X. Big Business Excesses and Erosion of Societal Norms (continued)

The last blog presented a perspective on how the concentration of wealth at the highest economic level in society has eroded societal norms; also, it explored how the repeal of Glass-Steagall and the creation of exotic financial instruments has contributed to the financial meltdown starting in 2007.

What Should Obama Do or Have Done?

Economist James K. Galbraith’s solution to the financial mess the U.S. finds itself in is to break up the banks, shrink the financial sector, expose and prosecute fraud, and create incentives for profitable investment in energy conservation, infrastructure and other sectors.

A major initiative being proposed to counter the contention that the financial industry is sitting on as much as $2 trillion in cash is to create an infrastructure bank to provide loans for rebuilding the nation This action would be similar to the urban bank proposed by former U.S. Senator Hubert Humphrey.

Another positive action would be to reinstate the Glass-Steagall Act to reestablish the firewall between investment banks and commercial banks.

Credit-default swaps should either be outlawed — the preferred action — or made more transparent through reporting requirements.

Bundling securities for home mortgages should also be outlawed to force banks and mortgage companies to manage and monitor the mortgages they initiate.

The unemployment problem is so massive — about 14 million unemployed and another 11 million underemployed — that it will not be resolved through providing tax credits for hiring workers. One of President Obama’s newest proposals is to provide tax credits for hiring military veterans.What is needed as a base solution is a  government-initiated jobs program modeled on the Works Progress Administration jobs program of Franklin Delano Roosevelt.

If work-sharing is instituted, whereby two workers each work half of a ten- or 12-hour day, many more families would have a regular source of income. Paying $10 an hour for a 6-hour day would bring in about $15,000 a year for a family; at $12 an hour the income would be about $17,000. At $10 an hour, 10 million workers could be hired at a minimum annual cost of $150 billion. Extending the program to three years would mean a minimum outlay of $450 billion.

A major stipulation of this program would be that no more than one member of a household could be hired.

A concomitant benefit of this WPA-type program is that the entire focus of this program would be on updating and renewing the badly neglected infrastructure of this nation. It would be a massive public works program.

Deregulation: Another Failing God

The current crop of Republican presidential candidates see deregulation as a primary way to get the economy moving. Herman Cain, for example, wants to get government off the backs of banks, assuming that they have backs. Deregulation is a god that has failed and will continue to fail. Unfortunately for the Democratic Party cause, President Obama is not well positioned to make the case against a potential Republican opponent, because he is deeply compliant in watering down or eliminating regulations.

Even among lawmakers, putting a stop to writing new regulations is not by any means an exclusively Republican effort. The main vehicle for this legislative effort is the Regulatory Accountability Act, introduced by Republican Senator Rob Portman of Ohio and Democratic Senator Mark Pryor of Arkansas. The Act would subject agencies to many hurdles in calculating the cost of new regulations and give corporations numerous opportunities to delay rule-making indefinitely. Few major rules would ever see the light of day.

The Regulatory Accountability Act is similar to what became to be called “smart science” when introduced in the Reagan administration. Smart science was designed to subject any proposed regulation to such a rigorous scientific test that meeting that hurdle was too costly in resources to even make the effort.

The US Chamber of Commerce is leading the anti-regulatory campaign, designed to block new safeguards against corporate wrongdoing and rolling back environmental, health, financial and other regulatory protections.

In an op-ed published in the Wall Street Journal in January 2011, President Barack Obama warned about “burdens that have stifled innovation and have had a chilling effect on growth and jobs.” He further wrote that, “We are also making it our mission to root out regulations that conflict, that are not worth the cost, or are just plain dumb.”

More recently, the Obama White House withdrew a proposed requirement for a simple and inexpensive way for employers to track repetitive stress injuries. More importantly, President Obama overruled his environmental science advisers and ordered the withdrawal of smog rules that would have complied with the Clean Air Act.

President Obama has made some good appointments to regulatory positions and he has increased enforcement budgets. Probably his best action for protection of the environment was to secure agreement on a significant increase in fuel efficiency standards, although those new standards don’t go into effect until 2025. Yet Obama’s regulatory record is far too compromised to pose a credible alternative to his reelection opponent.

Is excessive regulation the main reason that businesses are not hiring nor growing their businesses? Is it the cost of complying with government regulations that is a major reason that businesses are not hiring workers?

In a survey done by the National Federation of Independent Businesses, small businesses rated “poor sales” as their biggest problem and government regulations ranked second.The Bureau of Labor Statistics collects data from companies that lay off workers. According to information provided by company executives, 0.3 percent of those laid off in 2010 lost their jobs due to “government regulation/intervention,” while 25 percent were laid off due to a slowdown in business. The Bureau found much the same results when it did a survey for the first half of 2011.

Richard Morgenstern, who worked for the EPA starting under the Reagan administration, told the Washington Post that “there’s not much evidence that EPA regulations are causing major job losses or major job gains.”

Morgenstern participated in a study of the effects of regulations on pulp and paper mills, plastic manufacturers, petoleum refiners, and iron and steel mills between 1979 and 1991. The study concluded that higher spending to comply with environmental rules did not cause “a significant change in industry employment and when jobs were lost they were often made up in the same industry.”

The Post noted that while utility provider AEP will cut 159 jobs when it closes a decades-old coal-fired plant in Ohio, due to new rules from the EPA, it will build a new natural-gas-fired plant an hour away from the old plant and significantly reduce pollution in the bargain.

Tax cuts for businesses also does not seem to be a panacea, as businesses are loaded with cash. The 500 companies that comprise the S and P index have about $800 billion in cash and cash equivalents, the most ever,  according to the research firm, Birriyi Associates. The rating firm, Moodys, says that the roughly 1,600 companies it monitors had $1.2 trillion in cash at the end of 2010. That’s 11 percent more than at the end of 2009.

The upshot of the above is that neither reducing regulations nor major tax cuts for businesses pose a solution to the unemployment problem in the United States. President Obama has bought into the deregulatory craze to a great extent and he is relying on tax cuts to businesses as an important component in his current jobs plan. Obama’s position on both regulation and tax cuts would not be that much different from his likely Republican opponent in a general election for that to be a reason for voters to choose him.

Addendum on Small Business: The term “mom and pop” has a nice, friendly, homey connotation and it typifies the feeling most Americans have about small businesses. Small businesses are incessantly cited as the major creators of jobs in the United States. But to James Surowiecki, who writes a financial page in the New Yorker, small businesses “are not the real drivers of growth.” In a October 31, 2011 article entitled “Big Is Beautiful”, Surowiecki says, “small companies are, on the whole, less productive than big businesses, and though they do create most jobs, they also destroy most jobs, since, while starting a business is easy, keeping it going is hard.”

Surowiecki points out that “big businesses are able to enjoy economies of scale and scope. Big businesses are also better able to make investments in productivity.” They also enhance technology innovation and offer, on average, better wages and benefits.

James Surowiecki reaches back into U.S. history to bolster his “Big Is Beautiful” theme. He writes: “in the decades after the Second World War, when ordinary American workers became part of the middle class, very big companies were a huge percentage of the workforce.”

In his article, Surowiecki does not say that breaking up companies that are “too big to fail” is a bad idea, but his perspective that bigness in itself is not bad should be taken into account.

A Final Note on Job Creation: Macroeconomic Advisers, a forecasting firm, estimates that the current Obama jobs creation program could add 1.3 million payroll jobs by year-end 2012; however, it also notes the effect would be temporary unless Congress renewed the program.

Macroeconomic Advisers also considers Obama’s original stimulus plan to be only a partial success, because it failed in its main mission: triggering a strong, self-sustaining economic recovery.


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