Tag Archives: infrastructure

Why is Cuomo Leaving Wall Street Cash on the Table?

Co-Written with Lenore Palladino.

Governor Andrew Cuomo has claimed that he’s “a progressive Democrat who’s broke.” But in his most recent executive budget, he proposes ending a little-known tax that could make all the difference. For the last century, New York State has had a stock-transfer tax, which taxes nearly every stock trade. Since 1981, it’s been instantly rebated—no money is actually collected—leaving potential revenue on the table even as financial profits skyrocket. Cuomo suggests ending the tax, citing “unnecessary administrative work.” But New York’s stock-transfer tax can be easily re-implemented, instead putting that administrative work to good use.

Cuomo should work to end or reduce the tax rebate, rather than take the tax off the books. New York isn’t broke so much as unequal: one in every twenty-two people in New York City is a millionaire, while 56,987 New Yorkers live in homeless shelters. A tax like this could raise hundreds of millions of dollars.

The financial sector grew as a share of the economy by 175 percent from 1947 to 2013. This rapid growth has led many to observe that the financial sector increasingly relies on rent-seeking: making money from moving money around only to make more money. Financiers no longer need bother with productive investments.

Wall Street is flush with cash, but the state’s coffers continue to struggle. Public employment in New York dropped by 4.2 percent between December 2007 and June 2014. A modest 0.02 percent tax on stock transactions would raise hundreds of millions of dollars annually. New York City faces incredible risks from climate change. A recent report estimates that, without adaptation, the annual costs of climate change will be between $3.8 billion and $7.5 billion per year at mid-century. The stock-transfer tax could provide, on its own, a major head start toward protecting New York City from devastation.

Opponents of a tax on stock transactions claim that it would reduce trading and jobs and harm the economy, and it would certainly slow down short-term, highly speculative trading to some extent. The real question is: What are the costs that New Yorkers face right now from runaway speculation and insufficient public investment? Our research finds that New York would gain more from the revenue raised, which could be funneled toward job creation, even though falling trade may cause some job loss in the financial sector. Of course, some of those astronomical profits that Wall Street banks keep reporting could be put toward the tax as well.

Finance has increased inequality, pulled money out of the job-creating economy and largely sustained itself on grift. To reduce these negative effects, we should tax financial transactions as well. In the wake of the recent financial crisis, a tax could be a way to reduce systemic risk. Although the New York stock-transfer tax would cover only stock trades, it could provide a model for a more comprehensive national tax on a broader range of financial transactions, like derivatives.

Such a tax isn’t unprecedented. After all, New York had one in place from 1905 to 1981. From 1914 to 1966, the United States levied a modest tax on sales and transfers of stock. House Speaker Jim Wright pushed for a renewed federal tax in 1987, proposing a fee of 0.25 to 0.50 percent on the buyer and seller in each securities transaction, highlighting the tax’s progressive aspects. More recently, Senator Tom Harkin and Representative Peter DeFazio proposed the Wall Street Trading and Speculators Tax Act, which would assess a tax of 0.03 percent on trades of stocks, bonds, futures, options, swaps and credit-default swaps and would generate some $350 billion over nine years. Representative Keith Ellison proposed the Inclusive Prosperity Act, which would entail a 0.5 percent tax on stocks, a 0.1 percent tax on bond trades and 0.005 percent tax on derivatives; that bill was projected to raise similar amounts.

On May 6, 2014, ten European nations issued a joint statement that a financial tax would commence in 2016 as a means to reduce speculation and raise revenue. The initial tax will focus on the trading of stocks and some derivatives. The European Commission estimates that a broad tax could raise 31 billion euros ($39 billion) in annual revenue.

In New York, revenue is desperately needed. Governor Cuomo should support Assemblyman Phil Steck’s bill, which would begin collection for 40 percent of the tax and was supported by economist Jeffrey Sachs. Sachs has said that the “financial transactions tax is a solid idea that has been resisted by Wall Street for years.” Instead of repealing the tax, New York should restart collection and use the revenues to stimulate equitable economic growth.

This article originally appeared in the print version of The Nation and online.

How Wall Street is crushing Main Street

Co-Written with Wallace Turbeville.

The conservative assertion that government spending “crowds out” private investment has been ascendant since Ronald Reagan’s claim that “government is not the solution to our problem; government is the problem.” The idea is that the government is so big that it discourages private investors from competing in the marketplace.

Today, we face the reverse condition: the casino market that dominates the finance sector is crowding out important public investments. The deregulation of the financial sector — promoted by Republican and Democratic administrations — has changed America from an economy focused on sustainable growth toward a free-for-all for the wealthy.

This change is called “financialization.” The financial sector has grown to almost 8 percent of GDP, from about 4 percent in Reagan’s time. That the financial sector has grown isn’t necessarily a problem; what is a problem is that it has grown faster than the rest of the economy. The purpose of the financial sector is to facilitate investment in a wide array of activities — to grease the wheels of the economy, so to speak. If the rest of the economy doesn’t grow along with the financial sector, it is not fulfilling that purpose.

Financialization causes many problems. First, the financial industry is a poor producer of middle-class jobs, disproportionately benefiting high-end earners (see chart). Second, the financial industry is extremely myopic when it comes to economic trends. One study finds that the growth of the financial sector has decreased long-term investment in the real economy because financiers work in short-term gains and losses. Finally, financial “innovations” like securitization and derivatives have freed trading markets to grow unconstrained by the actual amount of stocks, bonds, and commodities in the real economy. One need only to recall the mortgage-backed market that crashed in 2008 to grasp the scope of this phenomenon.

A consequence of the rise of the financialization machine is that there is less money available for government investment in the real economy. Direct federal investment is already constrained by fiscal dysfunction, so indirect investment is even more important. When the Federal Reserve tries to pump up the economy through easy money, that easy money flows disproportionately to the supercharged investment in the financial sector. The banks end up using it to backstop trading businesses, rather than lending it to productive enterprises that generate jobs in the real economy.

State and local governments, already strapped by tax bases decimated by the Great Recession, have to compete with the financial industry, since investing in Wall Street is more profitable than investing in Main Street. The financial sector’s preference for the trading markets means that small businesses and households, the bulwark of state and local government tax bases, lose out in the competition for investment. As a result, critical public infrastructure investments have been ignored. One study estimates that our infrastructure system needs a $3.6 trillion investment over the next six years. In South Dakota, Alaska, and Pennsylvania, water is still transported via century-old wooden pipes. Large portions of U.S. wastewater capacity are more than half a century old. And in Detroit, some of the sewer lines date back to the mid-19th century.

Government investment in research and development has plummeted, and this will not be replaced by private investment that must compete with the short-term returns from capital investment in trading. The Financial Times reports that “public investment in the U.S. has hit its lowest level since demobilization” after World War II. That’s a shame, because investments in science, for example, produce huge benefits, both in terms of well-being and economic growth. The Human Genome Project, for instance, cost 3.8 billion in public funding and has produced economic gains of $796 billion. That’s a return of $140 to $1! The internet, too, was a product of government research and has produced tens of trillions of dollars in economic output and growth.

 

Public spending in the U.S. is far below the international average (see chart), and the rise of finance is part of the cause. By taking up a larger and larger share of the economy’s resources and using them for the economic equivalent of roulette, we’ve allowed important public investments to be passed up.

This is simply unsustainable. Rabindranath Tagore once warned of “precocious schoolboys of modern times, smart and superficially critical, worshippers of self, shrewd bargainers in the market of profit and power” who, “driven by suicidal forces of passion, set their neighbors’ houses on fire and were themselves enveloped by flames.” Today, these schoolboys increasingly sit on Wall Street, diverting resources from the real economy into fat paychecks. The only question is when the economy will again be enveloped by flames.

Originally published on The Week. 

Six ways America is failing its people

Although the U.S. is one of the richest societies in history, it still lags behind other developed nations in many important indicators of human development – key factors like how we educate our children, how we treat our prisoners, how we take care of the sick and more. In some instances, the U.S.’s performance is downright abysmal, far below foreign countries that are snidely looked-down-upon as “third world.” Here are six of the most egregious examples that show how far we still have to go:

1. Criminal Justice

We all know the U.S. criminal justice system is flawed, but few are likely aware of just how bad it is compared to the rest of the world. The International Center for Prison Studies estimates that America imprisons 716 people per 100,000 citizens (of any age). That’s significantly worse than Russia (484 prisoners per 100,000 citizens), China (121) and Iran (284). The only country that incarcerates a higher percentage of its population than we do is North Korea. The U.S. is also the only developed country that executes prisoners – and our death penalty has a serious race problem: 42 percent of those on death row are black, compared to less than 15 percent of the overall population.

Over two and a half million American children have a parent behind bars. A whopping 60 percent of those incarcerated in U.S. prisons are non-violent offenders, many of them in prison for drug charges (overwhelmingly African-Americans). Even while our crime rate has fallen, our incarcerated population has climbed. As of 2011, an estimated 217,000 American prisoners were raped each year ­– that’s 600 new victims every day, a truly horrifying number. In 2010, the Department of Justice released a report about abuse in juvenile detention centers. The report found that 12.1 percent of all youth held in juvenile detention reported sexual violence; youth held for between seven and 12 months had a victimization rate of 14.2 percent.

2. Gun Violence

The U.S. leads the developed world in firearm-related murders, and the difference isn’t a slight gap – more like a chasm. According to United Nations data, the U.S. has 20 times more murders than the developed world average. Our murder rate also dwarfs many developing nations, like Iraq, which has a murder rate less than half ours. More than half of the most deadly mass shootings documented in the past 50 years around the world occurred in the United States, and 73 percent of the killers in the U.S. obtained their weapons legally. Another study finds that the U.S. has one of the highest proportion of suicides committed with a gun. Gun violence varies across the U.S., but some cities like New Orleans and Detroit rival the most violent Latin American countries, where gun violence is highest in the world.

3. Healthcare

A study last year found that in many American counties, especially in the deep South, life expectancy is lower than in Algeria, Nicaragua or Bangladesh. The U.S. is the only developed country that does not guarantee health care to its citizens; even after the Affordable Care Act, millions of poor Americans will remain uninsured because governors, mainly Republicans, have refused to expand Medicaid, which provides health insurance for low-income Americans. Although the federal government will pay for the expansion, many governors cited cost, even though the expansion would actually save money. America is unique among developed countries in that tens of thousands of poor Americans die because they lack health insurance, even while we spend more than twice as much of our GDP on healthcare than the average for the Organization for Economic Co-operation and Development (OECD), a collection of rich world countries. The U.S. has an infant mortality rate that dwarfs comparable nations, as well as the highest teenage-pregnancy rate in the developed world, largely because of the politically-motivated unavailability of contraception in many areas.

4. Education

The U.S. is among only three nations in the world that does not guarantee paid maternal leave (the other two are Papua New Guinea and Swaziland). This means many poor American mothers must choose between raising their children and keeping their jobs. The U.S. education system is plagued with structural racial biases, like the fact that schools are funded at the local, rather than national level. That means that schools attended by poor black people get far less funding than the schools attended by wealthier students. The Department of Education has confirmed that schools with high concentrations of poor students have lower levels of funding. It’s no wonder America has one of the highest achievement gaps between high income and low income students, as measured by the OECD. Schools today are actually more racially segregated than they were in the 1970s. Our higher education system is unique among developed nations in that is funded almost entirely privately, by debt. Students in the average OECD country can expect about 70 percent of their college tuition to be publicly funded; in the United States, only about 40 percent of the cost of education is publicly-funded. That’s one reason the U.S. has the highest tuition costs of any OECD country.

5. Inequality

By almost every measure, the U.S. tops out OECD countries in terms of income inequality, largely because America has the stingiest welfare state of any developed country. This inequality has deep and profound effects on American society. For instance, although the U.S. justifies its rampant inequality on the premise of upward mobility, many parts of the United States have abysmal levels of social mobility, where children born in the poorest quintile have a less than 3 percent chance of reaching the top quintile. Inequality harms our democracy, because the wealthy exert an outsized political influence. Sheldon Adelson, for instance, spent more to influence the 2012 election than the residents of 12 states combined. Inequality also tears at the social fabric, with a large body of research showing that inequality correlates with low levels of social trust. In their book The Spirit Level, Richard Pickett and Kate Wilkinson show that a wide variety of social indicators, including health and well-being are intimately tied to inequality.

6. Infrastructure

The United States infrastructure is slowly crumbling apart and is in desperate need for repair. One study estimates that our infrastructure system needs a $3.6 trillion investment over the next six years. In New York City, the development of Second Avenue subway line was first delayed by the outbreak of World War II; it’s still not finished. In South Dakota, Alaska and Pennsylvania, water is still transported via century-old wooden pipes. Some 45 percent of Americans lack access to public transit. Large portions of U.S. wastewater capacity are more than half a century old and in Detroit, some of the sewer lines date back to the mid-19th century. One in nine U.S. bridges (or 66,405 bridges) are considered “structurally deficient,” according to the National Bridge Inventory. All of this means that the U.S. has fallen rapidly in international rankings of infrastructure.

America is a great country, and it does many things well. But it has vast blind spots. The fact that nearly 6 million Americans, or 2.5 percent of the voting-age population, cannot vote because they have a felony on record means that politicians can lock up more and more citizens without fear of losing their seat. Our ideas of meritocracy and upward mobility blind us to the realities of class and inequality. Our healthcare system provides good care to some, but it comes at a cost – millions of people without health insurance. If we don’t critically examine these flaws, how can we ever hope to progress as a society?

Originally published on The Rolling Stone.