Welcome to part two of a three part series on our presidential candidates’ stances on economic issues. Take a look at last weeks post on taxation, it’s exciting stuff. There are now fewer candidates, thanks to the Iowa Caucus smashing the hopes and dreams of a few contenders. So goodbye Martin O’Malley, Mike Huckabee, Rick Santorum, and, the only person I actually included in last week’s post who’s quitting, Rand Paul. This week I’ll also not look at Ben Carson, because I’d prefer to give more time to fewer candidates.
This week, the issue is regulation! An enormous part of government is regulating various economic environments to achieve what those in power perceive to be a more efficient and/or equitable outcome. We’ll look specifically at their views on regulating the financial sector, aka “Wall Street” in political lingo.
As can be expected, the Democratic candidates support tighter regulations on the financial sector while the Republicans are mostly for deregulation. The core of their arguments are concerns over equity and efficiency, and I’ll point that out in each case because it’s remarkable how often candidates employ economics, perhaps unknowingly.
Candidates on the Dodd-Frank Act: Some backstory first. This Act, enacted during the Great Recession, marked the biggest regulatory change to the financial sector since the Great Depression. It’s a huge bill, so in summary, it adds a lot of government oversight to the financial industry, creates the Consumer Financial Protection Bureau (CFPB) for protecting citizen rights, restricts forms of trading and much more. It also defines what constitute a “big bank”: a bank with over $50 billion in financial assets.
It’s still in effect, and all candidates have a strong opinion. Cruz, Trump, Rubio, and Bush all think the Act hasn’t helped create a safer financial environment, just a more costly one. Bush wants it repealed and appeals to equity. He says that Dodd-Frank is hurting community banks while larger banks with more resources can outmaneuver the laws.
Rubio and Cruz want it repealed because of their strong opinion that regulations in general hurt economic growth. As Senators, Rubio and Cruz repeatedly wrote bills that would have the Government Accountability Office research the cost of all federal regulation on economic growth annually. I’d like to counter with how impossible that is to calculate, and what an inefficient allocation of resources that would be. They both say Dodd-Frank is costing us by extending government reach and making more red-tape, which, in economic terms, they’re saying the government is preventing the efficient allocation of resources.
Similarly, Trump wants it repealed, saying that these regulations have prevented banks from loaning money to people who create jobs. That’s again an efficiency argument that the regulations are restricting investment and preventing the efficient allocation of resources.
The Democratic nominees contend that the Act is resulting in some forms of investment being diminished, but that these forms of investment are far too risky and contributed to the Great Recession, making them inefficient on a macro scale. Therefore, they’re saying that these regulations are effectively forcing a more efficient allocation of resources than the market creates on its own. Naturally, they want to keep and enhance Dodd-Frank.
Candidates on Glass-Steagall Act and More Regulation: This Act was also born from the Great Recession but was undone with Bill Clinton’s support in 1999. One important component of it prevented commercial banks from also being investment banks, meaning that a bank who takes citizen money couldn’t turn around and put it into stocks.
There’s a good point that the financial crisis wasn’t really caused because this Act was repealed, a point which no candidate dares bring up because it’s so misunderstood. However, Sanders is a huge supporter of bringing it back, stating that banks shouldn’t be gambling with other people’s money. It’s an equity issue clearly, but also an efficiency argument that normal people banks need to remain fluid and insulated from other financial institution woes.
None of the Republicans bother talking about Glass-Steagall because they’re against it. The same regulation argument as before I’m sure. Clinton bounces around the Glass-Steagall Act because of it’s troublesome connections to her husband, but she’s definitely for increased regulation of the financial industry.
Clinton’s Extra Regulations: Clinton wants to use the U.S. Department of the Treasury to reduce the number of tax inversions – where an American company merges into a foreign company to lower its tax burden – by making an “exit tax.” This would lower the profitability of leaving U.S. soil, keeping more companies based in here and paying U.S. corporate income tax. This is an equity concern, that companies shouldn’t be able to pay a lower share of taxes by gaming the system.
She’d also impose a “risk fee” on “big banks” (definition outlined in Dodd-Frank), which would be an incentive for huge banks to dissolve and be a disincentive for bank mergers. The argument is that having a few banks control most of the nation’s assets is asking for trouble; if one collapses, it would send giant recessionary shockwaves. Whereas, if we had many smaller banks, no single collapse would hurt the system. This, in turn, would make it less necessary to provide giant bailouts when trouble hits. It’s all about trade-offs, as it might hinder economic growth, at the same time it reduces the chances of catastrophe.
Finally, Clinton gives more equity nods by vowing to prohibit private sector employers from offering bonuses to departing employees who join the government, and hold financial executives more accountable for the conduct of their company by making and increasing criminal statutes. You can argue there’s an efficiency gain too, because private interests are better blocked from public office, public officials can focus on public matters, and holding the right people accountable increases punishment and enforceability, reducing illegal behavior.
Sanders’ Extra Regulations: Sanders takes bigger regulatory steps than Clinton. He agrees with Clinton that bonuses from former executives going into public office shouldn’t be allowed, and holding executives more accountable. He wants to cap credit card interest rates at 15%, the equity argument being that banks shouldn’t get to charge unnecessarily high prices, and the efficiency argument being that people in greater debt contribute less to society, so high interest rates hurts GDP.
He wants the Secretary of the Treasury to break up all “big banks” for the same reasoning as Clinton, except more drastic, of course. He wants to impose a Financial Transaction Tax that applies to every financial security trade, which disincentivizes some forms of trading that he deems as too risky and that contributed to the Great Recession.
He also wants post offices to provide simple banking services. His equity argument is that poor people don’t have access to the same financial resources as the rich, which sets them back and isn’t fair. The efficiency argument is that people with access to better financial resources can more efficiently allocate their money and boost the economy.