Warren v. Weiss: Both Sides Have a Point

December 4th, 2014 at 11:48 am

If you follow this sort of thing, then you know there’s an interesting, ongoing dust-up between Sen. Elizabeth Warren and the White House over the nomination of investment banker Antonio Weiss for under-secretary of the Treasury for domestic finance. I see strong points of both sides of the debate, but I think the points on behalf of Mr. Weiss need to be amped up a bit, as they’re a lot more obscure.

Having been on the inside of the Obama administration, as the VPs chief economist and a member of the President’s economic team, I strongly agree with the thrust of Sen. Warren’s recent HuffPo piece wherein she lays out her opposition to the nomination. Her general point—economic policy is hugely influenced by who’s represented in the halls of power—is a profound one to which I can attest first hand.

The over-representation of Wall Street banks in senior government positions sends a bad message. It tells people that one — and only one — point of view will dominate economic policymaking. It tells people that whatever goes wrong in this economy, the Wall Street banks will be protected first. That’s yet another advantage that Wall Street just doesn’t need.

I’d actually go further. It’s often said that policy making at the highest level is much influenced by who’s in the room. That’s right, of course, but it’s not precise enough. What matters is not just who’s in the room, but who the people in the room are representing.

What the Senator is saying, at least to my ears, is that too many of those making high-level economic decisions do not deeply understand or carry with them the concerns and struggles of working families. They know about these concerns—they’re aware of “the research.” Many understand that the diminished bargaining power of labor is a factor in the highly unequal outcomes about which the Senator is so clearly concerned.

But understanding “a factor” is a limiting insight. It feeds into a systematic, technocratic analysis that basically argues for fixing the various parts of the system as you understand them—achieving some sort of “market equilibrium”—and then assuming the rest will work itself out.

Those of us who have a different group of people in our minds, as does Sen. Warren (and Vice-President Biden, I should add) know in our bones that this is fundamentally wrong. The rest won’t work itself out. “Fixing the system”—correcting market failures—may reflate credit markets and restore GDP growth, but while this is absolutely necessary, it is demonstrably insufficient to achieve more broadly shared prosperity.

Sen. Warren is one of the few highly visible politicians right now who understand both the inherent limitations of the dominant agenda and the importance of involving people at the highest levels of the policy process who are willing to take steps that redistribute bargaining clout and thus growth in such a way that the bakers of the pie, as opposed to the owners of the bakery, have a fighting chance of getting a fair slice.

On the other hand, I’m not sure I’d apply that critique to Antonio Weiss and this undersecretary position.

I have a passing relationship with Mr. Weiss, and long-time readers of my blog have actually been exposed to his work: he co-authored this Center for American Progress tax reform plan that I praised in various posts. It raised significant revenue from both the wealthy on the individual side of the tax code and from businesses on the corporate side, and—something I thought was important at the time (and I believe I was right!)—it extended the payroll tax holiday in 2013 (the fact that this tax break died prematurely cost us a lot of growth and jobs last year).

The under-secretary for domestic finance has to manage the nation’s debt, which last I checked was over $12 trillion, over 70 percent of GDP (that’s the part held by the public). Mr. Weiss would oversee the market for Treasury bonds, bills, and notes; he would manage the maturities of the debt in the Treasury portfolio in order to keep the government’s borrowing costs as low as possible.

That means he’ll spend his time working with investors, dealers in Treasury securities, and the Treasury Borrowing Advisory Committee to assess investor demand and make sure our auctions of Treasury securities most efficiently meet the demand. He’ll be busy creating 12-month forecasts of cash flows and debt levels for the U.S. government. And if Congressional renegades get jiggy with the debt ceiling, it’s on him to manage the available borrowing room under the debt limit so as to avoid default, while massaging the jangled nerves of our investors (Yo, Weiss: careful what you wish for!).

It is thus essential to have a person in that position who has hands-on experience in global finance. I don’t know the long history of this position but at least since I’ve been paying attention, it’s typically been filled by someone with precisely the market experience that Weiss brings to the table.

Sen. Warren has also raised valid concerns about the financial market oversight function of the job. If confirmed, Mr. Weiss would assist in helping to coordinate Dodd-Frank implementation (though that effort will continue to be led by the Deputy Secretary of the Treasury Sarah Bloom Raskin, a former Maryland Banking Commissioner, and a strong consumer advocate that Senator Warren herself has solidly endorsed).

Again, I see both sides. We really don’t need to hire foxes to guard the henhouse and back when I was involved with what became Dodd-Frank, some of the voices I found most valuable were that of Warren herself and of Damon Silvers of the ALF-CIO, both of whom well understood the workings of financial markets but more so, knew the stakes of this regulatory function from the perspective of working families.

But here too, it’s useful to have Treasury officials with market experience in the mix and Mr. Weiss, like a number of other market participants with whom I’ve worked, shares my views about the importance of rigorous oversight in the interest of breaking the bubble/bust cycle. I’m sure Sen. Warren will use her position in the Senate to grill Mr. Weiss on his regulatory views, as she should. From what I know of him, she may find he’s closer to her than she thinks.

So I’m sorry for all this “on-the-one-hand-this-on-the-other-hand-that” and I couldn’t agree more with the Senator about the lack of representation of those who’ve been under-represented in the economic policy process for far too long, at great cost to their economic well-being. But I wouldn’t let that critical goal block the highly capable Mr. Weiss from a shot at managing the debt and serving the country.

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3 comments in reply to "Warren v. Weiss: Both Sides Have a Point"

  1. Carl says:

    I’m sure that one can find a financial manager who isn’t completely beholden to the interests of Wall Street. How about weighing the candidate’s background non-academic / non-professional background – i.e., not going out of one’s way to hire someone who was upper-class at birth? Surely, there are competent people who weren’t born with a silver spoon…?

  2. Larry Signor says:

    Jared, On the other hand, about that $20 million…then there is The President’s Council on Jobs and Competitiveness (http://en.wikipedia.org/wiki/President), where I see a very one sided representation of US economic interests. The room is getting very crowded, and I am having trouble finding the pro-labor clique.

  3. Lance says:

    Many who have been vociferous in criticizing income and wealth inequality such as Paul Krugman and Joseph Stiglitz have not pointed to the increase income inequality as the cause of the depression. Those on the left who might be the natural proponents of a more progressive tax system have not connected the dots. They have a different theory as to the cause of the depression. They are adherents to the regulatory fallacy, the belief that the depression was caused by insufficient regulation.

    To determine if someone is an adherent of the regulatory fallacy ask this question: Do you believe that given the degree that the tax burden was shifted from the rich to the middle class, was there any type of regulatory policy which would have prevented the financial crisis? If they answer yes, they are adherents to the regulatory fallacy

    In Paul Krugman’s 2012 book “End this Depression Now!” he comes heartbreakingly close to connecting the dots between the reduction in the progressivity of the tax system and the cycle of overinvestment that caused the depression. He states that the book is much less concerned with the cause of the depression than what should be done to end it. His prescription is fiscal stimulus focused on the spending side that has even less of a chance of being enacted than the tax cuts suggested above.

    Those on the right have their own version of the regulatory fallacy. They blame the government sponsored enterprises Federal National Mortgage Association Fannie Mae (FNMA) and Federal Home Loan Mortgage Corp. (FMCC) and the Community Reinvestment Act. According to their theory, regulation such as the Community Reinvestment Act resulted in a vast increase in subprime mortgage lending that caused the financial crisis. Possibly the non-bank private entities that originated and securitized the most of the subprime loans mistakenly thought the Community Reinvestment Act applied to them.

    A slight variation on the regulatory fallacy is the financial innovation fallacy. As with the regulatory fallacy, both left and right versions, there is a miniscule grain of truth to it. Financial innovations such as credit default swaps and regulatory changes like repeal of the Glass-Steagall Act slightly affected the exact timing of the onset of the depression. However, once the tax burden was shifted from the rich to the middle class it was just a matter of time before middle-class consumers became unable to absorb the increased production and service the debt that accompanied the overinvestment. Different regulatory policies might have shifted the bubble more towards commercial real estate rather than residential real estate or visa versa but the outcome would have been similar.

    Blaming regulatory policies and financial innovation for the depression is like blaming the armaments manufactures and soldiers for World War II. In order for the war to occur there had to some weapons made and some soldiers to fight. If those particular armaments manufactures and soldiers were not available, others would have taken their place.

    Equally unhelpful in terms of addressing the income and wealth inequality which results in the overinvestment cycle that caused the depression are those who emphasize various non-tax factors. Issues such a globalization, free trade, unionization, minimum wage laws, single parents, problems with our education system and infrastructure can increase the income and wealth inequality. However, these are extremely minor when compared to the shift of the tax burden from the rich to the middle class. It is the compounding year after year of the effect of the shift away from taxes on capital income such as dividends over time as the rich get proverbially richer which is the prime generator of inequality…”