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The Ideological Fantasies Of Inequality Deniers

Rising income inequality, like climate change, is an ideologically inconvenient issue for conservatives. They would prefer not to discuss it altogether. If forced to discuss it, they will generally either deny its existence or simply carry on as if it doesn’t exist.

The underlying facts, like the facts of climate change, are stark. Over the last few decades, income growth for most Americans has slowed to a crawl, while income for the very rich has exploded. That’s a reversal of the three decades following World War II, when all income groups got richer, with the poor and middle class rising at a faster rate than the rich. Crucially, the Congressional Budget Office’s new analysis shows that changes in government policy over this period have made inequality worse. (In CBO-speak: “The equalizing effect of transfers and taxes on household income was smaller in 2007 than it had been in 1979.”)

We’re not having a debate about how to reverse or even stop the growth of inequality. Nobody has a real plan to do that. The Democratic plan is to slightly arrest the growth of inequality by hiking taxes on the rich a few percentage points, so as to minimize the need to cut the social safety net. The Republican plan is to slash taxes for the rich and programs for the poor, thereby massively increasing inequality.

That is a hard position to defend in the context of exploding inequality, and conservatives would rather not defend it. Instead the right’s response has been to persistently deny or ignore the facts. Rick Perry, pressed by a reporter to explain why he was proposing a tax plan that would widen income inequality further, replied, “I don’t care about that.” The Wall Street Journal editorial page today dismissed the Tax Policy Center, whose calculations persistently show the ways in which various Republican tax proposals would widen inequality, as “liberal.” It didn’t even pretend to dispute the substance of the calculations. Eric Cantor gave a speech about income inequality centering on stories about how his grandmother worked hard and pulled herself up by the bootstraps in the old days. It was a nice speech if you like stories about plucky grandmothers. It failed to grasp the central dilemma, which is that it was a lot easier for poor people to move up sixty years ago, when tax rates on the rich happened to be far higher, than it is today.

Ah, but here comes Paul Ryan, fawned over in the media as “the GOP‘s strongest policy wonk,” to take the issue head on in a speech before the Heritage Foundation, hyped in advance by conservatives as a definitive statement of right-wing thought. Ryan’s speech is the portrait of a mind in the grips of an ideological fantasy, refusing to confront inconvenient facts.

Ryan establishes the tone of his argument by accusing President Obama of attacking “straw men,” and then proceeds to build a series of his own straw men, beginning in the very same sentence:

[Obama] is going from town to town, impugning the motives of Republicans, setting up straw men and scapegoats, and engaging in intellectually lazy arguments, as he tries to build support for punitive tax hikes on job creators. … he has launched his second campaign by preying on the emotions of fear, envy, and resentment. …Also according to the President’s logic, spending restraint is incompatible with a strong, well-functioning safety net.

Right, so Obama favors “punitive” tax rates, he promotes resentment of the rich, and he opposes any spending restraint whatsoever. Ryan produces no evidence to support these statements, because none exists. In reality, Obama never attacks the rich, he constantly insists that he respects economic success and merely wants to lessen the burden of budget cuts on the most vulnerable, and he agreed to reduce spending by more than a trillion dollars just this last summer. Ryan repeatedly accuses Obama of favoring “equality of outcome,” which is absurd.

Here is the closest Ryan comes to addressing Obama’s actual argument, which is that requiring somewhat higher taxes on the rich will reduce the scale of cuts required on programs for the poor and middle class:

The President has been talking a lot about math lately. He’s been saying that “If we’re not willing to ask those who’ve done extraordinarily well to help America close the deficit… the math says… we’ve got to put the entire burden on the middle class and the poor.”This is really a stunning assertion from the President. When you look at the actual math, you quickly realize that the way out of this mess is to combine economic growth with reasonable, responsible spending restraint. Yet neither of these things factors into the President’s zero-sum logic.

It’s “stunning,” says Ryan, because it relies on zero-sum math. More tax hikes on the rich means less spending cuts. Ryan finds this stunning because he believes in supply-side fairy tales in which cutting taxes for the rich will produce enormous growth. Never mind that the last two presidential administrations have disproved the supply-side theory about as conclusively as a real world experiment can do. (Bill Clinton raised taxes on the rich, conservatives predicted disaster, and instead we experienced a long boom; George W. Bush lowered taxes on the rich, conservatives predicted a huge boom, and instead we got an weak recovery with no income growth for anybody save the very rich.)

Ryan likewise assails Obama’s calculations by trying to persuade his audience that there’s really not much money to be raised by taxing the rich:

And his math is no better on the tax side. Let’s say we took all the income from those the President calls “rich” — those making $250,000 or more. A 100 percent tax rate on their total annual income would only fund the government for six months. Just six months!

Uh, has anybody told Ryan that there are only twelve months in a year? Because six of twelve months is not a trivial percentage. Another way to put this is that the richest 1 percent of taxpayers earn 17 percent of the nation’s income, and federal spending accounts for a little over 20 percent. Obviously, taking all the income from the top 1 percent would be a terrible idea, but taxing a decent chunk of their income clearly can get you pretty far.

Ryan likewise insists that the debate over rich investors who pay lower tax rates than the middle class is contrived:

Obama quotes Reagan as saying that bus drivers shouldn’t pay a higher effective tax rate than millionaires. Well, that’s a no-brainer. Nobody disagrees with that.

Nobody disagrees with that? How about Paul Ryan? His tax plan from 2010 would exempt all investment income from taxes, meaning that large segments of the rich would pay nothing at all. The average federal tax rate on households earning more than a million dollars a year, under Ryan’s plan, would be well under 13 percent, compared with a 19.5 percent average federal tax rate for households earning $50,000 to $75,000 a year.

Ryan concludes his speech with a ringing endorsement of equality of opportunity, which he contrasts with the stagnant, European-style class-bound society that Democrats crave to replicate:

Telling Americans they are stuck in their current station in life, that they are victims of circumstances beyond their control, and that government’s role is to help them cope with it — well, that’s not who we are. That’s not what we do.Our Founding Fathers rejected this mentality. In societies marked by class structure, an elite class made up of rich and powerful patrons supplies the needs of a large client underclass that toils, but cannot own. The unfairness of closed societies is the kindling for class warfare, where the interests of “capital” and “labor” are perpetually in conflict. What one class wins, the other loses.
The legacy of this tradition can still be seen in Europe today: Top-heavy welfare states have replaced the traditional aristocracies, and masses of the long-term unemployed are locked into the new lower class. …

Whether we are a nation that still believes in equality of opportunity, or whether we are moving away from that, and towards an insistence on equality of outcome.

It’s a compelling vision. Unfortunately, Ryan’s understanding of reality is a complete inversion of actual reality. “Equality of opportunity” bears no relation to the reality of the American economy or any economy. Parents can benefit their children by giving them money, better schools, better home environments, tutoring, camp, and other advantages. Opportunity is overwhelmingly unequal. One result is that rich kids perform far better in school than poor kids. But that is not the only result. Poor kids who beat the odds and get high test scores are less likely to complete college than rich kids with middling or even low test scores. Poor kids who beat those odds and graduate from college are still less likely to grow up to be rich than rich kids who did not graduate from college. I’m not sure if there’s a perfect solution, but pretty sure Ryan’s plan to slash Pell Grants is not going to help.

Ryan’s decision to cite Europe as a place where people can’t move beyond their birth station is especially unfortunate. In fact, social mobility in Europe is higher than in the United States, a fact even Rick Santorum has acknowledged.

The way to understand Ryan is that he’s deeply influenced by the theories of Ayn Rand, who believed that the root of all evil lay in attempts to alter the wealth distribution created by the free marketplace. Rand may have been a deranged cult leader, but she did live at a time when the fear of the poor devouring the rich had an actual real-world basis. She escaped communist Russia for the United States, Franklin Roosevelt — while not a reprise of the communists, as she mistakenly believed — really did denounce the rich and impose confiscatory tax rates. The world of Rand’s imagination bore a slight resemblance to the world she inhabited, but it bears no resemblance to the contemporary United States.

Ryan cannot process the realities of this world because they are so at odds with the imagined world of his ideology. After his speech, he was asked about the CBO’s report on inequality, and he brushed it off, falling back on Rand-esque lingo the virtuous rich (“takers”) and parasitic poor (“makers”):

“Let’s not focus on redistribution, let’s focus on upward mobility,” he said. “If these studies are used as justification for erecting new and more barriers for making it harder for people to rise, all that will do is reduce our prosperity in this country.”“We’re coming close to a tipping point in America where we might have a net majority of takers versus makers in society and that could become very dangerous if it sets in as a permanent condition.

Don’t confuse Paul Ryan with the facts. If studies run up against Ryan’s ideology, then the studies must give way.

By: Jonathan Chait, Daily Intel, New York Magazine, October 26, 2011

October 29, 2011 Posted by | Class Warfare, Conservatives, Economy, Elections, Income Gap | , , , , | Leave a comment

“Negative Equity”: Make The Banks Pay

There is $700 billion in negative equity in the U.S. housing market. That means Americans owe $700 billion more than their homes are worth. Any plan for the housing sector or the U.S. economy, that doesn’t take a serious bite out of negative equity isn’t serious.

Yet un-serious is what we continue to get from elected officials. This week the Obama Administration announced a new plan to help underwater homeowners refinance their mortgages to lower rates.  The plan, really an expansion of an existing program, is the latest in a series of programs designed to deal with the moribund housing market. Each has proven a more dismal disappointment than the next.

So too with the latest version of the proposed settlement between the state Attorneys General, led by Iowa’s Tom Miller, and the mortgage servicing industry. Yes, the deal has been sweetened by the addition of some interest rate reductions for underwater homeowners who are current on their payments. But that’s small potatoes.

These approaches haven’t worked and won’t work because they fail to acknowledge that negative equity is the critical problem in the U.S. economy. We’re in a “balance sheet recession” caused by people pulling back on their spending because they’re concerned about their households’ net financial position. The central reason for this concern is that houses—historically the major asset of most households—are worth much less than they were. In many cases, they are worth less than the debt they secure.

Until households feel more confident in their balance sheets, they won’t go out and spend (and banks won’t make them loans to spend).  That means less consumer demand for goods and services, which means less jobs, which means more mortgage defaults and foreclosures, which push down neighbors housing prices, triggering a vicious cycle. But addressing negative equity means that someone will have to accept a loss: the banks or the taxpayer or some combination of the two.

As between banks and taxpayers, we have to start by stating the obvious. Negative equity didn’t just appear by itself.  This wasn’t a freak meteorological event.  It was a man-made disaster: a housing bubble inflated by the deliberate acts of a limited number of financial institutions that profited greatly from bloating the economy with cheap and unsustainable mortgage financing. We witnessed a macro-economic crime in the inflation of the housing bubble and are living with the consequences of it.

Those who broke the economy should pay to fix it. The federal government bailed out the banks because they are indispensable to the economy as a whole, but that doesn’t mean that the banks shouldn’t have to pay now. Simply put, there needs to be accountability for blowing up the economy. (And someone needs to go to jail, but that’s another matter.)

Unfortunately, the goal of the Administration and the Attorneys General seems to be to make the housing problem go away. It won’t go away. Nearly four years of economic malaise and over five million foreclosures attest to that.  The goal has to be to fix the market, not to cover it up its problems.

Since 2008, we’ve seen a long and drawn out saga in the attempt to deal with the negative equity problem.  First there was a legislative attempt.  This was the ill-fated “cramdown” legislation that would have permitted homeowners to slough off negative equity by filing for bankruptcy, something that it currently possible when dealing with every asset except a single-family principal residence.  Cramdown would have forced lenders to recognize losses on bad mortgage loans and would have gotten the market clearing again—at least for those borrowers who were willing to endure the costs of bankruptcy.

The cramdown legislation passed the House in 2008, only to die in the Senate in 2009.  In 2008 then-candidate Obama endorsed the cramdown legislation.  But in 2009, President Obama made no effort to push the legislation, and the Treasury Department, fearing that the banks were too fragile to recognize losses, was just short of openly hostile to the legislation, essentially “slow-walking” the President yet again.

The Obama Administration turned its attention to its hallmark housing rescue programs:  the “Home Affordable Modification Program” (HAMP) and Home Affordable Refinancing Program (HARP).  HAMP is a program to modify troubled mortgages to lower interest rates, while HARP permits some underwater homeowners (a lucky subset whose loans chance to be owned or guaranteed by Fannie Mae or Freddie Mac) to refinance to lower interest rate mortgages.  Neither does anything to reduce negative equity.

HAMP and HARP were kick-the-can-down-the-road programs that aimed to buy time for the economy to recover, thereby bolstering home prices.  They failed because they misdiagnosed the problem:  the damaged economy wasn’t dragging down home prices; home prices were dragging down the economy.

Collectively, HAMP and HARP have helped about 1.6 million homeowners, but partially because of the failure to deal with negative equity, 15 percent of the HAMP modifications have already redefaulted.  And 1.6 million homeowners is only a fraction of the 11 million homeowners with negative equity.

HAMP and HARP were barraged with criticism on both sides from the get-go.  HAMP was the program that sparked Rick Santelli’s rant that gave birth to the Tea Party. At the same time, HAMP and HARP were criticized by consumer advocates as too timid. The Administration didn’t want to take on the negative equity problem, which would mean imposing losses on the banks or on the taxpayers.

In the fall of 2010, the “robosigning” scandal provided an entrée for the state AGs to join the fight. It was revealed that banks were routinely submitting affidavits in court cases in which the affiant had no idea about the facts to which he would attest. Several major banks imposed voluntary foreclosure moratoria while they examined their practices. (Unfortunately the media coverage missed the real and much more serious issue of backdating of documents by the banks.)  The robosigning scandal provided an entrée for state AGs, some of whom have been dealing with bank mortgage fraud issues for the better part of the last decade, only to find their efforts repeatedly frustrated by  federal bank regulators.  Quickly all 50 AGs announced an investigation, with Miller taking the lead.  Federal bank regulators then announced their own investigation, which ensured that they had a seat at the table.

Miller began negotiating with the largest banks and the federal regulators for a settlement involving robosigning and other assorted violations relating to debt collection practices. But Miller started negotiating without having done any investigation, which meant that he didn’t have any leverage on the banks.  When it leaked out that he was demanding something in the range of $20 billion for a settlement, many of the Republican AGs declared that the negotiations were a “shakedown” of the banks and walked out.

While $20 billion sounds like a lot of money, it isn’t actually that much when spread out over several banks.  Bank of America, for example, would gladly spend $5 billion to make its mortgage liability disappear.  The problem, however, was that the banks weren’t going to pay $20 billion to settle just robosigning. While illegal, it’s not clear that anyone was actually hurt by robosigning itself.  If the banks were going to shell out billions, they wanted a very broad release from the AGs covering all of their mortgage market wrongdoings.

Miller, however, couldn’t deliver such a deal.  Some AGs realized that $20 billion spread out over 50 states amounted to bupkis for their hard-pressed constituents.  ($20 billion works out to less than $2,000 per homeowner for each of those 11 million underwater mortgages. The average negative equity per loan is $65,000.)  On top of this, some AGs, like New York’s Eric Schneiderman and Delaware’s Beau Biden just are not willing settle on matters before an investigation is undertaken.

Frustrated by Miller’s inability to cut a deal, the federal regulators took matters into their own hands and entered into consent orders with the banks, in which the banks admitted no wrong-doing, but promised never to do it again.  The federal consent orders relieved some of the pressure on the banks to cut a deal with the AGs, and Miller’s  negotiations with the banks have dragged on since then. Every month, it seems, rumors emerge that a deal is on hand, only for no deal to be reached.  As things stand currently, the banks’ have offered an extra $2 billion to enable refinancing of mortgages with negative equity in exchange for a release of all claims relating the mortgage origination. Miller has countered with an offer of an extra $4 billion.  An extra $4 billion will result in meaningful help for perhaps 120,000 homeowners or one percent of the at-risk population.

There’s an element of the absurd in these negotiations. With a $700 billion negative equity problem, the AG’s are debating the difference between $22 billion and $24 billion. At best it’s naïve. At worst it’s an attempt to feign concern for homeowners and distract voters from a lack of engagement.

Robosigning was symptom of a much larger endeavor in reckless lending, in which cutting corners was the order of the day. When the prime borrower market was tapped out, banks simply loosened underwriting standards to keep expanding the pool of borrowers. Like a Ponzi-scheme, the rise in housing prices could only be supported by finding new people to put money in. Lower underwriting standards and exotic mortgage structures were the tools used to maximize profits that could be siphoned off before the Ponzi-scheme collapsed.

If one approaches the housing bubble as a prosecutor—as the AGs should—the major harm wasn’t the robosigning or associated servicing fraud. It was the pump-and-dump the banks did on the entire housing market. They recklessly inflated the housing prices and profited greatly from it. And the taxpayers, the government, and mortgage investors were left holding the bag. Fining the banks  $20 or 24 billion for robosigning and calling it a day just misses the point.

We need accountability for the entire financial crisis, not just for mundane consumer fraud. For Miller and the AGs to contemplate waiving the mortgage origination claims that were at the center of the crisis for an extra $4 billion without having even done an investigation is a blatant abuse of the public trust.  It’s another give-away to the banks.

The banks can afford to pay for writing down the mortgages from which they benefited.  Negative equity is a function of mortgages being held at face, rather than market value on banks’ books.  The book value of our major financial institutions is over $1.2 trillion, and that’s not counting Fannie Mae and Freddie Mac with their open-ended government support.  That means there’s plenty of ability for banks to take a write-down as a means of remedying the harm they have done.

It might cost the banks a quarter to a third of their book value to get rid of negative equity (Fannie and Freddie hold the majority of negative equity mortgages, which means the federal government is on the hook for part of the cost of eliminating negative equity), but the market already understands the much of banks’ book value is bogus.  Bank of America, for example, has a book value of $220 billion, but a market capitalization of merely $65 billion.  Investors understand Bank of America to have $155 billion in overvalued assets or unrecognized liabilities, and a substantial portion of that spread is because of negative equity.  Investors know that the $200,000 mortgage on a $150,000 house won’t yield $200,000 in most cases.

The framework for a settlement, then can’t be about settling robosigning claims a mere $20-$24 billion. Instead, the AGs should be pursuing a grand bargain—a global settlement deal structured around a broad release of the banks’ varied mortgage liability for origination, securitization, and servicing fraud in exchange for substantial write-downs of principal to whittle away the $700 billion in negative equity. Doing so will fix the economy and bring much needed accountability for the financial crisis.  It’s time to press the reset button and clear the market.

By: Adam Levitin, Salon, October 27, 2011

October 29, 2011 Posted by | Class Warfare, Financial Institutions, Income Gap | , , | Leave a comment

Rick Perry And His Rivals Serve Up Scare Tactics And Drivel

Rick Perry should have backed off. Instead, he doubled down, and in a way that was doubly illuminating — about Perry himself and the degraded state of modern politics.

The issue, amazingly enough, is President Obama’s birthplace — months after the release of his long-form birth certificate should have laid the matter to rest.

In an interview with Parade magazine, the Texas governor declared Obama’s place of birth a “distractive” issue even as he happily latched on to the opportunity to distract.

“Well, I don’t have a definitive answer [about whether Obama was born in the United States], because he’s never seen my birth certificate,” he said. It was classic Perry, combining logical incoherence and a smarmy cheap shot.

A smarter candidate would have stopped there. Perry, in an interview with CNBC’s John Harwood, kept going, despite Harwood’s repeated invitations to walk back his silliness.

“Look, I haven’t seen his,” Perry said. “I haven’t seen his grades. My grades ended up on the front page of the newspaper, so let’s, you know, if we’re going to show stuff, let’s show stuff. “

Is this a presidential campaign or a middle-school playground? I’ll show you mine if you show me yours? By the way, if I had Perry’s grades, I wouldn’t be mentioning them. Certainly not if I were running against a former president of the Harvard Law Review.

But then Perry, as is his style, let on what this was really about. “But look, that’s all a distraction. I mean, I get it. I’m really not worried about the president’s birth certificate. It’s fun to poke at him a little bit and say, ‘Hey, how about, let’s see your grades and your birth certificate.’ ”

The matter of the president’s birthplace, Perry added, is “a good issue to keep alive.”

You might think this was the candidate cannily trying to have it both ways: a nod to the birther crazies with a simultaneous wink at those who know this is a ridiculous distraction. Except that Perry managed to step on his real message of the day: his unaffordable and unfair proposal to “simplify” the tax code — by grafting a flat-tax alternative onto the existing system.

Perry’s acknowledgment of his interest in benefiting from birther mania was reminiscent of his artless dodge, during the last debate, about whether he thought the 14th Amendment should be changed to abolish birthright citizenship. “You get to ask the questions,” he told moderator Anderson Cooper. “I get to answer like I want to.”

Note to candidate: It’s better not to narrate your own stage directions. Just because your debate coaches tell you to answer the question you want to answer, not the one that’s been asked, doesn’t mean you should announce that’s what you’re up to.

Now we have Perry, who has a decent if fading shot at the Republican presidential nomination, openly practicing politics as poke-fest. The point isn’t to debate whose solutions are best for America — it’s to get under the other guy’s skin.

Thus Perry needling Mitt Romney on immigration: “You hired illegals in your home and you knew about it for a year. And the idea that you stand here before us and talk about that you’re strong on immigration is, on its face, the height of hypocrisy.”

As it happens, Perry is righter — that is, more correct — than Romney on immigration, at least when it comes to the question of the DREAM Act and the ability of the children of illegal immigrants to obtain in-state tuition rates.

But Perry’s jab at Romney was below the belt. The former Massachusetts governor employed a landscaping firm that, the Boston Globe discovered, had hired illegal immigrants. Romney told it to stop. When it turned out that the company hadn’t, he fired the firm.

The matter of Obama’s birth certificate should be a closed case. It is astonishing that a sitting governor, no less a serious candidate for president, would stoop to playing this game.

Then again, 2012 is shaping up to be an astonishing campaign. Witness Herman Cain’s bizarre, substance-less new ad in which the candidate is endorsed by, yes, the candidate’s campaign manager. Who is actually smoking (literally) during the ad.

“I really believe that Herman Cain will put United back in the United States of America,” says the aide, Mark Block.

The country is facing serious problems. This will be a fateful election. Voters deserve better than scare tactics and drivel.

By: Ruth Marcus, Opinion Writer, The Washington Post, October 25, 2011

October 29, 2011 Posted by | Class Warfare, Conservatives, Democracy, Elections, GOP, Ideologues, Ideology, President Obama, Republicans, Right Wing, Teaparty | , , , , , , , , | Leave a comment


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