Brookings: Experts - Philip A. Wallach

The Perils of Automatic Budgeting

Philip A. Wallach — Tue, 26 Mar 2013 11:00:00 -0400

In the fall of 1978, the United States Congress finally solved the federal government's budget problems. While the Senate debated a bill making some technical revisions to the Bretton Woods Agreement, Virginia senator Harry Byrd, Jr., offered an amendment that read, in its entirety: "Beginning with fiscal year 1981, the total budget outlays of the Federal Government shall not exceed its receipts." The amendment passed, and the bill was eventually signed into law.

The next year, in a bill increasing the debt ceiling, the overwhelmingly Democratic Congress again enacted essentially the same requirement for balanced budgets beginning in 1981. It did so again in 1980, and then in 1982 struck the reference to fiscal year 1981 but reiterated its "commitment" to balanced budgets. To this day, Title 31, Section 1103, of the United States Code reads: "Congress reaffirms its commitment that budget outlays of the United States Government for a fiscal year may be not more than the receipts of the Government for that year."

Of course, in all but four of the 30 years since, the federal government has indeed spent more than it has taken in — running an average annual deficit of more than $340 billion (adjusted for inflation) and well over a trillion dollars in more recent years. The debt held by the public has grown by more than $10 trillion in that time. Not surprisingly, promising to be fiscally responsible in the future has done nothing to mitigate the government's fiscal recklessness in the present.

And yet precisely that practice remains the essence of our fiscal policy today, as Congress and the president struggle to get the federal deficit under control. Now as then, their prayer is: Lord, make our budget sustainable — but not yet.

Our lawmakers contend that today's budget mechanisms are more effective than Senator Byrd's commitment to balanced budgets because they impose specific (if broad) spending cuts that will occur automatically unless Congress undoes them. There has been little recognition of the irony involved in continuing to make this argument even as lawmakers spent the past several months trying to avoid and then mitigate the consequences of a previously enacted mechanism of exactly the same sort: the sequester adopted as part of the 2011 debt-ceiling fight.

The automatic budget mechanism has long held Washington under its spell. But again and again it has disappointed, and for precisely the same reason that Byrd's balanced-budget language was meaningless: As a people no less sovereign than we, future voters (and, more to the point, their representatives) may not feel obligated to respect decisions made in years gone by.

At first glance, this inability to bind the future — which political scientists call the "commitment problem" — would seem to preclude the very possibility of responsible representative government, at least on matters that require sustained discipline (such as the management of the public debt). If representatives today can always put off hard choices until tomorrow — and especially if their voting constituents want them to — it is hard to see how any sacrifices will ever be made. And yet we know that responsible choices are possible, because our predecessors often made them. Balanced budgets in peacetime were the norm for most of our country's history until after the Second World War. Even in the aftermath of the New Deal and Great Society expansions, the polity has managed a few impressive moments of self-control — reining in runaway spending and reducing the growth of entitlement costs.

So why do most of our attempts to achieve such results through automatic budget mechanisms fail? And what has enabled those occasional fiscal successes? To answer these questions, we must first examine the automatic budget mechanisms employed over the past few decades, seeking to distinguish effective recipes for long-term balance from willful acts of self-delusion.

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Philip A. Wallach

Publication: National Affairs

Image Source: © Kacper Pempel / Reuters

Mr. Boehner, Tear Down This Debt Ceiling!

Philip A. Wallach — Thu, 10 Jan 2013 00:00:00 -0500

We begin a new year and a new Congress with a sense of déjà vu: as it was in the summer of 2011, our outstanding national debt is up against its legally specified limit. Speaker John Boehner has promised an encore in 2013, but Americans of all political persuasions should hope that this is a promise the Speaker decides to ignore.

In this research note, Governance Studies Fellow Philip Wallach explains our debt ceiling’s origins and development, showing that attempts to bring about effective policy change through threats not to raise the debt ceiling have a long historical record of failure dating back to the 1950s. This includes a little-remembered debt ceiling showdown in 1996 in parallel to the more famous budgetary standoff that led to government shutdowns. In that episode, Republicans demanded large spending cuts but eventually decided that creating a crisis would be politically disastrous, and settled for small concessions.

Wallach considers the strongest arguments for keeping the ceiling in place and shows why they fall short. He argues that debt ceiling brinksmanship represents an abdication of congressional authority over spending choices. Should Congress fail to increase the debt ceiling in a timely manner, the President would be forced to break laws, and would probably choose to fail to carry though many spending obligations. In doing so, he would have no legal guidance, forcing him to act in an autocratic manner fundamentally inconsistent with America’s rule of law tradition. Because Congress has nothing to gain in such a situation, their threats not to raise the debt ceiling ultimately ring hollow, rending debt ceiling brinksmanship an ineffective way to control spending, as the historical record confirms.

Wallach then offers superior alternatives to the debt ceiling that advocates of spending restraint should propose as replacements.

• To replicate the debt ceiling’s attention-grabbing quality, each party’s congressional leaders should be formally required to provide an explanation and plan whenever the country experiences distressingly large deficits.

• We should adopt a modest automatic-spending-control mechanism that would force spending reduction only if unemployment is low, thereby having a chance of passage and successful enforcement.

• We must reform our dysfunctional budgeting process. More government spending should be moved on-budget, forcing a hard look at the tradeoffs between entitlement expenditures and discretionary spending.

• Continuing resolutions should be forced to automatically push us toward balanced budgets, creating a default rule in which current unsustainable levels of spending are not retained simply through inertia.

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Philip A. Wallach

Image Source: © Kevin Lamarque / Reuters

Challenges Facing President Obama During His Second Administration

Wed, 28 Nov 2012 10:00:00 -0500

Event Information

November 28, 2012
10:00 AM - 11:30 AM EST

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue, N.W.
Washington, DC 20036

At the outset of a new administration, every president, whether incumbent or newly elected, faces management challenges unique to the executive branch: selecting and confirming staff, Cabinet members, and agency heads; establishing or renewing relations with Congress; and defining and then acting on an agenda. Newly reelected President Obama is no exception and faces any number of obstacles in his second term. What are the specific impediments to his success, and what might he do both as a leader and as head of the executive branch to move his second term agenda forward? Given that Republicans maintain control of the House and Democrats only have a slight edge in the Senate, what can be done to ensure executive branch effectiveness amid the continued challenges of divided government? What can a president hope to accomplish in an era of hyper-partisanship?

On November 28, Governance Studies at Brookings, as part of its Management and Leadership Initiative, hosted a forum on the various executive branch challenges facing the Obama administration in its second term. Discussion also centered on what defines presidential leadership, and how its manifestations reveal useful lessons for President Obama as he tackles a vast array of difficulties in his next term.

Campaign Platforms: What the Candidates Failed to Address

Philip A. Wallach — Mon, 05 Nov 2012 00:00:00 -0500

With such a heavy focus on the economy during this campaign season, Fellow Philip Wallach says the candidates missed the opportunity to address other critically important issues.

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Campaign Platforms: What the Candidates Failed to Address

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Philip A. Wallach

U.S. Regulation of Greenhouse Gas Emissions

Philip A. Wallach — Fri, 26 Oct 2012 13:16:00 -0400

Significant congressional efforts to address climate change have failed, and the issue has received almost no attention on the 2012 campaign trail. In spite of these facts, federal regulations designed to reduce greenhouse gas (GHG) emissions and mitigate climate change are real and growing in importance.

Without the benefit of new legislation, the Environmental Protection Agency (EPA) has finalized rules under the Clean Air Act affecting motor vehicle fuel efficiency and emissions from power plants. After surviving a number of legal challenges, these rules will remain in place and grow in importance in coming years. In this research note, Philip Wallach surveys the development of U.S. climate change policy and assesses where GHG regulation can and should go from here.

Wallach provides a detailed analysis of how the Clean Air Act was reinterpreted to apply to GHG emissions, examining the statute’s legislative history and the environmentalist lawsuit brought to force its application to GHG emissions, which culminated in the Supreme Court ruling that the agency must take action. He then examines the policies that have resulted, including ambitious new fuel economy standards for cars and trucks and stringent emission requirements for all new power plants, as well as not-yet-promulgated rules that the statute seems to require.

He explains why the Clean Air Act is an awkward tool for addressing the problem of climate change, arguing that a straightforward application of the Act’s requirements would require extremely burdensome regulations producing little social benefit.

Because of these difficulties, Wallach argues that future lawmakers should look for opportunities to clean up this increasingly messy policy area—emphasizing that congressional inaction has now become a recipe for wasteful regulation. He highlights one possibility that should be especially attractive in the current fiscally-challenged political moment: a grand bargain instituting a carbon tax in exchange for payroll or income tax reduction coupled with a narrowing of EPA’s mandate to regulate GHG emissions.

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Philip A. Wallach

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The Second Presidential Debate: A Live Web Chat with Philip Wallach

Wed, 17 Oct 2012 12:30:00 -0400

Event Information

October 17, 2012
12:30 PM - 1:00 PM EDT

Online Only
The Brookings Institution

After many observers concluded that GOP candidate Mitt Romney’s standing improved after a strong performance in the first presidential debate, the stakes for the remaining debates rose sharply. In this close election year, the race is tight and both candidates are struggling to win over independent voters. Did the second debate move the numbers again? Did either candidate emerge with increased momentum and energy?

On Wednesday, October 17, Brookings expert Philip Wallach responded to questions and took your comments about the debate in a live web chat moderated by Vivyan Tran of POLITICO. Read the full transcript of the chat below.

12:30 Vivyan Tran: Welcome everyone, let's get started!

12:30 Philip Wallach: Hi, I’m Phil Wallach, a Fellow in Governance Studies at the Brookings Institution (http://www.brookings.edu/experts/wallachp). My areas of expertise are regulation and fiscal policy, but I’ll do my best to cover whatever folks are interested in. Looking forward to a good discussion!

12:31 Comment from Anonymous: Simple question — who won the debate?

12:31 Philip Wallach: Anonymous gets right to the point!

Many people are saying Obama, almost nobody is saying Romney—I guess that means Obama won. Voters who didn’t tune in are mostly going to hear some variation on, “Whereas the President looked wearied and unenthusiastic in the first debate, in the second he seemed energized and eager to make his case aggressively.” That can’t be bad for Obama.

I’m going to mostly try to avoid grand pronouncements about the “atmospherics,” though. I tend to be somewhat tone-deaf about these things, and I’m more interested in the substance. On that front, I thought it was a close debate, with both candidates making some extremely effective attacks on their opponent but having a harder time laying out a really compelling account of their own agenda. I look forward to answering as many questions as I can that dig into the policy questions from the debate.

12:32 Comment from Marion: Oops sent early - My question is: political scientists generally claim that debates do little to sway elections. But could the social media effect change that? As in - what the candidates say or don't say might not matter. But could the Internet's interpretation of what they say move votes?

12:33 Philip Wallach: This is a great question. I don’t have a clear answer for you, but a couple things are worth noting. First, specialized media make it easier for people to read things they’ll agree with about the debates and avoid judgments they don’t like, so that might blunt the effect of whatever judgment you think "the Internet" rendered. Second, when it comes to rendering debate judgments, my sense is that social media might end up dragged along to follow the traditional media, which is still clearly extremely influential.

12:34 Comment from Marshall, CA: Some people are calling this debate “scrappy.” Do you think that applies? It seems a little too positive a word for their bickering…

12:35 Philip Wallach: Gerald Seib at the WSJ called it "the least decorous debate" in American history, and he's probably right. It certainly made for good television, but I wonder if it's harmful to the prospects of really substantive discussion.

12:36 Comment from Abigail: Obama repeatedly mentioned that Romney's tax plan was bad math. Is this true? How would Romney pay for the across the board tax cuts?

12:37 Philip Wallach: Obama did this in the first debate, too, though it wasn't talked about as much as his demeanor. I have a bunch to say about this issue.

12:37 Philip Wallach: Obama's attacks on Romney’s tax plans as impossible have a familiar ring to them. This whole line of debate between the candidates rhymes historically with the 1980 campaign, when President Carter said that Ronald Reagan’s simultaneous proposals to cut taxes, increase military spending, and balance the budget couldn’t all be realized (see http://www.debates.org/index.php?page=october-28-1980-debate-transcript). Say what you will about Carter and Reagan, but this attack was absolutely correct: budget deficits went way up during his two terms. President Obama is absolutely right to push Governor Romney on these points.

12:38 Philip Wallach: To be fair, Romney is also right to push Obama on his record when it comes to tax policy and deficits. The Obama campaign’s official line is that he’s a middle-class tax cutter, but will solve America’s budget imbalance by “asking the rich to do a little bit more.” Unfortunately, that doesn’t add up, either. Obama’s FY2013 budget proposal (http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/tables.pdf) has us adding $6.7 trillion to the national debt over the next decade.

12:39 Philip Wallach: Neither candidate wants to push too hard on these points, though, because they figure voters don’t really want to hear how bad the arithmetic really is (I argued the point here: http://www.brookings.edu/research/opinions/2012/08/31-campaign-issues-wallach).

12:39 Comment from Joe : Do you think the current format of debates (limited time, no direct questions, moderator interference) lends itself to all the interruptions and "Let me get back to what he said 15 minutes ago" moments?

12:41 Philip Wallach: Getting lots of questions about the moderators, and surely it's a matter of taste which ones you prefer. I think Joe's question really gets it right, though: given a more flexible format, we're going to end up talking more about the moderators. If you go back to older debates, they are far more structured and the candidates follow the time guidelines better, so the moderators seem less important.

12:42 Comment from MD: Do you think the public's tolerance or interest in these "controlled" debates will lessen as we grow more and more used to direct interaction with celebrities/politicians through social media/the Internet as a whole? Are we becoming more attuned to how fake or calculated their responses/talking points are?

12:43 Philip Wallach: As you can see from MD's questions, though, some people see this completely differently. If there was one word I wouldn't use to describe last night's debate, it would be "controlled." Politics is always going to be somewhat artificial, and for my own part I think we're better off if we're talking about the stylized points the candidates want to make rather than how they make them.

12:44 Comment from Reader in Maryland: So then a question on regulation - we haven’t heard as much in the campaign as I expected about the "evils of regulations" and how they harm job growth. It came up a bit last night. Do you think Obama has a good record on this issue? Should Romney be hammering him more on his regulatory policies?

12:45 Philip Wallach: Reader is right, regulation was actually discussed more in the first debate (when Romney talked a lot about Dodd-Frank). There were a few moments last night worth noting, though.

12:46 Philip Wallach: Romney went on the offensive about Obama's EPA's coal policies, saying that they had effectively banned building new coal plants. He's talking about the EPA’s new greenhouse gas rules for stationary sources under the Clean Air Act (see http://epa.gov/carbonpollutionstandard/pdfs/20120327factsheet.pdf). He’s right that the rule will effectively ban the construction of new coal plants unless they use (not-yet-commercially-viable) carbon sequestration technologies. The EPA is promulgating this rule pursuant to the 2007 Supreme Court ruling, Massachusetts v. EPA, rather than a specific legislative decision—and that is pretty remarkable, even if natural gas would be ascendant for economic reasons.

12:47 Philip Wallach: Much as I care about these issues, though, Romney may have decided that the American people aren't tuned in enough to make them central focuses of his campaign.

12:48 Comment from Xoff: Seeing Romney move to the center on his proposal may help him attract undecided independents. But with a very divided Congress can he, or Obama for that matter, pull these reforms off without carrying both House and Senate?

12:49 Philip Wallach: This is an important question...in a sense, about the future of American government! Reform is definitely going to be much harder for either candidate than they are likely to admit during campaign season.

12:49 Philip Wallach: The question of the night, from Mary Follano, got at this point regarding tax reform: basically, she said, I like my middle-class tax-expenditures very much, thank you, and don’t want them taken away as a part of tax reform! Her question highlights why it is so much easier to talk about how wonderful tax reform is than to actually make it happen politically. It might be easier politically to impose a cap on total deductions—as Romney has been proposing (see http://blogs.reuters.com/felix-salmon/2012/10/04/why-deduction-caps-are-a-great-idea/). Then again, this is basically the idea behind the Alternative Minimum Tax, and both political parties scramble to make sure that doesn’t affect middle-class taxpayers on an annual basis. So it will take some real political vision and leadership to make tax reform happen.

12:50 Comment from Westley: A lot of the debate—and the new "women in binders" meme—seemed to be aimed at female voters. Who won and who lost there, if anybody?

12:51 Philip Wallach: Many, many questions about the "women in binders." Figuring out what effect this will have is above my pay grade—though if I had to take a guess, I would say that nobody will remember it two months from now. The bigger issue is whether Romney is connecting with women—since, after all, they are the majority of the electorate.

12:52 Comment from John Willson: When discussing the administration's bailout of General Motors, Romney is reluctant to bring up Obama's Delphi Pension Scandal. Why won't he use the destruction of 20,000 plus non-union pensions to highlight the administration's cronyism?

12:54 Philip Wallach: John, this is a good question. At first blush, it seems like a promising way to counter-punch on the auto bailout stuff. My sense is that there is less there than it seems, though. The devil is in the details, and the GAO report which gets into those details (http://www.gao.gov/products/GAO-12-909T) doesn’t immediately scream "scandal" to me.

12:54 Comment from Xander: Are there historical examples of when and how debates actually changed the course of a campaign?

12:56 Philip Wallach: Mostly not, and that's important to keep in mind. The closest calls that I know of are 1960 and 1980. In both cases, the "atmospherics" really killed one candidate (Nixon and Carter) and helped the other (Kennedy and Reagan). I'm doubtful that we've seen such a decisive edge for either candidate this time around.

12:56 Comment from Teresa: Because neither offered a compelling vision for the next four years, what do you see as the two or three domestic policy issues that will dominate an Obama and Romney administration?

12:58 Philip Wallach: Well, the demands of fiscal policy on either candidate are going to be extreme—starting with the fiscal cliff, which has amazingly gone unmentioned in the debates. Getting beyond those challenges is going to be very tough for either candidate, especially since it's now inconceivable that either party will hold all of the Presidency, the House, and 60 seats in the Senate.

12:58 Comment from Katie: How does one explain the confusing economics of low gas prices mean the economy was on the decline versus today when gas prices are out of control (and the economy is still not back)

12:59 Philip Wallach: I was hoping for this question, Katie! When Romney stooped to making the gas price argument (the price of a gallon was under $2 when Obama took office, now it’s around $4, therefore the President’s energy policies are a failure), Obama had what I thought was his best moment of the night. He clearly explained that the reason for the low, low price was the sorry state of the world economy at that moment—and then suggested that Romney’s financial regulation policies might treat us to a repeat of that calamity, allowing him to bring those low prices back. The barb is certainly highly debatable, though it earned the President a laugh, but the explanation of prices in January 2009 is just indisputably correct.

12:59 Philip Wallach: I thought Obama was perfectly lucid on the point, but I don't know if it's enough to get through to voters who just know how much they hate the high prices.

1:00 Philip Wallach: That's all the time we've got here, sorry I couldn't get to more questions! Thanks for joining me today, it’s been a pleasure. You can follow me on Twitter at @PhilipWallach. I’m a low volume, high signal-to-noise tweeter.

1:00 Vivyan Tran: Thanks for the questions everyone, see you next week.

An Alternative to Norquist’s Tax Pledge

Philip A. Wallach — Tue, 09 Oct 2012 00:00:00 -0400

Grover Norquist’s Americans for Tax Reform asks prospective Members of the House of Representatives to sign this pledge:

I, ____, pledge to the taxpayers of the ____ district of the state of ____, and to the American people that I will:

ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and

TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

The vast majority of Republican officeholders take Norquist’s pledge, which, they say, shows their constituents that they are committed to smaller government. Instead, it encourages Americans to think primarily about their distaste for taxes even as they reject the need for spending cuts that affect their own families.

What began as a dream of delivering small government through low taxes transforms into a rallying cry for not having to pay the bills, the very opposite of fiscal responsibility.

Norquist’s grand strategic plan envisions reduced revenues eventually necessitating serious spending cuts, but his pledge does none of the rhetorical work necessary to bring this about. Though principled small-government visionaries of the recent past have recognized this flaw, abandoning their hopes of “starving the beast,” both the mainstream and the grass roots of the Republican Party have doubled down on their anti-tax mantra. In doing so, their rhetoric veers into the realm of fantasy, and we can only hope that they “face up to big government” as a reality that must be paid for soon.

By making just one party credible on one side of the fiscal equation, Norquist’s pledge creates a profoundly unsustainable political equilibrium, ending in fiscal ruin if unsupported by a rapidly growing economy (as the 1990s provided). The Republican Party becomes an engine of deficits, as the experience under President George W. Bush shows.

If voters really care about halting the growth of America’s debt, shouldn’t they ask for a different pledge? It would go something like this:

I, _____, pledge to the taxpayers of the ____ district of the state of ____, and to the American people, that I will:

Oppose any and all bills that would result in an increase in America’s debt burden, including insisting that cuts in marginal tax rates be matched with cuts in spending, elimination of tax expenditures, or compensating revenue increases of other forms.

If anti-tax voters are real deficit hawks (as many tea partyers claim to be), they ought to demand that prospective officeholders either take this pledge or refrain from taking Norquist’s. If they are unwilling to, but remain happy to accept Norquist’s anti-tax pledge, they fairly decisively reveal that they are not deficit hawks at all.

To be clear, I do not believe that elected representatives should be making pledges at all. I believe that a responsible (fiscally and otherwise) officeholder should reject both of these pledges — pledges are fundamentally grounded on a notion of corrupt and faithless representatives.

Ironically, voters’ distrust of their own elected representatives leads those representatives to conduct themselves in a less trustworthy manner, refusing to exercise real leadership whenever it would upset a faction of their constituents.

But if one insists on a pledge and demands real fiscal responsibility, the pledge should be the one proposed here rather than Norquist’s. Voters who are actually committed fiscal hawks must reject the destabilizing asymmetry inherent in Norquist’s pledge — and those who favor Norquist’s pledge must explain why and how they believe it is going to deliver balanced budgets in the future, despite the contrary experience of the last decade.

If our elected officials were to honor the pay-as-you-go pledge proposed here, our national debt would stabilize. No doubt that following this path to achieve a rapid narrowing of the federal deficit would be painful.

But more painful in the long run would be a continuation of the status quo: just enough bipartisan “compromise” to repeatedly worsen our fiscal trajectory, with Norquist-inspired reductions in revenues unmatched by comparable decreases in spending.

Pledges aside, if all politicians can do in coming years is make the long-term budget picture worse, it will be long past time for voters to adopt a far more heavy-handed approach to their leaders: Get new ones.

This piece originally appeared at Roll Call>>

Authors

Philip A. Wallach

Publication: Roll Call

Moving Beyond Calls for a “New Glass-Steagall”

Philip A. Wallach — Thu, 13 Sep 2012 10:14:00 -0400

In this paper, Philip Wallach examines arguments for resurrecting the Glass-Steagall Act. Wallach asserts that while arguing for the law to be revived is an attractive piece of political rhetoric, if reduced risk in commercial banking really is the goal, then Glass-Steagall is not the right legislative remedy.

Rather than looking backward to Glass-Steagall, Wallach argues that commercial banking reformers should focus on key provisions of the Dodd-Frank Act, particularly the Volcker Rule, as an effective means of promoting change in the banking sector. Complaints about the Volcker rule are premature, Wallach argues, as it has yet to be finalized or implemented, and there are many good reasons (including the banks’ stated distaste for the rule) to think that it will have significant effects.

Wallach also calls into question Glass-Steagall’s ability to address various problems in the banking sector in an age of sophisticated financial instruments, including segregating insured deposits from risk-taking and mitigating the risk associated with “Too Big to Fail” institutions.

So if not Glass-Steagall, then what? Wallach thinks reformers should focus on the following in their efforts to improve commercial banking in the United States:

The Dodd-Frank Act made dozens of major changes and hundreds of minor ones, many of which have yet to be implemented but are on their way. Discussions of “breaking up the banks” or “ending TBTF” should begin with what Dodd-Frank did on these fronts, rather than starting from either of the (equally oblivious) premises of “everything in Dodd-Frank is an incoherent disaster” or “Dodd-Frank did nothing to rein in the big banks.”
In addition to the Volcker Rule, Dodd-Frank also creates a Financial Stability Oversight Council (FSOC) with significant discretionary powers to wield an Orderly Liquidation Authority; addresses capital requirements; and creates an Office of Financial Research charged with independently monitoring systemic stability. Reformers miss a golden opportunity if they ignore ways to improve these policies in favor of making grand pronouncements about Glass-Steagall.
Proponents of “breaking up the banks” or using Glass-Steagall-like measures to limit bank size should also start with the provisions that already exist in law. Little-discussed is the fact that banks exceeding 10% of the nation’s deposits were already statutorily barred from making interstate acquisitions of other banks under the Riegle-Neal Act of 1994, though there were exceptions for absorbing failing banks.
Increasing capital requirements represents one of the most straightforward ways to get a safer, less-leveraged banking system—if that is indeed what Americans want in the current climate of consumer deleveraging and a struggling recovery. Dodd-Frank has left its mark here, too: § 165 requires adoption of prudential standards (including capital requirements) for systemically-important non-banks; § 171 tightens standards for banks; §§ 606 and 616 tighten standards for BHCs. As a result, overall leverage is down.
One possibility being explored, under § 115(c) of Dodd-Frank, is requiring financial institutions to use contingent capital—instruments that require their holders to purchase capital from issuers in some pre-specified circumstance, such as a crisis, providing “just-in-time” support. Measuring capital adequacy is another point of contention, with critics of risk-weighted measures of assets worrying that models of risk will inevitably be gamed.
Attention should also turn to regulatory reforms that would simplify corporate structures, institutionalize best-practices for assessing and managing risk, and consolidating regulatory requirements where possible. Ensuring that the infant Office of Financial Research actively contributes to these developments should be a priority in coming years.

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Truth-Telling a Casualty in the Presidential Campaign

Philip A. Wallach — Fri, 31 Aug 2012 00:00:00 -0400

“Our problems are big and the solutions will not be painless. We all must share in the sacrifice. Any leader that tells us differently is simply not telling the truth.” So said New Jersey Governor Chris Christie in his Tuesday night Keynote address to the Republican National Convention, focusing mostly on the need to confront hard truths about America’s massive deficits and debt. He is absolutely right: real leadership at this moment requires forcing voters to confront facts that they would prefer to ignore. Unfortunately, this quality was almost totally missing from the speeches of the Republican candidates, Paul Ryan and Mitt Romney.

The gap is most apparent on Medicare. Christie confidently declared that Republicans trust seniors’ willingness to sacrifice for their grandchildren in confronting entitlement reform. Paul Ryan’s reputation as a proposer of bold changes to the program seemed to signal that the Republican ticket would embrace this message. But he and Romney have instead aggressively pivoted to represent themselves as defenders of high Medicare spending against Obama’s hurtful cuts, and promise that they will not touch Medicare for Americans over 55. Specifics about cost control are conspicuously absent.

For all the talk of how the GOP is ready to ask Americans to sacrifice, the Republican candidates have been unwilling to give details about what hard choices they support (with the possible exception of making cuts to Medicaid). Ryan’s budgets have been distressingly thin on specific ways to broaden the tax base to pay for marginal rate cuts that have always been front and center. Early in the process, such vagueness can be forgiven; but by now it seems only fair to expect specific and credible identification of loopholes to close or spending to cut, expectations which Romney/Ryan have resisted with almost incredible totality. For those hoping to hear about the policies a Republican administration would champion, Romney’s speech had nothing to offer.

In 1976, Wall Street Journal writer and future Reagan adviser Jude Wanniski began pushing the “Two Santa Claus Theory,” which said that if Democrats were the Santa Claus of government spending, Republicans would have to become the Santa Claus of tax cuts to compete. By and large, Republicans have heeded this advice with reckless abandon through my entire lifetime. Today, neither party shows willingness to deliver coal instead of presents, with minor exceptions: Democrats for the rich, Republicans for the poor. Christie purported to demand the message of the anti-Santa for the broad middle class: sorry, it isn’t fair, but you are going to get less from the government than you thought.

But at the Republican convention, such remarks remained at the level of partisan-friendly abstractions: unions must get real, entitlements and tax expenditures must shrink in unspecified ways. Christie deserves credit for his famous willingness to tell firefighters and teachers in New Jersey that they must pay more toward their pensions, which came with real political risks. But bold leadership would mean telling the GOP faithful that their insistence that taxes never rise is sheer lunacy; that everyone will have to pay more, even the rich; and that “cutting entitlements” means that Medicare must control costs for everyone, not just Americans under 55.

Unfortunately, the problem is not entirely a Republican one. Republicans’ math is more offensively dependent on “magic asterisks,” but so far President Obama is not distinguishing himself for bold truth-telling on the campaign trail, styling himself as a tax cutter (for everyone except the rich) despite record deficits. One of his most prominent TV spots tells American voters that “asking the wealthy to pay a little more” will allow us to “pay down our debt in a balanced way” while also giving us the chance to “invest in education, manufacturing, and homegrown American energy for good middle class jobs.” That is not a serious pitch. Democrats may be right to reject “austerity now” given the continuing weakness of the economic recovery, but they cannot pretend that the debt problem is for another decade, or portray the “Bush” tax cuts as responsible for our debts while simultaneously trying to extend them indefinitely for all but the highest earners.

Election season may be a bad time to face up to uncomfortable facts. But at the very least, if party leaders of either side are going to insist they are tellers of hard truths, they should do better than serving up warm feelings about America and generic praise of truth-telling. As the campaign goes on, Americans should demand real leadership rather than settling for a hollow imitation of it.

Authors

Philip A. Wallach

Publication: The Hill

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Brookings: Experts - Philip A. Wallach

The Perils of Automatic Budgeting

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Mr. Boehner, Tear Down This Debt Ceiling!

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Challenges Facing President Obama During His Second Administration

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Campaign Platforms: What the Candidates Failed to Address

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U.S. Regulation of Greenhouse Gas Emissions

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The Second Presidential Debate: A Live Web Chat with Philip Wallach

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An Alternative to Norquist’s Tax Pledge

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Moving Beyond Calls for a “New Glass-Steagall”

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Truth-Telling a Casualty in the Presidential Campaign

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