal provisions that had been brought before it. Ironically, one of the justices who changed his position was Owen Roberts, a conservative Hoover appointee who would continue to serve on the court until 1945. Given his change in attitude, it is Associate Justice Owen Roberts—a man whom the current chief Justice John G. Roberts (no relation) apparently admires—who is most often credited with saving the New Deal or, as was said at the time, carrying out “the switch in time that saved nine.” Today, it appears that it was Chief Justice Roberts, who cast the decisive vote in favor of the Patient Protection and Affordable Health Care Act, who will make it possible for millions of uninsured Americans to finally gain access to what many consider a fundamental human right: affordable health care. 

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

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Myths About Government

Jun 20, 2012Jeff Madrick

The Rediscovering Government roundtable discussion in DC tomorrow sets out to debunk misconceptions about government spending and the economy and reinvigorate a dialogue about the importance and positive potential of government. 

The Rediscovering Government roundtable discussion in DC tomorrow sets out to debunk misconceptions about government spending and the economy and reinvigorate a dialogue about the importance and positive potential of government. 

Perhaps it isn’t odd that the American people are so skeptical of the uses and purposes of government. As a nation built on a revolution against a monarchy, such skepticism is likely built into our national character.

But it doesn’t accord with our history, and that is why it remains surprising. Government was inseparable from American economic and social development. It did not reduce freedom, but protected it.

I am always disturbed when economists in particular talk about the “role of government.” It is like talking about the role of parents in their children’s lives, or the role of the basketball in a basketball game. There is no economy without government, even in America. The government does not merely correct market failures; its purpose is far more profound. It is about true freedom, true opportunity, and necessary change.

We have organized an important panel discussion on June 21st in Washington, D.C., to put to rest some of the prevailing myths about government. Peter Lindert of the University of California at Davis will tell us about his empirical work on whether large government impedes growth; his extensive research shows it has not. Jon Bakija of Williams College will similarly tell us about how little hard evidence there is that high taxes impede growth. Lane Kenworthy of the University of Arizona will show how much of the income of the lower half of the distribution depends on social policies. Nancy Altman of Social Security Works will put straight the true finances of Social Security. And finally Ruy Teixeira of the Center for American Progress will tell us how extensive the American antagonism towards government is despite these facts, and whether these views can be changed.  

Our goal is to present a counter-narrative to the prevailing anti-government ideology. We will not argue that government is all good, requires no radical reforms, or cannot be made to work better. After all, why should we expect politicians to act in the interests of others, rather than their own sometimes contradictory interests?  

But there is reason to expect this, because it has happened time and again in American history. Moreover, acting in the interests of others is often acting in one’s self interest. Thomas Jefferson championed regulations of land sales in early America to make sure many people got a chance at ownership. The result was a strengthened democracy of secure and satisfied citizens.

His party built the canals through public financing in the states, led by New York. Many, and probably most, prospered when New York City became the giant hub of trade and commerce with the opening of the Erie Canal. American government created free and mandatory schools, subsidized the railroads, started technical colleges, and sanitized the cities, which in turn became sources of growth. In the 1800s, these activities were typically led by the state and local governments.

Markets don’t work when monopolies gather power, and the federal government in the next century set out to limit that from happening. It protected workers in all kinds of ways. In the 1930s, it recognized that financial markets were different from others and required special regulations. It built highways, invested in medical and technical research, subsidized college, and established necessary product, safety, and environmental regulations.   

As Lane Kenworthy points out in his fine summary piece on our site, if big government were a problem, why did the U.S. economy keep growing fast even as government got bigger?  

And let me point out one other factor that is neglected. As I emphasized in my book, The Case for Big Government, government is the key agent of change. No one anticipated we’d need high schools and colleges when the Constitution was written, but government was the instrument to create these critical institutions. No one knew of germ theory, but government led the way in sanitizing water and making large cities habitable. Who knew about the computer chip?

Perhaps I am biased because I live in New York. The New York City government eventually took over and aggressively expanded the subways. It built the dramatic walls of Riverside Drive, so often neglected. Miracle of miracles, it collects the garbage in this densest of cities.

But consider the great water works of the west. This was the work of state and federal government. And the highways, of course.  And the university system of California, among others.

If one needs further historical examples, consider the first great European city, Rome. Its aqueducts and enormous road network were the work of the government. Its devotion to law is a model to this day. It was highly productive and conducive to commerce because of these advances.  

American attitudes towards government have always shifted; sometimes pro-government and public investment and social programs, sometimes against them. We were usually at our best when we favored government, but government was far from always efficient. America was not immune to substantial corruption. Government always needed a good wringing out. But when it was widely vilified and weakened, America often failed. Political instability, widespread sacrifice, and jeopardized democracy were results.  

As for contemporary times, the Great Depression was an important catalyst. It turned an already partly progressive nation (since Teddy Roosevelt and Woodrow Wilson) far more so. It gave us a minimum wage, unemployment insurance, Social Security, labor organizing protections, securities regulations, and great public works to create jobs. The New Deal was followed by Johnson’s remarkable Great Society in the 1960s -- Medicare, Medicaid, historic civil rights legislation, and on. The American social sphere was brought into modern time along with its economy, which required those social investments.

But these attitudes shifted strongly beginning in the 1970s. Attitudes towards government had already become somewhat more skeptical in the 1960s, with new poverty programs and racial demands. The Vietnam War was a further blow to confidence in government, as was the Watergate scandal.  

In my view, however, the economic devastation of the 1970s was the major blow. Inflation of 12 percent, unemployment soaring, mortgage rates at 18 percent. In 1972, Governor Ronald Reagan of California supported a referendum to demand a sharp and permanent cut in state income taxes. Californians voted against it; they said they would pay their state taxes. By 1978, only six years later, Proposition 13 passed overwhelmingly, sharply cutting property taxes and with it undermining the state’s great education system.  Nationally, the Kemp-Roth tax proposal to cut federal income taxes up to 30 percent was rapidly gaining support in Congress. Economic pain caused Americans to seek quick and sometimes vindictive solutions, even personally self-destructive ones.  

In my view, the lost faith in and mismanagement of government is the key cause of the crisis of the future the nation now faces. This lost faith resulted in deregulation, unaffordable tax cuts, and the failure of government to develop new programs and act as the agent of change it should be.  

We can argue about these issues philosophically. But Rediscovering Government will stay as close to the demonstrable facts as possible. We will present the evidence about government, the economy, and growth. Then we can discuss how to restore a true sense of our own history, rebalance our sense of the purpose of government, and move on constructively.  

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

 

Capitol image via Shutterstock.com.

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The Senate’s Dimon Hearing Was Sadly No Pecora Commission

Jun 14, 2012David Woolner

Rather than digging up the truth behind Wall Street's behavior, Congress seems content to let the possibility of another crash loom.

Rather than digging up the truth behind Wall Street's behavior, Congress seems content to let the possibility of another crash loom.

Jamie Dimon’s testimony before the Senate Banking Committee yesterday has led some critics to charge that the Senators tasked with getting to the bottom of what led to JPMorgan Chase’s staggering $2-to-$5 billion dollar loss in the derivatives market have dropped the ball. In spite of Mr. Dimon’s frank admission that JPMorgan Chase, like the nation’s other big banks, was sometimes led astray by “greed, arrogance, hubris [and] lack of attention to detail,” and his additional observation that the instigation of the yet-to-be imposed Volcker Rule could have reduced the losses, Dimon faced few really tough questions. As a result, we learned little, if anything, from the hearings about the true nature of the decisions that led to the loss, or how Mr. Dimon and the CEOs of our nation’s other too big to fail banks might avoid such large losses in the future. This is particularly important if what he calls the “vague and unnecessary” Volcker Rule is ultimately watered down to the point of ineffectiveness.

Given the level of campaign contributions members of the Senate Banking Committee—on both sides of the aisle—have received from the banking industry, perhaps we should not be surprised by the coddling Mr. Dimon received in the Senate hearing room. But things were not always so cordial. Roughly 80 years ago, in the wake of the 1929 financial sector crash, the very same Senate Banking Committee, under the leadership of the committee’s indomitable chief counsel Ferdinand Pecora, excoriated members of Wall Street’s financial elite. The result was a series of revelations about the behavior—what Mr. Dimon accurately calls the “greed, arrogance [and] hubris”—of Wall Street that outraged the nation and shocked Congress into action.

In the spring of 1933, for example, under the grilling many top executives received at the hands of Pecora, who cut his teeth as a prosecutor as the Assistant Attorney General for the State of New York, the Senate Banking Committee learned that top executives at National City Bank (now Citibank) had bundled a series of bad loans to Latin American countries into securities and sold them to unsuspecting investors. The Committee also learned that these same executives had received large interest-free loans from National City’s coffers and that, as J.P. Morgan, Jr. admitted, it was fairly common practice among the members of Wall Street’s banking and financial elite to keep a list of influential “friends” who were given the opportunity to purchase stocks at drastically reduced prices. Most shocking, however, was the revelation that Mr. Morgan, who as head of the nation’s largest bank was the Warren Buffet of his day, had paid no income taxes between 1930 and 1933. Nor was he alone, for the committee soon learned that many of the nation’s other top bankers had also paid little or no income tax in the years since the 1929 crash.

These disclosures, coupled with additional revelations about excessive salaries and bonuses, outraged the public and helped inspire the incoming Roosevelt administration and Congress to push through some of the most important banking and financial reforms in American history. It is thanks in part to the work of the Senate Banking Committee, then, that the nation benefitted from such reforms as the Glass-Steagall Act, which separated commercial from investment banking and gave us the Federal Deposit Insurance Corporation; the 1933 Truth in Securities Act, which required the securities industry to provide potential investors with complete and accurate financial information about any financial product individuals or firms might wish to purchase; and the 1934 Securities and Exchange Act, which created the Securities and Exchange Commission.

Of course, the vast majority of the financial sector in 1933 and '34 vehemently opposed these reforms. But thanks to the willingness of the Senate Banking Committee to root out and expose many of the unethical practices that contributed to the collapse of the American economy, all Americans, from Wall Street to Main Street, were able to reap the benefits of a properly regulated financial sector for decades to come.

Today, most mainstream economists agree that it has been our return to the reckless and largely unregulated financial practices we saw in the 1920s, coupled with the dismantling of such key New Deal reforms as the Glass-Stegall Act, that led to the 2007-08 collapse of the world’s economy and the onset of the Great Recession. Yet the gentle treatment Mr. Dimon received at the hands of the current Senate Banking Committee pales in comparison to the penetrating line of inquiry pursued by its predecessors. This is unfortunate, for it represents yet another lost opportunity at the hands of our dysfunctional government to provide the kind of leadership required to bring about meaningful financial reform. Sadly, it seems that we would rather run the risk of another financial collapse than confront the truth about the unsustainable nature of an industry driven solely by the desire to accumulate vast quantities of wealth by whatever means necessary, no matter what the cost to the millions of Americans who still believe in an honest day’s pay for an honest day’s work.

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

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