The political philosophy underpinning the remarks of such Representatives in Congress as Heck (R-NV3), Amodei (R-NV2), and Senator Dean Heller (R), is that implementing the Three Legs of the Grand Plan will create Prosperity. Leg One is to be a reduction in government spending. Leg Two is to be the deregulation of the financial sector. Leg Three is to be the tort reform. The stool is shaky as it is, but the implementation of this policy makes a bad situation even worse.
The first leg of the stool is based on a fantasy vision of economic practice as it has never existed. As has been argued repeatedly in this space, you don’t get economic growth as measured in improvements in the Gross Domestic Product if you reduce one of the components of the GDP formula: Government spending. One of the reasons GOP economic arguments make no sense is simply that you can’t have it both ways — the reduction of government spending reduces in turn the total GDP, therefore contending that government spending is a drag on the overall economy is nonsense.
The only way to prevent this notion from being obviously risible is to couch it in terms which will appeal to those who don’t rattle Christmas packages to see if there’s anything inside. Thus we get an infinite variation on the same old theme: “The government takes your money, that’s money you can’t spend for what you want. So, the government is taking money out of the economy.” Stop and think for a second.
This argument works IF and Only IF the government takes the money, salts it away in a giant mattress and never spends it, draining money away from the consumer economy. But wait — the government does spend it. The Defense Contract Audit Agency deals with some $19 billion worth of private contracts, and reviewed over 2,600 forward pricing proposals totaling $103 billion in FY 2011. The Defense Contract Management Agency offers advice on about 334,000 prime contracts performed by 19,600 contractors. [Comptroller DoD pdf]
Since there was almost never a Defense Department contract inked in any congressional district that wasn’t beloved by the local congressional Representative — there’s a corollary to the government spending argument: Government money is spent on Stuff We Don’t Like.
At this point the argument moves out of the realm of economics and into the pit of fear-mongering and all too often good old garden variety racism. “They” are getting all your hard earned money.” Who’s “They?” It’s nonsensical to argue that all government spending is a drain on a consumer based economy, so the GOP targets those who are benefited by government services in categories other than Defense.
The old canards are still popular on the hustings: The Welfare Queen — a mythological character long since debunked; greedy foreign powers to whom we give “foreign aid,” which in reality only takes up only about 1% of the total federal budget; and, in its latest incarnation, The Mooching 47% who supposedly don’t pay taxes and simply mooch off the rest of us. The obvious point is ignored — these people do pay taxes (especially state and local ones) and they aren’t earning enough money from their low and minimum wage jobs to be liable for federal income taxes. If we truly wanted to reduce the federal deficit by increasing tax revenues then increasing the minimum wage would be a way to do it.
In sum, when a supposedly economic argument depends on a self-contradicting predicate and self-serving mythologies to support it there is really nothing there. It’s mostly wind bags blowing into the sails of corporate executives and the rentier class who don’t want to pay taxes.
The Welfare Queen isn’t the only bit of ideological mythology out there which tends to promote the interests of the few over the general benefit of all the others. What bankers want is reduced risk. Why not? None of us like to be in seriously risky situations. The purpose of various kinds of funds and investment products is generally to reduce risk…and then the investment houses can play with their derivative products. It’s the play time which has become part of the problem.
Boiled right done to the skeletal remains of Casino Capitalism, de-regulation has helped create the manufacturing of financial products which have no function other than to create secondary (and tertiary) markets for palming off risk onto others and thence to bet on the results of various sales.
There’s no small amount of circumlocution involved in justifying these products and practices. “We’re not doing anything wrong,” whine the investment houses,”We’re operating within the laws, and the revenue from these sales (“markets” ) is now a crucial part of our total revenue.” Yes, and who helped write the laws creating the de-regulated environment, and implementing the rules for functioning in a de-regulated financial regime?
To illustrate the point: Imagine a game in which I get to write the rules. Further imagine a game in which not only do I get to draft the original rules but if at any point it looks like you might win something I get to revise the rules to my advantage? Now, imagine my dismay when you discover what I’m doing and try to make me play by the original rules?
Returning to the original rules — there is nothing intrinsically wrong with derivative trading, and nothing essentially nefarious about swaps and other financial products — it’s when the system becomes freighted with sales which would be more appropriately assigned to realms like Las Vegas and Atlantic City than to the investment in corporate bonds and similar products that the problems begin.
If there’s slippage in commodities and foreign exchange trading, there’s always something to bet on with interest rates? So it would seem.
“Trading revenue at U.S. banks increased 73 percent last quarter, on a surge in trading of over-the-counter interest rate derivatives, according to a report on Wednesday by the Office of the Comptroller of the Currency. U.S. commercial banks and savings institutions reported trading revenue of $4.4 billion during the last three months of 2012, up from $2.5 billion in the same period a year earlier.
Interest-rate trading revenue represented 95 percent of total trading revenue, and more than made up for sharp declines in commodities and foreign exchange trading, and a $713 million loss from trading in credit products.” [WSJ]
There are a couple of other points in the Office of the Comptroller of the Currency’s report which deserve more attention:
“Derivatives contracts are concentrated in a small number of institutions. The largest five banks hold 96 percent of the total notional amount of derivatives, while the largest 25 banks hold nearly 100 percent.
Derivative contracts remain concentrated in interest rate products, which represent 81 percent of total derivative notional values. Credit default swaps are the dominant product in the credit derivatives market, representing 97 percent of total credit derivatives. “
While some of the Wild West aspects of investment banking seem to be calming down, with better collateral and tighter internal controls, the Big do seem to be getting Bigger — with another 10 major banks dropping out of the derivatives game.
Since the last investment banks collapsed in a heap after the Mortgage Meltdown, and just about everyone now is a “commercial” bank, U.S. taxpayers should be paying far more attention to how banks are accounting for the use of deposits in their derivative games. Just a friendly little warning. And, Paul Farrell, of Marketwatch has more on the subject of Wall Street banking, which is well worth the click and read.
Finally, good old fashioned corporate bonds have been attractive to investors because they were seen to be safer than equities, and paid a slightly better yield than Treasuries. These are the “loans” made to corporation which finance expansion, etc. Manic Mr. Market might be having a spasm lately?
“New, more granular data compiled by the New York Federal Reserve shows a worrying picture of the corporate-bond holdings of primary dealers—the big securities firms who deal direct with the Fed.
As of May 22, they held net positions of just $13.5 billion of investment-grade bonds maturing in more than one year and $8.3 billion of high-yield bonds—in a market with a value of trillions of dollars. Anecdotal evidence suggests institutional investors have on occasion found dealers unwilling to buy relatively modest amounts of bonds in recent days. That could mean sharper price declines lie ahead. Investment-grade bonds, which offer historically low yields, could be hit hard.” [WSJ]
Investment grade would be the good stuff, and if investment divisions aren’t buying into corporate financing plans…what will they be buying?
Pain and Peril
First, the numbers shown in the graphic above are only filings — they aren’t the outcomes. Cases get tossed, get settled, get bogged down… even then the percentage of PL cases in Federal courts hasn’t moved above 23.04% in the last few years.
Secondly, the odds aren’t really all that favorable for tort cases. The Bureau of Justice Statistics reported for the 2002-2003 period in which there were a total of 274,841 civil cases in Federal courts, some 13,000 of which were related to product liability, that “Plaintiffs won in 48% of tort trials terminated in U.S. district courts in 2002-03. Plaintiffs won less frequently in medical malpractice (37%) and product liability (34%)trials.” Therefore, the odds the plaintiff will win in a product liability case aren’t all that good, plaintiffs who do win will find the judgment appealed, and most appeals are more beneficial to the defendant than to the plaintiff.
Third, consider the kinds of corporations which are most commonly involved in litigation over product liability — pharmaceuticals, medical devices, automobiles and other vehicles, general aviation airplanes and other products… Generally speaking when something goes wrong with a product to be inserted, injected, or ingested in a human body it goes very very wrong. Likewise, human beings don’t tend to survive hard crashes and long falls. Large numbers of cases, such as the number in 2006 may also illustrate a particular problem — in that instance asbestos — or in other instances things like dangerous intrauterine devices.
Far from being an horrendous burden to corporate headquarters, the total filings in federal product liability cases really haven’t moved all that much in recent years, as the quick graph below illustrates.
What the proponents of so-called tort reform are counting on is the impact of jury awards in a few spectacular cases to grab the public imagination, and from thence try to make the point that “we” are paying for other people’s pain and suffering with higher prices at the register. It isn’t too far-fetched to conclude that those who are marketing some of the more dangerous products are the ones most interested in “tort reform” for guns (almost impossible to sue these days), pharmaceutical products (also almost impossible if the FDA has approved the drug), and automotive and aviation equipment — you have about a 34% chance of winning your case.
Long Leaps of Faith
Employees and business owners alike should be cautious about accepting the claims from the GOP that their “economic” vision will do much of anything for the average worker or the average business owner. The Federal Spending Myth demands a person believe in the impossible — more growth while diminishing one component of the GDP formula. The De-Regulation Myth demands a person conflate the wants of Wall Street with the needs of Main Street. And, the Great Tort Argument is merely an inflated barrage balloon deflecting further away the odds of a person injured by a defective product having his or her good day in court.
Three legs of the stool and not one holds up to scrutiny.
* Information on the Judicial system and statistics can be found in the Bureau of Justice Statistics reports, and in reports from the Supreme Court, other tables offer more statistics and compilations. The format and contents for reports from the Supreme Court changed in 2004, and some statistical data may need to be gleaned from other sources.