Tag Archives: economy

U.S. Chamber, You Are Wrong

The U.S. Chamber of Commerce and other industry groups sure do kick and scream when any new major safeguard to protect the environment, worker safety, or consumers is being proposed. Their oft-repeated mantra about the impacts of regulation, however, is “the sky is falling” rhetoric.

The most recent example is the U.S. Environmental Protection Agency’s (EPA) new proposed rules on existing power plants. The U.S. Chamber came out with a report on May 28th that claims nightmarish outcomes for consumers and the U.S. economy, but past experience just doesn’t match up with such claims.

For instance, utilities that operate coal-fired power plants tried to claim the end of the world was near when the EPA finalized a rule curbing pollution that crosses state lines, a rule the U.S. Supreme Court recently upheld. A large power plant in Homer City, PA warned of “immediate and dire consequences” due to this EPA rule three years ago. Three years later, that power plant still exists and has cut its sulfur dioxide emissions by 80 percent without raising anyone’s electricity prices.

The idea that smart regulation can spur innovation is nothing new. Rules on consumer products led to better and safer goods for millions of Americans. A report from the Center for International Environmental Law on chemical safety noted that chemical safeguards helped the larger national economy. “Our study finds that stronger laws governing hazardous chemicals can not only drive innovation, but also create a safer marketplace,” said Baskut Tuncak, staff attorney at the Center for International Environmental Law, and author of the report. “Well-designed laws spark the invention of alternatives and further help level the playing field to enable safer chemicals to overcome barriers to entry, such as economies of scale enjoyed by chemicals already on the market and the externalized costs of hazardous chemicals on human health.”

The problem with warnings about the effects of regulation from places like the power plant in Homer City and from groups like the U.S. Chamber is that analyzing rules on a purely economic basis almost always emphasizes and overestimates the negative consequences and the costs of the standard in question. At the same time, this analysis overlooks the tremendous social and societal benefits that result from standards and safeguards, such as improved health, lower medical costs, and fewer deaths.

“[R]egulations also shift jobs and can create new ones too. The weight of the evidence is that regulation is not a significant factor affecting overall employment levels in the United States,” notes Cary Coglianese, Director of the Penn Program on Regulation at the University of Pennsylvania Law School.

Americans are too intelligent to be fooled by false claims about our public protections. Bad corporate actors, however, do quite a bit to kill jobs and damage the economy by polluting the environment, endangering consumers and shipping jobs overseas. Americans want a strong system of sensible safeguards that protect them from buying an unsafe product at the store, that allows them to know they can visit a nearby river or lake without worrying about toxic waste, that they can use their credit cards and know they have expanded protections, and that they can go to work and not be put in harm’s way. Smart standards exist to make sure people have access to a fair economy and a healthy environment that benefits everyone.

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The Bank Oligopoly Sucks Away Economic Value

The following post first appeared on U.S News and was written by Wallace Tuberville at Demos

Without a doubt, the big banks should be broken up; the need is even more urgent than it was in 2007 or 2008. The Federal Reserve Bank of Dallas – hardly an Occupy Wall Street affiliate – titled its 2011 Annual Report “Choosing the Road to Prosperity: Why We Must End Too Big to Fail – Now.”

In the report, Dallas Fed President Richard W. Fisher called for a drastic “downsizing” of the megabanks. Financial institutions after the crash remain “too-big-to-fail,” he argued – in fact they’re bigger than ever – guaranteeing taxpayer bailouts when the system breaks down again.

big bank money grabHe’s right, of course. Banking in the United States has become extraordinarily concentrated. Waves of change have swept over financial services throughout the era of deregulation, primarily resulting in an economy skewed toward extraction of value by financial institutions. The financial crisis was actually the culmination of the process of concentration, as Lehman evaporated and Bear Stearns and Merrill Lynch were absorbed into JP Morgan Chase and Bank of America respectively. Well over half of all bank assets are now held by just five banks.

[See a collection of political cartoons on the economy.]

However, there is another argument against the megabanks not predicated on financial crisis. In fact, it happens every day.

“When competition declines, incentives often turn perverse and self-interest turns malevolent,” wrote the report’s chief researcher, Harvey Rosenblum. What he identified were distortions in a market that is dominated by an oligopoly of banks and the damage that can be done to the economy even if these banks do not fail.

It is clear that, aside from institutions that must be bailed out if they get into trouble, the concentration of banking activity into a handful of institutions has created an oligopoly that is empowered to parasitically extract value from the rest of the economy in dangerous amounts. The financial sector share of GDP has doubled in the last 30 years. In other words, the financial sector has not just done well; it has completely outpaced the rest of the productive sectors.

[See a collection of political cartoons on the budget and deficit.]

Bank profitability, in reality, camouflages this problem. The public and the regulators are reassured when they see that bank profits are higher. Unlike with other businesses, this is not necessarily a reassuring thing. So long as banks continue to trade in risky markets, there is a very close connection between profits and risk. Traders cannot make a profit without taking risks and banks are still incentivized to make bets that can go terribly wrong. Remember that the JP Morgan Chase “London Whale” trades lost the bank $6.5 billion in 2012, a little more than a year ago.

Breaking up the banks, either by resurrecting something like the Glass-Steagall Act (as recently proposed by the unlikely duo of Sens. Elizabeth Warren, D-Mass., and John McCain, R-Ariz.) or by implementing a so-called “Volcker Rule” with real teeth, is still priority one. It turns out that preventing another bailout – by shrinking the megabanks – also eliminates a costly oligopoly that siphons off value from the capital markets every day.