The Deregulation of Wall Street Is Now In Process

President Donald Trump with Treasury Secretary Steven Mnuchin. The Treasury Department released a report in June proposing a “broad rethink” of rules governing the U.S. financial sector. Many of the recommendations have been on the banking industry’s wish list for years. PHOTO: ZACH GIBSON / POOL/EUROPEAN PRESSPHOTO AGENCY
The Fox is now firmly in charge of the henhouse. This article in this morning’s WSJ shows clearly how far the present administration has already gone in dismantling the regulatory apparatus set up by the last administration to avoid another crash like the one we had in 2008. Whatever the bankers want, it seems, they will get.
 By RYAN TRACY and DAVE MICHAELS, Aug. 13, 2017 for The Wall Street Journal


Efforts toward financial deregulation are beginning to take concrete shape on rules governing trading desks, bank boardrooms, corporations’ financial disclosures and more. Nearly seven months into the Trump administration, regulators are setting the stage for a wave of eased rules.

Several agencies are reviewing the Volcker rule, a part of the 2010 Dodd-Frank Act that limits banks’ trading. Some regulators also recently dropped a plan to restrict bonuses on Wall Street that had been opposed by banks and brokerage firms. And the Labor Department on Wednesday disclosed an 18-month delay in the so-called fiduciary rule that requires brokers to act in retirement savers’ best interests rather than their own.

The moves show that while President Donald Trump is struggling to advance his legislative agenda in Congress, his administration has begun laying the groundwork to change some of the myriad rules that Wall Street has sought for years to overturn or water down.

“On most topics, we are still awaiting the approval of appointees, but it is encouraging that there are some issues, some of which are technical but incredibly important to running a bank, where some progress is being made,” said Greg Baer, president of the Clearing House Association of large banks.

“It is a time to…determine where the pendulum has gone too far,” Craig Phillips, counselor to U.S. Treasury Secretary Steven Mnuchin, told a government-advisory committee July 20 at the Federal Reserve Bank of New York.

Mr. Phillips, a former investment banker and senior executive at BlackRock Inc., has been leading the administration’s effort to identify changes to financial rules. He was a principal author of a Treasury Department report released in June that recommended 97 policies in the lending sector for Congress and regulators to re-examine. More reports are coming, covering other sectors.

So far, the rule book for Wall Street hasn’t been rewritten in major ways, in part because nominees for some key posts haven’t been named or are awaiting Senate confirmation. But officials who are in place are laying the groundwork.

Those efforts are triggering pushback about whether they would undermine protections adopted after the 2008 bank bailouts. Ohio Sen. Sherrod Brown, the top Democrat on the Senate Banking Committee, has said many of the proposals amount to “weakening or eliminating important safeguards.”

“Big banks are making record profits, yet they claim they’re besieged by their watchdogs,” he said last month.

Mr. Baer calls the changes under consideration “an effort to rethink things in a cogent way.”

Partisan tensions on Capitol Hill will make it difficult to make changes through legislation, meaning some items on the industry’s wish list, such as full repeal of the Volcker rule, are unlikely. But that inertia doesn’t restrict agency officials, who typically have broad discretion on how to implement rules that stem from legislation Congress has passed.

The current regulatory agenda of the Securities and Exchange Commission, published in July, removed more than a dozen proposals related to Dodd-Frank, including the plan to restrict bonuses.

The commission’s Trump-nominated chairman, Jay Clayton, has said he wants to lighten the regulatory burden on public companies, which are required to make public filings to keep shareholders informed about financial performance, business trends and potential risks.

He hasn’t taken action to scale back those rules yet, but his predecessor Michael Piwowar, a Republican SEC commissioner tapped by Mr. Trump to serve as acting chairman until Mr. Clayton was confirmed, started work toward changing two rules. One requires disclosure of the pay gap between chief executives and workers, and another requires companies to investigate whether their products include minerals from African countries where mining can benefit armed groups. Any significant changes to the rules would require an opportunity for public comment and a commission vote.

Mr. Clayton, in remarks last month to the U.S. Chamber of Commerce, also questioned whether small shareholders are abusing an election process that allows them to seek changes to corporate bylaws.

A more radical SEC step under study is how to revise the rules for who can invest in private companies. U.S. law allows companies to issue stock with little regulatory oversight as long as all investors qualify as wealthy or sophisticated enough to understand the risk or withstand potential losses. But Mr. Piwowar has questioned the restriction, saying it walls off sought-after investments for the rich.

The SEC and the four other federal agencies that wrote the Volcker rule agreed in recent weeks to give banks leeway on aspects of the regulation while beginning private discussions about how to rewrite it.

The Office of the Comptroller of the Currency, the chief agency that regulates federally chartered banks and which is temporarily led by a Trump appointee, took the first tangible step toward potentially rewriting the rule when it reopened it for comments from the public.

In early August, the Senate confirmed three of Mr. Trump’s nominees to the U.S. derivatives regulator, the Commodity Futures Trading Commission, including Chairman J. Christopher Giancarlo. That representation will strengthen the commission’s ability to carry out Mr. Giancarlo’s desired revamp of postcrisis rules governing the swaps market.

Mr. Trump in July announced his pick for the vacant job of Federal Reserve vice chairman in charge of bank oversight. The nominee, financier and former Treasury Department official Randal Quarles, has said he would support reviews of the Volcker rule as well as the central bank’s annual stress tests of large banks.

Staffers at the Fed already are taking a fresh look at a bank-capital rule known as the leverage ratio, a move long sought by the largest U.S. banks.

And the Fed in August proposed scaling back requirements it places on banks’ boards of directors, after determining it was overloading boards with too many specific requirements.

Not all the action is deregulatory. The new CFTC commissioners recently vowed to finish a position-limits rule to limit speculation in commodity markets, a regulation mandated by Dodd-Frank.

The Consumer Financial Protection Bureau, still led by an Obama appointee, in early July restricted mandatory arbitration in financial contracts, making it easier for consumers to sue financial companies. That rule won’t last if enough Republicans in the Senate vote to repeal it in the coming weeks.



Our Broken Economy, in One Simple Chart

    In 1980: The poor and middle class used to see the largest income growth.

     In 2014: But now, the very affluent (the 99.999th percentile) see the largest income growth.


By DAVID LEONHARDT, August 8, 2017 for The New York Times

Many Americans can’t remember anything other than an economy with skyrocketing inequality, in which living standards for most Americans are stagnating and the rich are pulling away. It feels inevitable.


But it’s not.


A well-known team of inequality researchers — Thomas Piketty, Emmanuel Saez and Gabriel Zucman — has been getting some attention recently for a chart it produced. It shows the change in income between 1980 and 2014 for every point on the distribution, and it neatly summarizes the recent soaring of inequality.


The line on the chart (which we have recreated as the red line above) resembles a classic hockey-stick graph. It’s mostly flat and close to zero, before spiking upward at the end. That spike shows that the very affluent, and only the very affluent, have received significant raises in recent decades.


This line captures the rise in inequality better than any other chart or simple summary that I’ve seen. So I went to the economists with a request: Could they produce versions of their chart for years before 1980, to capture the income trends following World War II. You are looking at the result here.

The message is straightforward. Only a few decades ago, the middle class and the poor weren’t just receiving healthy raises. Their take-home pay was rising even more rapidly, in percentage terms, than the pay of the rich.


The post-inflation, after-tax raises that were typical for the middle class during the pre-1980 period — about 2 percent a year — translate into rapid gains in living standards. At that rate, a household’s income almost doubles every 34 years. (The economists used 34-year windows to stay consistent with their original chart, which covered 1980 through 2014.)


In recent decades, by contrast, only very affluent families — those in roughly the top 1/40th of the income distribution — have received such large raises. Yes, the upper-middle class has done better than the middle class or the poor, but the huge gaps are between the super-rich and everyone else.


The basic problem is that most families used to receive something approaching their fair share of economic growth, and they don’t anymore.

It’s true that the country can’t magically return to the 1950s and 1960s (nor would we want to, all things considered). Economic growth was faster in those decades than we can reasonably expect today. Yet there is nothing natural about the distribution of today’s growth — the fact that our economic bounty flows overwhelmingly to a small share of the population.


Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation.


Remarkably, President Trump and the Republican leaders in Congress are trying to go in the other direction. They spent months trying to take away health insurance from millions of middle-class and poor families. Their initial tax-reform planswould reduce taxes for the rich much more than for everyone else. And they want to cut spending on schools, even though education is the single best way to improve middle-class living standards over the long term.


Most Americans would look at these charts and conclude that inequality is out of control. The president, on the other hand, seems to think that inequality isn’t big enough.

David Leonhardt is the managing editor of a new New York Times website covering politics and policy. He was previously the paper’s Washington bureau chief, as well as an economics columnist.


The United Auto Workers Lose Again

You will all recall the article we featured yesterday from the Sunday Review Section of The New York Times which told of how Nissan frightened its black employees in Mississippi into thinking they would lose their jobs if they voted for the union, and the National Labor Relations Board is investigating whether Nissan  illegally threatened to close the plant if workers chose to unionize.

This editorial covering the matter appeared in this morning’s Wall Street Journal and we have decided to reprint it in its entirety in this blog as an illustration of the newspaper’s bias. It so deftly  reverses explanations of each of the Times reported facts  as to fully satisfy its businessmen readers. Which of the two articles do you believe?  Reread the earlier article and compare. Doesn’t the editorial below strike you as having been written to match, blow for blow, the Times piece?

We have found the Journal’s reporting  to be on the whole balanced and fair. And we have drawn on it heavily for this blog. Its columnists, Peggy Noonan and William Galston (we apologize for having gotten Mr Galston’s name wrong in the earlier edition of this blog), are always worth reading. Its coverage of cultural events, films, books, art shows, compare favorably to the Times. It is only when the “Editor” takes up his pen to write that our mind says “prend garde” for here it comes! . . . .You judge.

By THE EDITORIAL BOARD of The Wall Street Journal, August 7, 2017

The United Automobile Workers suffered another humiliation in the South late last week as workers at a Nissan plant in Canton, Mississippi, voted in a landslide to reject union representation.

The nearly 2-to-1 defeat wasn’t for lack of effort from the union, which spent years making the case to the workers in Canton. In 2011 then-president Bob King said that if the union failed to organize transnational auto makers like Nissan, “I don’t think there’s a long-term future for the UAW, I really don’t.” The union spent heavily and enlisted big-name supporters like Sen. Bernie Sanders, Democratic National Committee chair Tom Perez, and actor Danny Glover. It lost 2,244 to 1,307.

More than 80% of the workers at the Canton plant are black, and the UAW and its Democratic allies sought to exploit racial politics as much as economics. In an op-ed for the Guardian, Sen. Sanders claimed that union supporters were “connecting workers rights with civil rights,” while Nissan was out to “exploit human misery and insecurity, and turn them into high profits.” They claimed white supervisors favored white workers.

But the race-baiting [the pot calls the kettle black] fell flat in Canton, where for 14 years Nissan has provided solid blue-collar jobs, many of which require only a high-school education. One of the UAW’s supporters told the New York Times last week that, before Nissan came to town, locals were stuck working in McDonald’s for $7 an hour, so “this is the best thing that ever happened to them.”

The plant’s initial hires are now earning about $26 an hour, while newer recruits can earn up to $24. That’s far more than the $16.70 average hourly production wage in central Mississippi. Nissan also offers retirement benefits comparable to other U.S. auto makers and up to 37 days a year of paid time off, including vacation and holidays. For the past two years workers have received a $4,000 annual bonus.

The Canton auto workers are also well aware of how escalating union demands and stifling work rules suffocated the Big Three U.S. car makers in Detroit. An indictment unsealed a week before the Canton vote alleges that the UAW’s vice president teamed up with the top labor negotiator at Fiat-Chrysler to pilfer millions of dollars from a fund intended to train auto workers. That’s not a good look when you’re asking workers to hand over a chunk of their paychecks in union dues.

Trigger warning: Nissan didn’t shrink from explaining to workers that unionization could strain the plant’s global competitiveness. The UAW responded by accusing the company of threats and harassment, filing a ritual complaint with the National Labor Relations Board, which supervised the election. The NLRB could order a new election, but unions typically do worse the second time around.

The UAW’s problem isn’t unfair negotiating tactics. The reason the union hasn’t been able to organize workers in the South, and the reason its ranks have shrunk by more than 75% in 35 years, is because most workers don’t think a union has much to offer and will eventually put their jobs at risk. [The Times points to the far more plausible reason that black workers in the South have little or no experience with unionization.]

Automation Replaces Financial Advisers in Some Banks, Part I

Sorry to put this out so late. By accident Parts II and III got posted before Part I.

“Automation is threatening one of the most personal businesses in personal finance: advice.” So begins this three part article in today’s Wall Street Journal. Ironic, isn’t it, that being replaced by automation—which managers haven’t hesitated to inflict on workers in the quest for higher profits—is now being imposed on them. It turns out that a great deal of the mystique of financial advising is spurious—since it can be done equally well by automation.


Because the original article is very long and complete in reporting this turn of events, we have broken it down into three parts.


In the latest test of the reach of technology, a new breed of competitors— including Betterment LLC and Wealthfront Inc. but also initiatives from established firms such as Vanguard—is contending even the most personal financial advice can be delivered online, over the phone or by videoconferencing, with fees as low as zero. The goal is to provide good-enough quality at a much lower price.

“It’s always been questionable whether or not advisers were earning our money at 1% and up,” said Paul Auslander, director of financial planning at ProVise Management Group in Clearwater, Fla., who says potential clients now compare him with less expensive alternatives. “The spread’s got to narrow.”

The shift has big implications for financial firms that count on advice as a source of stable profits, as well as for rivals trying to build new businesses at lower prices. It also could mean millions in annual savings for consumers and could expand the overall market for advice.

Competitors across the spectrum agree the demand is there. Advice “is big and growing—it’s what clients are looking for,” said Roger Hobby, executive vice president of private wealth management at Fidelity Investments.

The hunger for help marks a shift from the 1990s, when do-it-yourself investing was in vogue. Back then, the adoption of 401(k) plans moved responsibility for investment choices to company employees just as one of the biggest bull markets in history was boosting individuals’ confidence in their investing prowess. Meanwhile, pioneering online brokerage firms made trading inexpensive and convenient.

After internet stocks collapsed in 2000, along with the broader stock market eight years later, many individuals sought help. In the past decade, baby boomers started to retire and wanted technical guidance on drawing down their assets.


The advice industry expanded with the demand. Besides managing people’s investment portfolios—handling the trades, not merely suggesting them—some financial advisers also provide help with budgets or tax and estate planning.

The number of advisory firms grew to almost 3,900 in 2017, up from fewer than 750 in 2002, according to a Wall Street Journal analysis of Securities and Exchange Commission data. This universe of firms handles at least $100 million in assets each and provides both investment management and financial planning to individuals.

As of March 2017, such firms collectively had $5.5 trillion in assets on which they made investment decisions, the Journal’s analysis found. That is about six times as much as in 2002.

Throughout this period, advice fees have largely held steady—typically 1% of assets, with a potential discount for big accounts. One reason the standard held is many clients value aspects of advice that can’t always be measured or easily compared.

  1. Lansdowne Hunt, 72, of Burke, Va., said he became more price-conscious after his portfolio fell 31% in the late-2008 stock-market meltdown. So in 2012, he switched to a less expensive adviser, and this year, asked for a discount on its 0.9% fee.

After being rebuffed, Mr. Hunt shopped for a new adviser for his $1.3 million portfolio at firms including Charles Schwab Corp. , TD Ameritrade Inc. and Edward Jones. The former Naval officer and defense-contractor employee concluded his current Virginia advisory firm offers services, such as tax-sensitive investing and stock picking, that might be hard to replicate for a lower cost.

“I couldn’t get the exact twin,” he said.

Many firms are wagering that other customers will take less, for less.

Slow Economic Growth in The U.S.

Apart from the confirmation that we are not going to see economic growth in this country much above 2 percent  for a long time, if ever (which we read in Piketty long ago and have maintained in our blog ever since), what interests us in this article from The New York Times is Lawrence Summers’s listing of the conditions it would take to encourage such a growth and how we will never achieve them. The original article was twice as long.

       CreditJun Cen

By NEIL GROSS, August 6, 2017 for The New York Times

At the end of last month, the International Monetary Fund downgraded its forecast for economic growth in the United States. Where the I.M.F. previously predicted the economy would grow at a rate of 2.3 percent in 2017 and 2.5 percent in 2018, it now expects 2.1 percent growth in both years.

The reason? An uncertain and insufficiently expansionary economic environment linked to the chaos in Washington. Yes, the stock market has been strong and unemployment is down. But Donald Trump, friend of business, may be costing us growth, a key indicator of economic health. . . .

There are several schools of economic thought on why growth has been in the doldrums — but unfortunately, few offer solutions that are viable in an atmosphere of political instability.

For example, Lawrence Summers, the Treasury secretary under Bill Clinton, has developed a theory called “secular stagnation.” The core idea is that the advanced economies of the world, including the United States, have entered a phase where there is too much saving and not enough new investment, keeping interest rates and inflation lower than they should be.

Mr. Summers points out that it costs a lot less to start a company in the internet age than when the only way to make money was through manufacturing. So there’s less investment demand.

With a nod to the New Deal economist Alvin Hansen, who wrote about the relationship between population size and interest rates, Mr. Summers notes as well that population growth in Europe and the United States has steeply declined. Without new workers and consumers coming onto the rolls, there’s an upper limit to domestic profit-making opportunities.

Mr. Summers believes there’s a way out of the low-growth trap. He argues for a major debt-financed infrastructure spending program, coupled with tax reform, policies to address rising inequality (since when income gains go almost entirely to those at the top, it’s hard to get a broad-based rise in consumer demand) and efforts to counter protectionist trade practices.

The thing is, nothing like what he proposes will be possible so long as we have a president whose inflammatory language, egregious actions and administrative incompetence continue to alienate voters and members of Congress. President Trump campaigned for infrastructure spending, but at this point neither Democrats or Republicans are likely to get completely on board. As for the other pro-growth suggestions, the president and his cabinet of billionaires couldn’t care less about inequality and seem to be gunning for a trade war with China. And it’s anyone’s guess whether Mr. Trump has the discipline to negotiate corporate tax reform. . . .

Neil Gross is a professor of sociology at Colby College

Nissan Workers in Mississippi Reject Union Bid by U.A.W.

This article from The New York Times illustrates how manufacturers today prevent their workers from unionizing. Nevertheless, by threatening to unionize its workers, U.A.W. has forced Nissan to provide its workers with conditions almost as good  as the Union would have required.

By NOAM SCHEIBER, August 8, 2017 for The New York Times

In a test of labor’s ability to expand its reach in the South, workers at a Nissan plant in Mississippi have overwhelmingly rejected a bid to unionize.

Out of roughly 3,500 employees at the Canton-based plant who voted Thursday and Friday, more than 60 percent opposed the union. It was an emphatic coda to a yearslong organizing effort underwritten by the United Automobile Workers, which has been repeatedly frustrated in its efforts to organize major auto plants in the region. . . .

The election campaign at the plant, where a large majority of workers are African-American, frequently took on racial overtones. Some employees alleged that white supervisors dispensed special treatment to white subordinates, a charge the company emphatically denied.

For their part, anti-union workers highlighted the U.A.W.’s contributions to local civil rights and religious groups, accusing the union of seeking to buy support in the African-American community.

In the end, though, basic economics combined with a fear of change may have carried the day. Veteran workers at the plant make about $26 per hour, typically only a few dollars less than veteran workers represented by the union at the major American automakers, and well above the median wage in Mississippi.

Nissan also pays a roughly similar percentage of employees’ incomes into their retirement accounts as do the Michigan automakers.

Before coming to Nissan more than 14 years ago, “I didn’t have a 401(k), I had one week of vacation,” said Marvin Cooke, a Nissan paint technician who was previously an assistant manager at a Shoney’s restaurant. “Now, I have four weeks’ vacation. I’m off on every holiday. Nissan has provided a great living for me.”

Mr. Cooke voted against the union.

While a significant number of workers at the plant, which has a total work force of nearly 6,500, are contract workers who earn lower wages than employees, they were not eligible to vote in the union election. . . .  [It would have been interesting to learn what percentage of the Nissan workforce are contract workers without health benefits or holidays.]

In meetings between management and workers, and in a video featuring the plant’s top official, Nissan was more menacing, suggesting that a union would put workers’ jobs at risk.

“They’ve come out with some of the nastiest, most unprecedented attacks I’ve seen in the 20 years I’ve been doing this,” said Gary Casteel, the second-ranking official at the U.A.W. “This issue of threatening to close a facility is the worst threat you can put toward an employee.”

At one point leading up to the vote, managers delivered a slide presentation warning that in the event of a strike, most employees who walked out would not be guaranteed jobs afterward. Many workers appeared to find the presentation alarming, even though strikes are rare in the industry and replacing production workers could be difficult.

Another manager emphasized in a meeting that Nissan could decide not to automatically deduct workers’ union dues, in which case the union would end up sending workers a regular “bill.”

“It was just to deter people from joining, was what I’m getting out of it,” said Earnestine Mayes, a union supporter. “No one wants to sit there and pay that bill every week.”

The company said its communications with workers were an attempt to provide information and clear up misimpressions, and that dues were not a focal point.

A regional director of the National Labor Relations Board, prompted by a series of charges filed by the U.A.W., issued a complaint last week accusing Nissan of illegally threatening to close the plant if workers chose to unionize, and threatening to fire workers involved in the organizing effort. . . .

“Before all this came out, I felt like the U.A.W. might come in, like it had momentum,” Mr. Cooke said.

The defeat raises further questions about organized labor’s potential for inroads in the sparsely unionized South, which many union leaders see as the key to improving wages and labor standards across the country.

This year, workers rejected a union by a nearly 3-to-1 margin at a Boeing plant in South Carolina after a long organizing effort by the International Association of Machinists and Aerospace Workers.

In 2014, the U.A.W. narrowly lost a hotly contested organizing campaign at a Volkswagen facility in Tennessee, although a small group of the plant’s skilled-trades workers later voted to unionize, and the union has notched some victories at Southern auto parts-suppliers in recent years.

“If you’re in an area where there are unions, people have friends, neighbors and relatives that might be in a union, and it’s very clear that people in unions like them,” said Hoyt N. Wheeler, a retired business professor who taught labor relations at the University of South Carolina.

But in a region like the South, few workers can speak from personal experience on the union’s behalf when the company or local politicians attack. “It makes it tough; you don’t have contrary voices,” Mr. Wheeler said.

Whatever its advantages, Nissan took no chances, pressing its case through the final days. This week, it set up a huge tent outside the facility and invited every worker on each shift, even those ineligible to vote, for meetings in which senior plant officials made their closing pitch. . . .


President Trump Wants to Reduce the Current Corporate Tax Rate to 15 Percent. Can He?

We discovered this article on forthcoming tax cuts by the President in a recent New York Times and we reproduce it in a highly abbreviated form. The author believes such a corporate tax rate to be not only achievable  but also desirable. However, he sees that great difficulties in instituting it lie ahead, created largely by the inflexible ideologies of his followers on the right and by the President himself. We offer the article as an introduction to the weeks of debate over the new tax laws that will follow in Congress.

President Trump at the White House last week. He has said he wants to cap the corporate tax rate at 15 percent, turning what is now the highest rate among industrialized nations into one of the lowest. Credit Justin Gilliland/The New York Times

By JAMES B. STEWART, August 4, 2017 for The New York Times

There’s no doubt that a cut to 15 percent [from the current 35 percent] would be big, bold and historic. It might even be the biggest cut ever in corporate tax rates, to use another superlative Mr. Trump is fond of invoking. . . .

A 15 percent rate would take the United States from having the highest corporate tax rate among industrialized nations to having one of the lowest. Britain is moving to 17 percent, Canada’s federal rate has already gotten to 15 percent, and Ireland’s is at 12.5 percent. . . .

There’s only one major stumbling block to a 15 percent rate, and the conventional wisdom is that it’s an intractable one: how to pay for it.

According to estimates by the Tax Foundation, a cut in the corporate rate to 15 percent would add $2.2 trillion to the deficit over 10 years on a “static” basis, which assumes no additional economic growth. After factoring in growth and higher resulting tax receipts, known as “dynamic” scoring, the deficit would grow by $1 trillion, according to the foundation. . . .

How big is the challenge? In their tax blueprint, House Republicans could only get the corporate rate to 20 percent. The 2014 proposal from Representative Dave Camp, a Michigan Republican who was then the House Ways and Means Committee chairman, struggled to reach 25 percent. And when President Barack Obama nearly reached a “grand bargain” on tax reform with Republicans in 2013, he could only get to 28 percent, with 25 percent for some manufacturers. . . .

And yet 15 percent just might be possible.

For starters, eliminating the deductions and loopholes in the corporate tax code would go a long way toward paying for a significant corporate rate cut. There are so many of these that few companies actually pay the 35 percent statutory rate.

“Corporations benefit from all kinds of loopholes, especially the one allowing earnings to accumulate offshore without being taxed,” said Steven M. Rosenthal, a tax expert and senior fellow at the Urban-Brookings Tax Policy Center.

The Joint Committee on Taxation estimated that in 2016 the corporate income tax raised $300 billion in revenue, while what is called “targeted subsidies” cost about $270 billion. In other words, Congress could eliminate these subsidies and cut the corporate rate nearly in half without any significant loss in revenue. . . .

Another possibility would be to shift at least some of the tax burden from corporations to shareholders, by raising tax rates on capital gains and dividend income. Many economists favor that approach, because it reduces the double-taxation problem embedded in the current system. (Corporations pay taxes on profits, and then, when these are distributed, shareholders pay.) The added tax burden would fall primarily on affluent taxpayers since they tend to own stocks, helping to rebut the argument that slashing the corporate rate would be a tax cut for the wealthy.

While it’s difficult to estimate how much additional tax revenue would be generated if dividends and capital gains were taxed at the same rate as ordinary income, it would surely be substantial, another big step toward a 15 percent corporate rate. . . .


Environmentalists and many economists would love to see a carbon tax, which would presumably be repellent to an administration that is skeptical of climate change and wants to promote the coal industry. . . .

Then there’s the 15 percent pass-through rate. While taxing small businesses and partnerships at the same rate as corporations has a superficial appeal, there’s nothing that says they have to be the same. As the Tax Foundation maintains, cutting rates on these businesses has relatively little impact on growth. The House Republican blueprint was comfortable with a rate of 25 percent for small businesses and pass-through taxpayers, still a significant reduction from current ordinary income rates. And the 1986 reform act didn’t require that pass-through entities pay the same rate as corporations. . . .

The closer the pass-through rate is to ordinary income rates, the lower the incentive for lawyers, accountants, doctors and other service professionals to reorganize themselves into pass-through entities to avoid paying the higher rates. . . .

Everyone I spoke to mentioned that lowering corporate tax rates to anything close to 15 percent requires political courage and leadership to overcome the powerful special interests that benefit from existing loopholes — starting with real estate. Whether Mr. Trump can set aside personal interests and rise to the challenge remains to be seen.


Automation Replaces Financial Advisers in Some Banks, Part III

The pros and cons of automated versus human financial advice. Which to choose? Last part of WSJ article on reducing cost of financial advice.


Ann Gugle, a principal at Alpha Financial Advisors in Charlotte, N.C., said her firm recently cut its annual fee on assets of over $5 million to 0.125% from 0.25%. “If you do the math, you realize your practice will be worth significantly more if you’re smart about aligning your pricing with the value you deliver,” said Ms. Gugle. “If not, you’re going to be mincemeat.”

Robert Schmansky, a solo practitioner in Livonia, Mich., dropped his advisory fee to 0.85% from 1% earlier this year.

Until recently, Mr. Schmansky said, he has mainly marketed himself as a fiduciary—someone committed to working in the client’s best interests. Now he finds himself in direct competition with Vanguard, Schwab and others that also call themselves fiduciaries. “My key marketing distinction is being eroded by these firms in some ways.”

He said he works with a lot of younger investors, and “when I tell them my fee is 1%, they know immediately that Betterment costs less.”

Of all the initiatives, Vanguard’s is widely cited as the most threatening to the status quo. The firm’s size, brand recognition and aggressive pricing will create a challenge unlike anything independent advisers have seen before, said Michael Kitces, director of wealth management at Pinnacle Advisory Group Inc. in Columbia, Md.—much as Vanguard’s index funds have wreaked havoc on the traditional mutual-fund business.

Vanguard’s Personal Advisor Services (minimum investment: $50,000), has gained traction because customers want it, said Karin Risi, head of the firm’s retail investor group: “They didn’t just want to invest in a fund with us—they were saying they needed more help.”

So far, only about 10% of assets in the program comes from clients new to the firm. Advisers and industry analysts say it is only a matter of time before the service starts poaching more clients from competitors.


Vanguard has devoted about 500 financial advisers to its venture, said Ms. Risi. She expects the firm to hire roughly 100 advisers annually for the next several years. Clients with more than $500,000 get a dedicated adviser, who is a certified financial planner; those with less interact with rotating advisers drawn from a pool, some not yet CFPs.

Many traditional advisers suggest that partially automated services such as Vanguard’s provide basic, cookie-cutter advice inferior to what an experienced financial planner can provide. Ms. Risi said the firm’s advisers go through “pretty impressive training.”

Elyse Foster, an adviser in Boulder, Colo., has taken note. Three years ago, she cut financial-planning fees by an average of 40% at her firm, Harbor Financial Group Inc. It also has invested in technology that allows clients to open accounts online, automatically rebalances portfolios to a target mix of stocks and bonds, and shares software so clients can simulate their own planning scenarios.

“We are aware consumers are more price-conscious and are lowering our fees proactively,” said Ms. Foster. “We are trying to stay ahead of the industry.”

This concludes the three-part article on the automation of financial advising.

We refer the reader interested in learning more about the current trend of mistrusting human intuition and deferring instead to mathematical algorithms to the book by Daniel Kahneman, Nobel Prizewinner in Economics: Thinking Fast and Slow.

Automation Replaces Financial Advisers in Some Banks, Part II

Vanguard, foremost in the field of investor-oriented mutual funds (as opposed to manager- oriented), has been one of the first to adopt automated financial advice for its investors in order to reduce costs to as low as 0.3%. This three-part article from WSJ continues.

About two years ago, Vanguard Group, known for serving do-it-yourselfers, started undercutting the financial-adviser industry with an annual advice fee of 0.3%.

Assets in its service, which combines recommendations from computer-driven algorithms with phone, video and email consultations with human advisers, grew to about $35 billion in the first year and to $83 billion by end of last month, according to the firm.

Joe McDonald of Titus, Ala., was an early customer. Long a do-it-yourself investor, he decided he needed an adviser after making an ill-timed move into an all-cash portfolio after Barack Obama’s 2008 election.

“I pulled out and stayed in cash until 2014, which was a terrible mistake,” said the 74-year-old retired electrical engineer. “I found I didn’t really have the discipline to stick with my own plan.”

He thought about hiring a traditional adviser in Florida who charges 1% of assets under management. His wife wasn’t comfortable entrusting money with someone she didn’t know, he said.

Mr. McDonald said he first invested in a mutual fund from Vanguard in 1983. He liked its 0.3% fee on an account with advice, and moved his roughly $500,000 in retirement accounts there.

“Expenses don’t mean a whole lot if you are making 10% a year,” Mr. McDonald said, ”but if you are making 2% or 3% a year, they are a real big deal.”

At Schwab, assets handled by financial advisers, including those at independent firms that use Schwab’s services, now account for more than half of the firm’s total assets. In recent years, the discount brokerage firm has added a range of options for those seeking advice, including a “robo” service introduced in 2015 that uses algorithms to build and monitor portfolios.

At Fidelity, assets handled with financial advice, either from the firm or from independent advisers who use its services, have nearly doubled over five years.

Part of the shift is generational, as younger adults appear to trust technology more than what they see as salesmanship. “Kids are saying to their parents, ‘Why the hell are you paying so much to your adviser? Is it worth 1% a year to have somebody to play golf with?’ ” said Joe Duran, chief executive of United Capital Financial Advisers LLC, an investment-management and financial-planning firm that also provides services to advisers.

Independent robo advisers that target younger customers—with fees as low as zero for the smallest accounts—have enjoyed hefty growth. Betterment and Wealthfront say they manage $9.7 billion and $7.1 billion in assets, respectively, up from $5.1 billion and $3.5 billion a year ago.


Morgan Stanley , UBS Group AG, Wells Fargo & Co. and Bank of America Corp.’s Merrill Lynch, known for providing full-frills service at top rates, are testing or have already launched automated-advice ventures that charge less than their standard fees. The goal is to keep fee-conscious and lower-balance customers.

Some dealmakers are buying up traditional financial advisers with an eye toward consolidating and cutting costs, saying the industry has too many firms with outmoded technology and high overhead. The first half of 2017 was the most active yet for mergers and acquisitions among financial advisers, according to consulting and investment-banking firm DeVoe & Co.

Jobs Outsourced to India Are Returning to U.S. at Last

Good news! The economic situation that twenty years ago resulted in outsourcing so many American jobs to Asian countries is apparently beginning to reverse and bring those jobs back to our shores. This is particularly true in the technology industry, where small teams of well-informed staff need to be close to the ongoing work-at-hand in order to communicate quickly to customers. The rising standard of living in Asian countries and the higher salaries there are reducing the advantages of outsourcing. This is certainly a welcome change. Let us hope it remains permanent.

By STEVE LOHR, July 31, 2017 for The New York Times

For years, American companies have been saving money by “offshoring” jobs — hiring people in India and other distant cubicle farms.


Today, some of those jobs are being outsourced again — in the United States.

Nexient, a software outsourcing company, reflects the evolving geography of technology work. It holds daily video meetings with one of its clients,, where team members stand up and say into the camera what they accomplished yesterday for, and what they plan to do tomorrow. The difference is, they are phoning in from Michigan, not Mumbai.

“It’s the first time we’ve been happy outsourcing,” said René Lacerte, the chief executive of, a bill payment-and-collection service based in Palo Alto, Calif.

Nexient is a domestic outsourcer, a flourishing niche in the tech world as some American companies pull back from the idea of hiring programmers a world away.

Nexient’s new office in Newark. The company has added 150 people in the last two years, and plans to hire a few hundred more over the next year. Credit Jason Henry for The New York Times

Salaries have risen in places like South Asia, making outsourcing there less of a bargain. In addition, as brands pour energy and money into their websites and mobile apps, more of them are deciding that there is value in having developers in the same time zone, or at least on the same continent.

Many of these domestic outsourcers are private, little-known companies like Rural Sourcing, Catalyte, Eagle Creek Software Services and Onshore Outsourcing. But IBM, one of the country’s foremost champions of the offshore outsourcing model, has announced plans to hire 25,000 more workers in the United States over the next four years.

As a result, the growth of offshore software work is slowing, to nearly half the pace of recent years.

“The nature of work is changing,” said Vishal Sikka, chief executive of Infosys, an Indian outsourcing giant. “It is very local. And you often need whole teams locally,” a departure from the offshore formula of having a project manager on-site but the work done abroad.

“It’s not enough to have people offshore in India,” he added.

Infosys announced in May that it planned to hire 10,000 workers in the United States over the next two years, starting with centers in Indiana and North Carolina.

The offshore industry is not imperiled, analysts say. But from 2016 to 2021, the offshore services industry will have average yearly growth of 8 percent, the research firm IDC estimated. The rate in the previous five years was 15 percent.

“Domestic sourcing is here to stay, and it’s going to grow rapidly,” said Helen Huntley, an analyst at the research firm Gartner.

The first wave of internet-era digital change in business, starting in the 1990s, focused mainly on automating back-office tasks like payrolls and financial reporting. The software involved was a collection of huge programs maintained by armies of engineers.

 The company’s business model is fairly typical for onshore companies. On projects, it will send members of a team to the client for a couple of weeks to study the business and meet their counterparts. even interviewed and shared in the selection of five Nexient engineers who would work on the joint team.


Mr. Lacerte of had farmed out technology work over the years, but the headaches of navigating time zones, cultures and language often outweighed the cost savings. Those problems went away when he hired a domestic outsourcer.

The first wave of internet-era digital change in business, starting in the 1990s, focused mainly on automating back-office tasks like payrolls and financial reporting. The software involved was a collection of huge programs maintained by armies of engineers.

The internet allowed that work to be sent to low-wage nations, especially India.  That brought the rise of the big outsourcing companies like Tata Consultancy Services and Infosys.


Offshore services companies still excel at maintaining the software that runs the essential back-office systems of corporations. But today, companies in every industry need mobile apps and appealing websites, which can be made smarter with data and constantly updated. That software is best created by small, nimble teams, working closely with businesses and customers — not shipped to programmers half a world away.

Nexient, which has its headquarters in Newark, Calif., has three delivery centers in the Midwest: in Ann Arbor, Mich.; Okemos, Mich.; and Kokomo, Ind. It employs 400 people, up from 250 two years ago, and plans to hire a few hundred more over the next year, Mark Orttung, the company’s chief executive, said.

The company’s business model is fairly typical for onshore companies. On projects, it will send members of a team to the client for a couple of weeks to study the business and meet their counterparts. even interviewed and shared in the selection of five Nexient engineers who would work on the joint team.

Mr. Lacerte of had farmed out technology work over the years, but the headaches of navigating time zones, cultures and language often outweighed the cost savings. Those problems went away when he hired a domestic outsourcer.

Nexient has set up its centers away from the coastal high-tech hubs, like the Bay Area and New York, to tap skilled people who want jobs in the technology economy without leaving the Midwest, where living costs are far less.

Monty Hamilton, a former Accenture consultant, took over Rural Sourcing in 2009, when it had just a dozen employees. Today, the company has 300 workers in four delivery centers: in Albuquerque; Augusta, Ga.; Jonesboro, Ark.; and Mobile, Ala. The payroll will reach about 400 people by the end of the year, Mr. Hamilton said.

“Every business now realizes it’s a digital business,” he said. “They need technical help, and that’s really driven the demand for our U.S.-based talent.”


“The election has brought a lot of attention to these issues and to us,” Mr. Orttung said. “But nobody buys because of that.”

Rising labor costs abroad also make domestic sourcing more attractive. A decade ago, Mr. Hamilton said, an American software developer cost five to seven times as much as an Indian developer. Now, he estimates, the gap has shrunk to two times. The standard billing rate for his engineers is $60 to $70 an hour, compared with $30 to $35 in India, Mr. Hamilton said.

But the sales pitch made by onshore companies is not about raw labor costs. Instead, they claim the ability to deliver excellent work more efficiently than the offshore providers and less expensively than large technology services companies.


In the past two years, Cambia Health has cut its use of an offshore outsourcer in India by half, said Laurent Rotival, the company’s chief information officer. And the insurer has enlisted the help of Catalyte, an onshore outsourcer. “They can ramp up quickly,” Mr. Rotival said.

Catalyte, based in Baltimore, has doubled its work force in the last two years, to 300 people. To accommodate rapid growth, Catalyte is scouting locations for two new centers, which the company hopes to open by the end of this year, said Michael Rosenbaum, founder of Catalyte.

Employees at the Techtonic Group in Boulder, Colo. The company once relied on offshore services, but has made nurturing local talent a priority. Credit Ryan David Brown for The New York Times

 Training is a vital capability for all the onshore companies, but few have gone as far as the Techtonic Group in Boulder, Colo. Once a committed offshore outsourcer, Techtonic has made nurturing homegrown talent the centerpiece of its business. In 2014, it set up a training academy that feeds graduates into its Department of Labor-approved apprenticeship program for software engineers.


In the past couple of years, 30 people have gone through the program, which lasts six to nine months. Techtonic has hired 90 percent of the graduates, and many later became employees of its corporate customers, starting at salaries between $65,000 and $75,000.

A set of tools at the desk of a Techtonic apprentice. Techtonic began the apprentice program in 2014, and has hired 90 percent of the graduates. Credit Ryan David Brown for The New York Times

Techtonic has an ambitious expansion plan, going to 10 new cities in the next three years and hiring 100 developers in each city, said Heather Terenzio, the company’s chief executive.

“American industry has relied too much on overseas technology workers and neglected the potential talent here,” she said.