Policy Shop

Policy as if people mattered

The Shadow Derivatives Market Lives On

Flickr/Leader Pelosi
Tomorrow, the public interest will take a loss and the largest banks will chalk up a win. The shadow market for derivatives was a t the heart of the financial crisis. By far, the largest component of this market was the $60 trillion per year swaps market, with more than $700 trillion of swaps outstanding. Compare that with the 2012 U.S. GDP of about $15 trillion. These markets influence interest rates, currency values, credit costs, share values, and commodities, including food, fuel and precious and base metals. The shadow market was oligopolistic and became a goldmine for the big banks. Almost all swaps have a bank on one side. And the Office of the Comptroller of the currency has consistently found that four banks hold well over 90 percent of all derivatives. As would be expected in such a large oligopolistic market, bank profits have been staggering. Financier Bertrand de Pallieres has estimated that two-thirds of all trading revenues come from derivatives. This has syphoned...

The Most Viable Way to Give a Boost to Low-Income Workers

Flickr/Erin Johnson
In 2011, Jacob Hacker wrote a ground-breaking paper in which he coined the phrase predistribution . Under Hacker's definition, predistribution refers to measures governments take to reduce or eliminate inequality in market incomes. This differs from redistribution, which Hacker uses to mean measures states take to reduce or eliminate inequality after market incomes have been distributed, for instance through taxes and government benefit programs. As far I am concerned, there is no moral or political difference between the two. Predistributive institutions and redistributive institutions are both just institutions. What matters is achieving greater economic equality, not so much the precise institutional regime that we use to get there. If anything, I tend to find so-called redistributive institutions more attractive because they are easier to fine tune and strike me as more liberating. But, as Hacker correctly points out, my view is almost certainly an outlying one. For cultural or...

How Our Tax Dollars Are Fueling Inequality

(Good Jobs Nation)
My name is Roxanne Mimms and I work for a food service contractor at the National Zoo. I work full time but make barely minimum wage. I’m here because workers can’t live off what contractors pay us. I’m here because I don’t want my two children to grow up on public assistance. I’m here because I have dreams – My American Dream is a good job with fair wages to provide for my children, being able to pay my bills on time and save for the future. I’m here because I want to help all the workers at the National Zoo whose dreams are on hold.” I was proud to stand with Ms. Mimms—and see her beautiful little ones—at the launch of Good Jobs Nation Wednesday morning in Washington, D.C. Ms. Mimms and other employees working for federal contractors and other private businesses serving the American public joined together to speak out about their wages and working conditions. Faith leaders, community groups, and members of Congress—including Representatives Keith Ellison and Eleanor Holmes Norton—...

The Shame of Pension-Advance Loans

http://rapidpensionadvances.com/
The financial services industry is second to none in dreaming up ways to rip off Americans. Show me a a financial product—credit cards, mortgages, checking accounts, 401(k)s, annuities—and I'll show you a stack of consumer complaints documenting how banks and other firms have sought to bleed dry the American public. The latest alarming example are "pension-advance loans." Never heard of these nifty loans? Well, I hadn't either until The New York Times ran a shocking expose Saturday about firms that offer workers and retirees a chance to "convert tomorrow’s pension checks into today’s hard cash"—but with annual interest rates that have "ranged from 27 percent to 106 percent—information not disclosed in the ads or in the contracts themselves." The story focused on loans against defined benefit pensions, the kind you get if you serve in the military or civil service. Unlike 401(k)s, which are a failed retirement vehicle in part because so many people borrow against their nest eggs, DB...

The STEM-Shortage Myth

Flickr/jasonandrebecca09
Flickr/jasonandrebecca09 The Economic Policy Institute published a report yesterday on the supposed shortage of professionals in science, technology, engineering, and math (STEM). You've probably heard of the crisis by now. America is not producing enough STEM degrees. This will be the death of innovation and global competitiveness. We must reorient higher education to convert more liberal arts students into STEM students. And so on. The problem with this alleged crisis is that it is not real. As the EPI report lays bare, the common wisdom about our STEM problem is mistaken: We are not facing a shortage of STEM-qualified workers. In fact, we appear to have a considerable STEM surplus. Only half of students graduating with a STEM degree are able to find STEM jobs. Beyond that, if there was an actual shortage of STEM workers, basic supply and demand would predict that the wages of STEM workers would be on the rise. Instead, wages in STEM fields have not budged in over a decade. Stagnant...

An Antidote to Citizens United?

Last week, 72 New York State Assemblymen sent a letter to Assembly Speaker Sheldon Silver urging him to support a public financing program for primary, general, and special election campaigns for statewide offices. Such a program would match modest contributions with public funds, which allow small contributors to have a larger impact and brings more donors into the political process. As New York legislators consider adopting a public financing system, a new report from Demos shows the positive impact public financing has had in Connecticut. Fresh Start: The Impact of Public Financing in Connecticut analyzes how public financing has affected both legislators and the legislative process by complimenting empirical data studies with interviews of current and former legislators. Connecticut has offered public financing for candidates running for statewide office, the General Assembly, and the State Senate since 2008. The report finds that the program is very popular and that 77 percent of...

Reinhart and Rogoff's Theory of Government Debt is Dead

NBER
Carmen Reinhart and Kenneth Rogoff wrote a wildly influential book four years ago called This Time Is Different .* The thesis of the book is that when a government has a debt-to-GDP ratio above 90 percent, it is terrible for economic growth. The authors also followed up with a couple of papers arguing the same thing. Pro-austerity forces here and elsewhere in the world have seized upon the book to push their favored policies. From the beginning, the paper was met with extreme skepticism among the left. The theory could have gotten the causation backwards: perhaps low growth drives high debt, not the other way around. The theory also seemed hard to understand within any macroeconomic frame. It would follow from it that a government that holds assets instead of selling them to reduce debt somehow caused growth to decline, which is just a very confusing idea. The conceptual problems could iterate on and on. Beyond those problems, other researchers also had a hard time replicating their...

Wall Street's Grand Bargain

Flickr/ White House
Three developments in finance cropped up in the last days that must be read as a single story. First , Blankfein, Dimon, and the rest of the Wall Street bigwigs visited the White House to meet with the president and his team. That team consisted of Denis McDonough (Chief of Staff); Valerie Jarrett (Senior Adviser); Cecilia Munoz (Domestic Policy Adviser); Gene Sperling (National Economic Council Director); and Alan Krueger, (Chairman, Council of Economic Advisers). The meeting was secret, but we can deduce much from its attendance. The White House appears to want Wall Street support in the policy/politics battles to come. This is not far fetched, especially coming on the heels of steak dinners served to Republican Senators earlier this week and the Obama budget that grabbed the “third rail” issue of Social Security. But every conversation has two sides. What did the power brokers of Wall Street want in return? High on the list is a roll back of financial reform. Industry...

Cash Benefit Programs Are Not Really Government Spending

Wikimedia/Social Security Administration
For accounting purposes, it makes sense to count programs like Social Security, disability insurance, and Temporary Assistance for Needy Families as government spending. But these kinds of programs are not really government spending because the government does not actually direct how the money is spent. Unlike building a road, for instance, where the government decides that a road should be built and then pays to make it happen, cash benefit programs involve the government distributing money to people and allowing them to decide where to spend it. This is an important distinction because many of the problems people often raise about government spending simply do not apply to cash benefit programs. For example, one common criticism of government spending is that the government is incapable of figuring out what people actually want, and therefore wastes a bunch of money on projects and services that do not deliver much value. Another common criticism is that directly spending money...

The Horrible Youth Labor Market

Flickr
One of my pet peeves about the coverage surrounding the plight of young people in America is that it focuses heavily, and at times exclusively, on how well recent college graduates are doing. Why people focus on this is a mystery to me. I suspect it is because the chattering classes are almost all college graduates, as are their friends. To them, being a recent college graduate is simply what it means to be a young person in the labor market. The focus on college graduates is pernicious for a couple of reasons. First, most young people are not college graduates. So on a purely descriptive level, focusing on graduates fails to capture what the reality of being a young person looking for work actually looks like. Second, college graduates are considerably better off than their non-degreed peers. As bad as being a recent college graduate might be, being in the same position without a degree is so much worse. The primary focus on young college graduates skews our understanding of the...

Industry-Funded High-Frequency Trading Study Falls Short

I recently published an article in response to a study of high-frequency trading (“HFT”) by Professor Charles M. Jones of Columbia Business School and an opinion piece he published simultaneously in Politico . My article focused on the funding of the research by Citadel LLP, a major HFT user. It also pointed out broad concerns about the study, which asserts that computer-based algorithmic trading provides substantial net value to the economy. Keeping in mind the Professor Jones’ funding source, it is useful to look into the studies on which the professor relies (his independent work was limited to interpretation). These should be compared with other academic work that draws alternative conclusions. The studies that he cites as supportive are generally based on conventional views of the efficiency of markets. These studies identify lower trading costs that have been experienced during the years that HFT has emerged as a dominant force in the equities and commodities markets. He...

What New York’s (Partial) Victory on Paid Sick Days Means

New York Paid Leave Coalition
The news broke last night: a deal to bring paid sick days to a vote in the New York City Council has been reached. As I noted in my recent testimony on the bill , paid sick time is far from a pie-in-the-sky idea. It is the law in 145 countries around the world as well as the state of Connecticut, and the cities of San Francisco, Washington D.C., Seattle, and Portland, Oregon. Based on how this policy has operated in practice, the evidence strongly suggests that this is a successful policy and that it does not harm employment or the growth of small businesses as opponents have argued. The majority of New Yorkers —and indeed the majority of Americans —believe that one shouldn't lose a day's pay (or their job itself) just because they get sick. Every working person should be guaranteed at least a few paid days off a year for illness. My case was based on careful studies from McGill University, the Urban Institute, the Institute for Women’s Policy Research, the Community Service Society...

What Do Wealthy Super Citizens Want from Government?

Demos
It's no secret that wealthy people have a lot more clout when it comes to politics and civic life. They are more likely to vote, contact their representatives, belong to advocacy organizations, and—of course—contribute to politicians, parties, and PACs. Compared to ordinary folks, many of the wealthy are "super citizens." More controversial, though, is whether these disparaties pervert our democracy—or whether it's no big deal to have super citizens wielding what Demos has called " million dollar megaphones ." One way to examine whether disproportionate influence matters is to take a close look at what the wealthy actually want from government. Political inequality might not be such a big deal if there was no difference between the preferences of affluent Americans and the rest of the nation. It is a very big deal if the affluent have their own separate agenda, and the clout to pursue it. Several political scientists, including Larry Bartels and Martin Gilens, have recently examined...

Are Academics for Hire Influencing the High Frequency Trading Debate?

Last week, Professor Charles M. Jones, a noted economist at Columbia, published an opinion piece in POLITICO claiming to enlighten readers on the realities of high-frequency trading (or “HFT”), computer driven trading at millisecond speeds driven by complex algorithms based on complex trading strategies. This has surfaced as the subject of politically charged debate in the context of of a proposed financial transaction tax that would, among other things, curb the most excessive forms of HFT. The POLITICO piece and a longer, academic-style article were published simultaneously. These articles catalogue existing claims of the benefits of HFT and dismiss concerns of the potential harm of such activity. Perhaps the most important bit of information does not appear in the articles. It can be found at the very end of the press release by Columbia Business School announcing the article: “ The research was supported by a grant from Citadel LLC.” The interest of Citadel in the subject is clear...

Low-Wage Workers Say It's Not Getting Better

Flickr/ Walmart Corporate
It’s not getting better. That’s the key finding of a new survey of low-wage workers out yesterday from the Associated Press and NORC Center for Public Affairs Research at the University of Chicago. Eighty-one percent of low-wage employees surveyed said their family’s financial situation was the same or worse than it had been four years ago, while 64 percent reported that their wages have been stagnant or declined over the past five years. The survey queried 1,606 workers earning $35,000 or less annually. According to the survey: Less than half of lower-wage workers agree that their employer offers good benefits (48%) or that they are paid well for their job (32%). Only 30 percent of lower-wage workers report receiving any promotion to a higher position that pays more while working for their current employer. Although the proportion of workers who have received a promotion increases with the length of time the worker has been with their employer, only 41 percent of lower-wage workers...

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