Category: Uncategorized

Categories
Uncategorized

Reagan, Supply-side Economics, and Trump w/ Ed Oswald – EP238

This episode explores the profound influence of Reaganomics and its enduring legacy in American economic policy with tax expert and former US Treasury attorney Ed Oswald. He is the author of a new book, “From Ronald to Donald: How the Myth of Reagan Became the Cult of Trump”. Oswald discusses the transition from Reagan’s tax reforms to Trump’s tax policies, highlighting the continuity in supply-side economics and its implications for fiscal policy and the national debt.

Please contact us with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. 

You can listen to the episode via the embedded player below or via podcasting apps including Google Podcasts, Apple Podcast and Spotify.

About this episode’s guest: Edwin G. Oswald

Edwin G. Oswald is a partner with the law firm of Orrick, Herrington & Sutcliffe LLP, resident in Washington D.C. He served as an attorney-advisor in the United States Treasury’s Office of Tax Legislative Counsel during the Clinton Administration. He is a Fellow of the American College of Tax Counsel and a frequent lecturer on financing State and local infrastructure and the federal taxation of municipal debt. The book is a personal project of Mr. Oswald’s and the views and opinions expressed herein are those of the co-authors and do not represent the views and opinions of Orrick.

What’s covered in EP238

  • Reagan’s economic policies and their impact on the US deficit. (0:00)
  • Supply-side economics and its impact on US deficits. (6:55)
  • Reaganomics and its impact, and the impact of Clinton administration policies (e.g. NAFTA, repeal of Glass-Steagall). (16:14)
  • Reagan and Trump similarities, tax cuts, and budget. (26:24)
  • Tax policy and its impact on the economy. (33:22)

Takeaways

  1. Reagan’s economic policies, particularly his tax cuts, have had a lasting influence on American politics, setting a precedent followed by later administrations including Trump’s.
  2. Ed Oswald argues that supply-side economic policies from Reagan to Trump show a consistent belief in tax cuts for the wealthy as a means to stimulate economic growth, despite debates about their effectiveness and impact on the national debt.
  3. Addressing the US debt will likely require a balanced approach of both tax increases and spending cuts, in Ed’s view.

Links relevant to the conversation

Ed’s book: https://www.amazon.com.au/Ronald-Donald-Reagan-Became-Trump/dp/1476690324 

Ed’s bio: https://www.edwingoswald.com/ 

Recent episode with Dan Mitchell on US debt:

https://economicsexplored.com/2024/04/17/is-uncle-sam-running-a-ponzi-scheme-with-the-national-debt-w-dr-dan-mitchell-ep235

Transcript: The Tax Guru the WSJ says has Wall Street’s “Strangest Hustle”: w/ Andy Lee, Parallaxes Capital – EP237

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Ed Oswald  00:00

I think in many ways some of that seed corn was was laid down by Ronald Reagan in terms of, you know, disrespect for government and in frankly, the proper role of government. Although, again, I agree with your point that certainly, you know, Reagan’s cabinet was filled with adults was filled with, you know, many competent people. But still the broadcast far and wide was, government is the problem.

Gene Tunny  00:39

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, and welcome to the show. Today we’re joined by Edie Oswald, a prominent taxation expert and lawyer based in Washington DC. He’s a former attorney advisor to the US Treasury Department. And he’s the co author of a new book, from Ronald to Donald how the myth of Reagan became the cult of Trump. In our conversation, we delve into the profound influence that the Reagan administration had on American and global economic policy. We also explore Trump’s relationship with Reagan’s legacy and the potential implications of a second Trump presidency. Okay, I’d love to hear your thoughts on my discussion today with it. Also, please let me know your ideas on how I can improve the show. My contact details are in the show notes. Without further ado, let’s dive into the episode. Enjoy it Oswald is great to be speaking with you about your new book.

Ed Oswald  02:08

Thank you, Jane. Pleasure to be here.

Gene Tunny  02:10

Very good. Yes. From Ronald to Donald I, I learned quite a fair bit about Reagan that I didn’t know. So I enjoyed reading it for that reason. In particular, as someone with Irish ancestry myself, I was, I was surprised to learn, I didn’t realise and I mean, as you point out, or your you and your co author point out, it’s obvious once you realise, you think about his last name, that he had that Irish ancestry and he and for political reasons, it was something he didn’t reveal in the campaign, which I found fascinating and the story about his the origin of his nickname, Dutch, his, his underprivileged background, it’s a rather extraordinary story to to begin with, what did you find most fascinating in your, when researching the life of Reagan for this book? Well,

Ed Oswald  03:06

thank you, Jean. You know, what I found most interesting is, is really subtle, although he didn’t say much about it. Though his relationship with his father. His father was basically a shoe salesman. His father was an alcoholic, that always had a battle with the bottle. I think how Reagan tried to grapple with that somewhat, both in terms of acknowledging it, and then somebody denying it. But I think that did have an impact on his view of the world and how he carried himself. Right.

Gene Tunny  03:43

Yeah, yeah, indeed. That’s interesting, too, because they, you know, Trump has an interesting relationship with with alcohol too, because he, I think his brother was an alcoholic and died of alcoholism or, or an illness related to it. I can’t remember. Exactly. And so Trump himself doesn’t drink. So that’s, uh, yeah, that’s that’s, that’s interesting after that, to go revisit that part of Reagan’s story. To get into the, you know, what most interests me about the book? Is these economic issues, because Reagan’s obviously a pivotal figure in economic history of the 20th century. Would you be able to take us through what was so different or revolutionary even about Reagan’s economic policies for his head?

Ed Oswald  04:34

Yeah, thank you. So, you know, you have to remember the political scene in the United States in the late 70s, where you had, you know, Jimmy Carter was president. We were going through a high inflationary period, we were dealing with the remnants of a gas crisis and energy crisis. We were dealing with the Iranian hostage crisis, it was really quite a dire time and America. And I guess really to mirror what Joe Biden has been saying lately in terms of him wanting the wealthy to pay their fair share. US tax policy, historically had high tax marginal, high, high marginal tax rates, effectively, from the beginning of really World War Two, the wealthy pay their fair share Republican tax rates on the rise in how or the highest marginal rate was, you know, 90 or above, with Nixon, it was 70 or above. So in terms of, you know, the the spectrum of the US taxes, when Reagan came in with, with the notion of something called supply side economics, which is basically the notion that the tax rates in the country are too high. And if we cut tax rates and tax rates significantly, which Reagan did, we can talk more about, primarily towards the wealthy. The economic benefits will trickle down to the lower rungs of the economic spec, that being the wealthy, the wealthy, the well to do, the industrialists will have more capital, they’ll have more money to spend. And therefore, that we’ll juice the economy and move us forward. Move us if you will, out of the Jimmy Carter era. You know, and what, what we can talk more about really the consequences of that. But you know, what that really led to was a ballooning of the US deficit. And a lot of really negative effects that way try to illustrate the highlight in the book.

Gene Tunny  06:54

Yeah, gotcha. So this is the supply side doctrine. And this was based on the Laffer curve is that concept of the Laffer curve? So one of the advisors to Reagan was art laffer. And, I mean, I guess how economists think about it nowadays is that, you know, there’s obviously some efficiency loss associated with taxes and, and that efficiency loss or the cost of taxation, the deadweight loss, so to speak, that increases disproportionately or at a faster rate than the increase in the tax rate. So essentially, I think there’s some there’s some truth to this, that there is an adverse impact. But the the issue is, is where you are on that Laffer curve. And, you know, there’s so they may have got some there may have been some offset from increased economic activity, but there wasn’t enough to to actually compensate for the loss of income from the cut in the rates. So that’s what you’re you’re talking about, isn’t it? So this is actually something that contributed to future deficits. Is that right? Yeah,

Ed Oswald  08:04

I think that’s well said that, you know, I think a well designed tax cut, you know, can lead to, you know, economic growth. And as you say, it’s a struggle a little bit for what that sweet spot is. But really, where supply side economics have gone within the GOP or GOP doctrine or conservative doctrine is that basically, you know, tax cuts, if you will pay for themselves. That’s really that’s really the slogan. That’s not true. Every tax cut does, you know, result in a loss of revenue, and no tax cut will pay for itself. We do state in the book that in that time, 1980 1981, with the highest marginal rate being 70%. It was probably a good time for a tax cut. It was probably a good time to deregulate the economy. But what what we kind of highlight in the book is that, you know, Reagan’s policies really live on some 40 years later, we’re still living with supply side economics within the United States. The notion that tax cuts do not pay for themselves have led to a really a ballooning of the national debt. The national debt when Reagan came into office was slightly less than one tray and and when he left off his office, it was close to 3 trillion. So although Reagan really did rail against the deficit, and the balanced budget, the US deficit increased 171% under Reagan, which, you know, is a bit shocking in terms of his paradigm and the Reagan missed in terms of a budget hawk. Gotcha.

Gene Tunny  10:00

Now these the tax cuts or the supply side economics that was controversial at the time, wasn’t it? As you point out, so George Bush Senior HW Bush, I mean, I think he was a Yale economics major, wasn’t he? I mean, he had, you know, he was a yeah, yes. Yes. And he, as you point out, he famously called it voodoo economic policy. And you also mentioned, David Stockman, what can you remind us? What was Stockmans critique? Was it was he concerned about supply side economics and the logic of it all? Well,

Ed Oswald  10:36

yeah, so David Stockman was the Reagan’s first head of OMB, the Office of Management and Budget, and really his his wing man, if you will, in terms of tax policy, implementing the significant tax cuts, you know, just to give the listeners a sense of perspective, when Reagan came into office in 1980, again, it became president in 81, the highest marginal tax rate in the US was 70%. And when he left in 1988, the highest marginal rate was 28%. So really a dramatic dramatic reduction and the highest marginal rate within the US. So stock when was really he was a former congressman from Michigan, really rate, you know, the point man for the budget, budget policy, tax policy, what the significant tax cuts have on spending and so forth. And I believe that, you know, initially, Stockman was really a disciple. He believed in supply side economics. He believed that the tax cuts would move the economy forward. But the other end of a revolution, and I think he says this, in terms of the Reagan Revolution, is not only do you need a revolution in tax rates, but you need a revolution in terms of spending. And if you’re looking at, if you’re looking at the significant spending on the US side, it’s a big part of his social security, that big targeted because Medicare, big part of it is the US defence budget. And I think that Stockman became more and more alarmed. And he read, he really wrote extensively about this, that this revolution was only one side, it was really a revolution on the revenue side, not the spending side. And ultimately realised, politically, although Reagan ran on this revolution, it was kind of a revolution to name only. And he became more and more alarmed as he got signals from the point persons and within budget, that Reagan is not going to take on significant domestic spending. Hence, I think his chagrin down the road, and also the blurring of the US national debt there. Yeah,

Gene Tunny  13:10

yeah. I think the best case that can be made for and I’m not necessarily advocating for this, but I think the best case that can be made for cutting taxes in advance of spending cuts is that there’s that starve the beast idea, isn’t there? I think that’s the that’s the concept that eventually this will force Congress to make the hard decisions. But I mean, so far that that really hasn’t happened yet. And so you trace this, this policy or this, you see this supply side economics as being influential in future administrations? Can you talk about that, please, Edwin? I mean, what what administration’s or what policies has it influenced? Post Reagan?

Ed Oswald  13:54

Yeah, I’d be happy to. So it’s clearly influenced. George W. Bush, Herbert Walker, his son, who initiated significant supply side tax cuts in 2001. Perhaps more sun are bringing in son of Bush, if you will, in terms of the least, tax policy outlook, he didn’t see the Voodoo that his father did. And then in 2017, really, frankly, Trump’s only Trump’s real signature domestic legislation was the 2017 tax cuts and Jobs Act, which is which was not quite as significant tax cuts as the 2001 George W. Bush, but still quite significant in terms of supply side economics and having, you know, tax cuts weighted towards the wealthy. I would say Jean, you know, one one general observation I would make just in terms of you US policy, US domestic policy, which is, I think, hamstrung the Democratic Party somewhat, is if you if you have one major political party believing that tax cuts pay for themselves, you know, tax cuts are the major elixir that moves the economy forward. And then you have another party that believes in math, or math and science, and they will get into that, too, is very hard for the Democratic Party to say, you know, look, folks, we have large national debt, tax cuts don’t pay for themselves, and therefore we want to raise taxes not lower than, again, if one party believes in math and the other party doesn’t, it really does handicap the Democratic Party, that being Barack Obama, or Bill Clinton, people who were elected later than Ronald Reagan, to really raise rates significantly, because it’s not politically popular. In other words, to get cutting taxes as easy, raising taxes is difficult. It’s kind of like when your mother says eat your vegetables. The first reaction is no, I’d rather have

Gene Tunny  16:14

candy. Yeah, yeah. So yeah, this is an interesting point to explore. So we might go through this. I had Dan Mitchell on the show the other week, he’s got his new book out, the greatest Ponzi scheme on Earth with with Rubin, you know, you know, Dan, if you’ve heard of damage, I’ve heard about the book. Yes, yes. Yes. And I mean, Dan’s argument is that well, actually, I mean, it’s not the taxes is the issue with suspending as the out of control entitlements. So yeah, I guess you can I mean, there is going to be that political debate about what’s the best way to, to, to deal with this with this debt? And I mean, one options, definitely tax increases, which put them in that’s politically unpopular. I mean. Yeah. I mean, maybe that’s the through the mean, your argument is that that’s due to this, this myth of Reagan, the supply side economics, the view that taxes are good for growth and can help pay for themselves? I mean, that’s, that’s a hypothesis that that’s fair enough. But yeah, but I mean, it is, I guess there is a legitimate debate about what the best way to fix the the debt is, and whether in Dan’s argument is that, well, if you just let them raise more taxes, they’ll just find more things to spend it on, and you’re not really going to solve the problem. So how would you like to respond to that at all that otherwise, we’re gonna move on to something else? I just thought I’d make that observation. Because I thought that was an interesting argument from Dan. Yeah,

Ed Oswald  17:44

I mean, briefly, I really think at this point, you know, with an ageing US population, with significant national debt, racked up over 40 years of largely peace and prosperity, I frankly, think there has to be, you know, a balanced approach, there’s got to be, you know, a level of mature adult discussion about both raising taxes. And also, I think, looking at entitlements and looking at spending, looking at the fact that, you know, people are living longer, and it just really needs to be a balanced approach. And I think, a sober discussion, that, you know, there’s no free lunch. Ultimately, this has to be paid for, right now a payment for borrowing from future generations. And, you know, there needs to be a reckoning, if you will.

Gene Tunny  18:39

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  18:45

If you need to crunch the numbers, then get in touch with adept economics. We offer you Frank and fearless economic analysis and advice. We can help you with funding submissions, cost benefit analysis, studies, and economic modelling of all sorts. Our head office is in Brisbane, Australia, but we work all over the world. You can get in touch via our website, www dot adapt economics.com.au. We’d love to hear from you.

Gene Tunny  19:14

Now back to the show. So one thing I want to explore. So you I mean, this is a really damning critique of Reagan and Ngop administration’s. I mean, you’re essentially blaming them for all Well, I mean, maybe this is a mischaracterization, but it’s very strong critique of Reagan, and then how how that has influenced GOP policy in the future. And so you’re right. It was Reagan who said America on a course of hyper capitalism and wholesale industry deregulation. The legacy of Reaganism is all around us heedless consumption. Reduction in the progressivity of the tax code, weaken environmental laws, a war against expertise, and government legitimising structural budget deficits and widening economic Inequality. What I’d like to ask and I’d like you to reflect on is I mean, to what extent is the Democratic Party? Part of the problem here? Right? Because? I mean, I mean, and as an economist, I think the mean, I’m not necessarily criticising some of these policy decisions, because I was probably support would have been supportive of them at the time. But the didn’t do regulation begin under Carter, with the airlines. And then I mean, Reagan, then took on the unions and, you know, did further deregulation, Clinton, the Clinton administration had the NAFTA agreement, which Ross Perot said, created this great, great sucking sound out of the data centre in New Mexico. Glass Steagall was repealed by the Clinton administration, with Rubin and summers. So what’s the Democratic Party’s role in all of this as well, please, Edwin?

Ed Oswald  20:56

Yeah, fair, quite fair question. And I think that, you know, in the wake in the wake of Reagan, in the wake of George Herbert Walker Bush, there was certainly I think, a reset, you know, within the Democratic Party, in terms of thinking about the New Deal, thinking about the the Great Society of Lyndon Johnson, recognising that Americans after 12 years of having a Republican in the White House, that they became accustom and conditioned to lower tax rates. So I think there frankly, had to be, you know, an accommodation, if you want to be a successful political party, saying, at least at that point, we need more government and higher taxes is not going to get you elected, it’s not going to get you elected, you know, post Reagan, the great communicator, the man who really, I think, conditioned Americans to think about our society in tax policy and other things in in very convincing and very convincing ways. So I think there Yeah, I think there were compromises. And I think, though, though, although, you know, Bill Clinton did raise taxes, he did raise the highest marginal tax rate, up to 39.6. If you look at that, by historical standards, it’s you know, it’s way wider the mark. So I think that was kind of an April mentalism post Reagan to move to shift the ball back in a somewhat progressive nature. But it was a compromise given, I think, one Reagan’s presidency and to the way that, you know, US society had to evolve at that point. Yeah.

Gene Tunny  22:56

Yeah. And I think one point, the important point about the Clinton administration, and to its credit, it did work with the Congress to, to rein in the budget. And I think you ran some budget surpluses in the late 90s. Yeah, yeah. So that was that was to its credit. Okay. One of the things I found interesting and I want to ask you about this specifically for among those that are the charges against Reaganism, you’re talking about a war against expertise and government now, is this just about supply side economics? Or is it more general? Because I mean, to me, I mean, looking at the like that Reagan had a very impressive cabinet lineup. And then you had people like James Baker, George Shultz, Weinberger, it seemed to be a fairly strong cabinet of people with expertise. So what’s your critique? There, please, Edwin, what is that war against expertise and government that you see

Ed Oswald  23:58

here? So let me just maybe give you a little bit of a a backdrop. I think one thing we tried to make it clear in the book is certainly that the character of Reagan and Trump, I think, is quite different. And we try to make this frankly, in chapter one, we try to make that distinction that you know, Reagan, you know, had Reagan was a moral person. You know, Reagan had shame. Reagan had true, you know, legit government bonafide, he was a two term governor of California. So he come he came to the table, both as a man and with experience very different than what Donald Trump came with. So we’re not saying the character of Trump and Reagan is similar. We in fact, say it’s this song. But the one to your point. You know, one of the things that I think start is down the road would have, perhaps dismissing expertise was very famously in his inauguration speech and the January 2019 81. Reagan said at the present time, government is not the solution to our problem. government is the problem that’s been somewhat mythologized by the GOP over the year in terms of shorthand that government is the problem. Yeah, I think I think implicit is that is contempt frankly, contempt for government contempt for bureaucrats. You see aspects of that really bubbling up in the GOP in terms of global warming. You know, in terms of respect to science, and the poor until the house scientists become politicised over the last few decades. And I really think in many ways, some of that seed corn was was laid down by Ronald Reagan in terms of, you know, disrespect for government and in frankly, the proper role of government. Although, again, I agree with your point that certainly, you know, Reagan’s cabinet was filled with adults was filled with many competent people. But still the broadcast far and wide was government is the problem. Yeah,

Gene Tunny  26:23

yeah. I mean, I learned I didn’t know that there was that qualification, or how he began that famous statement. So I learned something from that as well. And yeah, it makes more sense. And it sounds more, it sounds more sensible. And it sounds more like something you would say at that inauguration without being where you’re not familiar. It was an otherwise it’s a very ideological statement, a very broad brush statement. But with that qualification, it does make more sense. So I think it was good for me to to learn that. So I really appreciate that. That was a good part of the book. Okay. Yeah. Right. Oh, so I guess what I want to ask now it is, I mean, what’s the link with with Trump? I mean, where are how many years? Is it? 35 or 36 years since Reagan was in the White House? I mean, how is this? How is this relevant to? I mean, I guess we’re talking about the the tax cuts and the belief in their, their ability to pay for themselves. Okay, that’s an argument you can make. But what about Trump? Is Trump at any one in in any way influenced by the Reagan legacy? Or is he a he’s a man with his own views? I mean, he’s a, he’s his own force of the universe, really, rather than inspired by Reagan. I mean, how do you see the connection between Trump and Reagan?

Ed Oswald  27:47

Yeah. So, you know, as we, as we wrote the book, and certainly part of the book was written when during the Trump presidency, although it’s a book primarily on Reagan, we couldn’t help but not see the connection somewhat between, you know, Reagan and Trump and let me give you kind of desensitise. You know, for So for starters, you know, Reagan really was the first, you know, Magog president, if you will, if you recall, Reagan’s slogan back in 1980. Was let’s make America great again. Trump shorthand did that by one word, make America great again. So they both really ran on the same slogan just in terms of commonality. And what if you will, what Trump took from Reagan, to I think, gene that the DNA of the campaigns were quite similar. There was contempt for government, I think, contempt for expertise, both pro tax cut, both somewhat based in nationalism. And I think also, more importantly, both based on some aspects of nostalgia, hence, America Great Again, you know, they were both democrats are certainly portions of their lives. You know, Reagan was, ironically, a new dealer, until the 60s and Reagan and Trump was a Democrat. For a large portion of their lives. They didn’t have his life. They were both divorced. Neither one was really a student of government. Neither one was deep and expertise. No one really took on a political career, took on politics as a political career. And I think they’re also, frankly, both you know, mythmakers, and I think they both played a long, perhaps a weakness in the American psyche to believe mediated mythology, as opposed to one meeting reality. You know, Reagan was the Marlboro Man, the man on the books, Reagan was you know, Morning in America, Trump was the man with the Midas touch the entrepreneur, the character you see from, from the apprentice. So they both played upon those myths, which was a strong suit for for both of them in terms of dealing with the media.

Gene Tunny  30:18

Yeah, gotcha. Okay. And I mean, what are your thoughts on what? What we could see in terms of economic policy? If there is a another Trump administration? I mean, I, I mean, being in Australia, it’s hard for me to make an assessment of, of what’s going on, sometimes I hear, I’ll look at, it’s easily going to be Trump, it’s going to be a Wipeout. And then other times I hear I’ll hang on not so don’t be so sure about that. There’s a way for, for, for Biden to hang on. So I’ve got a really got no idea who’s going to win the election. I mean, my suspicion is it will be Trump and that, therefore we should start thinking about what, whether there’ll be economic policy changes. Do you have any thoughts on that? Edwin? What’s the Do you have any? Can you look into the crystal ball for us, please? Yeah,

Ed Oswald  31:10

so it’s certainly going to be a tight race. I would say just on the political front, you know, you know, Donald Trump now is in the middle of a criminal trial in New York City, taking him off the campaign trail, and perhaps people are taking a second look at some of the facts and circumstances there. But I would say, Jane, in terms of, you know, economic policy tax policy, if Trump is reelected, you know, an important element of that is whether the House and Senate also turned Republican. That’s an important fact there. If Trump is reelected, and they and the GOP wins the House and Senate, then I think you’ll see, you know, more tax cuts, at least one thing to highlight is many aspects of Trump’s 2017 Tax Act, expire at the end of 2025. So you’ll do so I think you’ll see a lot of energy, about renewing those tax cuts, and perhaps even further tax cuts above and beyond what Trump did in 2017. You know, if Trump is reelected, but doesn’t take the House and Senate, well, then you’re probably looking for some type of compromise, you know, along perhaps party or various lines there. It’ll be much more difficult, I think, for Trump to press on in a significant way and material way in terms of tax cuts, if he doesn’t have both underlying houses as well.

Gene Tunny  32:55

Yeah, yeah. I mean, given the state of the, the budget of it, it’d be good, be courageous to try and get additional tax cuts. I mean, whether, you know, you might you know, for some of us who are more on the, you know, classical classically liberal side of things, we might say, well, it’s, you know, it’d be good to have a smaller government and have, you know, tax cuts. But yeah, if you don’t cut spending, then that’s problematic. And it’s adding to the, the data. And you’ve already got a problem there. And I think one of the one of the important messages of your book, which I liked is that you’ve got to have, you’ve got to have this respect for the numbers. And to some extent, some of these policies that have been advanced, they seem to not have a, you know, the advocates may not understand the actual arithmetic. So I think that’s a, that’s a fair point. And it is such a change. And I might sort of start to wrap up, but you quote JFK, JFK to Yale University’s Class of 1962. And I mean, this just highlights the change that we’ve had that, like, JFK said that the differences today are usually a matter of degree what is at stake today is not some grand warfare of rival ideologies, which will sweep the country with passion. But the practical management of a modern economy, the unravelling of America’s post war governing consensus began with the election of Ronald Wilson Reagan. Okay. So very, very strong charge there. Before we wrap up, Edwin, anything else? Before we should conclude anything else you’d like to add?

Ed Oswald  34:31

Well, just maybe just reflect upon that passage you quoted is? You know, I liked that passage. Well, one, you know, I quote, JFK, as you know, a number of times in the book, just in terms of, although, you know, a Democratic president, I think he was very eloquent and staining the states and the times of his presidency. A and going really back perhaps to where we started that, you know, in terms of tax policy, historically, at least up to 1980, you did not have really a dramatic difference in tax rates between the GOP and the Democratic Party. As we started earlier, you had tax rates, the wealthy really did pay their fair share, regardless of who is elect building, because, you know, deficits mattered, the Balanced Budget Narrative, paying our bills matters. And all that really did change in 1981. Were really there was a revisiting of what JFK said about managing managing a modern economy. And looking at things really with very different prism in stark contrast, in terms of governing philosophy. Hence, here we are 40 years later, still in the middle of that, in many ways, still dealing with, you know, Reagan’s tax policies. In the wake of the deficit here.

Gene Tunny  36:13

Rock Gotcha. Okay. Yep. I mean, it’s a, it’s a well argued book. And there’s a lot of really interesting stories in there a lot of things I learned. So I’ll definitely recommend it. I’ll put a link in the show notes, I suppose, where, and I might have to come back to this in a future episode, what I’d like to explore, and it’s to what extent I mean, can we just say it’s, is it because of the tax rates? Or is it also because of, you know, there was the China shock that David Autor talks about, there’s the, you know, the NAFTA, and those, you know, both of those developments, they had implications for the middle America, so to speak, a lot of towns in, in the Midwest and in, in rural America were were badly affected by by those shocks. And you’ve also got the skill biassed technological change. We’ve got the internet and all of that, which is led to increased inequality. So that’s one thing I’d like to explore a bit more I know, it’s, you would have had the, you know, your your book had a slightly different focus. But as an economist, I’d probably want to explore the the empirics around that. What are the relative contributions a bit more? I don’t know if you’ve had any, before we wrap up any reflections on that? Or any if you’ve done any investigations yourself on that, Edwin?

Ed Oswald  37:34

Well, I would just say, you know, those are all those are all fair points. And I And you’re right, my my book as a kind of singularity of focus, which is really, you know, more on tax policy, and tax cuts. But I would say that what really influenced me was there was been a London School of Economics study that came out in 2020. You know, a 50 year of study, you know, based on cutting tax cuts for the wealthy looking at, you know, 18 OECD countries. Which really, you know, did, I think, empirically link, the notion of, you know, tax cuts for the wealthy lead to a largest share of the national income going to the wealthy. And I would say that, despite the events, you say, some of which we could control and some of the some of it, we can, it’s just the, you know, the macro economic situation. You know, Congress in the executive branch can control tax policy and tax rates and something within our control. And I think if we want to deal with the growing deficit with the growing income divide and wealth divide, at least tax policy is something within our control. It’s something to be more considered, if you will. Very

Gene Tunny  39:01

good. Okay. Edwin hospital. Thanks so much for your time. I really enjoyed reading your book and well done on the book. Yes, I’ll definitely recommend that and put a link in the show notes. very much enjoyed the conversation. Look forward to speaking sometime in the future.

Ed Oswald  39:19

Here was my pleasure. Thank you very much for having me on.

Gene Tunny  39:23

rato, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

40:10

Thank you for listening. We hope you enjoyed the episode. For more content like this where to begin your own podcasting journey, head on over to obsidian-productions.com

Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

Categories
Uncategorized

From Jekyll to Hyde: Exploring the Dual Nature of Finance | The Bankers’ Club w/ Prof. Gerald Epstein  – EP226

Show host Gene Tunny interviews UMass Amherst Professor Gerald Epstein about his new book “Busting the Bankers’ Club”, which is about the powerful influence of banks in politics and regulation. Epstein argues the bankers’ club maintains control through political allies and regulators. The conversation also covers financial deregulation, insufficient Dodd-Frank reforms, Quantitative Easing impacts, and alternatives like public banking and non-profit financial institutions.

Please get in touch with us with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. 

You can listen to the episode via the embedded player below or via podcasting apps including Google Podcasts, Apple Podcast and Spotify.

About this episode’s guest Prof. Gerald Epstein

Gerald Epstein received his Ph.D. in economics from Princeton University, is a professor of economics, and is a founding co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts Amherst. He has published widely on various economic policy issues, especially in central banking and international finance. His most recent book, Busting the Bankers’ Club: Finance for the Rest of Us, was forthcoming in January 2024 from the University of California Press. 

What’s covered in EP226

  • Banking industry’s influence in politics and regulation. (0:04)
  • Financial deregulation and its impact on the economy. (8:58)
  • Financial system’s impact on democracy and fairness. (13:24)
  • Financial system issues and regulation. (16:24)
  • Economic policy after the financial crisis, including impacts of Quantitative Easing. (22:50)
  • Financial regulation and publicly owned institutions. (28:08)
  • Public banking, crypto, and risk-taking in finance. (33:30)

Takeaways

Professor Epstein argues in this episode:

  1. The “bankers’ club” of allies including politicians, central banks, and economists helps sustain the power and influence of large banks.
  2. Financial deregulation in the US and weak Dodd Frank reforms failed to address issues like too-big-to-fail banks and accountability.
  3. Quantitative easing policies after the financial crisis disproportionately benefited wealthy asset holders over others.  
  4. There is a need for more diverse public and non-profit financial institutions focused on social missions over profits.
  5. Crypto poses risks if it infects the core banking system or continues high-carbon polluting practices.

Links relevant to the conversation

Gerald Epstein’s book Busting the Bankers’ Club: Finance for the Rest of Us

https://www.amazon.com/Busting-Bankers-Club-Finance-Rest/dp/0520385640

Working paper co-authored by Prof. Epstein “Did Quantitative Easing Increase Income Inequality?”

https://www.ineteconomics.org/research/research-papers/did-quantitative-easing-increase-income-inequality

Transcript: From Jekyll to Hyde: Exploring the Dual Nature of Finance | The Bankers’ Club w/ Prof. Gerald Epstein  – EP226

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gerald Epstein  00:04

There’s a phenomenon in the US. The political scientists talk about this called capture that is that the regulatory agencies that are supposed to be regulating the industry, artefact captured by the industry and tend to operate, often in the in the interests of the industry.

Gene Tunny  00:29

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the shownotes relevant information. Now on to the show. Hello, thanks for tuning into the show. My guest this episode is Professor Gerald Epstein. He’s professor of economics at the University of Massachusetts Amherst, and he’s co director of the Political Economy Research Institute. We discuss his new book busting the bankers club published by the University of California Press. It’s a great book demonstrating Professor Epstein’s deep knowledge of the US financial system. I thoroughly recommend it. So if you enjoyed this conversation, please consider buying a copy. I’ll put a link to it in the show notes. As always, please get in touch. If you have any thoughts on this episode, guest suggestions or ideas for how I can improve the show. You’ll find my contact details in the show notes. Right? Oh, we’d better get into it. I hope you enjoy my conversation with Professor Gerald Epstein. Professor Gerald Epstein, welcome

01:53

to the programme.

Gerald Epstein  01:54

Thanks so much for having me. Excellent. Gerald,

Gene Tunny  01:57

look, I’m really grateful for you appearing on the show to talk about your new book busting the bankers club finance for the rest of us. To start off with, could you tell us what is the bankers club?

Gerald Epstein  02:12

So the bankers Club is a group of allies, very powerful allies that support the banks and the financial Titans more generally. And the reason that’s important is because the banks in the United States in the book is mostly about the United States, but I think it’s true in many other places. They’re not very popular, people don’t like banks very much as a whole. I have my students look at a bunch of American movies about banks, they say, please find me a movie that has a favourable gives a favourable impression of the banks and, and they really can’t find them. So in the popular culture, you know, banks aren’t very popular, but they’re incredibly powerful. They’re in powerful politically, they’re powerful economically. And this is, despite the fact that we have these prices that the financial institutions seem to create every 10 years or so. And so the question is, how do they remain so powerful? And my answer is that it’s the bankers club is this group of allies that support the banks politically, economically, and helps them sustain their both economic and political power? And so I go into some detail discussion of various components or various groups within the bankers club,

Gene Tunny  03:37

broad and who are they? I mean, are you able to give some examples?

Gerald Epstein  03:42

She, of course, so there’s some usual suspects as you is what anybody would think about. So they’re the banks themselves and by banks, in this context, I mean, the mega banks, like Chase Manhattan Bank and Bank of America and the large banks, then the major hedge funds and private equity firms, and the large asset management firms. So we’re talking about mega finance more generally. So, of course, they’re the head of the club, but they get politicians to help them out, then that’s well known in the US and in other countries, and they get politicians to help them out by giving them campaign contributions by offering them good, lucrative jobs when they get out of the legislature. And in a variety of ways. They find finance friendly politicians, that will help them with legislation and so forth. So that’s kind of well known in many countries. Perhaps less well known is that the our central bank, Federal Reserve Board, is what I call the chairman of the club. The central bank, is historically Since it was founded in 1914, has been a big supporter of the banks. Partly this is for structural reasons that is, they rely on the banks, when they make their monetary policy they operate to the banks that interest rates, they expect the banks to pass these interest rate changes, up or down, depending on whether they’re fighting inflation or trying to get the economy going. So they have a kind of an intimate relationship with the banks. But what it also means, however, is that they tend to see the world through what I call finance coloured glasses. And so they tend to see the world the same way the bankers do. And more than that, they help out the banks in very significant ways. And we can see that most clearly in two areas. One is when they bail out the banks, like we have this great financial crisis of 2007 2008, and the Federal Reserve along with the US Treasury, but in trillions of dollars that keep the big bankers operating. But they also do it with regulation. That is they the Federal Reserve, and I think is true in many other countries, tends to really push for fairly flexible, and even very easy forms of regulation on the banks. And I’m very reluctant to put on very tough regulations on them. So we have politicians, the Federal Reserve, and then we have regulatory agencies, in the United States, we have various regulatory agencies that are in charge of regulating the banks. And there’s a phenomenon in the US, the political scientists talk about this called capture that is that the regulatory agencies that are supposed to be regulating the industry, artefact captured by the industry and tend to operate often in the in the interests of the industry. And once again, this is a process that goes on with financial regulation, the SEC, the OCC and other financial regulators we have, and I’m sure you have some in Australia. And we have the same revolving door processes that we have with the Fed. And then there are a couple of other groups that maybe are less well known. One is lawyers, many lawyers work for, for banks, they, they when they’re working in the regulatory agencies or in Congress, they help fashion regulation and and, and regulate and laws that help the banks. And they actually help write laws that are very bank friendly. And so we have a whole group of lawyers that are that are involved. non financial corporations, you think that one thing that I started during the Great Depression when this books my book starts talking about in talking about the Great Depression, and the New Deal financial regulation put into place by Franklin Delano Roosevelt and his administration. At that time, the big companies like us steel and the big industrial companies, they kind of parted way with the banks, the banks had helped crash the economy. And the big industrial companies said, Look, we need a new path. And they supported a lot of the financial regulation, like the Glass Steagall Act that separated for a commercial from industrial banks. But these days, our biggest corporations are very supportive of the banks, they don’t want to regulate finance. And so there many of them are members of the bankers club, too. And finally, I have to admit my own profession, economists, were very many of us are very me, but many are loyal members of the bankers club, become stuck with economic theories that say low regulation is best for society. Markets are efficient. They work better on their own, and this all works in the interests of the banks.

Gene Tunny  08:58

Yeah, yeah. Okay. Look, yeah, I think there’s definitely scope for discussion about the appropriate regulation of banks. That’s right. And we might get into that a little bit later. I’m just thinking about, you know, some of the people involved, I mean, often you hear their accusations levied against people like, was it Robert Rubin. And then Larry Summers, who were the treasury secretaries in the Clinton administration. That’s right. Is there a was there a concern that they were perhaps too close to, to the banks and that yes, yeah. Yeah.

Gerald Epstein  09:35

So Larry Summers, Robert Rubin. Alan Greenspan. They are, you know, golden members of the bankers club, all of them. The major deep financial deregulation that happened in the United States that kind of took apart the New Deal, structure of financial regulation. It happened. First, slowly building up. But then it really happened with the Big Bang. under President Clinton, who was a Democrat with the advice of Robert Rubin, who was chair of Goldman Sachs, and then city city Corp. Alan Greenspan, who was a libertarian, he was a follower of the philosopher Ayn Rand. And he was head of the Federal Reserve. And Larry Summers, who was a was was a very good economist, but somehow found himself kind of, as part of his part of the bankers club. And that was, that’s what really led us down the path to the great financial crisis. And to the problems we’re still having with banking. Yes,

Gene Tunny  10:39

yeah. It’s interesting, this idea the bank is clogged because it reminds me in Australia here, I mean, we’ve had successive treasury secretaries, that’s the head of the cabinet. First and responsible the Treasury is called the treasurer, that we’ve have successive treasury secretaries who have gone on to be the chairman of a bank. And I think for years that was seen as a pretty sort of cushy job. And it was until like, we had David Morgan who became head of Westpac, and then my old boss, Ken Henry ended up head of NAB, but for Ken ended up getting grilled at the Royal Commission into banking, and I don’t think he ever expected that that because we had a whole bunch of bad behaviour. Yeah, the bank’s due to a guest lacks oversight by our Prudential regulator. So absolutely. Same kind of thing. Yeah, yeah. Okay, so I think you’ve, you’ve given us a good description of the bankers club. What’s your case? Can you state your case, please, Professor Epstein, as to why the bankers club should be busted? Well,

Gerald Epstein  11:51

yeah, the title of the book is busting the bankers club finance for the rest of us. And the problem with the system as it is, is that our, our financial system has been has become incredibly bloated. It’s much too much too large. It uses way too many of our financial and human resources, it sucks in some of the best and the brightest of our young people, I can tell you, from my classes here at the University of Massachusetts, when I teach classes, a lot of our best and brightest students want to go into finance and banking. And they want to go in to the mega banks. And you know, the really the really lucrative ones. And there’s a whole literature, which I registered my built on, which is called too much finance. It’s an economics literature, which shows that its financial sectors get too large relative to the size of their economies. And this is a cross national study, that after a while, they’re they’re too big, or they’re structured inappropriately, or they’re doing negative things in the economy. And they actually contribute, after a certain point to lower economic growth, lower national income. And there’s something about having a bloated, an excessively large and complex financial system, which really harms everybody. So that’s, that’s one problem. But we have that’s just one of the problems. Another problem is that it’s bad for democracy that is, you know, Australia’s democracy, the United States is trying to risk to remain a democracy. And the idea is that it’s one person, one vote. But the process I’ve described, where the, these large institutions of powerful institutions are able to, by essentially legislation, regulatory practices that benefit them at the expense of the rest of society. That’s a major problem. But it’s, it’s even worse than that in the United States, because people understand that, that the whole process is unfair. When we had the great financial crisis, the Federal Reserve the Treasury, the government, and this was under both W Bush and Obama bailed out the banks. But they didn’t bail out the people, people lost their homes, people’s jobs were lost. And this made many Americans, understandably, very angry. And I think this turn to this very anti government kind of politics in the United States. That started with the so called Deep party at that time. And it’s now morphed into very, very extreme right wing populism that we had, that has kind of organised around and been organised by Donald Trump. Really stems I think, from this sense that our system is not fair. And so yeah, well understand that it’s not democratic. And I think it’s really poisoning our politics.

Gene Tunny  15:06

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  15:12

If you need to crunch the numbers, then get in touch with adept economics. We offer you Frank and fearless economic analysis and advice. We can help you with funding submissions, cost benefit analysis studies, and economic modelling of all sorts. Our head office is in Brisbane, Australia, but we work all over the world, you can get in touch via our website, www dot adept economics.com.au. We’d love to hear from you.

Gene Tunny  15:41

Now back to the show. Well, I think this idea of this, too much finance literature, I’m gonna have to have a look at it or a closer look, I’ve seen some of it, I think. I mean, obviously, we need banks. Okay. I mean, we’re not necessarily any banks, because banks do play an important role in providing credit and supporting businesses. I mean, you asked most bankers, they will think they’re adding value to society. What are the activities where there’s this so called too much finance? I mean, how, like, what how does that manifest? Yeah,

Gerald Epstein  16:18

excellent question. Well, I start off my book with a chapter called the Jekyll and Hyde finance. It builds on this idea from the Robert Louis Stevenson story, which some some of your listeners might have heard of, this very upstanding doctor, Mr. Dr. Jekyll, who was a pillar of the community and really supported the committee and did all kinds of things with it. But we had another base hidden inside of him, this Mr. Hyde, who was who was a criminal, and murderous, and so forth. And, and these different phases of this one entity would show itself depending on on the conditions. So our financial system is kind of like that, you’re absolutely right. We need a financial system that works for the everybody that works for the economy, we need to be able to finance people’s retirement be able to finance people’s ability to buy homes, we need to finance credit for businesses to invest in new plant and equipment. And the list goes on and on and on. The problem is that our current financial system in the United States, which I call roaring banking, it’s kind of comes from the bill boring banking idea of the 1950s and 60s that was very regulated, and morphed into roaring banking as a result of this deregulation, it led this financial markets and these big financial institutions to engage in more speculation taking on more and more risks, to invest in speculative bets and derivatives and other kinds of speculative activity. Yeah, and it resulted in them taking on much more risk, which allowed them to increase the profits and wages, going to the major investors, and to those at the top, without, at the same time, investing a lot in in new plant and equipment for businesses and so forth. In the United States. Many big corporations do not rely on the banks or even the financial markets for their major investments, they get most of the financing from the major investments from their own retained earnings, their own profits. And so it raises the question, well, what are these these big banks, hedge funds, private equity funds, what are they really doing? And many of them are not really supporting the real needs of the economy. In the United States, we have a lot of smaller banks and community banks. And they’re the ones who are much more likely to give home mortgages to give to lend to small businesses, and so forth. And the problem is, in the United States, we have a particular system, your system is different in Australia, what we have is these very speculative mega banks that are driving out to smaller banks. Part of the reason that happens is that when there’s a financial crisis, our government has a too big to fail policy. That means if you’re a really big bang, chances are you’re gonna get bailed out by the government. Whereas if you’re a mid sized or smaller bank, and you get in trouble, you’re not going to get bailed out or you’re gonna go bankrupt or get merged into another bank. And so depositors and investors don’t feel that safe, putting their money in the smaller banks. They Put them in the big banks as well. So the cost of capital for the smaller and community banks is higher, because of the too big to fail subsidy that the big banks get. So it’s an unfair competition. And it’s not a one of the things that I propose in the book is a set of policies that help make this competition, more level more, more fair, so that we have a whole variety of financial institutions that provide the needed services, as you said, that our economy needs. Okay.

Gene Tunny  20:36

Now, in your book, you talk about issues with mortgage backed securities, I suppose one of the things that people, you know, they were most critical of some of these major investment banks was there, you know, they’d be packaging up, or creating these mortgage backed securities and then selling them around the world. But at the same time, I forget which firm it was, but was one of the banks betting against products that was actually selling or one arm of Goldman Sachs. Yeah, Goldman Sachs was one of them. Yeah. So it’s, it’s,

Gerald Epstein  21:09

you know, it’s not really taking care of your clients. And it’s really betting against your own clients. And that’s kind of one example of a behaviour that this all allowed. Yes. Yeah.

21:23

And another. Another good point I think you make in the book.

Gene Tunny  21:29

And this gets to the fact that you argue that the Federal Reserve is at the head of the bankers club, you talk about the impact on of quantitative easing and the the adverse, or the unfair impacts of that. Could you elaborate on that, please? Professor Epstein.

Gerald Epstein  21:47

Yeah. So when the great financial crisis hit Central, the Federal Reserve and other central banks, were trying to revive the economy, understandably, that’s what they should have been doing. Interest rates were already in almost zero. So they wanted to come up with another tool to put liquidity in the in the economy and reduce the cost of investment, cost of capital and so forth, while helping to sustain the banks that were in trouble. So they engaged in what’s called quantitative easing. They put liquidity in the economy by buying up not just government securities, which is the typical way that they do open market operations. But they bought up asset backed securities, mortgage backed securities, this kind of thing from banks, which ended up increasing the value of these assets, which helped the banks because they had these, these assets on their balance sheets were which were not worth very much. So it helped the banks. But the the idea is that it was there hoping that it would also lower the cost of capital to borrowers and investors, and then to generate more employment, and so forth. So my graduate students, and I looked at whether what the impact was in the United States. So there could have been, there was this asset in value increase, which increases the wealth of asset holders, the banks and others, there was cost of capital mechanism that would have possibly lowered the cost for homeowners and others who were borrowing money. And then there was the impact on the interest rates that the consumers get on their savings in banks and banks. So we had a various impacts going in opposite directions, the asset value increase, we’re going to help the wealthy people because they’re the ones who have all the assets, reducing the cost of capital, would help those homeowners who needed to get their mortgage cost down. And the lowering of interest on savings might have hurt middle class and working class people because they hold their money in savings in the bank. So we have these different possible impacts. So we tried to figure out what the net effect was. And what we found was that in the case of the United States, during this period, the main impact was on increasing the wealth of the wealthy, that the other impacts were relatively modest. So there have been other studies of quantitative easing in other countries during this period, and most of them find something similar that it had a relatively small impact on employment and cost of capital for borrowing and a much bigger impact on the value of assets which helped primarily the wealthy. There’s some counter studies, but most of them go in that direction. Now. It’s not necessarily the case. But we weren’t arguing that the Fed was trying to do that, per se. I I think they would have liked to have seen the economy get going more. But that was the impact of the policy that they pursued.

Gene Tunny  25:05

Yeah, yeah. Okay. Why was Dodd Frank? So there were there were some changes to legislation, post financial crisis. So as a result of the financial crisis, why were they insufficient. So Dodd Frank in particular,

Gerald Epstein  25:22

right, so what what really needed to happen after the financial crisis, in my view, and in the view of other others who were looking for some big changes, first of all, these mega banks, Goldman Sachs, the Bank of America, and so forth, they’ve gotten too big to fail, too big to manage. Oftentimes, the people at the top didn’t really understand what the heck they were doing. The big jail that is, the government didn’t even put any of these people who ended up taking on fraudulent activity, they never made them have any consequences at all. So they were just too big. And so there were proposals during the Dodd Frank process, to shut down these big banks that one was to implement a new Glass Steagall Act, which was kind of a modern version of the separating commercial and investment bank, another was putting an asset cap on these banks to try to get them into a size that couldn’t run the economy that can be managed better, and so forth. That was never put on the table. Another thing that the some of us argued for, were consequences for the bad behaviour of the decision makers or the wrong decision makers. When these Goldman Sachs was selling these securities to their clients and betting against them. And then they they made a lot of bonuses and profits, and then the bank threatened to collapse. They didn’t have to give back their salaries, they didn’t have to give back their bonuses, they were able to take the money and run, there were attempts to put in so called law backs into the Dodd Frank legislation. So that we didn’t have moral hazard that is, so we didn’t have a situation where people didn’t have to pay the consequences of their bad behaviour. That was never really put in as in in a significant way. There were conflicts of interest all over the place, including with credit rating agencies, we had the credit rating agencies that were rating the securities, the asset backed securities and so forth, that were full of really dicey mortgages, they rated them leave parts of them triple A, which is this, which is the same as the US government securities, triple A ratings. And why? Well, because the investment banks demand that they rate them triple A, the veteran banks paid the rating agencies, if they didn’t rate them, triple A, then the investment banks would take their business elsewhere to another rating agency. So there are all these kinds of conflicts of interest. They weren’t really dealt with either the list could go on. We needed more regulation for derivatives, derivatives are relatively unregulated. And again, there wasn’t much done there is Well, the question is why? Why wasn’t there better regulation? And the answer is bankers club. Dodd and Frank were both very weak members of they had very kind of weak backbone for really taking the banks on both Republicans and Democrats in the Senate and the House of Representatives. Many of them were were on the take from the banks. Tim Geithner, who was Treasury Secretary, Larry Summers, we talked about before Ben Bernanke, head of the Fed, they didn’t really want to shake up the financial system. They just wanted to get it back up and running again. So the bankers club really did a number on Dodd Frank. Now, there were a few things that were done, and they were good, but they weren’t enough.

Gene Tunny  29:08

Yeah, okay. Okay. And did Trump do anything when he was in office?

Gerald Epstein  29:12

Yeah, Trump’s an interesting story. He ran on a platform when he was running against Hillary Clinton, a very populous platform, who said, All the banks are terrible. They really messed everybody up. Probably Clinton makes money from the banks as she terrible. I’m really going to do a number on the banks. But then when he was elected, he immediately put a bunch of Goldman Sachs people in his administration. And he appointed people to try to dismantle the Dodd Frank Act. And among the things that they did was to raise the size that banks could get before they were subjected to special capital requirements or liquidity requirements. The so called mid size banks, were set free to kind of do what they want and The result of that is we had the Silicon Valley Bank that went under, in 2023. Because they were a bank that had been subject to special reg regulation. Under Trump, they were, they were let go and not have had to be subject to this regulation. And they got in trouble. In the end, the government had to bail out the financial markets again. So the question is, you know, what would trump do if he got into power? Again, you know, it’s probably going to be a similar story, where he’s going to rail against the wealthy and the banks and so forth. But chances are, they’ll do more of the same and it will be kind of this the supreme member of the bankers club if he ever gets back into office. Okay. Do

Gene Tunny  30:43

you see a greater role for publicly owned financial institutions?

Gerald Epstein  30:47

I do. And so it’s time I think, to raise the point of about the others theme in my book, I talk a lot about the bankers club. But I also talk a lot about group I call the club of busters. That is, there are many legislators like Elizabeth Warren and others in our in our government, there are activists, there are economists and lawyers and regulators, who really do want to try to do the right thing. They really do want to try to regulate the financial institutions properly, and are pushing for legislation and regulation to do so Gary Gensler, for example, the head of the SEC, really wants to regulate crypto very strictly, as an example, is giving the crypto people a lot of headaches. He’s a member, he’s what I call a club buster. And what we need, I think, not only tighter regulations, and this is what most people argue for, but we need a whole ecology a whole set of public financial institutions. Now by public, I don’t necessarily mean government owned. But what I mean is financial institutions that have a public orientation, that is making the maximum profits is not their only goal. It’s not their goal. They have missions, public mission, social missions. So some of them can be owned by the government. And the United States, we have some community banks, state banks, and so forth. There are many government owned banks around around the world, but they can also be public private partnerships. They can even be privately owned, nonprofit, non nonprofit nonprofits, who have a social mission. We need many more of these financial institutions to provide low cost mortgages, and loans for small businesses, investment in deprived communities that need more investment, help with transition to a greener economy, at the local level, and the regional level. So we need what I call banks without bankers, that is, banks who don’t have typical bankers in them, they have to have skilled people, technically competent people. But for whom maximising profits is not the main goal. And in the United States, we have a very active public banking movement of activists around the country pushing for public banks of various kinds. Their major obstacles, like once again, is the bankers club who was trying to prevent them from from succeeding, but they’re, they’re these bank posted this quote, officers are working very hard.

Gene Tunny  33:29

Gotcha. Okay, I’ll have to look into that public banking movement. That’s interesting. I like your point that, look, it doesn’t necessarily have to be publicly owned, because like where I’m coming from, as in Australia, we’ve had some, we had some really colossal state bank collapses in the late 80s, early 90s, tri continental state bank of Victoria, and Bank of SA South Australia, if I remember correctly, so we’ve got a bit of a, an aversion to publicly owned banks here, because of the risks to the balance sheets. I liked how you describe that. And I think I’ll have to look more into that at public banking movement. It looks interesting. The one concern I would have is, is there a concern? Is there a risk that maybe, maybe they’re too cautious or they’re not innovative enough? Have you thought about that? Right?

Gerald Epstein  34:16

So, you know, there’s, there is an upside and a downside. As a graduate student, I study the cyclical behaviour of publicly oriented banks in different countries relative to the purely private for profit banks. And what we found was that they were much less cyclical that is they went up much less than the upside and went down much less on the downside. So it’s can be a stabilising force in the economy. But I think what you’re going to getting errors don’t we need some you know, real risk takers and people who are really good, willing to go out on the limb with some some crazy but maybe great ideas. Take the risks and we Absolutely do need that in a dynamic economy. The problem is, what we don’t want is the government backstopping that we don’t want the government saying, you when you gain, you lose, we pay. We don’t want a kind of lemon socialism. So, yes, we need a risk takers, and and they have to pay the consequences if it doesn’t work out. Yeah,

Gene Tunny  35:24

yeah. Yeah, that’s a good point. I mean, that was one of the points that came up during the financial crisis that they were privatising the profits, but socialising the losses. So exactly. That’s a that’s a good point. Right. Okay. Well, to finish up, we might, I might ask you about crypto because in your book, you talk about Jekyll and Hyde. You write just as finance, as both Dr. Jekyll and Mr. Hyde face crypto has a bit of a Dracula quality as well. Could you tell us more about that, please.

Gerald Epstein  35:56

So if anybody who’s followed crypto or invest in it, they know, they know that there was a big bubble and Bitcoin and other cryptocurrencies and 2122. But there was the so called crypto winter, and when the crypto values just, you know, collapsed, and then there are all kinds of scandals with sand bank and freeze in jail and several the other main crypto people are in are subject to criminal investigation, or maybe are in jail. So it seemed like around that time, the crypto was dead. But like the vampires you stick across in them, and they somehow, you know, they revive and now crypto I think, has has had a revival. It’s still trying to push ahead. And there are a lot of crypto friendly legislative leaders in the US and in other countries. And so it’s like, yeah, we all thought it was was dead, but it’s risen from the dead. And my view on crypto, is that again, it’s fine. It’s like, it’s fine if people want to mess with it, you know, in line and death, you know, gamble with it, and so forth. But we can’t let it do two things, one, either of two things. One is infect core banking system. Once we have crypto infecting the core banking system, we’re back to where we were in 2007 2008, when these exotic asset backed securities and collateralized debt obligations, and so forth, infected the very core of the banking system. So when they collapse, they threaten to bring down the banking system with it. As long as it’s a marginal thing. Have fun with it, I suppose, as long as people are aware of the the downsides, but there’s another problem. Most crypto is very carbon intensive, the crypto mining, it’s very bad for our environment, we have this, this existential threat of climate change. And the way crypto mining is done in most cases, not all cases now. It’s really adding as much carbon to the atmosphere as a small country like Iceland or some other country. So I think that has to be taxed. And if crypto can still you know, give some thrills to the its investors in a safe way without destroying the environment. Okay, go for it. But let’s not let it ruin the environment. And it let’s not let it infect our our core banking system. Yeah, very good points.

Gene Tunny  38:27

Okay. Professor Epstein, any final points? Before we wrap up? I think this has been a great conversation. And I did enjoy reading your book. And I’m going to recommend it. And I’ll put the link in the show notes. Any final points before we wrap up?

Gerald Epstein  38:42

Yeah, the final point is that was one of the things that’s kind of obvious from our conversation, my book is, is almost entirely about the United States. So whatever, if these processes happen elsewhere, it will happen in a different way. There have been people doing work in similar kinds of work in other countries, we have Nicholas Shaxson, who’s done interesting work in in England, and we have Jim Stamford, who you might know who is then actually work in Australia and Canada. So I don’t claim that this is a universal process. But But I do hope that other people explore some of these ideas in their particular countries in particular environments to see what’s similar and what’s different.

Gene Tunny  39:21

Absolutely. Okay. Professor Gerald Epstein, thanks so much for your time. I really enjoyed the conversation.

Gerald Epstein  39:26

Thank you very much.

Gene Tunny  39:29

Right. Oh, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating thanks So listening, I hope you can join me again next week

40:16

thank you for listening. We hope you enjoyed the episode. For more content like this where to begin your own podcasting journey, head on over to obsidian-productions.com

Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

Categories
Podcast episode Uncategorized

US Inflation, Woke Capitalism & China w/ Darren Brady Nelson – EP127

With US inflation at a 40-year high, who wins and who loses? Are greedy corporations to blame as some pundits are suggesting? Episode 127 of Economics Explored features a wide-ranging conversation with Darren Brady Nelson, Chief Economist of LibertyWorks, an Australian libertarian think tank, which also considers so-called Woke Capitalism and what’s going on with China. Here’s a video clip from the episode featuring Darren chatting with show host Gene Tunny about the 40-year high US inflation rate.

In the second part of the show, the Grattan Institute’s Economic Policy Program Director Brendan Coates explains the franking credits controversy, related to some peculiar Australian tax rules, to show host Gene Tunny.   

You can listen to the episode using the podcast player below or on Apple Podcasts, Google Podcasts, Spotify, and Stitcher, among other podcasting apps.

About this episode’s guests

Darren Brady Nelson is an Austrian School economist and liberty evangelion as well as a C.S. Lewis and G.K. Chesterton style Christian. He is currently the Chief Economist at LibertyWorks of Brisbane Australia and a long-time policy advisor to The Heartland Institute of Chicago USA. He is also a regular commentator in traditional and online Australian and American media. Check out his full profile at Regular guests – Economics Explored.

Brendan Coates is the Economic Policy Program Director at Grattan Institute, where he leads Grattan’s work on tax and transfer system reform, retirement incomes and superannuation, housing, macroeconomics, and migration. He is a former macro-financial economist with the World Bank in Indonesia and consulted to the Bank in Latin America. Prior to that, he worked in the Australian Treasury in areas such as tax-transfer system reform and macro-economic forecasting, with a strong focus on the Chinese economy.

Americans Return to Work as Biden Administration Work Disincentives Expire, but Jobs Remain Over 7 million Below Trend | Latest | America First Policy Institute (article referring to inflation tax of $855/year for an American family associated with a 7% yearly inflation rate)

Summers stumbles – John Quiggin

Woke Capitalism Is a Monopoly Game | Mises Wire

Joe Biden appears to insult Fox News reporter over inflation question

The implications of removing refundable franking credits – Grattan Institute

Here’s another video clip from the episode in which Gene and Darren compare the contributions to economics of Friedman, Keynes, and Mises:

Charts

US CPI inflation rate, through-the-year

US Producer Prices inflation rate, through-the-year

US inflation expectations – University of Michigan estimates

Clarifications

“Average hourly earnings for all employees on US private nonfarm payrolls increased by 5.7% year-on-year in January of 2022” (see United States Average Hourly Earnings YoY – January 2022 Data – 2007-2021 Historical) This compares with inflation running at 7.5% through-the-year. 

Amazon hikes average US starting pay to $18, hires for 125,000 jobs | Reuters

Abbreviations

CPI Consumer Price Index

PPI Producer Price Index

Credits

Thanks to Darren and Brendan for great insights and conversation, and to the show’s audio engineer Josh Crotts for his assistance in producing the episode. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

Categories
Uncategorized

EP103 – Ayn Rand, Self-esteem, and Three Minute Therapy with Dr Michael Edelstein

In Economics Explored Episode 103, Dr Michael Edelstein explains why Ayn Rand’s concept of self-esteem is unreasonable and unhelpful. Program host Gene Tunny asks Michael to explain his Three Minute Therapy approach, which is solidly based in Rational Emotive Behavior Therapy (REBT).  

https://economics-explained.simplecast.com/episodes/why-ayn-rands-concept-of-self-esteem-is-unreasonable-with-dr-michael-edelstein
About Dr Michael Edelstein

Michael R. Edelstein, Ph.D., has an in-person and telephone therapy practice in San Francisco. He is the author of Three Minute Therapy, a self-help book for overcoming common emotional and behavioral problems, for which he has been awarded Author of the Year. The book was a Quality Paperback Book Club/Book-of-the-Month Club Selection, a Behavioral Sciences Book Service Book Club Selection, and an Albert Ellis Institute Selection. His 2009 book, Stage Fright, includes interviews with Robin Williams, Jason Alexander, Melissa Etheridge, Maya Angelou, and others, relating their personal experiences and wisdom in coping with performance anxiety.

Links relevant to the conversation

Michael’s website – http://threeminutetherapy.com/

Michael Edelstein – Why Ayn Rand’s Self Esteem is Unreasonable [Capitalism & Morality Seminar 2015] – https://www.youtube.com/watch?v=pMHFGfVnZQ0

‘Fountainhead’ a good read beneath the controversy http://brandeishoot.com/2012/01/27/fountainhead-a-good-read-beneath-the-controversy/

William F. Buckley Jr. speaks with Charlie Rose about Ayn Rand’s Atlas Shrugged – https://youtu.be/5KmPLkiqnO8

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

Exit mobile version