Category: financial lobbying

The Protected

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September 3, 2023

by Stephen Stofka

This week’s letter examines the proliferation of lawyers in America and how they are reducing our economic productivity. In grade school civics class, we were taught that America is a nation of laws; that no one is above the law. Since the 1960s we have become a nation of competing rights, not laws. An army of lawyers stands ready to argue the cause of any business or advocacy group with access to sufficient funds. Those who can afford the legal bills can lengthen legal proceedings against them for a decade or more. Conflicts over land use hamper infrastructure projects and housing reform.

In 2018, Steven Brill, author of Tailspin and many other books, wrote an article in Time magazine titled “How Baby Boomers Broke America.” Brill is a Yale educated lawyer who founded Court TV several decades ago. Brill noted that the best and brightest among us, particularly those in the financial and legal professions, have become part of a protected class. They are shielded from the laws that govern the rest of us, the unprotected class. The professional class claims to have the public’s best interest at heart but it often acts to protect itself first at the expense of the public interest and social mobility.   

In 1951 there were 220,000 lawyers for 155 million people in America, according to the American Bar Association (ABA). That represented a ratio of one lawyer to 700 people. is  In the 1960s and 1970s, Congress passed much social and environmental legislation that left the actual rulemaking up to lawyers at federal and state agencies. During the 1970s, businesses hired many lawyers to thwart the impact of this new legislation. By 1984, the number of lawyers had tripled to 664,000 for a population of 237 million, a ratio of one lawyer to 357 Americans. In an annual address to the ABA that year, Chief Justice Warren Burger remarked on this worrisome trend, warning that society would be overrun by hordes of lawyers. By 2018, there were 1.1 million lawyers for 315 million people in America, the highest number of lawyers per capita in the world. Just five years later, there are now 1.3 million lawyers, a ratio of one lawyer for 255 people.

With the advent of Johnson’s Great Society and the Environmental Protection Act in the 1960s, the burden of regulation grew heavy. Large companies hired lawyers to discover and develop loopholes that created a legal safe harbor from the regulatory machine. Burdened by regulation, smaller companies became less efficient, making them less competitive. Wage gains which might have gone to workers now went to accountants, lawyers, government and insurance fees to protect business owners from the fines and liabilities of the new regulations. Larger companies, able to wield more legal power per dollar of revenue, absorbed their smaller competitors, giving larger companies greater pricing power.

In 2021, the American Bar Association listed 175 members of Congress with law degrees, a third of the 535 members of the House and Senate. By design, bargaining or incompetence Congress writes laws in imprecise language, leaving it up to the legal staff of executive agencies and the courts to determine what Congress meant. There is a public outcry against rule by unelected bureaucrats and judges but in an evenly divided electorate, those unelected officials protect the minority of 49 from the abuses of the majority 51. Computer algorithms enable a slim majority in a state to gerrymander voting districts to give one party representative power that enfeebles the 49% who belong to the other party. Those who control the democratic process control the power.

The growing adoption of computer technology in the late 1980s inspired the hope that automation would reduce the need for lawyers. Instead, compliance and regulatory work has increased each year. A 2017 CNBC article speculated that Artifical Intelligence (AI) might replace lawyers. Its doubtful that lawyers would allow that to happen. They write the rules that protect them from the rules, including the rule of competition. John Dingell, former Congressman from Michigan, once said “If I let you write the substance and you let me write the procedure, I’ll screw you every time.” Like an infestation of grasshoppers in a field of plants, too many lawyers diminish the productive vitality of our economy.

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Photo by Wesley Tingey on Unsplash

Keywords: finance, law, lawyers, regulations

Competition

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July 11, 2021

by Steve Stofka

This week President Biden issued an executive order (White House, 2021) to counter the trend toward corporate consolidation and oligarchy that has arisen during the past decades. I appreciated that the report contained links to the outside data sources they are using. After almost six months in office, Mr. Biden has signed 51 orders, almost half of them rescinding the orders of former President Trump (National Archives, 2021). In 2017, Mr. Trump signed 55 orders total but only eight of those were rescinding orders. The pace of orders slows after the first several months in office. I’ll review some highlights from this order.

For the past decade inflation has been below the Fed’s 2% target but the trend toward consolidation in some key industries gives those few companies that dominate an industry greater pricing power. Modern Farmer reported that 80% of the meatpacking industry is controlled by just four companies (Nosowitz, 2020). In 2000, the top 20 home builders controlled 15% of the market. Today it is 30%. Mr. Biden’s order notes that mark-ups, the charges over a company’s cost, have tripled in recent years. Since 2010, Federal Reserve data (2021) shows that after-tax profits have increased almost 50%, substantiating the claim of higher markups. In the past decade, low interest and rising profits have fueled a tripling of the stock market.

For the ten years following 9-11, after-tax profits also tripled, despite the worst financial crisis since the Great Depression in the 1930s. Many financial companies lined up at the corporate soup kitchen in Congress and were bailed out. Homeowners and workers went hungry while Congress paid bonuses to the same speculators that sparked the crisis (Story & Dash, 2009). Sorry, folks, we had to honor the contracts, the politicians in Washington said. It’s the law. Who helped write the laws? The corporations that got bailed out.

The order notes the growing increase of non-compete agreements for new job hires, making it more difficult to move to a more attractive job. It references data from the Economics Innovation Group (EIG, 2021) that the rate of new business formation has sunk by half in the past fifty years. The shift of manufacturing to China has also contributed to the overall decline.

The report notes the upswell in occupational licensing requirements over the past several decades. Licensing appears to be about public safety and some of it is. The states have come to depend on the revenue from the licensing fees and it avoids having to raise some taxes on voters. Trade schools that certify beauticians and other occupations like the tuition revenue they receive. Established business like licensing because it keeps out competition. The benefits are widespread and the costs are concentrated to those seeking careers in those occupations, many of them blue collar and little political power.

There are many faults in our federalist system that an executive order cannot remedy because the Constitution gives a lot of power to the states. What it can do is bring more attention to these anti-competitive practices. New Zealand and Singapore top the World Bank’s list of countries with low obstacles to doing business. The U.S. is sixth, just behind S. Korea and a few places ahead of Norway.

Americans believe in American exceptionalism but the Nordic countries keep beating us in various international categories. People say “You Americans. You should be more like the Nordic countries!” Suck on it, Norway, Finland and Sweden. We are ahead of you in ease of doing business. Next year we’re going to take on S. Korea and after that, tiny Denmark. There is nobody more capitalism loving than America and we’re going to prove it by stopping some of these anti-competitive practices!

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Photo by Pietro Mattia on Unsplash

EIG. (2020, June 29). Dynamism in retreat. Retrieved July 11, 2021, from https://eig.org/dynamism

Federal Reserve. (2021, June 24). Corporate profits after TAX (without IVA And ccadj). Retrieved July 11, 2021, from https://fred.stlouisfed.org/series/CP.

National Archives. (2021). Federal Register: Executive orders. Retrieved July 11, 2021, from https://www.federalregister.gov/presidential-documents/executive-orders/joe-biden/2021

Nosowitz, D. (2020, June 09). DOJ reportedly Subpoenas ‘Big Four’ Meatpackers. Retrieved July 11, 2021, from https://modernfarmer.com/2020/06/doj-reportedly-subpoenas-big-four-meatpackers/

Story, L., & Dash, E. (2009, July 30). Bankers reaped lavish bonuses during bailouts. Retrieved July 11, 2021, from https://www.nytimes.com/2009/07/31/business/31pay.html

Van Dam, A. (2019, October 19). Increasingly, economists find, homebuilding in fewer hands. Retrieved July 11, 2021, from https://www.providencejournal.com/news/20191019/increasingly-economists-find-homebuilding-in-fewer-hands

White House. (2021, July 09). FACT sheet: Executive order on promoting competition in the American economy. Retrieved July 11, 2021, from https://www.whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-on-promoting-competition-in-the-american-economy/

Green Incomes

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March 10, 2019

by Steve Stofka

Many Americans cross the street if they think a socialist program is walking toward them. We believe that the U.S.A. is the heart of capitalism, but recent history reveals that our financial and legal systems are based on socialism for the very, very rich.

In the past two weeks, I reviewed the infrastructure goals as well as the justice and education goals of the Green New Deal (Note #1). In Part Three this week, I’ll look at the income supports included in the resolution’s economic agenda.

“Guaranteeing a job with a family-sustaining wage.” This is yet another example of clumsy language used to state a goal that some might read as utopian. Some can group the first phrase as ” Guaranteeing a job with a family sustaining wage” meaning that all wages should have a certain minimum. That sounds like the language of Minimum Wage 2.0, but does that mean that each job should be able to support a family of four, or six, or eight?

Others might group the first phrase as “Guaranteeing a job blah, blah, blah” and read the intent as a platform point of a Socialist Manifesto. Is the government going to hand out jobs to everyone that wants one? Only if the government takes over some of the means of production and becomes the nation’s chief employer can it hand out jobs to anyone who wants one. That is the textbook definition of socialism. It is not enough to have good intentions. Clarity of language matters.

Why the clamor for more income redistribution? The real (after inflation) income of poor and working families has lost more than half since 1980. That might not surprise some readers. The trend is even broader and more insidious. Income data from the Congressional Budget Office (CBO) shows that even the top 5% of real incomes have dropped 30%. The real income of a ¼ million families – the very, very rich – have grown in that time. Here are some highlights from the data.

In 2015 and 1980, the number of poor households, or bottom 20%, equaled the number of rich households, or top 20%. In 2015, the government took money from each rich household and gave it to 5-1/4 poor households to raise their income by 65% (Note #2). In 1980, the government took money from each rich household and gave it to 10-1/4 households to raise their income by only 25% (Note #3).

Why did poor households need so much more support in 2015 than they did in 1980? Because their real incomes before transfers and taxes (BTT) lost more than 50% (Note #4). The real BTT incomes of the top 5%, the very rich, have lost more than 30% . It is only the very, very rich, the top 1%, that have fared well in this fight against inflation. Their BTT income has grown 15% in the past 35 years. The bulk of those gains have probably come from the top .1%, or less than ¼ million families.

Why? Where has the money gone? The high interest rates of the 1980s made the dollar so strong that manufacturers began to move their operations to lower cost markets in Asia. Japan kept the value of the yen low relative to the dollar and attracted much of this investment. The Japanese economy and real estate boomed. American exports of manufactured goods declined, and commodity prices crashed, destroying a lot of income producing wealth, particularly in rural areas (Note #5). Bankruptcies during this decade far exceeded those filed during the Financial Crisis ten years ago (Note #6). Older readers may remember the charity concerts to raise money for farmers (Note #7). Today, many commercial buildings in small towns throughout the country stand empty. As rural clinics and nursing homes close, people must move to urban areas where medical services are available (Note #8).

As real incomes declined in the late 1980s, households and governments borrowed to make up for the loss of income. Who did they borrow from? Financial institutions who managed the assets of the very, very rich. As the financial sector grew in proportion to the size of the entire economy, the top managers of financial firms became very, very rich themselves (Note #9).

In the past twenty years, lobbying by the financial sector has quadrupled (Note #10). It paid big dividends during the latest crisis. After the initial bailout by the Bush administration in the fall of 2008, the Obama administration brought in a team led by Robert Rubin, Larry Summers, and Timothy Geithner. The first two helped dismantle the safeguards between deposit banks and investment institutions during the Clinton administration. Geithner was a protégé of Rubin. All were deeply embedded in the interests of the banks, not the creditors and governments who had trusted the judgment of financial managers.

The lack of separation between deposit banks and investment banks helped spread a cancer from the investment banks to banking institutions throughout the world. As Obama’s Treasury Secretary, Geithner continued to protect the bonuses of top managers despite massive losses. To preserve the wealth of the very, very rich, the Federal Reserve loaded up their own balance sheet with toxic bonds bought at full value.

After a 35-year period of rising real incomes and wealth because of favorable fiscal and monetary policy in Washington –
after Washington protected their wealth and income during the financial crisis at the expense of middle-class families who lost their savings and houses –
it is time for the very, very rich to pay taxpayers back.
You have eaten well. Here is the check.

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Notes:

1. Politifact article
2. In 2015, the bottom 20% of households (24.3 million) averaged $20,000 in income before taxes and transfer payments. The top 20% (25 million) earned almost $300,000. After taxes and transfer payments, the incomes of the bottom 20% rose 65% to $33,000. CBO report on household income in 2015, updated Nov. 2018
3. Number of households underlying CBO report is in Sheet “1. Demographics” of Supplemental Data spreadsheet linked on last page of report. Dollar amounts are in Sheet “3. Avg HH Income”, of same spreadsheet.
4. The impact of high interest rates on investment and commodities during the 1980s Secrets of the Temple pp.590-604
5. Using BLS calculator to compare CPI January 1980 to January 2016 prices, $1 in 1980 = $3.05 at the end of 2015. Average income amounts from Sheet 3. See Note #3 above.
6. Four decades of bankruptcies chart at Trading Economics
7. Farm aid timeline
8. Nursing centers in rural areas are closing NYT
9. The financial industry’s increasing share of GDP
10. Increase in financial lobbying since 1998

Lobbyists

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When I watch Senate and Congressional hearings on C-Span, I see a number of people seated behind the Senators and Congresspersons. I have assumed that they were employed as part of a representative’s staff.

When the banking system exploded in crisis in September 2008, Fed chairman Bernanke and Treasury Secretary Paulson insisted that they needed mega-billions of dollars in immediate funding to avoid the destruction of civilization. I believed them. The Congress believed them and gave them our money.

In March 2009, two non-profit organizations, Essential Information and The Consumer Education Foundation, released a report, “Sold Out”, on political lobbying by the financial industry. For every Senator and Congressperson, there are five financial lobbyists. Perhaps that’s who I see sitting behind our representatives at those hearings. The one page summary of the report, as well as the full report, can be found here at Wall Street Watch.