Brought to us by the comic duo of Christopher Dodd and Barney Frank, the Consumer Financial Protection Bureau officially opened for business last month. The CFPB is the greatest offense against limited government since, well, since the enactment of Obamacare last year. Hey, it’s the Age of Obama. The enormities pile up so quickly it’s hard to keep up.
Todd Zywicki noted the CFPB’s vast powers in a good column this past May. As Professor Zywicki has explained elsewhere, it is one of the most powerful bureaucratic organizations ever created in the American political system: “It can regulate or ban almost every consumer credit product in the country, yet it is beyond Congress’s power of the purse because its budget is guaranteed as a percentage of the Fed’s annual revenues.”
The CFPB is the brainchild of Harvard Law Professor Elizabeth Warren, who was to be the agency’s first director. Republicans in the Senate kept her from assuming the position, but Obama appointed her a czar and made her the agency’s de facto head. Warren left the administration on Monday to return to Harvard Law School, where she will step back into her position as the the Leo Gottlieb Professor of Law. CNNMoney reports that Raj Date, the CFPB’s current associate director of research, markets and regulations, will replace Warren as the CPFB’s special advisor to the Secretary of the Treasury and that Obama nominated former Ohio Attorney General Richard Cordray as the agency’s director.
The nature of the CFPB is problematic, to say the least, but Senate Republicans did the right thing in keeping Warren from taking it over. She is a piece of work. Professor Zywicki has been on her case for a while as well as that of the agency. See, for example, his Wall Street Journal column “In Elizabeth Warren we trust?,” from which I have drawn the quote regarding the powers of the CFPB above. (Professor Zywicki elaborated on his WSJ column in this video interview.)
Professor Zywicki has exposed Warren as something of an academic charlatan. She has even managed to dupe Christopher Caldwell, a writer whom I have greatly admired. Caldwell’s Reflections on the Revolution in Europe has resided on our Amazon bookshelf for a long time.
In 2003 Warren cowrote a brilliant and counterintuitive work of pop economics called The Two-Income Trap. People were going bankrupt at an alarming rate. . . .Why this was so had nothing to do with consumerism. Parents spent 32 percent less on clothing, and 52 percent less on appliances. What they spent more on was big necessities: mortgages (up 76 percent), cars (up 52 percent), taxes (up 25 percent), and health insurance (up 74 percent). And the reason for all but the last of these was the entry of women into the workplace. Working mothers “ratcheted up the price of a middle-class life for everyone, including families that wanted to keep Mom at home,” Warren wrote. As a result, she showed, two-income families have less disposable income than one-income families did in the old days. What is more, today’s families are deprived of a safety net—a spare worker—of the sort her own family was able to lean on when she was a child. If anything goes seriously wrong in your average two-earner family today, they are in grave financial jeopardy.
So what’s wrong with that? Professor Zywicki explains:
[W]hile that conclusion is what Professor Warren says is the upshot of her analysis and is the what appears to be the conclusion of her analysis, that is not actually what her own data actually shows. Although Caldwell’s reading is the logical and natural inference of how Warren presents her argument in the book, it is not actually what the data shows. Although he is far from the first, Caldwell has fallen into the two-income trap.
Here’s the key problem in Caldwell’s argument: note his list of increased expenses for household “big necessities: mortgages (up 76 percent), cars (up 52 percent), taxes (up 25 percent), and health insurance (up 74 percent).” The problem is that while it is an accurate representation for mortgages, cars, and health insurance, that the expenses increase by that percentage, it is not for taxes. For the other expenses it is the percentage increase in dollars spent on those expenses. For taxes, however, the 25% increase is actually the percentage increase in the percentage of income spent on taxes. So the 25% is not how many more dollars go to paying taxes, it represents the household’s change from paying 24% of its income in taxes to 33% of its income in taxes–a change of 25% in the percentage of income dedicated to taxes, not a change of 25% in spending on taxes. I swear I am not making this up: I have attached to the bottom of this post the full excerpt from this book where this is done. And, again, I have laid this out in considerable detail previously here.
What this means is that once taxes are converted to an apples-to-apples comparison–percentage change in dollars instead of percentage change in percentage–household spending on taxes actually increased 140%, not 25%. The entire two-income trap, therefore, is actually a two-income tax trap, as I noted in my Wall Street Journal commentary on this awhile back.
Professor Zywicki’s post goes into further detail on the point, but this is the gist, and he emphasizes that Caldwell has been hoodwinked by Warren, not that he is deliberately misleading his readers. (Unfortunately, Professor Zywicki’s Wall Street Journal commentary on the two-income trap issue appears to be unavailable online.)
Incidentally, John and I devoted a long 1995 paper — The Truth About Income Inequality — to the games that liberals played with income statistics to denigrate the Reagan era. Warren has added an extraordinary twist to an old and discredited game.
One footnote. Caldwell makes what I believe to be another extremely misleading point in this paragraph:
Almost anyone who uses a bank will have a story of making a $1,000 deposit drawn on a bank across the street, meant to cover four $200 checks written two days later and cashed four days after that—and seeing the bank put a hold on the deposit just long enough so they can collect $35 “bounce” fees on each of the four checks (although the checks do not actually bounce!).
How is this misleading? The answer depends on understanding the Federal Reserve’s Reg CC, a subject for another day.
One more footnote: Professor Zywicki and Professor Gail Heriot awarded Warren the crown for one of the most misleading pieces of research ever placed before Congress (together with David Himmelstein) for the co-authored 2005 study “Illness and Injury as Contributors to Bankruptcy.” This is one of the studies discussed in Professor Zywicki’s Wall Street Journal column linked above.