Topic: Finance, Banking & Monetary Policy

Are These Examples of Washington Corruption?

The “appearance of impropriety” is often considered the Washington standard for corruption and misbehavior. With that in mind, alarm bells began ringing in my head when I read this Washington Times report about Jacob Lew, Obama’s nominee to head the Office of Management and Budget. A snippet:

President Obama’s choice to be the government’s chief budget officer received a bonus of more than $900,000 from Citigroup Inc. last year — after the Wall Street firm for which he worked received a massive taxpayer bailout. The money was paid to Jacob Lew in January 2009, about two weeks before he joined the State Department as deputy secretary of state, according to a newly filed ethics form. The payout came on top of the already hefty $1.1 million Citigroup compensation package for 2008 that he reported last year. Administration officials and members of Congress last year expressed outrage that executives at other bailed-out firms, such as American International Group Inc., awarded bonuses to top executives. State Department officials at the time steadfastly refused to say if Mr. Lew received a post-bailout bonus from Citigroup in response to inquiries from The Washington Times. But Mr. Lew’s latest financial disclosure report, provided by the State Department on Wednesday, makes clear that he did receive a significant windfall. …The records show that Mr. Lew received the $944,578 payment four days after he filed his 2008 ethics disclosure.

Why did Citigroup decide to hire Lew, a career DC political operator, for $1.1 million? As a former political aide, lobbyist, lawyer, and political appointee, what particular talents did he have to justify that salary to manage an investment division? Did the presence of Lew (as well as other Washington insiders such as Robert Rubin) help Citigroup get a big bucket of money from taxpayers as part of the TARP bailout? Did Lew’s big $900K in 2009 have anything to do with the money the bank got from taxpayers? Is it a bit suspicious that he received his big windfall bonus four days after filing a financial disclosure?

See if you can draw any conclusion other than this was a typical example of the sleazy relationship of big government and big business.

Lest anyone think I’m being partisan, let’s now look at another story featuring Senator Richard Shelby. The Alabama Republican and his former aides have a nice relationship that means more campaign cash for him, lucrative fees for them, and lots of our tax dollars being diverted to such recipients as the state’s university system. Here are some of the sordid details:

Since 2008, Alabama Sen. Richard Shelby has steered more than $250 million in earmarks to beneficiaries whose lobbyists used to work in his Senate office — including millions for Alabama universities represented by a former top staffer. In a mix of revolving-door and campaign finance politics, the same organizations that have enjoyed Shelby’s earmarks have seen their lobbyists and employees contribute nearly $1 million to Shelby’s campaign and political action committee since 1999, according to federal records. …Shelby’s earmarking doesn’t appear to run afoul of Senate rules or federal ethics laws. But critics said his tactics are part of a Washington culture in which lawmakers direct money back home to narrow interests, which, in turn, hire well-connected lobbyists — often former congressional aides — who enjoy special access on Capitol Hill.

Some people think the answer to such shenanigans is more ethics laws, corruption laws, and campaign-finance laws, but that’s like putting a band-aid on a compound fracture. Besides, it is quite likely that no laws were broken, either by Lew, Citigroup, Shelby, or his former aides. This is just the way Washington works, and the beneficiaries are the insiders who know how to milk the system. The only way to actually reduce both legal and illegal corruption in Washington is to shrink the size of government. The sleaze will not go away until politicians have less ability to steer our money to special interests — whether they are Wall Street banks or Alabama universities. This video elaborates:

No, There Are NOT “Five Job Seekers for Every Job Opening”

The Washington Post published “5 Myths about unemployment” by Heidi Shierholz of the Economic Policy Institute.  The article is indeed full of myths, though not in the intended sense. 

“There are now roughly five unemployed people for every available job,” says Ms. Shierholz,  adding “there literally aren’t jobs for four of every five unemployed workers.” That statement has been repeated endlessly− in recent columns by Paul Krugman and Art Laffer, for example, and in a July 20 Wall Street Journal editorial which said “there are still five job seekers for every job opening.”

Regardless how often you hear this, the statement is completely false.  After all, the same survey that showed only 3.2 million “job openings” in May also showed 4.5 million people were hired that month.   If 3.2 million “openings” measured all available jobs, as Ms. Shierholz claims, then how did 4.5 million get hired?  I exposed this myth and others in my June 10 Wall Street Journal article. “The myth that there are nearly six job seekers for every available job,” I wrote, “arises from the misnamed BLS ‘Job Opening and Turnover Survey’ (JOLTS), which asks a few thousand businesses how many new jobs they are actively advertising outside the firm. But note well that this concept of ‘job openings’ does not purport to include ‘every available job.’ On the contrary, it is closer to being a measure of help wanted ads. ‘Many jobs are never advertised,’ explains the BLS Occupational Outlook Handbook; ‘People get them by talking to friends, family, neighbors, acquaintances, teachers, former coworkers, and others who know of an opening.’ Because many jobs are never advertised they are also never counted as job openings!  The BLS Handbook also notes that, ‘Directly contacting employers is one of the most successful means of job hunting.’ Those jobs are also not counted as job openings.” 

Unfortunately, I apparently failed to persuade even the Wall Street Journal editors about this statistical hoax.  So, let’s get a second opinion. 

The Minneapolis Fed recently interviewed Stanford economist Robert Hall, the famed co-author of Hall-Rabushka flat tax and (as he once told me) a “Clinton Democrat.”  For 32 years he has chaired the NBER committee that defines the dates of business cycles.  If he’s not an expert, who is?

Hall noted that “there’s been a decline in the profitability of hiring a worker without a corresponding decline in the wage. The incentive to create a job is the difference between what a worker will contribute to the business and what the worker has to be paid.”  But he also noted that the difficulty of finding a job is not just because fewer jobs are created, but because employers “do relatively little to try to recruit workers” when unemployment is high:  “Interestingly, the number of people who find jobs each month  is more or less a constant…,” said Hall, ”So, something like 4 million people find jobs every month.  Even with 10 percent unemployment, as recently, we’ve still seen the same thing. A very large number of people looking, very low job-finding rate for each individual, but the product—the number of jobs filled—is roughly a constant. It’s a very important fact about the labor market.  Think about a slack market from an employer’s point of view.  They see there are all kinds of highly qualified people out there they can hire easily, so they don’t need to do a lot of recruiting— people are pounding on the door.”

When job seekers are pounding on the door, the number of advertised “job openings” is a useless indicator of the much larger number who actually find jobs.   If the Washington Post were really interested in exposing myths about unemployment, they could start by debunking the myth that the “job openings” survey means “there literally aren’t jobs for four of every five unemployed workers.”  That is literally hogwash.

Obama Tells It Like It Is

The New York Times reports:

President Obama signed into law on Wednesday a sweeping expansion of federal financial regulation….

A number of the details have been left for regulators to work out, inevitably setting off complicated tangles down the road that could last for years…complex legislation, with its dense pages on derivatives practices….

“If you’ve ever applied for a credit card, a student loan, or a mortgage, you know the feeling of signing your name to pages of barely understandable fine print,” Mr. Obama said.

Americans Voting with their Feet

The Financial Times reports that the number of Americans giving up their citizenship to protect their families from America’s onerous worldwide tax system has jumped rapidly. Even relatively high-tax nations such as the United Kingdom are attractive compared to the class-warfare system that President Obama is creating in the United States.

I run into people like this quite often as part of my travels. They are intensely patriotic to America as a nation, but they have lots of scorn for the federal government.

Statists are perfectly willing to forgive terrorists like William Ayres, but they heap scorn on these “Benedict Arnold” taxpayers. But the tax exiles get the last laugh since the bureaucrats and politicians now get zero percent of their foreign-source income. You would think that, sooner or later, the left would realize they can get more tax revenue with reasonable tax rates. But that assumes that collectivists are motivated by revenue maximization rather than spite and envy.

From the FT article:

The number of wealthy Americans living in the UK who are renouncing their US citizenship is rising rapidly as more expatriates seek to escape paying tax to the US on their worldwide income and gains and shed their “non-dom” status, accountants say. As many as 743 American expatriates made the irreversible decision to discard their passports last year, according to the US government – three times as many as in 2008. …There is a waiting list at the embassy in London for people looking to give up citizenship, with the earliest appointments in February, lawyers and accountants say. …“The big disadvantage with American citizens is they catch you on tax wherever you are in the world. If you are taxed only in the UK, you have the opportunity of keeping your money offshore tax free.”

To grasp the extent of this problem, here are blurbs from two other recent stories. Time magazine discusses the unfriendly rules that make life a hassle for overseas Americans:

For U.S. citizens, cutting ties with their native land is a drastic and irrevocable step. …[I]t’s one that an increasing number of American expats are willing to take. According to government records, 502 expatriates renounced U.S. citizenship or permanent residency in the fourth quarter of 2009 — more than double the number of expatriations in all of 2008. And these figures don’t include the hundreds — some experts say thousands — of applications languishing in various U.S. consulates and embassies around the world, waiting to be processed. …[T]he new surge in permanent expatriations is mainly because of taxes. …[E]xpatriate organizations say the recent increase reflects a growing dissatisfaction with the way the U.S. government treats its expats and their money: the U.S. is the only industrialized nation that taxes its overseas citizens, subjecting them to taxation in both their country of citizenship and country of residence. …Additionally, the U.S. government has implemented tougher rules requiring expatriates to report any foreign bank accounts exceeding $10,000, with stiff financial penalties for noncompliance. “This system is widely perceived as overly complex with multiple opportunities for accidental mistakes, and life-altering penalties for inadvertent failures,” Hodgen says. These stringent measures were put into place to prevent Americans from stashing undeclared assets in offshore banks, but they also make life increasingly difficult for millions of law-abiding expatriates. “The U.S. government creates conflict and abuses me,” says business owner John. “I feel under duress to understand and comply with laws that have nothing to do with me and are constantly changing — almost never in my favor.” …Many U.S. expats report being turned away by banks and other institutions in their countries of residence only because they are American, according to American Citizens Abroad (ACA), a Geneva-based worldwide advocacy group for expatriate U.S. citizens. “We have become toxic citizens,” says ACA founder Andy Sundberg. Paradoxically, by relinquishing their U.S. citizenship, expats can not only escape the financial burden of double taxation, but also strengthen the U.S. economy, he says, adding, “It will become much easier for these people to get a job abroad, and to set up, own and operate private companies that can promote American exports.”

The New York Times, meanwhile, delves into the misguided policies that are driving Americans to renounce their citizenship.

Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship. …[F]rustrations over tax and banking questions, not political considerations, appear to be the main drivers of the surge. Expat advocates say that as it becomes more difficult for Americans to live and work abroad, it will become harder for American companies to compete. American expats have long complained that the United States is the only industrialized country to tax citizens on income earned abroad, even when they are taxed in their country of residence, though they are allowed to exclude their first $91,400 in foreign-earned income. One Swiss-based business executive, who spoke on the condition of anonymity because of sensitive family issues, said she weighed the decision for 10 years. She had lived abroad for years but had pleasant memories of service in the U.S. Marine Corps. Yet the notion of double taxation — and of future tax obligations for her children, who will receive few U.S. services — finally pushed her to renounce, she said. …Stringent new banking regulations — aimed both at curbing tax evasion and, under the Patriot Act, preventing money from flowing to terrorist groups — have inadvertently made it harder for some expats to keep bank accounts in the United States and in some cases abroad. Some U.S.-based banks have closed expats’ accounts because of difficulty in certifying that the holders still maintain U.S. addresses, as required by a Patriot Act provision.

Major Whistleblower Provisions in Financial Regulation Bill

When Congress passes major new regulatory laws, it nowadays routinely throws in provisions authorizing lawsuits on behalf of so-called whistleblowers at regulated businesses. Lawmakers do this despite frequent complaints that such provisions encourage discontented employees to seize on borderline conduct and label it fraud or rule-breaking, enrich some persons who themselves took part in questionable practices, and interfere with companies’ own internal compliance efforts, to name a few presumably unintended consequences.

One reason these provisions are added with such regularity despite their at-best-mixed record is that they are lobbied for avidly by two groups of lawyers, the so-called qui tam bar (which collects a percentage of the sometimes enormous informant bounties provided by statute) and the plaintiff’s employment bar, for whom the laws (especially “anti-retaliation” provisions) can provide valuable leverage in negotiating on behalf of terminated employees even if no bounty is available.

While it has not been a major focus of bill opponents, the Dodd-Frank financial regulation bill is loaded with major new extensions of whistleblower law into the economy’s financial sector. Michael Fox at Jottings By An Employer’s Lawyer has more, and links to a more detailed account at an understandably jubilant plaintiff’s-lawyer site. I covered the issue a few weeks ago at Overlawyered, where there is also background on qui tam and whistleblower matters more generally.

Senate Bill Sows Seeds of Next Financial Crisis

With Majority Leader Harry Reid’s announcement that Democrats have the 60 votes needed for final passage of the Dodd-Frank financial bill, we can take a moment and remember this as the moment Congress planted the seeds of the next financial crisis.

In choosing to ignore the actual causes of the financial crisis – loose monetary policy, Fannie/Freddie, and never-ending efforts to expand homeownership – and instead further expanding government guarantees behind financial risk-taking, Congress is eliminating whatever market discipline might have been left in the banking industry.  But we shouldn’t be surprised, since this administration and Congress have consistently chosen to ignore the real problems facing our country – unemployment, perverse government incentives for risk-taking, massive fiscal imbalances – and instead pursued an agenda of rewarding special interests and expanding government.

At least we’ll know what to call the next crisis: the Dodd-Frank Crash.

Show Me the Money

A number of economists have been warning about the Federal Reserve’s easy-money policy, but defenders of the central bank often ask, “if there’s an easy money policy, why isn’t that showing up in the form of higher prices?” Thomas Sowell has an answer to this question, explaining that people and businesses are sitting on cash because anti-business policies have dampened economic activity.

Not only has all the runaway spending and rapid escalation of the deficit to record levels failed to make any real headway in reducing unemployment, all this money pumped into the economy has also failed to produce inflation. The latter is a good thing in itself but its implications are sobering. How can you pour trillions of dollars into the economy and not even see the price level go up significantly? Economists have long known that it is not just the amount of money, but also the speed with which it circulates, that affects the price level. Last year the Wall Street Journal reported that the velocity of circulation of money in the American economy has plummeted to its lowest level in half a century. Money that people don’t spend does not cause inflation. It also does not stimulate the economy. …Banks have cut back on lending, despite all the billions of dollars that were dumped into them in the name of “stimulus.” Consumers have also cut back on spending. For the first time, more gold is being bought as an investment to be held as a hedge against a currently non-existent inflation than is being bought by the makers of jewelry. There may not be any inflation now, but eventually that money is going to start moving, and so will the price level.

I do my best to avoid monetary policy issues and certainly am not an expert on the subject, so I asked a few people for their thoughts and was told that perhaps the strongest evidence for Sowell’s hypothesis comes from the Federal Reserve’s data on “Aggregate Reserves of Depository Institutions” - specifically the figures on excess reserves. This is the money that banks keep at the Federal Reserve voluntarily because they don’t have any better options. As you can see from the chart, excess reserves shot up during the financial crisis. But what’s important is that they did not come back down afterwards. Some people refer to this as “money on the sidelines” and Sowell clearly is worried that it will have an impact on the price level if banks start circulating it. That doesn’t sound like good news. On the other hand, it’s not exactly good news that banks are holding money at the Fed because there are not enough profitable opportunities.

What this really tells us is that the combination of easy money and big government isn’t working any better today than it did in the 1970s.