Fisking Frank's Grand Bargain

James Taranto pointed me towards this article in the Boston Globe about Barny Frank’s agenda once he becomes chairman of the House Financial Services Committee. Taranto makes a good point about how Frank’s agenda would be more like a protection racket in the private sector. The article also illuminates a number of important aspects of Frank’s worldview that I thought interesting enough to fisk below.

Representative Barney Frank has proposed in a series of meetings with business groups a "grand bargain" with corporate America: Democrats would agree to reduce regulations and support free-trade deals in exchange for businesses agreeing to greater wage increases and job benefits for workers.

So we are going to reduce regulations in return for more regulations on minimum wages and benefits. What does this even mean? The article does not make clear exactly which regulations are at issue here, but clearly they must not be doing much if he is willing to get rid of them in exchange for businesses paying their employees more. Furthermore, the usual protectionist concern about free-trade deals revolves around increased competition for higher paid US workers from lower paid foreign workers. Simultaneously removing trade barriers and increasing the minimum wage, would have the effect of putting more people out of work. So, how does this make any sense?

Frank, the Newton Democrat who is in line to chair the House Financial Services Committee, has struck a conciliatory posture with financial-industry leaders in recent years. But since the morning after Election Day, he has moved quickly to lay out an ambitious plan to try to end the political stalemate between Republicans and Democrats on broad economic issues.
"What I want to do is break that deadlock," Frank said in an interview. "A lot of policies that the business community wants us to adopt for growth are now blocked. On the other hand, the business community is successfully blocking the minimum wage [increase] and created a very anti union attitude in the Congress."

Well, you cannot really blame the business community from attempting to block anti-growth minimum wage increases can you? As for creating an anti-union attitude in Congress, I see the existence of unions as evidence of poor corporate management at some point in the past simply because in the presence of good management employees would not feel any need to form a union. Unfortunately, unions also tend to make their companies less competitive. So being anti-union is really just being for good corporate management, which is ultimately a pro-growth and pro-prosperity position.

Frank proposes that if businesses support a minimum wage increase and provide protection for workers adversely affected by trade treaties, Democrats would be more willing to ease regulations and approve free-trade deals.

What kind of protection can a business possibly provide to workers adversely affected by trade treaties? A US based business with expensive workers has products with a higher cost than a business with inexpensive foreign workers. So in the presence of free trade, consumers will tend to buy products from the low cost foreign business than from the high cost US business. That will ultimately put the US business out of business. I have no idea what Frank can possibly mean by this.

Frank also would support changes to immigration rules favored by businesses, and noted that allowing more immigrants would put needed funds into the Social Security system.

I assume that he is talking about increases in the number of H1-B visas granted for highly educated immigrants, which would certainly be a positive for the economy, although I am a little skeptical that H1-B people are going to save Social Security. Also at least in the short term, the presence of more immigrants, highly skilled or not, would put more downward pressure on wages, which would seem to be at odds with the plan to raise the minimum wage.

Furthermore, true immigration reform, would have to include allowing anyone willing to work the ability immigrate to the US. These low skilled immigrants would certainly prove helpful to the US economy, but they might not be able to find legal work if the minimum wage were increased.

Frank casts his proposal as a way for capitalists to quell some of the populist fervor that was expressed in last week's election, when many Democrats vowed to crack down on companies moving jobs overseas.
"I'm a capitalist, and that means I'm for inequality," Frank told Boston business leaders on the morning after Election Day, in a speech about his grand bargain. "But you reach a point where you get more inequality than is healthy, and I believe we're at that point.

It is actually quite reassuring to hear a liberal Democrat describe himself as a capitalist who is for inequality, though I am curious to see how Frank defines more inequality than is healthy.

"What we want to do is to look at public policies that'll get some bigger share of the increased wealth into wages, and in return you'll see Democrats as internationalists. . .. I really urge the business community to join us."

I am not sure quite what to make of this statement. I assume that Frank is talking about creating policies to increase wages relative to corporate profits, which illustrates how much Frank trusts the government in relation to private business. I remain convinced that the only way to have general prosperity is to have wildly successful businesses that can identify problems and offer to solve them in new and innovative ways.

After 26 years in Congress, Frank's ambition -- and his ability to broker such a deal -- is at an apex. His power will take a quantum leap when his chairmanship is approved by House Democrats -- an approval that is little more than a formality. The 70-member Financial Services Committee oversees everything from banking to housing to urban affairs.
Frank is also a close adviser to Speaker-elect Nancy Pelosi, with whom he bonded during the campaign when Republicans deemed both of them reasons to be fearful of Democrats.
But while Frank has won support in Massachusetts among financial-services executives, some national business leaders are skeptical. Bruce Josten , chief lobbyist for the US Chamber of Commerce said he is worried that Frank's grand bargain would mandate costly benefits to employees, including health care , in exchange for support of free trade.
"His grand bargain . . . certainly is not going to sail with the American business community," Josten said in an interview. Josten noted that Frank historically has been at odds with the US Chamber due in part to opposition to trade deals. In 2005, for example, Frank supported the chamber's issues only 33 percent of the time.

Hopefully this post illustrates some of the reasons that Frank’s grand bargain is not going to sail.

Frank, for his part, is unconcerned. Asked about the chamber's low ranking of him, he responded with one of his classic zingers: "That's more than I give them."
Frank said he will work out details of his grand bargain after conducting a series of hearings starting early next year. "I am not claiming I have majority support," he said. "I expect to spend much of the next year in the committee documenting this." But he said he has general backing from Pelosi and other top Democrats.
A starting point could be health care. Many businesses are trying to shed high health care premiums. Frank hopes that workers and businesses can agree on a government-administered plan paid for by workers that would reduce burdens on businesses, which would pass on savings to employees through higher wages.
"I think employer-paid health care is a mistake," he said. "I think it depresses wages."

Employer-paid heath care is certainly a mistake, but not only because it depresses wages. Employer-paid health care is a mistake because it greatly reduces consumer choice and responsibility. Forcing the majority of Americans into low deductible healthcare plans whose premiums are employer-paid causes major distortions in the healthcare market by removing price signals from the consumer’s decision-making process.

What we really need is a worker-administered plan paid for by workers. The reason that we do not see this today is because businesses who pay healthcare insurance premiums for their employees can deduct the money paid for those premiums from their earnings for tax purposes. Because individuals cannot deduct premium payments from their income for tax purposes, the current logical solution is for the employer to pay the premiums so that both employer and employee come out ahead and the government gets less in taxes. The simple change here is to allow employees to deduct healthcare insurance premiums from their income for tax purposes. Simply creating one more individual tax deduction allows for the market to function; creating an optimized healthcare insurance market.

Then you can worry about what to do with low-income individuals who cannot afford or choose not to purchase health insurance. Frank would likely favor a governmental solution while I would prefer private charities to fill this need.

Stephen J. Collins , president of the Automotive Trade Policy Council, which represents Detroit's Big Three automakers, said business leaders would welcome such a discussion with Frank. "Our companies are very open about the fact that they are facing massive competitive challenges of a global nature that need big answers," Collins said. "There has to be a partnership between government and industry to solve some of these problems, and health is one of them."

Of course the automotive industry wants to talk to Frank about this. They are terrible at managing their people and are uncompetitive because of it. I am sure they would love to have some government subsidies to keep them afloat so that they do not need to do the hard work of making their operations efficient. Foreign-based automotive manufacturers have been opening plants in the US for decades and they are killing the Big Three. The problem has nothing to do with American workers or government policy. It has everything to do a legacy of terrible management.

Much of Frank's work on economic issues has been behind the scenes until now. In the months before the election, Frank wrote a series of strategy memos to Democratic colleagues in which he urged them to campaign on "how poorly most workers have fared under the Bush economy."
In one memo, Frank went through a point-by-point rebuttal of a White House report on how workers fared under the Bush administration, arguing that only the wealthiest Americans have seen a significant income gain.

Yeah a 4.4% unemployment rate is really terrible for workers, right? Come on, the economy is tearing it up and has been for the last five years.

While it might seem like a stretch for one of the most liberal members of Congress to believe he is in position to strike a monumental deal with big business, Frank said he has a track record of working with banking and financial companies that should allay such concerns.
For example, he said, he put pressure on Bank of America to retain jobs in Massachusetts, but he also helped pass rules allowing banks to process more money electronically.

Although I am sure that passing rules to help banks process more money electronically is helpful to banks (why are there even federal rules on this in the first place?) I am not sure that putting pressure on a company to do something qualifies as working with the company. It sounds more like threatening the company to me.

He also has backed measures to help banks by making it harder for Wal-Mart and similar national chains to enter the retail banking business.

Well that certainly qualifies as working with banks. Of course it also qualifies as working against Wal-Mart, working against Wal-Mart’s customers, and working against efficiency in the economy. If Wal-Mart can offer its customers banking services less expensively or more conveniently than a traditional bank then it should be allowed to do so. Failing to allow a new company to enter into an established market is called being parochial and is an anti-growth position. The only ones better off are the banks. Everyone else is worse off.

For Boston's large money-management industry, meanwhile, Frank has served as an important ally. For instance, he once sided with Fidelity Investments chief executive Edward C. Johnson III in arguing against a law that would require mutual-fund boards to have independent chairmen.

Admittedly I agree with Frank on this point. It was certainly a courageous stand considering his base and congressional allies.

Many national representatives of the financial industries have become major Frank supporters. In the 2006 election cycle, banking and financial industries poured $457,299 in Political Action Committee money to Frank's campaign fund, accounting for the majority of the $721,561 in committee funds that he received. By comparison, labor union committees , a more traditional ally of liberal Democrats, gave Frank $83,000.

If they were successful in keeping Wal-Mart out of their businesses then this looks like a great deal.

At the meeting with Boston business leaders, Frank was lauded as a liberal who has helped the financial industry. "I believe he's one of the voices in the Democratic party that is trying to reposition the party as a pro-growth, pro-jobs party as opposed to simply being against things," said Paul Guzzi , president of the Greater Boston Chamber of Commerce, which sponsored the speech.

As stated there are certainly some positives in Frank’s record but I also have some major concerns. Nonetheless at least he is not talking like the socialist wing of the Democratic Party.

Former representative Steven Bartlett , a Texas Republican who served with Frank in Congress and who now represents businesses as the president of the Financial Services Roundtable, said Frank's ability to work with business leaders and Republicans should not be underestimated.
"I'm a very conservative Republican and Barney is a very liberal Democrat, but we worked a lot of legislation together," Bartlett said in an interview.
But even Bartlett wonders whether Frank will be able to broker something so large as a grand compromise between business and labor and Democrats and Republicans. Bartlett said Frank's effort sounds more like a political framework than legislation.
Frank, however, is optimistic. Asked how much his power increases by going from ranking minority member to committee chairman, he responded: "It's a quantum difference. It is the difference between 'I wish I could do this' and 'I'm going to do this.' "