Via Naked Capitalism

A bit of candor: I’d really like to like Elizabeth Warren’s plans. Seriously.

First, as a general rule, politicians who propose meaningful change should get specific enough about their idea so that voters can have a good look before they go to the polls. So Warren is setting a good example on this front and likely raising the bar for other Democratic party aspirants.

Second, I want to make sure I’m not falling prey to the cognitive bias called the halo effect, which is a tendency to see people as all good or all bad. So I want to make sure my reaction to the neoliberal frogs that sometimes hop out of Warren’s mouth doesn’t taint my reading of her generally. For instance, her private equity plan is very strong, particularly her sweeping ideas about how to make private equity firm principals liable when they bankrupt companies. But as America’s top bankruptcy scholar, the core of that plan falls in an area where she has unparalleled expertise.

But generally, Warren’s change programs have a frequent shortcoming: they do a great job of assessing the challenge but then propose remedies that fall well short of remedying them. As Matt Yglesias pointed out in January:

If Two-Income Trap were released today, I’d say it suffers from a striking mismatch between the scale of the problem it identifies and the relatively modest solutions it proposes. Tougher regulation of consumer lending would be welcome but obviously would not fundamentally address the underlying stagnation of income.

On top of that, Warren’s “I have a plan” mantra sounds an awful lot like a dog whistle to Clinton voters. And even though I’ve only given a good look at two of her plans so far ex her private equity plan, there’s a lot not to like in both of them. We covered her wealth plan earlier, and didn’t treat Sanders’ at the same time because hers was sucking up all the media attention even though Sanders had proposed a wealth tax years before she did. That was a mistake. Sanders’ wealth tax plan is better than Warren’s.

Even though Sanders plan has the same fundamental problem, that of not recognizing how the IRS in recent decades has never won a large estate tax case where you have the same valuation issues with a wealth tax, Sanders proposes a more aggressive beef up of the IRS than Warren does, so he may have a sense of the severity of the enforcement problem and also provides for some legal fallbacks regarding valuation. He also realistically does not depict his tax as a global wealth tax, since there’s no way to get the needed information or cooperation on foreign holdings that aren’t in bank or brokerage firms.

But even more important, both Warren and Sanders wealth tax schemes rely on the work of economists Emmanuel Saez and Gabriel Zucman in devising their taxes and estimating how much they’d yield. The structure of Sanders’ tax hews to their recommendations as to how to maximize revenues and cut into inequality. Warren’s does not. So contrary to popular perceptions, Sanders’ wealth tax plan should get higher wonk points than Warren’s.

So on to the next Warren plan.

Warren’s Excess Lobbying Tax

Warren presented her Excessive Lobbying Tax. The problem it is meant to solve is not just lobbying as currently defined, which is the petitioning of member of Congress to influence legislation. Warren is out to tackle not just that but also what she depicts as undue corporate influence in the regulatory process:

But corporate lobbyists don’t just swarm Congress. They also target our federal departments like the Environmental Protection Agency and the Consumer Financial Protection Bureau….

Regulatory agencies are only empowered to implement public interest rules under authority granted by legislation already passed by Congress. So how is it that lobbyists are able to kill, weaken, or delay so many important efforts to implement the law?

Often they accomplish this goal by launching an all out assault on the process of writing new rules — informally meeting with federal agencies to push for favorable treatment, burying those agencies in detailed industry comments during the notice-and-comment rulemaking process, and pressuring members of Congress to join their efforts to lobby against the rule.

If the rule moves forward anyway, they’ll argue to an obscure federal agency tasked with weighing the costs and benefits of agency rules that the rules are too costly, and if the regulation somehow survives this onslaught, they’ll hire fancy lawyers to challenge it in court.

Before we get to Warren’s remedies, there are some odd things about the problem statement. One is that she fails to acknowledge that regulatory rulemaking devises more specific policies in order to implement legislation. That reflects the fact that legislation often isn’t detailed enough to provide a definitive guide to agencies. And the public is entitled to weigh in on rulemaking. So what she is objecting to is that corporate interests are able to overwhelm the comment process. Second is that there is a significant abuse that she fails to mention, that some proposed rule changes, such as regarding net neutrality, where ordinary citizens weighed in heavily, saw comments on the other side that were submitted by bots, overwhelming the agency. The bot abuse is specific and important, and it’s odd to see Warren leave it by the wayside.

Warren’s plan has three main prongs. First, she would make pretty much anyone who as part of their employment seeks to influence Federal legislation or regulation register as a lobbyist. They would be require to make public who they’d been lobbying and what information they provided (an interesting question here as to what gets reported from in person discussions).

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Second, she would require that “every corporation and trade organization” with over $500,000 per year in lobbying expenditures is subject to an “excess lobbying tax”. Spending of $500,000 to $1 million would be taxed at a 35% rate, over $1 million, at a 60% rate, and over $5 million, 75%.

Warren states that her tax would have raised $10 billion in the last ten years and she intends to use that for the third major leg of her programs, which is various anti-lobbyist initiatives. She plans to spend the revenues on

A “Lobbying Defense Trust Fund” to bolster “Congressional independence from lobbyists” by providing more money to Congressional support bodies like the CBO

Extra funding to agencies that are on the receiving of lobbying. When an entity in the $500,000 or higher lobbying spending bracket, the agency gets a special allocation “to help it fight back”.

An Office of the Public Advocate to help ordinary citizens get better representation in the lobbying process

She also asserts that her plan will also “shut the revolving door between government and K Street” but she offers no mechanism to provide for that. So that is a handwave.

The Conceptual Flaws in Warren’s Approach

It’s hard to know how much of this Warren believes and how much of this was dreamed up by her staffers (the document is signed “Team Warren).

Taxation is the wrong approach. Even though Warren discusses how much money her tax would raise, her strident disapproval of lobbying and the punitive tax levels make clear that the purpose of the tax is to discourage lobbying. But if lobbying is as bad as Warren believes it is, she should instead be prohibiting abuses, like comments by bots. In the 1970s, economist Martin Weitzman came up with an approach to determine when taxation was the right way to discourage problematic behavior, as opposed to barring it. A summary from the Bank of England’s celebrated economist Andrew Haldane:

In making these choices, economists have often drawn on Martin Weitzman’s classic public goods framework from the early 1970s. Under this framework, the optimal amount of pollution control is found by equating the marginal social benefits of pollution-control and the marginal private costs of this control. With no uncertainty about either costs or benefits, a policymaker would be indifferent between taxation and restrictions when striking this cost/benefit balance.

In the real world, there is considerable uncertainty about both costs and benefits. Weitzman’s framework tells us how to choose between pollution-control instruments in this setting. If the marginal social benefits foregone of the wrong choice are large, relative to the private costs incurred, then quantitative restrictions are optimal. Why? Because fixing quantities to achieve pollution control, while letting prices vary, does not have large private costs. When the marginal social benefit curve is steeper than the marginal private cost curve, restrictions dominate.

The results flip when the marginal cost/benefit trade-offs are reversed. If the private costs of the wrong choice are high, relative to the social benefits foregone, fixing these costs through taxation is likely to deliver the better welfare outcome. When the marginal social benefit curve is flatter than the marginal private cost curve, taxation dominates. So the choice of taxation versus prohibition in controlling pollution is ultimately an empirical issue.

Moreover, the tax would hit all lobbyists. Who do you think has the better odds of raising more money to offset the tax and carrying on as before: Public Citizen or the Chamber of Commerce?

By contrast, one idea of ours that could have helpful chilling effects would be to go much much further than merely requiring all lobbyists, broadly defined, to register and also require them to provide reports on what government officials they contacted/met with and what information they provided them.

We’d also make these lobbyists subject to FOIA and provide stringent standards that apply only to lobbyists, such as:

Set strict and tight time limits for responses (California requires that an initial determination be made in 10 days, for instance)

Require judges to award legal fees and costs to parties who successfully sue over FOIAs where the records were withheld. Provide for awards in cases where the defendant coughs up records as the result of a suit being filed. Set punitive damages for abuses (such as excessive delay, bad faith responses). Strictly limit invocation of attorney/client privilege to demonstrable litigation risks

Letting journalists and members of the public root around in the discussion between various think tanks and their business allies would regularly unearth material that would be embarrassing to the parties involved. It would go a long way toward denting the perceived legitimacy of lobbying, which over time would strengthen the immune systems of the recipients.

Warren assumes that most people in Congress and at regulators are anti-corporate but are overwhelmed by lobbyists. First, the piece presents a Manichean world view of evil greedy corporate interests versus noble underrepresented little people. And while this is very often true, it’s not as absolute as Warren suggests. The companies are often have conflicting interests, which can allow for public-minded groups to ally with the corporate types who are on their side on particular matters.

A second part of the Manichean take is the notion that the agencies aren’t on board with the corporate perspective. Unfortunately, reality is vastly more complicated. For instance, banking regulators are concerned overall with the safety and soundness of the institutions they oversee. They aren’t in the business of consumer advocacy or consumer protection save as required by legislation. The concern with safety and soundness perversely means that they want the institutions they oversee to be profitable so as to help assure capital adequacy and to attract “talent” to make sure the place is run adequately. (We’ve stated repeatedly we disagree with this notion; banks are so heavily subsidized that they should not be seen as private businesses and should be regulated as utilities). For instance, in the late 1980s, McKinsey was heavily touting the idea of a coming bank profit squeeze. McKinsey partner Lowell Bryan in his 1992 book Bankrupt spoke with pride at how his message was being received, and in particular, that regulators were embracing deregulation as a way to bolster bank incomes.

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Another complicating factor is that in certain key posts, industry expertise and therefore an insider status is seen as key to performing the job. For instance, it’s accepted that the Treasury Secretary should come from Wall Street so he can talk to Mr. Market. Of all people, GW Bush defied that practice, appointing corporate CEOs as Treasury Secretary. The position wound up being a revolving door in his Administration as his appointees flamed out. Finding a modern Joe Kennedy, someone who knows sharp industry practices and decides to go against incumbents, is a tall order.

Similarly, agencies have career staffers and political appointees at a senior level. That included critical roles like the head of enforcement at the SEC. If Republicans or pro-corporate Democrats control the Administration and the Senate, business-friendly appointees will go into these critical posts. The optics may be better with the Democrats, but the outcome isn’t that much different. As Lambert likes to say, “Republicans tell you they will knife you in the face. Democrats tell you they are so much nicer, they only want one kidney. What they don’t tell you is next year they are coming for your other kidney.”

So Warren is also implicitly selling the idea of Team Dem as anti-corporate vigilantes, a fact not in evidence.

And speaking of kidneys…a letter from a departing SEC career employee and Goldman whistleblower, James Kidney, shows how even staffers who want to do the right thing have their perspective warped over time. As we said about his missive, which you can read in full:

Two things struck me about Jim Kidney’s article below. One is that he still wants to think well of his former SEC colleagues…

Number two, and related, are the class assumptions at work. The SEC does not want to see securities professionals at anything other than bucket shops as bad people. At SEC conferences, agency officials are virtually apologetic and regularly say, “We know you are honest people who want to do the right thing.” Please tell me where else in law enforcement is that the underlying belief.

So it also seems unlikely that there is a cadre of vigorous regulators just waiting to be unshackled by the likes of Warren and her anti-lobbyist funding. The way institutions change is by changing the leadership and enough of the worker bees to send the message that the old way of doing things isn’t on any more. That does not happen quickly. And absent a system breakdown like the Great Depression, staff incumbents know that talks of new sheriffs in town may not last beyond the next election cycle.

And the experience of Warren’s hand picks at her own pet agency shows that they were all too willing to let corporations set the agenda. Recall that Warren recommended that Richard Cordray, head of the CFPB when it became clear she would not get the job, and Raj Date, the first deputy director of the CFPB, was also an ally of hers. From our 2012 post, Consumer Financial Protection Bureau Launches “Make Life Easier for Lobbyists” Tool:

I’m pretty gobsmacked by the link (hat tip reader Scott S) to a webpage at the Consumer Financial Protection Bureau which says it is written by Richard Cordray: “We want to make it easier for you to submit comments on streamlining regulations.”

There is more than a little bit of NewSpeak in this idea. “Streamlining regulations” is generally right wing code for “eliminating/relaxing regulations.” Admittedly, Elizabeth Warren during her brief time as de facto head of the nascent CFPB, proposed and launched a project to simplify mortgage disclosure forms to combine two required forms into one and make them easier to understand….

However, this opening of the door by Cordray does not look as likely to produce such happy outcomes. Maybe this is a means for the CFPB to force lobbyists to provide their input in a format that makes it easier for CFPB to process. But I can’t imagine that Cordray or Raj Date would say to the American Bankers Association: “We are trying to create a level playing field, so we won’t meet with you. Put it in writing and we’ll give it due consideration.”

So if this portal is a supplemental channel, who exactly is it intended to serve? The dropdown menu on the “Tell Us About Yourself” page tells us who it expects to comment: people from organizations, specifically:

Financial services provider
Trade association
Government agency
Community organization

In other words, it does not contemplate that consumers have the expertise or motivation to provide input. Citizens are probably assumed to be represented via the CFPB itself or perhaps also by consumer groups, but even then, they may have specific axes to grind (think the AARP).

With friends like this, who needs enemies? Date, a former McKinsey partner and Capital One executive when he joined the CFPB, was singled out in a 2013 article in The Hill on how he was among the recent departures that showed the revolving door was active at the agency.

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More generally, this is another example of attacking the problem at the wrong level. The reason there is so much corruption in Washington is that the pay gap between what people can make at senior levels at regulators versus what they can make in the private sector is so enormous. And pay matters more than ever given the cost of housing, private schools, and college. Singapore’s approach was designed explicitly to prevent corruption in government: pay top-level bureaucrats at the same level as top private sector professional (think law firm partners) and have tough and independent internal audit. We are a long long way from embracing any system like that, but it’s important to recognize what the real issues are.

Lobbyist “tax” walks and quacks like an attack on free speech and the right to petition the government. Even worse, she makes it easy to attack her program in court with this section and similar observations in her piece:

In the first four months, the DOL received hundreds of comments on the proposed [fiducairy] rule, including comments from the U.S. Chamber of Commerce, Morgan Stanley, Bank of America, BlackRock, and other powerful financial interests. After a public hearing with testimony from groups like Fidelity and J.P Morgan, the agency received over 100 more comments — including dozens from members of Congress, many of which were heavily slanted toward industry talking points. Because the law requires agencies to respond to each concern laid out in the public comments, when corporate interests flood agencies with comments, the process often becomes so time-consuming and resource-intensive that it can kill or delay final rules altogether — and that’s exactly what happened.

Warren is depicting the act of making public comments as an abuse. And her clear intent is to reduce corporate input. This particular bit is very problematic: “….many of which were heavily slanted toward industry talking points.” Was she objecting to the fact that a lot of the submissions were highly parallel, and therefore redundant, designed to choke the pipeline…or simply that they presented familiar pro-business tropes and were low value added? Not being well crafted is not a basis for rejecting a public comment.

Warren sets herself for a legal challenge to her idea with this bit: “..if the regulation somehow survives this onslaught, they’ll hire fancy lawyers to challenge it in court,” and she later criticizes opponents of the fiduciary rule:

Today, the Department of Labor is led by Eugene Scalia, the very corporate lawyer and ex-lobbyist who brought the lawsuit to kill off the proposal.

Was Warren missing in action in civics class when they presented the fact that Presidents make appointments subject to the advice and consent of the Senate? And what would she do about future Eugene Scalias? She is intimating that he shouldn’t have been allowed to serve, but that’s the call of the Senate, not hers.

But more important, Warren makes it clear that she is so opposed to undue corporate influence that she objects to judicial review. Help me. Philosophically, the US system allows even the devil to have the benefit of law. But apparently not former law professor Elizabeth Warren.

Again, the problem of ordinary people and pro-consumer organizations being outmatched in court isn’t going to be solved by treating use of the legal process as illegitimate. The idea in her scheme that struck me as the most promising was the idea of an Office of the Public Advocate. If I were in charge, I’d throw tons of money at it, including for litigation.

The Practical Flaws in Warren’s Approach

Since this post is already long, we’ll address these issues briefly. The IRS is a weak agency that loses cases against corporate American all the time. A colleague recently confirmed that take with an insider story on enforcement matters. The short version is that the IRS was unable even to pursue issues only of moderate complexity. The problem isn’t just expertise but apparently also poor internal communication and coordination.

Tax avoidance is completely legal. If you don’t think some of the targets of Warren’s tax would find ways to restructure their operations so as to greatly reduce their tax burdens, I have a bridge I’d like to sell you. And they’d probably do it not so much to reduce taxes (“We need more donations due to meanie Warren” would be a powerful fundraising cry and a lot of the heavyweight groups and big corporations that lobby directly wouldn’t miss a stride) as to avoid funding her anti-lobbying initiatives.

And who would be least able to reorganize their lives to reduce the tax hit? The smaller public advocates, natch.

* * *

It could be that I’ve simply hit upon two of Warren’s weakest plans. But I have a sneaking suspicion not. A contact who is an expert on political spending gave a big thumbs down to her campaign reform proposal. The spectacle of Warren, whose Congressional staffers would regularly turn out pointed, well-argued, very well supported requests for information from officials that showed her to be operating way way above legislative norms, publishing plans that score high on formatting and saber rattling and low on policy plumbing is a bad sign.

The most charitable interpretation is that Warren has weak people on this part of her campaign and either doesn’t know or doesn’t care. But Warren historically has also show herself to be an accomplished administrator. Is she more over her head than the press has figured out?

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