Dogs and Cats Living Together
A Tea Party-Occupy Wall Street agenda
Nov 14, 2011, Vol. 17, No. 09 • By PETER J. HANSEN
What if the two prominent grassroots movements of the day, the Tea Party and Occupy Wall Street, joined forces to support an agenda that would be good for America?
A Tea Party gathering in Orlando, April 2009
UPI / Roger L. Wollenberg / LANDOV
Both groups are short on policy specifics. As popular movements, they lack organizers and spokesmen; both are to some extent expressions of mood. Nonetheless, there are several policies that reflect the concerns of at least a large part of both groups and that would be beneficial for the ordinary Americans whom both claim to represent. These policies would be a departure, however, from the current positions of the Democratic and Republican parties—whose shortcomings caused the two movements to spring up in the first place. So here it is, the Tea Party-Occupy Wall Street agenda.
Prevent bank bailouts
Both Occupy Wall Street and the Tea Party are disturbed by the way the federal government handled the financial crisis of 2008. The problem is not that people on Wall Street make a lot of money (though some in Occupy Wall Street might think it is). The problem is that when they lose money, at least when they lose a lot, the rest of us have to bail them out.
In addition to being unfair and heightening income inequality, this arrangement corrupts Wall Street itself. It produces an incentive for traders at financial institutions to take foolish risks, in particular to follow strategies that usually yield modest profits but occasionally produce spectacular losses. In other words, this arrangement rewards bad traders and thereby misallocates capital.
The most significant way in which the taxpayer stands behind financial institutions is federal insurance of bank deposits, which began as a response to the massive bank failures of the Great Depression. Federal deposit insurance clearly serves the public interest, but it is not without cost. It commits American taxpayers to support every insured deposit at an American bank. People in the Tea Party are rightly suspicious of government regulation, but where the federal government puts taxpayers on the line, it should exercise strict oversight.
The Dodd-Frank financial legislation passed in 2010 includes the so-called “Volcker rule,” named for proponent Paul Volcker, former chairman of the Federal Reserve. The Volcker rule is a step in the right direction, but it doesn’t go far enough. It forbids banks from trading for themselves, but it allows them to engage in what is called “market-making”—offering prices at which one is ready to buy and sell a particular instrument, such as a foreign currency or a stock. Doing so involves taking short-term positions—buying or selling until one can offset the transaction—and market-makers often also take longer-term positions, based on their sense of where the market is going.
The distinction between trading and market-making will be difficult if not impossible to enforce in practice. Even if it could be enforced, market-making itself is a risky activity which should not be underwritten by insured bank deposits. We should go further and reinstate the division between commercial and investment banking that existed until the partial repeal of the Glass-Steagall Act in 1999. (There is also much we don’t need in Dodd-Frank, notably the establishment of an Office of Fair Lending and Equal Opportunity, which may help ensure that the recent financial crisis is not our last.)
Any financial institution that accepts FDIC-insured deposits should be deemed a commercial bank. Commercial banks should not be permitted to engage in investment activities other than lending to borrowers and purchasing U.S. debt instruments. They should be permitted to buy only U.S. debt instruments, not those of Italy or California or Fannie Mae or any private corporation, and certainly not stocks, options, futures, currencies, mortgage-backed securities, swaps, and so on. The United States is the entity issuing the guarantee—and holding the bag if troubles arise. It should not be compelled to guarantee anybody else’s creditworthiness.
In a word, commercial banking should be boring. Other financial firms—investment banks, private equity firms, hedge funds, venture capitalists—can take big risks and reap big rewards. When things go awry, as they will from time to time, the taxpayer should not have to pay. The government should ensure that no firm is in a position to cause a financial crisis which might require a taxpayer bailout. And that will be easier to do if we reinstate the division between commercial and investment banking. Panics will occur from time to time, but for the most part they won’t affect regular banks or endanger insured deposits, so the damage will be limited.
The chief argument against strict regulation of commercial banking is that it limits American banks as they compete with other entities, including foreign banks. This argument is weaker than it might seem. Insured banking is dominated by government involvement; the taxpayer underwrites whatever occurs. When banks are allowed to use taxpayer-insured money for risky activities, they tend to make a lot of money when times are good, largely for their own highly paid trading desks, and to lose a lot of money when times are bad. It is not clear why taxpayers should underwrite such activity.
The brief and inglorious era of lightly regulated insured banking began with the partial repeal of Glass-Steagall. This was preceded by a highly publicized though not-yet-legal merger between Citicorp, a very large bank, and the Travelers Group, a very large insurance company, resulting in the formation of Citigroup. Ten years later, Citigroup was effectively bankrupt and needed a huge infusion of taxpayer money to meet its obligations. This is a useful example of what we stand to lose with strict regulation of commercial banking.
Eliminate corporate welfare
Despite differences of emphasis, the Tea Party and Occupy Wall Street share a well-founded suspicion that the federal government favors politically connected interests at the expense of the rest of us. Corporate welfare is one way this happens, and it should be understood broadly. Farm subsidies are one form of corporate welfare; they redistribute money from other Americans to a select group of large corporations and mostly wealthy individuals. The massive subsidies and loan guarantees given to putatively “green” corporations are another form, though they generally benefit less successful corporations. The recent scandal surrounding Solyndra illustrates how political connections rather than viability in the marketplace determine who receives corporate welfare, and how it tends to produce “heads I win, tails you lose” situations. If Solyndra had been successful, its well-connected owners would have made a fortune; when it wasn’t, the taxpayers lost one.
The proper policy is simply to eliminate corporate welfare. Unlike federal insurance of bank deposits, corporate welfare does not benefit us. Its elimination will both lower our taxes and strengthen our economy. The market is infinitely better at allocating capital than the federal government; and when things go wrong, as they often do, the investors who hoped to profit are the ones who should lose, not the taxpayers.
Support American workers
Supporting the wages of American workers with a tariff is not quite a respectable position among our political elites, which is why it is valuable to hear other voices, like those of the Tea Party and Occupy Wall Street.
Free trade brings America many benefits, but it also puts downward pressure on wages, especially for unskilled workers. (We do not have completely free trade, but our current average trade-weighted tariff is only 2 percent.) The impact of foreign trade on domestic wages, moreover, has grown substantially in recent decades, largely because we have so much more trade with countries whose workers are paid much less than ours. Our top three trading partners in 1975 were Canada, Japan, and Germany. They are now Canada, China, and Mexico. China has actually surpassed Canada as the top exporter to the United States, though if we consider both imports and exports, Canada is still our largest trading partner. (Our trade with Canada is much more balanced than our trade with China, and so is our trade with Mexico.)
Josh Bivens of the Economic Policy Institute estimates that foreign trade currently decreases wages for unskilled labor in the United States by 4 percent. Bivens also estimates that foreign trade raises the wage ratio between skilled and unskilled labor by about 7 percent. In other words, foreign trade increases income inequality by increasing the disadvantage unskilled workers face relative to skilled workers in the United States. (There is debate among economists about Bivens’s analysis, but he seems to present the best estimates available.)
Restricting imports in order to support a particular industry imposes a hidden tax on the rest of the country and is akin to corporate welfare. Nonetheless, there are some helpful things the federal government can do. China, which exports about four times as much to the United States as it imports from us, and which has been manipulating its (and our) currency for years in order to sustain this imbalance, is the obvious place to start. There is no need for hostile rhetoric, but if China will not allow its currency to float freely on international markets, we should impose a substantial tariff on Chinese products, aimed at producing something like the ratio of imports to exports we have with the rest of the world, which is roughly 1.5 to one. (In recent months China has allowed its currency to appreciate modestly, but nowhere near the level that would produce this ratio.) The Senate recently passed legislation calling for the Treasury Department to increase tariffs on Chinese goods if it determines that China has been manipulating its currency. This is a rather weak response; nonetheless, the Obama administration considers it excessive. The administration’s apparent fear of angering China is pusillanimous. There is little China can do to harm us without doing more harm to itself.
Beyond China, we should consider implementing a modest tariff, in the range of 10 percent, on all imported goods from countries with which we do not have bilateral trade agreements. (We currently have such agreements with 20 countries, including Canada and Mexico. While we run an overall trade deficit with these countries, our trade with them is closer to balance than that with countries with which we have no such agreements, and of course the agreements with these countries bolster friendly relations.) Unlike other forms of taxation, this would increase domestic employment, and thereby decrease dependence on the government. A 10 percent tariff on imported goods would produce additional federal revenue of about $100 billion annually—which is impressive for a form of taxation that voters would actually welcome. If we simultaneously increased the tariff on Chinese goods to 25 percent, we would see $150 billion more in federal revenue than we currently receive.
To be sure, there are arguments against such a -policy. Everybody who has taken economics in college has learned that free trade maximizes one’s advantage, even if other countries follow a different policy. The advantage thereby maximized, however, is total consumption, not total production. In the long run, consumption and production tend to come into balance, but the long run can be very long indeed, especially when the world’s second-largest economy is working to foster an imbalance that favors its exports. In the meantime, damage may be done both to individual citizens and to a nation’s work habits and political system.
Some international trade economists have studied the harm free trade causes workers in developed countries at a time of rapid manufacturing growth in less developed countries. This situation will not last forever, but a 10 percent tariff seems a modest and reasonable way to cushion our economy against whatever external shocks the future may hold. This policy would increase employment and add to the take-home pay of less skilled American workers at a time when they are being squeezed by low-wage foreign competition. We’d all pay a little more for a lot of products, but that’s a price many people would gladly accept in exchange for some protection of domestic manufacturing jobs.
These three items—preventing bank bailouts, eliminating corporate welfare, and adopting tariff protection for American workers—constitute an agenda that could win support from both the Tea Party and Occupy Wall Street, as well as many other Americans. It is an agenda that would make our country stronger, fairer, and wealthier. And it suggests a framework within which to approach other issues as well. The Tea Party and Occupy Wall Street share a desire to help working Americans in ways that do not foster dependence on big government. One might examine immigration policy in this light, since our current high level of immigration puts downward pressure on wages, especially for those who are not highly skilled or educated. Limiting immigration would probably be less welcome to Occupy Wall Street protesters than to Tea Party members, but it would be an effective way of pursuing an objective that Occupy Wall Street supports: improving the lives of American workers. Other issues such as school choice and health care reform might be susceptible to similar thinking.
Our political system sometimes seems to offer a choice between the party of welfare and the party of Wall Street. We can do better. The time is ripe. Political entrepreneurs should look beyond the usual partisan divide, discern the intersection between the Tea Party and Occupy Wall Street, and seize the moment.
Peter J. Hansen is president of Hansen Capital Management, Inc., in Lexington, Virginia.