Dogs and Cats Living Together
A Tea Party-Occupy Wall Street agenda
Nov 14, 2011, Vol. 17, No. 09 • By PETER J. HANSEN
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.)