Trump's 45% Tariffs

Think Trump's 45 Percent Tariffs Are Bad? Try Obama's 10,000 Percent Tariffs

Monday, 28 March 2016 00:00By Dean Baker, Truthout | Op-Ed

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Demonstrators march in a rally in San Francisco, California, against the proposed Trans-Pacific Partnership trade agreement on January 31, 2014. (Photo: Stop FastTrack)

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Lately the media have been going wild mocking Donald Trump's plans to put 45 percent tariffs on imports from China. They are partly right. It's not clever to indiscriminately impose large tariffs on major trading partners in violation of existing trade agreements.

On the other hand, the projections of economic collapse are almost certainly way overblown. Furthermore, it would be reasonable negotiate a lower value of the dollar against other currencies in order to reduce our trade deficit, even if the threat of big tariffs might not be the best way of getting there.

But what is even more striking is the selective concern over tariffs. While Trump wants to put large tariffs on imports from some of our major trading partners, President Obama is actively pushing to have far larger tariffs imposed on a wide range of goods in his trade deals, most importantly the Trans-Pacific Partnership (TPP). Measures in the TPP pushed by US negotiators will raise the price of many items by several thousand percent above the free market price.

If you missed this discussion, it's because these trade barriers are referred to as "intellectual property," which takes the form of patent and copyright protection. But markets don't care what term politicians use to describe a government imposed barrier. If a patent monopoly raises the price of a protected drug by 10,000 percent, it leads to the same sort of waste and corruption as if the government imposed a tariff of 10,000 percent, except that in the case of prescription drugs, high prices can also threaten lives.

If a price increase of 10,000 percent sounds high, you haven't been paying attention to what the drug industry charges for its new drugs. For example, the list price for the Hepatitis C drug Sovaldi is $84,000 for a three-month course of treatment. A recent analysis found that Indian manufacturers can profitably produce the drug for just $200 per three-month course of treatment, suggesting a tariff equivalent of more than 40,000 percent.

And we have ample evidence that patent monopolies produce the same sort of distortions that trade theory predicts from extraordinarily high tariffs. First, we have a whole army of lobbyists who descend on government officials constantly pushing for stronger and longer patent protections. The industry employs a fleet of highly paid lawyers who attempt to intimidate generic competitors from entering a market, even if legitimate claims to protection have already expired.

The industry employs a massive number of sales representatives to push their drugs to doctors. And, we are treated to silly television ads that try to get patients to pressure doctors into prescribing drugs even when there is no reason to think they would help them.

And of course there is the enormous waste associated with dealing with high priced drugs. Patent protected prices cause us to have insurance companies that must decide on complex payment systems and the new industry of pharmacy benefit managers that negotiate directly with the drug companies for both insurance companies and hospitals. There would be no place for these intermediaries if drugs were selling at free market prices.

Then we get the bad stuff. Drug companies steer their research toward developing patentable products. Evidence that diet or environmental factors may be important in treating a condition is generally not pursued. Drug companies also routinely pay doctors to push their drugs for unapproved uses. And, they conceal evidence that their drugs may be less effective than claimed or potentially harmful.

It is also important to realize that this is not a minor sector of the economy. We spend more than $400 billion a year on prescription drugs (2.2 percent of GDP). We would likely spend close to one-tenth of this amount if drugs were available in a free market.

We all know the story about how we need patents to finance innovation, but this is nonsense as even some in the pharmaceutical industry are coming to recognize. There are plenty of other mechanisms of paying for research. For example, Andrew Witty, the CEO of GlaxoSmithKline, explicitly called for delinking the price of drugs from research costs. He proposed a system where the government pays for drug company research on a cost plus basis, with the drugs developed then sold as generics. We already support more than $30 billion a year in biomedical research through the National Institutes of Health.

So we do face a very real threat of protectionism, but it is in the form of the Obama administration pushing for stronger and longer patent and related protections in the TPP and other trade deals. Unfortunately most media outlets are perfectly happy with protectionism when the main beneficiaries are drug companies. It is only when someone proposes protectionist measures with the idea that they could help ordinary workers that they get upset.

Copyright, Truthout. May not be reprinted without permission.

DEAN BAKER

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is a regular Truthout columnist and a member of Truthout's Board of Advisers.

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Break Up Too Big, Too Corrupted Banks

Why the Next President Must Reform Wall Street

Tuesday, 01 March 2016 00:00By Deena Zaidi, Truthout | News Analysis

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The New York Stock Exchange on Wall Street, New York City. Many of the reforms suggested by Bernie Sanders address the issues of the 2008 financial crisis, including the issue of banks being "too big to fail." (Photo: meagankirk / Shutterstock.com)

"The business model of Wall Street is fraud. It's fraud. I believe that corruption is rampant, and the fact that major bank after major bank has reached multibillion-dollar settlements with the United States government when we have a weak regulatory system tells me that not only did we have to bail them out once, if we don't start breaking them up, we're going to have to bail them out again, and I do not want to see that happen..."—Bernie Sanders in a one-on-one debate with Hillary Clinton.

Some of the many reforms suggested by Sen. Bernie Sanders in the 2016 presidential race focus on Wall Street reforms. Along with bridging the wealth inequality gap, he talks about taking some stringent steps to regulate some of the biggest banks by breaking them up.

Here are a few of the reforms proposed by Bernie Sanders that could be a concern to some of the most powerful on Wall Street.

A 21st Century Glass-Steagall Act

Sanders proposes to break up big banks that are "too big to fail" by supporting a "21st Century Glass-Steagall Act." In the February 4 Democratic debate, he said, "If Teddy Roosevelt were alive today, a good Republican by the way, what he would say is: Break them up; they are too powerful economically; they are too powerful politically."

For more original Truthout election coverage, check out our election section, "Beyond the Sound Bites: Election 2016."

Many economists believed that the integration of commercial banking with investment banking, which was allowed under the repeal of the Glass-Steagall Act, deepened the 2008 crisis. The repeal of the Glass-Steagall Act was called the Gramm-Leach-Bliley Act. The Glass-Steagall Act was passed in 1933 in response to a number of bank failures that happened after the Great Depression. It separated commercial banking activities from risky investment banking activities. But the act was repealed in 1999 under President Bill Clinton after $300 million worth of lobbying efforts. He believed that the act was "no longer appropriate to the economy in which we live. It worked pretty well for the industrial economy ... But the world is very different."

Some of the biggest banks, like JPMorgan Chase, are already 80 percent bigger than they were since they were last bailed out.

After the repeal, the investment banks resorted to risky trading, since such activities remained largely unregulated. These non-bank financial institutions were known as "shadow banks" and were not subjected to traditional banking regulations. They remained in the shadows of the traditional banking system and channeled funds from savers to investors through a range of funding techniques. The shadow banks earned enormous profits from reckless derivatives trading, and their interlinkages with commercial banks and insurance institutions made the risk systemic in nature. Another act that left the multitrillion-dollar derivatives market unregulated was the Commodity Futures Modernization Act, which was signed into a law in 2000. The act allowed inclusion of some of the most complicated derivatives, like mortgage-backed securities and credit-default swaps. In a loosely regulated environment, these risky products brought in lots of uncertainty to the financial system.

Eventually, the banks became so leveraged and huge that in the event of a failure, they posed a huge systemic threat to the entire economy. The estimated value of the derivatives holdings on banks' balance sheets had expanded from $88 trillion in 1999, to a whopping $672 trillion by 2008. During the subprime mortgage crisis, the banks were bailed out with taxpayers' money to prevent financial contagion from spreading to the entire financial system. In 2015, Forbes reported that according to the special inspector general for the Troubled Asset Relief Program (TARP), the total commitment of the US government was $16.8 trillion, out of which $4.6 trillion had already been paid out. TARP was created by the US Treasury to stabilize the economy and prevent any foreclosures in the wake of the 2008 financial crisis.

In 2014, The New York Times reported that US banks still held huge amounts in derivative trading. "American banks have nearly $280 trillion of derivatives on their books, and they earn some of their biggest profits from trading in them," the Times reported. Some of the biggest banks, like JPMorgan Chase, Bank of America and Wells Fargo, are already 80 percent bigger than they were since they were last bailed out.

Reforming the Wall Street Business Model

In a one-on-one debate with Hillary Clinton on February 4, 2016, Sanders highlighted the seriousness of the banking scandals not being treated as criminal offenses. He said, "Kid gets caught with marijuana, that kid has a police record. A Wall Street executive destroys the economy, $5 billion settlement with the government, no criminal record."

The 2008 financial crisis left many scarred due to the greed of the most powerful in the financial system, but post-2008, the banking system witnessed a series of banking crimes. Banking scandals like money laundering, insider trading and foreign exchange rigging involved some of the biggest banks. The concerned CEOs and the involved bank executives either voluntarily stepped down or were sacked in an event of fraud detection. In August 2015, Tom Hayes, a former trader at UBS and Citigroup, was sentenced to 14 years in prison for his alleged role in what was known as the Libor scandal.

Hayes was convicted of attempting to fraudulently manipulate the London interbank offered rate, or Libor, which is the interest rate that banks charge one another for loans in the London market, according to Bloomberg. Galleon Group hedge fund founder Raj Rajaratnam made $63.8 million in illicit profit from 2003 to 2009. He traded in stocks such as eBay Inc., Goldman Sachs Group Inc. and Google Inc., and was sentenced in 2012. The New York attorney has identified 70 additional hedge funds, but the prosecution for them has been very slow.

As of May 2015, global banks have paid more than $9 billion in fines, with many traders and brokers being fired, barred and forced to resign. Many of the banking crimes were related to subprime mortgage lending. In a recent settlement, the world's largest mortgage lender, Wells Fargo, agreed to pay $1.2 billion for engaging in reckless lending under a Federal Housing Administration program.

Reforming the Credit Rating Agencies

Sanders proposes to turn credit rating agencies into nonprofit organizations and make them independent from the shadow of Wall Street. Credit rating agencies (CRAs) give ratings to financial products and sovereigns and these ratings help investors decide which product is safe for investing. Hence, the role of CRAs remains crucial to the economy and investors.

Many of the CRAs were involved in providing inaccurate ratings to products that turned toxic during the 2008 financial collapse. The CRAs knew about the risk of the speculative mortgage-backed derivatives, but still gave them AAA ratings. Currently, the "big three" CRAs - Standard & Poor's (S&P), Fitch Ratings and Moody's Investors Service - control 95 percent of the credit ratings market, with very little competition from any major player in the market.

Sanders aims to make the CRAs independent of Wall Street and to do away with the "issuer-pays model" under which the CRAs operate. The model allows a bond's issuer to pay an agency or agencies for initial ratings and for ongoing ratings. The big three CRAs were criticized for behaving as monopolies during the crisis and providing investors with biased ratings that were inaccurate and lacked transparency. In 2015, a lawsuit alleged that S&P issued inflated ratings that misrepresented securities' true credit risks. Many investors, mostly federally insured financial institutions, lost billions of dollars on collateralized debt obligations (CDOs). Finally, S&P agreed to pay $77 million, in addition to being banned for one year from rating commercial mortgage-backed securities.

Many of the suggested Sanders reforms address the issue of the 2008 financial crisis, including the issue of banks being "too big to fail." A document signed by 170 of the nation's top economists has supported the Wall Street reforms proposed by Sanders. In the document, they write, "The only way to contain Wall Street's excesses is with reforms sufficiently bold and public they can't be watered down. That's why we support Senator Sanders's plans for busting up the biggest banks and resurrecting a modernized version of Glass-Steagall."

The Importance of Community Banks

The 21st Century Glass-Steagall Act and breaking up big banks will surely also encourage the growth of a traditional community banking system that has been adversely affected by the rise of "too-big-to-fail" banks (that have easy access to huge funds). Community banks are roughly defined as small banks that carry an asset size of less than $10 billion. They are vital to local communities as they work on building long-term relationships with their customers. Community banks focus on the needs of local families, businesses and farmers, and provide small loans for local and agricultural businesses. A 2015 Harvard University study found that they provide 77 percent of agricultural loans and 50 percent of small business loans.

But the 2008 crisis and implementation of strict regulations under Dodd-Frank have put this important sector under immense pressure. The cost of sustenance in the current banking environment under expensive regulations has become a challenging factor for many community banks, resulting in mergers or shutdowns. Community banks have seen a decline of 12 percent in their shares of assets since the introduction of Dodd-Frank regulations in 2010. This section of the small banking system had little role to play in the 2008 financial crisis, yet it had to face the repercussions in the form of stringent banking rules. According to the Federal Reserve Bank of Kansas City, "community banks are not major participants in large-dollar wholesale payments systems" and hence "they pose little or no systemic risk to the overall financial system." Sanders' approach toward big banks and breaking them up will help bring back the traditional community banking system and promote healthy and fair competition in the industry.

Breaking up big banks, instating a 21st Century Glass-Steagall Act, restructuring the rating methodology of credit rating agencies and holding bankers accountable for their banking crimes are likely to address some relevant and pending issues on Wall Street.