Monday, October 10, 2011

blame game blues

From the very early days of the economic crisis up through this very moment, a considerable amount of energy has been put toward finding someone to take the blame.  While yes, there are some bad guys out there, there always were and always will be bad guys, and the core of the problem is systemic: weak regulation and screwed-up incentives did more damage than any criminal or unethical behavior.

If we're truly interested in preventing this from happening again, the scapegoating has to stop.  Not only is it a horribly destructive force (consider that the last great global economic crisis inspired its own desperate scapegoating that led to the bloodiest war in history), it's a cheap out in that it's easier to point a finger at someone else than to consider how our own behavior may have contributed to our problems.  In this case, I think our collective shortcomings were largely ideological, with major errors on both sides of the political aisle. So, I propose that we call off the dogs and instead focus our efforts on addressing three concerns:

1. Re-regulating the financial system: The key principle to appreciating the importance of regulating the financial services industry more than others is that in capitalist societies, the financial system acts as a crucial utility and thus should be regulated in a manner similar to how we regulate other utilities, such as the electrical power industry (i.e., heavily, rendering it decidedly boring).  This was a lesson we learned in the Great Depression but somehow collectively un-learned in recent decades, and did so in a bi-partisan fashion.  While deregulation is a central cause of the Libertarian movement, in fact it was Jimmy Carter who kicked off the whole deregulatory hootenany with the airline industry in 1978, and the Clinton administration played a singular role in deregulating the financial services industry (namely, with the repeal of the Depression-era Glass-Steagall act and in deliberately choosing to not let regulations keep pace with the "innovation" occurring in the derivatives markets).  I think Dodd-Frank was a good first step but more needs to be done to address the global nature of our financial system.  This is not an easy lift by any means, but in the long run we will need much more coordination among global regulators in order to properly oversee things, and the difficulty of the task only demands that more effort be put toward it.

2. Correcting the incentives in our tax system: Supply-side economic theory is based on the observation that, all things being equal, increasing supply does more to improve social welfare than increasing demand does because, while both make more goods available to more people, increasing demand is eventually counterproductive because it is inflationary.  It further contends that the most efficient way to increase supply is to lower the costs of production.  I have no qualms with this insight and accept it as a given.  My complaint is with the manner in which it has been applied.  To put it plainly, the entire idea of a "trickle down" effect of disproportionately lowering taxes for the wealthy is downright stupid.  The argument you hear for subsidizing rich people, repeated as recently as last year by the GOP during the debate over extending the Bush tax cuts, is that much of the income in question is actually business income generated by sole proprietorships.  However, the data indicates otherwise.  Still, regardless of how you interpret the data, it's hard to argue that if your aim is to lower the costs of production for companies it wouldn't be vastly more efficient to lower corporate taxes than personal taxes. Hell, I would consider eliminating corporate taxes entirely, but that's an argument for another day.  In any event, it wouldn't be too hard to offset the hit to government revenue with a combination of increases in taxes on rich people and on the dividends corporations pay their shareholders (and in a paragraph I'll show you data suggesting that taxes on dividends are highly progressive, as regular working stiffs tend to hold their stock via pension funds and other tax-deferred retirement accounts).  I believe this would also have all sorts of positive side effects I'll get into another time.  Also, bolder people like the great Robert H Frank (perhaps the most insightful economist alive) have even better ideas.

3. Improving corporate governance: The first two items were mainly about reversing two significant, multi-decade economic policy trends, but this one is about fixing something that, like a drought exposing rocks that were previously lurking under the pond surface, relates to design defects that were always there but were made much more dangerous by the regulatory and tax changes.  Improving corporate governance doesn't need to be a partisan fight, but there is (almost literally) all the money in the world stacked up against it, which probably makes it more difficult to make progress on than even the most intractable political squabble.  Nevertheless, it doesn't take a policy wonk to look at the cases of Lehman Bros., Bear Stearns, and the like and note that flaws in compensation and management systems inadvertently encouraged excessive risk-taking that proved harmful to shareholders and, ultimately, because these firms acted as crucial utilities, the harm spread to taxpayers.  The board of directors is supposed to be beholden to shareholders but the system is rife with "you be on my board and I'll be on your board" cronyism.  Meanwhile, the rules are written in such a way that it's very difficult for shareholders to have a meaningful say in who serves on the board.  For evidence of the problem, ask yourself in what world does it make sense for the chief executive of a company (i.e., employee #1) to also serve on the board of directors - and as the chairman of that board, no less?  This is a classic case of the fox guarding the hen house, and yet this is the precisely how over two-thirds of the companies that make up the S&P 500 are governed. Given the fact that union pension funds make up some of the biggest shareholders in the U.S. (as well as that 70% of all U.S. stock is held in a tax-deferred retirement plan of one sort or another, indicating that U.S. companies are owned by the labor that powers them), it's absolutely dumbfounding to me that corporate governance reform doesn't rank on the Liberal agenda. It's not uncommon to hear Liberals talking about corporations in an adversarial sort of way; I have a big beef with this view that I'll have to save for another rant, so suffice it to say that this is a seriously outmoded perspective that should be replaced by seizing the mantle of reducing the principal-agent conflicts present in corporate management.

Now, make it so!

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