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Thursday, November 13, 2014

Fun with FinCEN: Regulating the Unlawful


I am currently doing some research for an upcoming program on regulating payment networks. Financial institutions have been assigned duties under the Bank Secrecy Act to know their customers and to monitor and report suspicious financial behavior.  Unlike a neighborhood watch association, in which membership is voluntary, these institutions are effectively being deputized by the government to perform gatekeeping and monitoring functions.  And if they don’t do their jobs property, they could be kicked out of the neighborhood!

Snooping banks may threaten our liberty, I suppose.  But perhaps this form of monitoring is less intrusive than having the government watching you directly.  (Hey, wait a minute, they may be doing that, too!)  And neutralizing threats from criminals and terrorist organizations likely enhances our wellbeing more than a snooping banker.  Frankly, I don’t worry about these privacy concerns so much.  In fact, I have told my banker that he knows more about me than my doctor and probably even my priest.  (Maybe that means I am going to confession too infrequently.)  

The current state of legal  conflict regarding the possession and distribution of marijuana presents some additional dilemmas for financial institutions and others who deal with persons or entities engaged in such distribution.  While laws have  been change to removed criminal sanctions in some states and localities, federal law continues to criminalize this activity.  The Controlled Substances Act, coupled with other laws such as those involving aiding and abetting criminal activity, mean that marijuana continues its status as a dangerous controlled substance that creates a risk for civil and criminal penalties not only to those who distribute, but also to those who aid them. 

So, what’s a bank to do when approached by a customer who is connected to marijuana distribution in a state that has effectively legalized this activity under state law?  The most risk averse advice would be to turn him away and/or turn him in.  Guidance issued early this year by the Financial Crimes Enforcement Network (FinCen) and by the U.S. Department of Justice (DOJ) leave the financial services industry in a bit of a quandary if they want to do business with a person or entity engaging in legal activities from the perspective of state law, but illegal activities under federal law.    On one hand, FinCEN has provided guidance regarding how a bank may comply with ongoing reporting obligations under the Bank Secrecy Act.  On the other hand, the DOJ has also announced that all the laws that could be applied to such a banking relationship with a known distributor of marijuana continue to be on the books.  However, it has also announed that the DOJ will likely to exercise prosecutorial discretion in enforcing these laws assuming the customer is not doing things that trigger enforcement priorities, like distributing the drugs to other states, to minors, around school zones, or as a ruse to support other criminal activities.  And the banks are supposed to conduct due diligence to be sure the customer is not doing these things.   

If I was a banker (or like Kramer, who once testified that he always wanted to be a banker), I would not like these competing signals one bit. They expect too much of bankers, who are great people and all, but not clairvoyant.  Bankers should be good at taking deposits and evaluating credit risks when they make loans.  It seems a stretch to assume they are also proficient at evaluating whether (a) a customer engaging in legal activity under state law is also engaged in illegal activities, and (b) whether the DOJ will continue to exercise discretion not to prosecute them for providing services to such a customer.  The former kind of discernment could perhaps be learned, but the latter is admittedly an exercise in predicting the unknowable. (Even Secretary Rumsfeld knew better than to try this.  This candor is surely missed.)

FinCen has come up with some interesting “red flags” to alert bankers to concerns with their customers, and here is my favorite:  “A customer seeks to conceal or disguise involvement in marijuana-related business activity.  For example, the customer may be using a business with a non-descript name (e.g., a “consulting,” “holding,” or “management” company) that purports to engage in commercial activity unrelated to marijuana, but is depositing cash that smells like marijuana.” 

Of course, a red flag is not equivalent to a problem.  Your client may be a consulting firm that promotes Willie Nelson concerts.  And what exactly do they mean by “cash that smells like marijuana”?  Is that a figure of speech?  Or should the bank employees be trained by attending a Willie Nelson concert?  I am not quite sure these regulators or the DOJ have thought this through, not to mention the folks who voted for greater access to a drug with a known propensity to make its users stupider.  But that is another story.
 
 
EAM

Thursday, November 06, 2014

Ruminations on the Minimum Wage: Pulling out the lowest rung on the ladder of progress?

On November 4, Nebraskans overwhelmingly voted in favor of Initiative 425, which will increase the current $7.25 minimum wage to $8 by January 1, 2015, and then to $9 by January 1, 2016.  Supporters of this initiative touted the need to boost income for working families.  Perhaps this law will do that for some workers, but few heads of households rely solely on a job that pays only minimum wage.  Most workers have advanced skills and accordingly they receive more than minimum wage based on the market demand for their skill sets, not based on a legal prescription of their worth. 

 

But lots of young people start out in jobs that don’t require many skills, but pave the way for future growth.  Many of us in the Midwest may recall getting up early in the summer to “walk beans”, which, contrary to rumors by city folks, did not involve a leash.  It was hard work, usually supervised by the farmer who owned the bean field, requiring the removal of invasive weeds from the desirable crop.  We started early because the sun got hot and the work got more difficult later in the day.  But that meant walking through dew-soaked plants, getting wet and sticky, attracting a fair share of bugs, and sometimes even getting a minor injury from an errant hoe or corn knife.   We muddled through with our friends, sometimes having a good time while experiencing the discipline of perseverance, as well as the satisfaction of looking back at the field free from weeds.  In a few weeks, the farmer would know if you were following instructions, as those who cut off his weeds in a haphazard manner often saw them grow back.  The skillful and diligent, on the other hand, removed the root and left a clean field behind. 

 

What has become of walking beans today?  Few, if any, do this work.  The same is true of other jobs kids used to do.  For example, my colleague told me of growing up in Texas and earning $.50/hour (that’s fifty cents, not dollars) washing cars at the service station or the car dealership.  Other jobs like this included service station attendants, which are rare as hen’s teeth today.  And what about human pin setters in the bowling alley? 

 

All of these jobs allowed young people an opportunity to get their start in the world of work.  They did not require an advanced degree or technical training.  They provided an opportunity to generate some spending money, while at the same time teaching us punctuality, cooperation, and diligence.  And most importantly, we learned that the real world had real expectations that we had to meet in order to succeed.  None of us expected to stay at those jobs, and in fact their difficulty provided a powerful incentive to stay in school and make something of ourselves.  But I am profoundly grateful for those formative opportunities available to us low-skilled but eager workers.    

 

Today we substitute capital in order to eliminate many of those low-skilled jobs.  My nephew, Matt, uses a giant mechanical sprayer to apply herbicides that kill weeds in the soybeans more effectively than high school kids, and at a fraction of the labor cost.  Better living through chemistry?  Perhaps. Likewise, mechanical washers have replaced those kids washing cars, which don’t require so much supervision.  And Brunswick made mechanical pinsetters, changing the labor market there.  (My antitrust students told of their adventures in an old-fashioned bowling alley, where it was customary at the end of the game to fill the holes of a bowling ball with dollar bills and roll it to the pinsetters.  Doesn’t that sound more delightful than just shrugging while the machine trudges on?)

 

So what does all this have to do with the minimum wage?  Humans sometimes innovate purely for thrills.  But more often, innovation is driven by the realization of cost savings.  As wage costs go up, it makes sense to substitute capital when it is more cost effective.  That is not all bad, as it surely creates new jobs in the sector that manufactures and services the capital improvement.  But those jobs are not usually the same kind of entry level jobs, but instead require considerable training and perhaps advanced degrees.  That is all quite wonderful, really, because it allows us humans to do more interesting things than walk beans or wash cars or set pins with our time.  But there are also consequences, particularly for the least-skilled, the young and inexperienced, who don’t get the same opportunity to start out in the world of work, and thus must scrap and scrape even harder to develop marketable skills.  And they must also do this without the formative experiences teaching them basic skills, like punctuality, dedication, and perseverance.  (Schools are ill equipped to do this for many reasons – and that can be the subject of another blog.)

 

This is a real problem.  Consider this inconvenient truth:  public school graduation rates in Nebraska average 78 percent.   Of course, this average masks significant variation, as some rural schools manage to graduate nearly all students, while urban ones do much worse.  Where are the dropouts going to become gainfully employed?  Will we have enough low-skilled jobs to match their skill sets, and to allow them to start building upward?  (And of course, some of the graduates are in equally bad shape, given low learning outcomes.)  These young people don’t yet have skill sets to build the capital that is replacing those low-skilled labor jobs.  How will they get them if they cannot get on the ladder of upward mobility? 

 

If we continue to raise the minimum wage, it stands to reason that we will further reduce the number of low-skilled jobs available, as capital continues to substitute for labor.  Will we soon be speaking to a synthesized voice saying, “Welcome to McDonald’s, may I take your order, please?”  Some may welcome this, but I would rather interact with that cheery young person and know that he or she is getting a start in the world of work.  And someday, she may be running that store -- or running for the Senate.  (Congratulations to Iowa Senator-elect Joni Ernst, who once worked in fast food on her way to better things.) 

 

Sure, there may be some winners from a legal edict to raise wages. But there are always unintended consequences to enacting laws that disrupt market forces.  Those who love making speeches and touting their big-hearted concerns for their fellow man often don’t contemplate the negative impacts on the very people they profess to care about.  There is real value to having a low rung on the ladder of the world of work that can be reached by anyone with ambition and the will to succeed.  Unfortunately, those people are most likely to be hurt by the initiative when the lowest rung is raised beyond their reach.  Perhaps those 40% of Nebraskans who voted no may be the ones who really cared for these people after all.

 

EAM

 

Thursday, October 16, 2014

Kansas Cuts Taxes and Expands the Economy: Earnings Growth Soars Past U.S. and Neighbors Since Passage

In 2012, Kansas Governor Brownback pushed the Legislature to whack individual tax rates by 25%, to repeal the tax on sole proprietorships, and to increase the standard deduction. In 2013, the Legislature cut taxes again. Since passage in 2012, how has the Kansas economy responded to these dramatic tax cuts?

Post Tax-Cut Earnings: Since QIV, 2012, Kansas grew its personal income by 2.92%, which was higher than the U.S. gain of 2.85%, and was greater than the growth experienced by each state bordering Kansas, except Colorado. Additionally, in terms of average weekly earnings, Kansas experienced an increase of 4.82%, which was almost four times that of the U.S., more than four times that of Missouri, approximately seven times that of Nebraska, and nearly four times that of Oklahoma. Of Kansas' neighbors, only Colorado with 4.82% average weekly wage growth outperformed Kansas.

Post Tax-Cut Job Performance: Between the last quarter of 2012 and August 2014, the U.S. and each of Kansas' neighbors, except Nebraska, experienced higher job growth than Kansas. However, much of Kansas' lower job growth can be explained by the fact that during this period, Kansas reduced state and local government jobs by 1.4% while all of Kansas' neighbors and the combined 50 U.S. states increased state and local government employment. In terms of unemployment, Kansas' August 2014 joblessness rate was 4.9% compared to rates of 6.1% for the U.S., 5.1% for Colorado, 6.3% for Missouri, 3.6% for Nebraska, and 4.7% for Oklahoma.

Kansas job and income data since the tax cut show that, except for Colorado, the state economy has outperformed, by a wide margin, that of each of its neighbors and the U.S. To remain competitive, expect Kansas' neighbors to reduce state and local taxes in the years ahead.
Ernie Goss

Thursday, September 25, 2014

Raising Minimum Wage Impact: Employee Hours Worked Will Be Reduced

The current popular rant among many non-economists is that opposition to raising the minimum wage is equivalent to opposition to worker rights. Those who are more intellectually curious will find there is no theoretical basis for this conclusion and empirical studies have come down on both sides of the argument--i.e. increasing the minimum wage is beneficial to workers, or boosting the minimum wage is harmful to workers.

Total wages in a state are the product of the number of hours worked and the hourly wage rate. Raising the minimum wage may diminish the number of hours worked to the point that total state wages shrink instead of expanding.

There are currently 24 U.S. states and DC that have a minimum wage above the federal level, and 27 states with a minimum wage that is at or below the federal minimum hourly wage of $7.25. Since the beginning of the economic recovery in 2009 extending through 2013, the states with minimum wages above the federal level, compared to states with minimum wages at or below the federal minimum, experienced, on average: 3.1% lower gross domestic product growth (GDP), 0.3% lower job growth, and 0.2% higher welfare payments.

On the other hand, these same high minimum wage states experienced a 0.4% lower increase in the median poverty rate than states with minimum wages at or below $7.25. Furthermore, Washington, the state with the highest minimum wage in the nation at $9.32, underperformed the 27 low minimum wage states in GDP and job growth during the recovery period, but did experience a slower growth in its poverty rate.

This analysis is certainly not definitive and does not control for other important factors influencing a state's economy. But it does at least question the popular notion, or "accepted science" that raising the minimum wage is necessarily a winner for the state economy.
Ernie Goss

Wednesday, August 20, 2014

Lew Says "Be a Patriot, Pay More Taxes" Support Government, Not Shareholders

Last month, Jack Lew, sounding more like a Sunday school teacher than the U.S. Secretary of Treasury, called on U.S. corporations to be patriotic, and reject the corporate, legal tactic labeled "inversion."

Using this device, U.S.-based, multinational companies slice their tax bills by merging with a foreign company and reorganizing in a country with a lower tax rate. For example, many U.S. corporations can reorganize in Great Britain and cut their income tax burdens in half.

Instead of pleading for corporations to financially support the government at the expense of shareholders, U.S. policymakers should undertake two steps.

First, allow U.S. corporations to repatriate foreign earnings at a competitive tax rate. A recent analysis by the Wall Street Journal concluded 60 large corporations are parking over $160 billion of income overseas to avoid paying U.S. corporate taxes. Thus, shrinking the U.S. corporate tax rate to 20% on repatriated earnings could potentially raise $32 billion in taxes.

Second, the U.S. should decrease the tax rate on domestic earnings to 25% and chop deductions/subsidies to favored businesses. In 2013 for example, Walmart experienced a combined state and local income tax rate of 40% and Exxon-Mobil paid a combined tax rate of 42.7%. On the other hand, General Electric and U.S. Geothermal, taking advantage of various federal energy subsidies, braved income tax rates of 5.1% and 0.0%, respectively.

Commenting on inversion, President Obama, the former constitutional lawyer turned legal vigilante declared that, "I don't care if its legal, it's wrong." The President should lower the rhetoric, cut the corporate tax rate, and reduce deductions/subsidies. These actions would encourage corporations to do what is legal, ethical, and consistent with U.S. economic interests.
Ernie Goss

Monday, August 18, 2014

Enron, An Omaha Community Playhouse Production

Hello readers.  After a hiatus from posting, I'm back with a theater review.  On Friday evening I attended the Omaha Community Playhouse production of Enron.  Kimberly Faith Hickman directed this play by Lucy Preeble, which is loosely based on the events that led to Enron’s bankruptcy and the public downfall of its leadership. 

I went into this play expecting dull, well-worn rants against capitalism.  In some respects, I was not surprised.  But the cast and staging was phenomenal, injecting levity and creativity into what otherwise could have been a monotonous story.  (How does one turn financial accounting decisions into a gripping drama?)  

As for the cast, Paul Schneider was a very credible Ken Lay.  Connie Lee (who happens to be Schneider’s wife) was simply fabulous as Claudia Roe, the hard-driving rival to Jeffrey Skilling.   Chris Shonka and Matthew Pyle also turned in creditable performances as Andy Fastow and Jeff Skilling, respectively.

The costumes were wonderful, blending technology, light, and whimsy which added to the story.  (The three blind mice who appeared as Enron directors, the geek and ventriloquist dummy that appeared for Arthur Andersen, and the Raptors that appeared frequently throughout the latter part of the play, were especially wonderful. Not to mention two Lehman Brothers joined as Siamese twins.)  In short, it was a pleasantly engaging production that reflected genuine artistry by the director, all of the performers, and the costume designers and stage managers. 

But Lucy Preeble, the writer, could have given them more, which would have made it a better play.  She would have done well to resist the clichés and seemingly obligatory disrespect offered toward George W. Bush.  Those listing toward the Left simply can’t avoid casting aspersions on Bush as the cause of all which vexes them.  As Skilling and the Enron team longed for deregulation of electricity markets, the Bush v. Gore contest was portrayed as a turning point in the company’s future.  Preeble has Skilling tell us that Enron got along fine with Clinton, but Gore scares him.  Is she suggesting that a Gore victory would somehow have stopped the Enron debacle?

Al Gore has gone on to become a venture capitalist and investor.  His twenty-percent stake in Current TV, which has been sold to Al Jazeera, is in the news today because of disputes over payment of nearly $500 million.  He may talk a good game about environmental issues (while at the same time jetting about and creating a massive carbon footprint), but he is no enemy of capitalist greed. 

Deregulation began in the deep Blue state of California, governed by the RINO Terminator, not with the federal government.  Bad experiences in California are no fault of Bush.  Preeble apparently cannot fathom government run by democrats as being inept at governing.  Instead, she paints them as the friends of the little people, who are clearly the losers after Enron implodes. 

But politics aside, Preeble’s development of Skilling particularly shows her need to cast aspersion on a belief in free markets as the basis for human progress.  In fact, markets ultimately worked very well in exposing Enron’s failures – it just took time for the information to come out.  Markets require information, which was not being provided.  And markets involve humans and all their foibles.  Many people were cajoled by their own vanity into going along when they could not admit they did not understand how Enron was making money (when in fact, it was not).  Pride and vanity are not restricted to capitalist pigs – plenty of socialists have these problems, too.  Preeble apparently finds no irony in a U.S. Senator telling Skilling that the U.S. Government will not tolerate their bad behavior.

The play is still a lot of fun, which was well staged and acted.  But the writer left the most important issues unfocused and, of course, unresolved, while she tilted the dialogue in favor of invectives about corporate greed and self-aggrandizement.  We can all agree that dishonesty and deception give rise to harms that extend far beyond the executive suite and into the lives of many average folks who are just trying to earn a living.  But many executives do not do these things, and instead confer countless benefits on their communities through the capitalist model.  Those executives get adulation when the going is good, but when the populist sentiment turns against them, look out for the mob. 
 
What is the real solution for the problems presented by dishonesty?  Is a vastly empowered regulatory state really the answer?  Do we really trust government actors to behave competently and honestly with extensive powers, particularly when it is quite clear that they are often co-opted as participants in the nefarious deeds of the greedy capitalists?  Or should we opt for a more limited government role, with greater personal vigilance and diversification to protect ourselves, recognizing that some bad apples will succeed despite the best efforts of government?  Wouldn’t we be better off in a world where government did not have so much power over the success or failure of private ventures?  After all, regulatory costs can harm the working folks, too, when they cannot get jobs.

It seems that Ms. Preeble, like others on the Progressive Left, pines for a world in which all wrongs are righted and all losses are compensated through the intervention of a big and benevolent government.   Unfortunately, that world does not exist, and if we think that empowering government to protect us from all of the downside risks in this life will make life better, we had better wake up and smell the coffee.  Those government actors are just as prone to be deeply flawed as the capitalists they seek to regulate.  Ultimately, we need to ensure we do not lose sight on the importance of character development.  Those lessons our clergy and our mothers and fathers have been teaching us may turn out to be more important than we think.

Criticism aside, I encourage you to enjoy this play for yourselves.  Some may find a few scenes of frank sexual dialogue to be off-putting, and there is ample profanity.  But real actors playing their hearts out convey a dimension of humanity that cannot be duplicated on the screen.  Kudos to all of them for their fine efforts.     

EAM


     

Wednesday, July 23, 2014

Piketty's Taxing the Rich More Heavily Doesn't Help Poor: Education Does

Thomas Piketty's New York Times best-selling book, Capital in the Twenty-First Century has created quite a stir among armchair economists, sociologists and politicians. Among Piketty's most embraced, rebuked and naïve recommendations for reducing income inequality is to raise income taxes on high income earners.

U.S. tax collection data since 1996 crush the soundness of this proposal. In 1996, taxpayers earning more than $200,000 paid an average tax rate three times that of workers making less than $50,000, and two times that of taxpayers earning between $50,000 and $200,000. By 2011, those making more than $200,000 paid almost seven times the average tax rate of taxpayers earning less than $50,000, and 2.5 times that of workers earning between $50,000 and $200,000.


Furthermore between 1996 and 2011, the bottom half of income earners' portion of total federal income tax collections dropped from approximately 10% to 2.5%. During this time period, the degree of income inequality rose as measured by the Gini Coefficient. The expansion in the U.S. Gini Coefficient from 39.3 in 1996 to 47.7 in 2011 indicates greater inequality.


If taxing the rich more heavily does not reduce income inequality, what does? Education!

In 2011, the ten states with the greatest degree of income equality had a high school graduation rate of 90.7% and the ten states with the greatest degree of inequality, had a much lower high school graduation rate of 59.1%. Furthermore, the latest U.S. employment data shows high school dropouts have an unemployment rate almost three times that of college graduates, and average annual earnings roughly 42.6% that of college graduates. Reduce income inequality, don't drop out!