Friday, November 28, 2014

Mitt and the Moochers

WASHINGTON, DC – The Republican Party has some potentially winning themes for America’s presidential and congressional elections in November. Americans have long been skeptical of government, with a tradition of resistance to perceived government overreach that extends back to their country’s founding years. This tradition has bequeathed to today’s Americans a related rejection of public subsidies and a cultural aversion to “dependence” on state support.

But Republican presidential candidate Mitt Romney and other leading members of his party have played these cards completely wrong in this election cycle. Romney is apparently taken with the idea that many Americans, the so-called 47%, do not pay federal income tax. He believes that they view themselves as “victims” and have become “dependent” on the government.

But this misses two obvious points. First, most of the 47% pay a great deal of tax on their earnings, property, and goods purchased. They also work hard to make a living in a country where median household income has declined to a level last seen in the mid-1990’s.

Second, the really big subsidies in modern America flow to a part of its financial elite – the privileged few who are in charge of the biggest firms on Wall Street.

Seen in broad historical perspective, this is not such an unusual situation. In their recent bestselling economic history, Why Nations Fail, Daron Acemoglu and James Robinson cite many past and current cases in which powerful individuals attain control over the state and use this power to enrich themselves.

In many pre-industrial societies, for example, control over the state was the best way to assure wealth. And, in many developing countries endowed with valuable natural resources, fighting to gain control of the government has proved a very attractive strategy. (I have worked with Acemoglu and Robinson on related issues, though I was not involved in writing the book.)

The traditional mechanism of state capture in much of the world is violence. But that is not true in the United States. Nor is it the case that US government officials are typically bribed in an open fashion (though there have been some prominent exceptions).

Instead, special interests compete for influence through campaign contributions and other forms of political donations. They also run large, sophisticated media campaigns aimed at persuading policymakers and the public that what is good for their special interest is good for the country.

No one has succeeded in the modern American political game like the biggest banks on Wall Street, which lobbied for deregulation during the three decades prior to the crisis of 2008, and then pushed back effectively against almost all dimensions of financial reform.

Their success has paid off handsomely. The top executives at 14 leading financial firms received cash compensation (as salary, bonus, and/or stock options exercised) totaling roughly $2.5 billion in 2000-2008 – with five individuals alone receiving $2 billion.

But these masters of the universe did not earn that money without massive government assistance. By being perceived as “too big to fail,” their banks benefit from a government backstop or downside guarantee. They can take on more risk – running a more highly leveraged business with less shareholder capital. They get bigger returns when things go well and receive state support when fortune turns against them: heads they win, tails we lose.

And the losses are colossal. According to a recent report on the aftermath of the 2008 crisis, prepared by Better Markets, an advocacy group that pushes for stronger financial reforms, the cost to the US economy of the financial crisis – caused by financial institutions’ reckless risk-taking – amounts to at least $12.8 trillion. A big part of this cost has come in the form of jobs lost and lives derailed for the bottom 47% of the American income distribution.

Former Utah Governor and Republican presidential candidate Jon Huntsman addressed this issue clearly and repeatedly as he sought – unsuccessfully – to win his party’s nomination to challenge President Barack Obama. Force the banks to break up, he argued, in order to cut off their subsidies. Make these financial institutions small enough and simple enough to fail – then let the market decide which of them should sink or swim.

That is an argument around which all conservatives should be able to rally. After all, the emergence of global megabanks was not a market outcome; these banks are government-sponsored and subsidized enterprises, propped up by taxpayers. (This is as true in Europe today as it is in the US.)

Romney is right to raise the issue of subsidies, but he badly misstates what has happened in the US during the last four years. The big, nontransparent, and dangerous subsidies are off-budget, contingent liabilities generated by government support for too-big-to-fail financial institutions.  These subsidies do not appear in any annual appropriation, and they are not well measured by the government – which is part of what makes them so appealing to the big banks and so damaging to everyone else.

If only Romney had turned popular disdain for subsidies against the global megabanks, he would now be coasting into the White House. Instead, by going after the hard-pressed 47% of America – the very people who have been hurt the most by reckless bank behavior – his prospect of victory in November has been severely damaged.

Read more from our "Romney Revealed" Focal Point.

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    1. Commentedliz banker

      There are differences between the two major political parties; however, one should be alarmed by some recent reporting on the Trans-Pacific Partnership, a trade Agreement being quietly supported by BOTH presidential candidates Obama and Romney. Thought outsourcing was bad, thought the financial crisis of 2008 was averted, thoughts of the U.S. economy will improve after Nov, American exceptionalism on the rise (and not in decline) - one should think again.....; a letter to the Treasury Secretary from Senator Levin and Rep. Frank on banning of capital controls ; globalizing efforts to undermine financial regulation through TPP:

      This Trade Agreement is a global effort to expand the One Percenters at the expense, labor, and skills of the “99” and “47” percent.

      Yes, the funniest lines from the President's DNC acceptance speech: "I won't pretend the path I'm offering is quick or easy. I never have. You didn't elect me to tell you what you wanted to hear. You elected me to tell you the truth." ...."So you see, the election four years ago wasn't about me. It was about you. My fellow citizens, you were the change. (APPLAUSE)......" (“You were the “Change”, “Change You Can Believe In":

    2. CommentedMark Pitts

      Professor Johnson has apparently given up on being a serious social scientist.

      All readers should read the piece by Better Markets on which he bases much of his analysis. It is no more than partisan advocacy that does not even consider causes of the crisis aside from the banks (like too much risk taking by homeowners, government agencies Fannie and Freddie, long periods of extremely low interest rates, lax regulation, excess global savings, etc.) And the most important numbers adduced by the study are totally different from those published by the US Treasury.

      Advocacy is fine Professor Johnson, but don’t try to fool your readers by pretending to be a social scientist.

        CommentedTooScaredToUse MyRealName

        So the 47% are supposed to be experts in every facet of modern life so they don't crash the world economy by participating in the real world the 1% sets up? They're supposed to disbelieve every pronouncement by those in charge of setting up the systems, regulating them and praising their performance? Based on what transparency of information that supposedly guides the invisible hand?

        OK, let's just say the 47% deserve all the blame...why don't we just find a way for them to "die and reduce the excess population".

        Oh, wait, we're working on that...

        CommentedMelanie holzman

        Thank you Mark Pitts! Yes, I also think he is not much of a professor. He seems more inclined to the stage.

        CommentedA. T.

        >> too much risk taking by homeowners<<

        Lending is risky, not borrowing. If a Nigerian prince asks to borrow $10,000 from you, it is you who must do the due diligence on his ability to pay, not him.

        The financial system failed because too much power was held in too few hands (each pair of which was subject to the inescapable human traits of – inter alia – greed, laziness, and irrationality), and this applies equally to governmental and non-governmental actors in the system. This imbalance of power led to unadulterated mooching (again, as any significant imbalance of power inevitably does). Unfortunately, the over-centralisation has remained in place throughout the crisis (perhaps growing even worse) and the mooching has continued unabated.

        Romney is the candidate of the James Taggarts and the Wesley Mouchs of modern America.

    3. CommentedJohn Brian Shannon

      Hi Simon,

      I was pleased to find your brilliant article today — the best summary of America’s economic situation that I have yet seen.

      The psychology of the present paradigm is very odd indeed.

      "Let’s just blame the 47 percent for everything!"

      The psychology of many conservatives this decade at least, approximates the following statement; Blame 47% of the working people and taxpayers — for the combined failures of the banksters, a few corporations and some inept government regulations — and then at length, when some of the 47% complain about getting blamed for a situation not of their creation, just default to calling them ‘victims’ in the pejorative sense of the word. Oh, and let’s make the 47% pay to fix much of the damage they didn’t cause.

      Many of the people who are among the first to benefit from the (so far) $12.8 trillion dollars of corporate welfare — are the first ones to criticize the 47% of Americans, most of whom;

      “pay a great deal of tax on their earnings, property, and goods purchased. They also work hard to make a living in a country where median household income has declined to a level last seen in the mid-1990’s.” — Simon Johnson

      In a general way, I take these developments as a sign that the formerly deep roots of American egalitarianism are getting shallower and we are now seeing the beginnings of a class-based society.

      “the emergence of global megabanks was not a market outcome; these banks are government-sponsored and subsidized enterprises, propped up by taxpayers. (This is as true in Europe today as it is in the US.)” — Simon Johnson

      Although all of the above are egregious enough in their own right. But what I take greatest offense at are those corporations which having made poor decisions, then race to receive billions of corporate welfare — whereby the government effectively rewards those organizations with heavy doses of cash for their poor decisions — while corporations and companies which made good decisions all along are comparatively weakened.

      It is a sure sign of the (economic) apocalypse, when corporations which invested in better decisions do not receive federal ‘reward’ money, but lesser performers do. No lasting good can come of this state of affairs… in fact, it is to weep.

      John Brian Shannon

    4. CommentedMark Pitts

      Professor Johnson once again leaves the facts aside and indulges his personal vendetta against the banks. But the central fact remains:

      The “bailout” of Wall Street cost the taxpayers nothing. In fact, the government earned a very good return on the investment.

      No matter how often you repeat an untruth Professor Johnson, it never becomes true.

        CommentedMoritz G€d1g

        Even if the banks payed that money back with interest, the fact that they got it in the first place saved them from great losses. They indirectly got that money they else would have lost from the government.
        Their irresponsible behavior cost the government money and they were never punished for it.
        The banks took what looked like earnings when everything was going fine and then they were protected from losses that would have diminished the perceived income of the past.
        It is just a very well disguised way of taking from the government.

        CommentedMark Pitts

        @John, generally I agree. But of course your argument applies to GM as well. In that case, the taxpayers are way under water.

        In the case of the banks, the taxpayers actually made money.

        CommentedJohn Brian Shannon

        Hi Mark,

        We know that ALL government money dropped into the economy acts as stimulus to the economy and every dollar of it will change hands and be taxed many times over.

        So much so, that in less than 15 years, the U.S. government 'makes back' all of it's original outlay in the form of tax revenues.

        (If you are an economist, you know this)

        The 15-year rule applies (in the U.S. economy) to bailout money of any sort.

        But is it right and in the best interests of the U.S. to reward bad bank practices and bad corporate decisions?

        Why should government money be dropped on irresponsible bankers and poor corporate decision-makers to prop them up -- while well administered banks and corporations get nothing?

        All government money works to stimulate the economy, that is a given. What I'm talking about is a matter of choice.

        If we let the market decide which businesses are to be rewarded, ipso facto we reward the survival of the fittest -- but when we prop up failing institutions and corporations, we are indulging in rewarding the less fit.

        Rewarding lackluster corporate performers or excessively risky bank investment policy, while comparatively punishing well-run business will have a detrimental effect on the U.S. economy, long term.

        John Brian Shannon

        CommentedA. T.

        Pretty much the entire expansion of the deficit under Obama was the result of policies trying to fix a problem created more-or-less singlehandedly by high finance. That financial firms are good at passing off their negative externalities to other parties makes them greater moochers, not lesser ones. That they further managed to get a direct (and, to them, cost-free) subsidy in the form of the bailout is just the insult being added to the injury.