Tag Archives: partisanship

Why Washington’s gridlock won’t go away

Pundits have suggested that the Republican control of U.S. Senate will lead to a new era of bipartisanship, which will offer new solutions on immigration, the environment and tax reform. These arguments are extremely myopic. A critical look at the recent structural shifts in the American political system shows that the gridlock in Washington is caused by increasing inequality and benefits the rich.

To be sure, Congress is facing an almost unparalleled level of gridlock. Since President Barack Obama took office in 2009, we have seen an unprecedented use of the filibustervery little major legislationlong delays in mundane appointments, government shutdowns and highly partisan attacks on a progressive legislative agenda.

To understand the current congressional gridlock, it’s important to look at who is benefiting from the stalemate. A recent report published by the University of Tennessee at Knoxville found (PDF) that gridlock in the U.S. political system benefits the rich and has significantly contributed to rising inequality. The findings have been confirmed by Alfred Stepan and Juan Linz, who conclude that the structure of the Senate, the majority-constraining capacity of veto players and the filibuster all contribute to rising inequality.

The question then becomes, Why have we not seen the same level of gridlock in our lifetimes?

The growing economic power of U.S. elites coincides with increasing political dominance. Numerous studies have shown that the U.S. political system is no longer responsive to the electorate. In part this is because the United States’ political system is designed to be slow moving, with multiple checks and balances. In addition, as with other developed countries, the United States has incredibly low voter turnout. The 2014 midterm elections saw the worst voter turnout in 72 years (a dismal 36.3 percent of eligible voters). Higher voter turnout is positively correlated internationally with higher income redistribution (PDF, see chart on page 27). A vast body of literature shows that low-income voter turnout leads to more-left-leaning governments. The U.S. political system has had persistent class bias, but in the past these factors did not prevent stymie important legislation that benefits the poor.

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The dramatic reduction in top tax rates and the deregulation of finance in the 1980s opened the door for mass inequality. Rising inequality had three important effects on U.S. politics. First, it allowed the rich to take over the political system. Research shows (PDF) that the richest 0.01 percent of Americans now provide 40 percent of political contributions — up from 10 percent in 1982.

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By nearly every measure, the rich are far more likely to participate in the political process, and the superrich make up most of the donors. A 2013 study in The Journal of Economic Perspectives found (PDF):

In 1980, the top contributor … gave $1.72 million (in 2012) dollars, nearly six times the amount given by the next largest contributor. In 2012, the two largest donors were Sheldon and Miriam Adelson, who gave $56.8 million and $46.6 million, respectively. Other members of the Forbes 400 accompany the Adelsons; 388 current members are on record as having made political contributions. They account for 40 of the 155 individuals who contributed $1 million or more to state and federal elections during the 2012 election cycle.

At a time when Congress increasingly dominated by superrich (and white) politicians, these contributions buy enormous political influence. A similar study by Jesse H. Rhodes and Brian F. Schaffner found (PDF) that “millionaires receive about twice as much representation when they comprise just 5 percent of the district’s population than the poorest wealth group does when it makes up 50 percent of the district.” As Duke University professor Nicholas Carnes has demonstrated (PDF), “representatives from working-class occupations exhibit more liberal economic preferences than other legislators, especially those from profit-oriented industries.” But those measures often die or are shelved in deeply gridlocked Congress.

Second, rising inequality has created ideological structures. As the rich grow richer, they justify their wealth by inflating their sense of intelligence and superiority. The poor and middle class begin to accept this narrative,forgoing their desire for redistribution. Since individuals understand inequity by relating it to their circumstances, higher inequality leads to its growing acceptance. Given the United States’ racist history, whites try to avoid feeling being in the last place by punitively harming blacks. In turn, the rising inequality erodes the social trust necessary to reduce inequality.

“The best policy response to growing inequality is to enact universalistic social welfare programs,” Bo Rothstein and Eric Uslaner, wrote in a 2005 study (PDF) published by World Politics. “However, the social strains stemming from increased inequality make it almost impossible to enact such policies.” Because the rich views the poor as personally responsible for their failings, they see no reason to help them up the ladder. A recent Gallup poll found that fewer Americans than ever believe that hard work can help one get ahead in life. Data from the American National Election Survey shows the percentage of people who say the government is run “by a few big interests looking out for themselves” has grown dramatically. (See chart below.)

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Finally, amid rising inequality, both Republicans and Democrats have moved to the right, rejecting liberal economic policies to woo wealthy donors. Democrats have struggled to maintain their coalition of single women, people of color and educated progressives. In fact, as Benjamin Page, Larry Bartels and Jason Seawright noted in the journal Perspectives on Politics last year (PDF), “on economic issues wealthy Democratic respondents tended to be more conservative than Democrats in the general population.”

Studies show that the strength of unions is a far more important bulwark against inequality than the number of Democrats in Congress. “The effect of the Democratic Party [on the rate of financial deregulation] is not very large, but rather varies along with the strength of unions,” writes Christopher Witko in an upcoming paper on the rise of finance. He argues the Democratic Party has been attempting to win the votes of professionals (that is, rich people), pulling them to the right. Other studies confirm that the decline of unions has led to steep rise in inequality.

Meanwhile, the wealthiest Americans have increasingly favored one party. In a 2003 paper, Nolan McCarty, Keith T. Poole and Howard Rosenthal examined 40 years of data and found that “partisanship has become more stratified by income.” In a later study, the researchers show how tight polarization tracks with inequality (PDF, see chart on page 108) and wages in the financial sector. American National Election data also confirm the rising class polarization of the electorate, particularly at the 68th to 95th income percentile range, which went from a nearly 40 point margin preference for Democrats in 1952 (58 percent Democratic, 20 percent of Republican) to a 5 point margin for Republicans (43 percent Democrat, 48 percent Republican) in 2008. In the 2008 elections, the poorest Americans (below the 16th income percentile) preferred Democrats by 42 points, while the richest (above the 96th income percentile) preferred Republicans by 40 points.

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Widening class divide

The increasing class divide within the two parties has made gridlock inevitable. But Republicans automatically win from gridlock. The asymmetric partisanship of the last six years is driven by a simple dynamic: Government inaction benefits the wealthy and harms the working class. When Republicans are in the majority, they hollow the government out from the inside with tax cuts, deregulation and austerity. When they are not in power, the easiest way to benefit the rich is to dither. In essence, the GOP serves a 1 percent agenda, based entirely on making government fail. “We should not be judged on how many new laws we create. We ought to be judged on how many laws we repeal,” House Speaker John Boehner said in a moment of honesty earlier this summer.

Rising economic and political inequality have coincided over the past three decades. As the rich have grown richer, they have been able to exercise more political power. Their aim is to allow laissez-faire to do its dirty deeds by preventing the government from working for the poor and middle class. As a result, conservative-leaning rich Americans oppose reducing economic inequality. (See chart below.) Politics is nothing more than a class war by other means. The problem is that the poor are losing. Nothing that happened in this year’s midterm elections will change that.

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This article originally appeared on Al Jazeera

New York already has a financial transaction tax on the books — it’s time to start collecting it

Co-Written with Lenore Palladino.

Recently re-elected Governor Andrew Cuomo likes to complain that he’s “a progressive Democrat who’s broke.” Here’s a simple way to raise millions of dollars and make the economy safer at the same time: a small tax on financial transactions. Politically impossible? Not in New York, where Governor Cuomo could lead the way to reinstate New York’s Stock Transfer Tax, which remains on the books but currently is not collected.

A modest tax on financial transactions would raise revenue while slowing down the frenetic short-term trading that could drive us straight into another financial crisis. Gridlock at the federal level will make congressional action tricky. New York State has had a financial transaction tax-specifically a stock transfer tax– on the books since 1906, but since 1981 has instantly rebates all of the money.  It’s time to start collecting.

The case for a Financial Transaction Tax

The idea for a financial transaction tax has been around for since John Maynard Keynes’sGeneral Theory. The basic argument is that a small fee would be trivial for long-term investors, and only deter the activities of socially useless high-turnover speculators. The idea began to gain traction in the late 70s and 80s with the rapid growth of the financial sector. In 1989, Lawrence Summers and Victoria Summers proposed a U.S. Securities Transfer Excise Tax, arguing that it could raise some $10 billion annually. Recently, the International Monetary Fund (IMF) has supported a financial transaction tax as well. A metastudy by Neil McCulloch and Grazia Pacillo finds that a Tobin Tax (a type of FTT) would be “feasible and, if appropriately designed, could make a significant contribution to revenue without causing major distortions.”

From 1914 to 1966, the United States levied a 0.02 percent tax on sales and transfers of stock. Federally, Speaker Jim Wright pushed for a renewed tax in 1987, proposing a fee of 0.25 percent to 0.5 percent on the buyer and seller of each securities transaction, highlighting the tax’s progressive aspects. More recently, the “Wall Street Trading and Speculators Tax Act” was proposed by Senators Harkin and DeFazio, which would assess a tax of 0.03 percent on trades of stocks, bonds, futures, options, swaps, and credit-default swaps, and would generate $352 billion over 10 years.

Such a tax would not be unprecedented. On May 6th, 2014, ten European nations issued a joint statement that a financial tax will begin in 2016 as a means to reduce speculation and raise revenue. The initial tax will focus on the trading of stocks and some derivatives, even though the initial proposal included taxing most financial products. The European Commissionestimates that a broad tax could raise $39 billion (31 billion EUR) in annual revenues.

New York’s Stock Transfer Tax

Capital intermetiation is an important and integral part of the modern economy. However, rapid deregulation has allowed it to become poisoned by rent-seeking and hyperactive trading while exacerbating rising inequality. A modest tax on financial transactions could reduce the propensity for systemic risk, while providing much-needed money to revenue-starved governments. However, it’s unlikely that such a tax can be passed at the federal level, given the partisan climate.  That’s why New York’s Stock Transfer Tax is such an important opportunity.

There was a Stock Transfer Tax in place in New York from 1905-1981. Revenue from the tax was split between the city and state (in the 1960s the full revenue reverted entirely to New York City). Beginning October 1, 1979, 30% of the tax was rebated to the investor, which was increased to 60% in 1980 and then the full value of the tax in 1981 Because of this quirk in its phase-out, the STT was never repealed. Instead, 100 percent of the revenue is rebated to the trader. Because the tax remains on the books, politically putting the tax in place would not require passage by the legislature of a new tax, but instead the reduction of the rebate, whether by 100% or some smaller percentile.

Governor Cuomo included a repeal of the tax in his Executive Budget (S. 6359), by calling for a full repeal of the tax due to its “unnecessary administrative work for the financial services industry as well as for the Department of Taxation and Finance,” (along with a separate proposal by the Governor to repeal the bank tax). This followed a recommendation by his Solomon/ McCall Commission to repeal ‘nuisance taxes’ like the STT. Assemblyman Phil Steck proposed a bill (A. 8410) to reduce the rebate and re-start collection of 40% of the nominally-collected tax. The threat of a final repeal of the tax prompted action from a variety of stakeholders, including a call by Jeffrey Sachs for a reinstatement of collection. The final enacted budget bill (S. 6359) did not include a repeal of the tax; it remains on the books as a fully-rebated tax.

New York could serve as a pilot program for an eventual national tax. A modest tax on stock transactions would raise millions annually, which could be used to offset any minimal job loss. If the revenue was directed toward creating public jobs and infrastructure, New York could reduce the twin risks of climate change and rampant economic inequality at the same time.

Instead of repealing the tax, Governor Cuomo should re-start collection and use the revenues to stimulate equitable economic growth.

This piece originally appeared on Vox.