Posts Tagged ‘Politics’

Debt Ceiling Fears and Reality

Thursday, July 28th, 2011

Smeal’s Ed Ketz and co-blogger Anthony Catanach weigh in on their blog on the threats and rhetoric swirling in the debt ceiling debate. In particular, they question the August 2 deadline and President Obama’s assertion that Social Security payments may be delayed:

First, Geithner’s August 2 date is artificial.  We see this in part because he set one date and then he switched to a later date, seemingly to give his side more heft in the debate.  The problem with either date is that the U.S. government has almost $2 trillion in discretionary spending.  As discretionary means “optional, not obligatory, non-compulsory,” if no agreement is achieved by August 2, the Obama administration will not have to default on its bills.  Instead, it can reduce the discretionary spending, just as ordinary families with strained budgets may have to forego eating out or going to the theater.  Indeed, if the Treasury Department defaults, it will be due to a political calculation and a stubborn unwillingness to reduce discretionary spending.

President Obama recently stated that Social Security checks might not be sent out in August if the debt ceiling is not raised.  This Social Security scare is artificial and part of the political rhetoric.  Again, there is almost $2 trillion in discretionary spending and the White House merely needs to decide which things get paid and which things are delayed.  We assume he thinks Social Security is a priority.

There’s more on their blog, Grumpy Old Accountants.

Tags: Accounting, Economy, Ketz, Politics
Posted in News | 46 Comments

Smeal’s Liechty Testifies Before Congress

Thursday, July 21st, 2011

Smeal’s John Liechty testified before the U.S. House Committee on Financial Services, Subcommittee on Oversight and Investigations, last week regarding the newly formed federal Office of Financial Research (OFR). The OFR, which was formed last year with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is charged with collecting data on the financial system to allow another government entity, the Financial Services Oversight Council, to effectively monitor its stability and ward off potential threats. The agency is the brainchild of Liechty, who spent 18 months gathering industry support and meeting with members of Congress to push its establishment.

According to The Hill‘s On the Money blog, the banking subcommittee wanted to learn “how the new Office of Financial Research plans to keep mounds of financial data safe from hackers. … With hackers always looming over the horizon, Republicans want to know what the office—which they charge lacks proper congressional oversight—is doing to keep that information in the right hands.”

In his prepared testimony, Liechty explained the origins of the OFR and why he believes its a necessary component to the country’s financial security. He opened with an outline of his three main points:

Financial stability requires transparency – The ability for regulators to both see through the counterparty network and the ability to see through asset backed, financial products to the underlying assets is an important fundamental component that is needed in order to be able to monitor the stability of the financial system. Transparency will require universally accepted identifiers and reporting standards—in essence it will require banks to get their back-offices in order. The investments required to improve transparency will not only result in improved macro-prudential regulation; they will result in improved risk management and substantial operational savings for the industry.

We face a significant scientific task – Not only do we not have the data in place, we have not done the science needed to understand system-wide risks to the financial system. In many ways, financial regulators are like the weather services, before the National Oceanic and Atmospheric Administration (NOAA) was established. NOAA was given the mandate to i) collect new data, ii) develop new models for identifying extreme events and improving weather forecasts, and iii) conduct the science necessary to understand the weather systems and build these next generation models. The Financial Services Oversight Council (FSOC) and the Office of Financial Research face similar challenges and have been given a similar mandate.

We cannot afford to fail – We live in a leveraged economy where the resilience and growth potential of the economy depends on having both an innovative and stable financial system. Innovation often leads to instability, unless the appropriate infrastructure is in place to provide stability. The FSOC and OFR offer a way forward to build this infrastructure. The risk that we live with, if we fail to have the proper oversight to provide a stable system, is not just the devastating economic impact that would come from another financial crisis of the magnitude of the 2008 crisis, but more importantly the political reality that will follow. If we can’t get this right and there is another crisis, then there is a very real risk that the political response may result in a response that adversly affects the finanical market’s ability to innovate.

You can view the entire hearing on the House banking committee’s website. For more on the Office of Financial Research and Liechty’s role in its creation, check out this Smeal Report feature from late last year.

Tags: Banking, Economic Crisis, Economy, Finance, Liechty, Politics
Posted in News | 17 Comments

Smeal’s Liechty on Marketplace

Friday, May 20th, 2011

Public radio’s Marketplace last night reported on the federal Office of Financial Research, a new financial watchdog dreamed up by Smeal’s own John Liechty and put into place with that passage of the Dodd-Frank financial reform law. The Marketplace report, which tells the story of how Liechty came up with the idea for the oversight agency, is online here.

For more on the Office of Financial Research and Liechty’s role in its creation, check out this Smeal Report feature from late last year.

Tags: Economic Crisis, Finance, Liechty, Politics
Posted in News | 14 Comments

Uncle Sam v. Toucan Sam

Friday, April 29th, 2011

“The federal government proposed sweeping new guidelines on Thursday that could push the food industry to overhaul how it advertises cereal, soda pop, snacks, restaurant meals and other foods to children,” The New York Times reports. “The guidelines are meant to be voluntary, but companies are likely to face heavy pressure to adopt them. Companies that choose to take part would have five to 10 years to bring their products and marketing into compliance.”

Way back in 2005, Smeal’s Marvin Goldberg wrote an article warning that the food industry would be wise to self regulate in order to avoid government intervention a la big tobacco. An excerpt:

Rather than encouraging children to reach for the same high-calorie snack every day, marketing messages should urge kids to make healthy eating decisions. These ads should also portray a balance between healthy consumption and exercise. As a whole, the industry should band together and agree to voluntarily dampen the level of advertising of high-sugar, high-fat products.

Anyone who has ever tried to improve their diet and avoid high-calorie foods knows that a key ingredient is not to leave those foods in full view in the kitchen. A full cookie jar on the counter is likely to be a recipe for failure. The exposure that children get to foods from television commercials, in-store displays, and, increasingly, messages in the new media are the equivalent of very powerful and persuasive cookie jars. This effect can be countered by replacing those cookie jars with healthy snacks.

With government agencies and Congress breathing down their neck, now would be a good time for food marketers to start using their powers for good. I’m not advocating that we rid the Earth of all candy bars and cheeseburgers. Rather, I’m reminding my fellow marketers that the food industry stands at a crossroads today, just as tobacco did in the 1990s and as McDonald’s did [in 2001].

Food manufacturers and restaurants have a choice: They can go the road of tobacco and be forced into behaving acceptably or they can build upon McDonald’s modest efforts [at offering healthy alternatives] and make money without exploiting our waistlines.

Tags: Goldberg, Marketing, Politics
Posted in News | 18 Comments

Resizing Government

Monday, February 7th, 2011

“Governors around the U.S. are proposing to balance their states’ budgets with a long list of cuts and almost no new taxes, reflecting a goal by politicians from both parties to erase deficits chiefly by shrinking government,” The Wall Street Journal reports. “Some state officials and lawmakers say they have a chance to reshape government in ways that might not have been politically palatable in years past.”

In his newsletter Early Indications, Smeal’s John Jordan writes: “The process of resizing government … needs to begin with a look at what governments can and need to do, as well as how they do it. Furthermore, there are tasks that at one time were essential, but technological obsolescence is slow to alter governments.”

Jordan proposes that there are at least five questions that need to be answered when talking about resizing government:

1. What must government do, and how can other entities help deliver necessary services?
2. What can government stop doing entirely?
3. What is the right level of organization?
4. How can interested parties self-organize?
5. How can government do what it needs to do, more efficiently?

Elaborating on the fifth question, Jordan writes that, when it comes to IT, government could take a few cues from the private sector:

IT in government remains a sore subject. President Obama’s chief information officer, Vivek Kundra, recently put forth a 25-step plan to reform federal IT management. Many of the items are broad and seemingly self-evident to anyone familiar with industry (“consolidate data centers” and “develop a strategy for shared services” for instance). The fact is, however, that industry does not follow federal acquisition or implementation practices; getting federal IT to perform at a reasonable fraction of an Amazon or FedEx would be a massive achievement. Many of the most notable IT project failures of the past decade are government implementations: systems development disasters at the U.S. Census and the FBI are prime examples of the performance gap.

Compared to customer service in travel, banking, shopping, or information businesses (iTunes, anyone?), finding even basic information on most government websites can be painful. Transparency can be difficult to track down. Control of bills passing through legislation is a key perquisite of power, and holding up the process with committee hearings that happen very slowly and/or erratically is common, so clear, open calendars are not always the rule. Like legislatures, regulatory bodies can be opaque, in that budget and headcount information is typically difficult to obtain, unlike the information readily available in a private company’s annual report.

If information can be hard to find, the state of on-line transactions is even more dismal: compare getting a fishing license or renewing other permits to checking in for an airplane flight. While efficient government looks much better to citizens on the outside than to gainfully employed government workers on the inside of slow-moving bureaucracies with no incentive to improve customer service, perhaps the current crisis can provide the impetus for real change to commence. In a sector that lags private industry by many performance metrics, a combination of new tools and more focused motivation has the promise to improve service, cut costs, increase accountability, and enhance security.

Tags: Economy, Jordan, Politics, Technology
Posted in News | 10 Comments

No Deal: South Korea Trade

Tuesday, November 23rd, 2010

President Obama returned from his Asia trip earlier this month without accomplishing one of his principle goals: negotiating a new free trade agreement with South Korea.

Smeal’s Terrence Guay explains what tripped up the deal and what it indicates about the U.S. and global economies:

President Obama’s November trip to Asia sought, among other initiatives, to finalize a free trade agreement with South Korea. With negotiations concluded and a treaty signed in 2007, the U.S. Congress balked at ratifying the treaty. In effect, President Obama tried to persuade the Koreans to amend the treaty to allow greater access to U.S. automobile and beef exports.  His inability to do so reflects several changes in the domestic and international political economy.

First, South Korea successfully stood up to U.S. pressure to change the terms of the treaty. The Asian country refused to weaken its fuel economy regulations, which are higher than U.S. standards and impose additional costs for U.S. auto companies seeking to expand into the Korean market. Also, due to citizens’ concerns about the safety of U.S. beef (the “mad cow” phenomenon), the Korean government refused to relax its regulations on beef imports.  That two products presented an obstacle to completing a trade agreement with our seventh largest trade partner suggests that American influence on global economic matters is in decline.  For further evidence, see the inability of the United States to persuade other countries at the G20 summit this month to apply pressure on China to revalue its currency, or the nine-year (and counting) negotiations on the World Trade Organization’s Doha round of global trade talks.

Second, the failure to reach a trade deal with South Korea underscores the growing distrust of many Americans and politicians of the benefits of global trade and investment flows, especially during “the Great Recession.” The global economy played virtually no role in the recent Congressional elections, other than the simplistic campaign ads blaming China for our economic problems. And while a Democrat-controlled Congress was wary of approving trade agreements with South Korea, Panama and Colombia for a variety of reasons over the past three years—including concerns about labor and environmental issues in those countries—it is not at all obvious that a Republican-controlled House of Representatives will pursue trade agreements with any greater fervor. Most economists expect modest contributions to domestic job and economic growth should these trade deals ultimately be implemented. But with opinion polls consistently showing an American public wary of globalization, the benefits of free trade, and the increasing global influence of other countries, there is little to be gained by congressional Republicans or Democrats using political capital on an issue where the benefits are not widely acknowledged.

Tags: Economy, Globalization, Guay, International Relations, Politics, Trade
Posted in News | 18 Comments

Smeal Faculty on the Fiscal Commission Recommendations

Tuesday, November 16th, 2010

The co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform last week released their preliminary recommendations for increasing tax revenues and reducing federal spending in an attempt to bring the deficit under control. Calling the debt a cancer that will destroy the country if not fixed, co-chairs Erskine Bowles  and Alan Simpson proposed cuts to everything from defense contracting to the White House budget to the federal workforce.

Below, Smeal faculty members Ron Gebhardtsbauer, Austin Jaffe and Anthony Warren weigh in on three of the recommendations.

Ron Gebhardtsbauer, faculty-in-charge of the Actuarial Science Program, on the commission’s Social Security proposals:

In the process of putting our fiscal house in order, the Obama Fiscal Commission also gets Social Security back in financial balance, which is great. The most important fix is indexing the retirement age to our increases in longevity, which makes Social Security sustainable, and encourages people to work longer.  Without indexing, Social Security’s finances go out of balance as we live longer.  And it’s not draconian at all.  They very slowly raise the normal retirement age for full benefits to age 68 in 2050 and around age 69 in 2074.  This won’t affect older workers, and middle age workers won’t be affected much.  Older workers in physically demanding jobs will be able to get disability benefits under an easier disability definition. 

I also like that they are finally making Social Security truly universal by covering the remaining state and local government workers (although that will be tough to get through Congress, as the large states have lots of power). 

There are many other fixes, which I’ll discuss in a later blog. 

Austin Jaffe, chair of the Department of Insurance and Real Estate, on the possibility of eliminating the mortgage interest tax deduction:

Perhaps the “sacred cow” of U.S. housing subsidies has been the mortgage interest tax deduction. Even when consumer interest was disqualified, interest deductibility from a mortgage was preserved. Recent discussion has raised the possibility that subsidizing mortgage interest payments is no longer a worthwhile policy. The Deficit Commission has suggested limits on mortgage interest deductibility: The benefit would only be available for primary homes, no interest would be deductible from home equity lines of credit, and no deductions would be available on mortgages larger than $500,000.

Here are some areas of current debate:

1.  The costs of lost revenue are being raised over and over again these days. The Joint Commission on Taxation estimated that it cost $80 billion in 2009 alone. About one-half of homeowners claimed tax benefits were a “major reason” to buy. Yet many households do not itemize their deductions (including about 50 percent of homeowners).

2.  Poterba and Sinai’s 2010 study found that 2.8 million households with annual income over $250,000 saved about $15 billion, while 19 million households with incomes between $40,000 and $75,000, saved only about $10 billion. The savings to middle- income households amounted to $542, or $1.48 per day. This is hardly sufficient to become a homeowner.

3.  Finally, commentators are now beginning to wonder if the deduction is a destabilizing force in housing markets. Inducing homeowners to borrow for consumption of housing services may add additional volatility to house prices since indebtedness adds financial risk to the system, especially when prices are dropping. This is another example of distortions created by providing incentives via the tax code.

There are other issues including the capitalization of tax benefits into current prices before the purchase takes place, comparisons of housing markets in countries without interest deductions, violation of horizontal equity of renters, and others.

After all of these years, it would truly be amazing if this well-liked tax subsidy would be rescinded even if the benefits are not as great as is typically thought relative to the costs.

Anthony Warren, director of the Farrell Center for Corporate Innovation and Entrepreneurship, on the Bowles-Simpson recommendation to merge the Department of Commerce with the Small Business Administration and cut the new entity’s budget by 10 percent:

For many years the Small Business Administration has been the poor cousin among government agencies with the result that small companies have suffered from inadequate representation in Washington.  Recently for example, the administration has supported larger corporations rather than the lifeblood of the economy, innovative job-creating small firms. Therefore there is a concern that smaller companies will now lose any voice that they may have had for the illusion of ever elusive cost cuts.  It would be better to double the Small Business Administration and half the Department of Commerce.

Tags: Economy, Entrepreneurship, Gebhardtsbauer, Jaffe, Politics, Real Estate, Social Security, Taxes, Warren
Posted in News | 7 Comments

President, New Speaker to Talk Taxes

Wednesday, November 10th, 2010

From the Los Angeles Times: “House Republican leader John Boehner signaled Wednesday that he was unwilling to compromise on a permanent extension of the so-called Bush tax cuts, saying preserving current rates is ‘the most important thing we can do to create jobs.’”

Smeal’s resident tax expert Charles Enis agrees that extending the tax cuts may boost economic growth, but there’s also that pesky deficit that needs some attention:

If we allow the tax cuts to expire and the tax rates go up, this could mean trouble for the economic recovery. Right now, you have some policy-makers declaring the recession is over, but try telling that to someone who’s out of work. That’s the problem—jobs. You can say the recession is over but that doesn’t help all those people who are out of work. Will higher tax rates hinder these people from getting back into the workforce? Possibly.

On the other hand, there are those who want to let the tax rates increase. We have a huge budget deficit. We need the tax dollars to pay down the deficit. There are a lot of people arguing that the Bush tax cuts favor the wealthy and that it’s really not a fair distribution of the tax burden.

By making the tax cuts expire, you may create a perception that the tax code is fair and may get additional revenues to pay down the deficit. On the other hand, by keeping the tax cuts, you may be able to have a quicker economic growth and be able to get people back to work.

Regardless of whether the tax cuts are extended or not, Enis says lawmakers should take the opportunity to simplify the tax code:

Congress has a good opportunity here to improve the transparency of the tax codes. For example, if they let the tax cuts expire for the upper income categories, the maximum statutory rate will rise from 35 percent to 39.6 percent. I would say let that happen, but to counter that, fix permanently or get rid of the alternative minimum tax (AMT).

Additionally, part of the Bush tax cuts was to repeal Section 68 of the code, in which high-income taxpayers lose a certain portion of their itemized deductions. This is, in effect, a tax. When you take away deductions, it detracts from the transparency of the code. It was repealed gradually and done away with finally in 2010, but the phase out of itemized deductions and exemption allowances comes back full force in 2011 if the Bush tax cuts are not extended.

The phasing out of itemized deductions and exemption allowances let that go away. They should extend the repeal advantage. In other words, you’re going to have a higher marginal tax rate, but you’re going to do away with a lot of these unobtrusive hidden-type taxes, which I think would be a great opportunity.

If you’re going to go and say to the wealthy people, we’re going to let your tax rates go up as high as 39.6 percent, then I think you should also tell these people that they no longer have to worry about their itemized deductions, exemption allowances, and the AMT.

There’s more from Enis on Smeal’s Research with Impact website.

Tags: Accounting, Economy, Enis, Politics, Taxes
Posted in News | 3 Comments

Liechty on Bloomberg Television

Tuesday, September 28th, 2010

Smeal’s John Liechty appeared on Bloomberg Television yesterday to talk about the Office of Financial Research, a new federal agency he helped create that  is charged with identifying systemic risk in the financial sector.

You can view his appearance on YouTube.

Tags: Economic Crisis, Finance, Liechty, Media, Politics
Posted in News | 1 Comment

First Health Insurance Reforms Take Effect

Thursday, September 23rd, 2010

Six months after President Obama signed the Affordable Care Act, the first set of reforms take effect today. These consumer protection provisions include, among others, banning insurance companies from excluding children with preexisting conditions or imposing lifetime benefit limits.

Other reforms will take effect in the coming years, and according to Smeal’s Keith Crocker, the biggest change is on its way in 2014. In an interview on Smeal’s Research with Impact website, Crocker explains his belief that the Affordable Care Act will destroy the private insurance market:

The big issue here is that the recent health care reform legislation will eliminate medical underwriting beginning in 2014. This will be implemented through the elimination of the preexisting condition exclusions and the result will be to destroy the individual market for insurance. The argument is that “an insurance company shouldn’t be allowed to reject you just because you’re sick, ” and everyone says, “Oh yeah. They shouldn’t be able to do that.” The problem here is that if you don’t allow insurance companies to tailor the premium to the cost of the risk that they are assuming, then the result will be adverse selection where only the sickest people will buy insurance.

As an example, think about life insurance. Suppose there was a prohibition of preexisting conditions on life insurance, meaning the insurance company had to accept all applicants for the same premium, no matter what they looked like. Well, as it turns out, one preexisting condition is age, so, in this setting, insurers would have to charge everyone the same price for life insurance independently of how old they were. Young folks would find the insurance to be too expensive and would exit the applicant pool, while older folks (for whom the chances of their heirs collecting on the policy are higher) would go ahead and purchase the insurance. As a result, the applicant pool would end up consisting of older high-risk individuals and the premiums would have to increase to reflect that high-risk pool. The only way to get younger folks to buy life insurance would be to charge them a lower premium that reflected their lower actuarial cost. But, then, insurers would be classifying applicants based on a pre-existing condition—their age.

It’s the same with medical insurance. If insurers have to take everybody, then only the sickest people will find it useful to get insurance, so the premiums will have to rise to reflect the costs associated with the sickest people. When the premiums go up, the young and healthy and the smaller businesses will drop out of the insurance market because they cannot afford the premiums, and they will join the ranks of the uninsured.

Prohibiting pre-existing condition exclusions destroys an insurance market because risk classification through medical underwriting is what eliminates adverse selection and adverse selection is the poison that kills insurance markets.

Tags: Crocker, Health Care, Politics
Posted in News | 42 Comments