The Price of Inequality: How Today's Divided Society Endangers Our Future (62 page)

36.
Ally, formerly GMAC, in which the government has 74 percent ownership.

37.
Quoted in Gretchen Morgenson, “Massachusetts Sues 5 Major Banks over Foreclosure Practices,”
New York Times
, December 2, 2011, pp. B1, B9. New York State’s attorney general Eric Schneiderman also sued Bank America, Wells Fargo, and JPMorgan Chase, describing what they did as “bizarre and complex,” an end run around the traditional public recording system. The motive was clear: saving $2 billion in recording fees. MERS, of course, denied the charges. “New York Sues 3 Big Banks Over Mortgage Database,”
New York Times
, February 4, 2012, p. B6.

38.
Based on an analysis of data from Lender Processing Services. On average, it took 792 days for large loans, 611 for small loans. The differences were especially large in states that required court proceedings. Still, in California, a state that doesn’t, foreclosures on large mortgages took 50 percent longer than on small ones, 671 days vs. 445. Interestingly, before the mortgage crisis, when the “ordinary” rule of law was working, there was essentially no difference, 251 days for large mortgages, 260 for small ones. See Shelly Banjo and Nick Timiraos, “For the Costliest Homes, Foreclosure Comes Slowly,”
Wall Street Journal
, February 28, 2012, available at
http://online.wsj.com/article/SB10001424052970204369404577209181305152266.html
.

39.
Our complex legal system contributes to the costs and uncertainty. The oil companies have tried (in part successfully) to limit their liability for, e.g., offshore oil disasters. Courts have limited liability for economic damages resulting from, say, an oil spill to those most directly affected. In the case of the
Exxon Valdez
oil spill, this meant that many of those who were injured by the destruction of the fishing industry couldn’t recover their lost profits. The Oil Pollution Act of 1990 tried to correct some of these limitations. But the full testing of the legal framework—with the legions of lawyers that likely will be mounted by BP, attempting to limit what it has to pay out—will take years. For a discussion exemplifying the complexity of the legal framework, see Ronen Perry, “The Deepwater Horizon Oil Spill and the Limits of Civil Liability,”
Washington Law Review
86, no. 1 (2011): 1–68.

40.
The patent system has long been used in such an unfair and discriminatory way. Patent fees in the UK from the start made access to the patent system available only to the wealthy. See Z. Kahn and K. Sokoloff, “Patent Institutions, Industrial Organization and Early Technological Change: Britain and the United States, 1790–1850,” in
Technological Revolutions in Europe
, ed. M. Berg and K. Bruland (Cheltenham, UK: Elgar, 1998). B. Zorina Kahn has noted, “Prohibitively high costs . . . limited access to property rights in invention. These constraints favoured the elite classes of those with wealth or exceptional technical qualifications. Inventors who wished to obtain protection throughout the realm had to contend with the bureaucracy of three patent systems, and to pay fees that ranged from £100 for an English patent to £300 for property rights that extended to Ireland and Scotland.” Khan, “Intellectual Property and Economic Development: Lessons from American and European History,” mimeo, 2003. See also B. Zorina Khan,
The Democratization of Invention: Patents and Copyrights in American Development, 1790–1920
(New York: Cambridge University Press, 2005).

41.
Lower courts sometimes rule one way, higher courts the other, with the entire legal process stretching out for a very long time. Moreover, some jurisdictions may recognize the patent, others reject it. See S. Decker, “NTP Wins Court Ruling on 7 Patents from Apple, AT&T Cases,”
Bloomberg
, August 1, 2011. For an earlier and broader discussion of these issues, see J. E. Stiglitz,
Making Globalization Work
(New York: W. W. Norton, 2006).

42.
There are alternative ways of organizing the patent system that can avoid the scope for extortion, such as the liability system, where individuals have the right to use any patent, upon payment of a “reasonable” fee. Alternative ways of organizing the intellectual property regime can create a more level playing field. Small changes in the rules can have large distributive consequences. There was a heated debate in the United States concerning the move from a system where the patent was given to the “first to file” rather than “first to invent.” The first to file gives a big advantage to big corporations that have on their staffs large numbers of patent lawyers, ready to file a patent application the second a patentable innovation occurs. See the work of Jerome H. Reichman, including his “Saving the Patent Law from Itself: Informal Remarks concerning the Systemic Problems Afflicting Developed Intellectual Property Regimes,”
Advances in Genetics
50 (2003): 289–303, and the references cited there.

43.
Edward Wyatt, “Judge Blocks Citigroup Settlement with S.E.C.,”
New York Times,
November 28, 2011.

Chapter Eight
T
HE
B
ATTLE OF THE
B
UDGET

1.
The report of the commission is available at
http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf
.

2.
Bipartisan Policy Center Debt Reduction Task Force (chaired by former Senate Budget Committee chairman Pete Domenici and former White House budget director and Federal Reserve vice chair Alice Rivlin, and included nineteen former White House and Cabinet officials, former Senate and House members, former governors and mayors, and business, labor, and other leaders). Their report, “Restoring America’s Future,” is available at
http://www.bipartisanpolicy.org/sites/default/files/BPC%20FINAL%20REPORT%20FOR%20PRINTER%2002%2028%2011.pdf
(accessed March 5, 2012).

3.
Titled “Roadmap for America’s Future,” the proposals are available at
http://www.roadmap.republicans.budget.house.gov
/ (accessed March 5, 2012). The House of Representatives passed a variant of his budget on April 15, 2011, available at
http://budget.house.gov/UploadedFiles/PathToProsperityFY2012.pdf
(accessed March 5, 2012).

4.
The ceiling limits how much the government can borrow. But Congress had also passed laws mandating expenditures and assessing certain taxes. Although Congress legislates tax rates, the tax revenues depend on how well the economy is doing. If the economy is doing well, revenues are high; in recessions, revenues are low. As the government borrows more year after year, the total amount of
debt
increases. Congress, somewhat inconsistently, also sets a limit on the amount that the government can borrow. Without an agreement to increase the ceiling, some thought, the government would be forced to shut down. In any case, it would face an impossible situation: either the law specifying what was to be spent had to be broken, or the law specifying how much could be borrowed had to be violated.

5.
During testimony in Congress on January 25, 2001, Greenspan gave support for near-term tax cuts and expressed worries about the government’s paying off its debt too quickly. “But continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer-term fiscal policy issue of whether the federal government should accumulate large quantities of private (more technically nonfederal) assets. At zero debt, the continuing unified budget surpluses currently projected imply a major accumulation of private assets by the federal government. This development should factor materially into the policies you and the Administration choose to pursue. . . . In today’s context, where tax reduction appears required in any event over the next several years to assist in forestalling the accumulation of private assets, starting that process sooner rather than later likely would help smooth the transition to longer-term fiscal balance,” he said. “And should current economic weakness spread beyond what now appears likely, having a tax cut in place may, in fact, do noticeable good.” See “Testimony of Chairman Alan Greenspan: Outlook for the Federal Budget and Implications for Fiscal Policy,” before the Committee on the Budget, U.S. Senate, January 25, 2001, available at
http://www.federalreserve.gov/boarddocs/testimony/2001/20010125/default.htm
(accessed March 5, 2011).

6.
See the CBO’s “Current Budget Projections: Selected Tables from CBO’s Budget and Economic Outlook: An Update,” August 2010, pp. 9–10, available at
http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/117xx/doc11705/budgetprojections.pdf
(accessed February 22, 2012). This estimate includes an adjustment for the magnified effect of both the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003.

7.
Economic Policy Institute, “Economic Snapshot,”
May 18, 2011, available at
http://www.epi.org/publication/what_goes_into_a_budget_deficit
/ (accessed March 5, 2012), based on CBO data. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, not only extended the Bush tax cuts by two years; it introduced other tax expenditures. The CBO estimated that the act would expand the deficit by $390 billion in 2011, and by $407 billion in 2012. See “The Budget and Economic Outlook: Fiscal Years 2011 to 2021,” CBO 2011, available at
http://budget.senate.gov/democratic/index.cfm/files/serve?File_id=94312aeb-8a73-41cd-b774-8533403f83a6
(accessed March 5, 2012). In January 2012 the CBO projected a deficit for the year of about $1.1 trillion. See “The Budget and Economic Outlook: Fiscal Years 2012 to 2022,” CBO 2012, available at
http://cbo.gov/sites/default/files/cbofiles/attachments/01-31-2012_Outlook.pdf
(accessed March 5, 2012).

8.
In present discounted terms, expressed in today’s dollars. See J. E. Stiglitz and Linda Bilmes, Testimony before the U.S. Congress Hearing on the Economic Costs of the Iraq War, October 24, 2007,
http://www.hks.harvard.edu/news-events/news/testimonies/linda-bilmes-testifies-before-us-house-of-representatives-commitee-on-the-budget-on-the-economic-costs-of-the-iraq-war
); and Linda J. Bilmes and J. E. Stiglitz,
The Three Trillion Dollar War: The True Cost of the Iraq Conflict
(New York: Norton, 2008). Others have provided even higher numbers. The Eisenhower Study Group Research Project estimates that as of June 2011, $3.2–$4 trillion had been spent or obligated in the wars in Iraq, Afghanistan, and Pakistan since 2001. See “The Costs of War since 2001: Iraq, Afghanistan, and Pakistan,” available at
http://costsofwar.org/sites/default/files/Costs%20of%20War%20Executive%20Summary.pdf
(accessed March 5, 2012).

9.
“Funding for Operations in Afghanistan and Iraq and for Related Activities” was projected to cost $145 billion for 2012. See “The Budget and Economic Outlook: Fiscal Years 2012 to 2022,” CBO 2012, available at
http://cbo.gov/sites/default/files/cbofiles/attachments/01-31-2012_Outlook.pdf
(accessed March 5, 2012). See the next footnote for why this almost surely represented an under-estimate of war spending.

10.
Bilmes and Stiglitz, in
The Three Trillion Dollar War
,
estimate that the cumulative increase in defense spending between 2003 and 2008
beyond
costs attributed to the war at $600 billion. A substantial fraction of this was, in fact, hidden war spending.

11.
See “Defence Costs,”
Economist
,
June 8, 2011, available at
http://www.economist.com/blogs/dailychart/2011/06/military-spending
(accessed March 7, 2012). For an additional discussion see Bilmes and Stiglitz,
The Three Trillion Dollar War
.

12.
See “Lockheed F-35 Cost Controls in $662 Billion Defense Bill,”
Businessweek
, December 15, 2011, available at
http://www.businessweek.com/news/2011-12-15/lockheed-f-35-cost-controls-in-662-billion-defense-bill.html
.

13.
See the discussion in chapter 3 for cost estimates of this provision.

14.
CBO estimate, see p. 117 of “The Budget and Economic Outlook: Fiscal Years 2012 to 2022,” CBO 2012, available at
http://cbo.gov/sites/default/files/cbofiles/attachments/01-31-2012_Outlook.pdf
(accessed March 5, 2012).

15.
The U.S. government benefited from the bubble, for a while, which masked its true financial position, as it did that of ordinary Americans: some of the revenues were from artificial capital gains and profits from bubble prices, so that even after reversing the four actions described above, there might still be a deficit. Besides, health care inflation has exceeded overall inflation, necessitating further expenditures for Medicare and Medicaid.

16.
Of course, the capital gains tax cut was only part of the story of the creation of the bubble. Lax regulations and low interest rates also played a role.

17.
See Anton Korinek and J. E. Stiglitz, “Dividend Taxation and Intertemporal Tax Arbitrage,”
Journal of Public Economics
93 (2009): 142–59. The advocates of the preferential tax treatment for dividends made one other argument: it was
unfair
to tax both corporate profits and dividends. Originally, the preferential treatment was supposed to extend only to firms that actually paid taxes; but then in one of those frequent last-minute switches, that restriction was dropped. The result is an even greater inequity—income that escapes corporate profits taxes and, then, when it’s paid out, is taxed at a lower rate than comparable income of wage earners.

18.
The actual inefficiency of the municipal tax provision is less than this hypothetical example suggests. One study suggested that some “20 percent of the benefit from the municipal-bond exemption unintentionally leaks to bond buyers from higher-income tax brackets.” See Jordan Eizenga and Seth Hanlon,“Tax Expenditure of the Week: Tax-Exempt Bonds,” March 2, 2011, website of the Center for American Progress,
http://www.americanprogress.org/issues/2011/03/te030211.html
(accessed March 5, 2012), citing T. J. Atwood, “Implicit Taxes: Evidence from Taxable, AMT, and Tax-Exempt State and Local Government Bond Yields,” 
Journal of the American Taxation Association
 25, no. 1 (2003): 1–20.