Jan. 14, 2020 6:59 pm ET

To resist President Trump’s campaign of economic reform and deregulation, his critics usually attempt to portray long-overdue, common-sense policies as assaults on the poor. A good example is the controversy regarding the Community Reinvestment Act, or CRA, which requires banks to meet the “credit needs” of their “entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institutions.” The media howled at a plan to rein in abuses of the law—despite its role in fueling the subprime crisis—setting off a fight among regulators.

Bank regulators started using the CRA in the mid-1990s to pressure banks to make subprime loans. Congress used quotas to force government-sponsored enterprises to buy these loans, and regulators set capital standards to induce banks to hold them. By 2008, roughly half of all outstanding U.S. mortgages were high-risk, as measured by down payments and creditworthiness. The federal government itself guaranteed, issued or held 76% of subprime loans. The term “subprime” originated from the implementation of the CRA.

To curb this abuse and encourage sounder lending, the comptroller of the currency proposed new benchmarks last month to measure CRA compliance and require full reporting and accountability. His reforms represent an essential step toward relieving the pressure banks face to lend to politically favored, uncreditworthy entities—the policies that helped cause the subprime crisis.

Yet after the proposal was tarred by the media as an attack on poor neighborhoods, a Federal Reserve Board member proposed an alternative that largely preserves the Obama CRA policy. Disputes among bank regulators are rare, and President Trump should help resolve this one by publicly supporting the comptroller’s reforms.

While policy makers fight over CRA abuses, another effort is under way to politicize credit. This time, instead of steering credit to the favored uncreditworthy, activists want to deny credit to the disfavored creditworthy. Banking was used as a weapon against legal, solvent businesses by the Obama administration during Operation Choke Point, a program to deny the disfavored access to banking services. The Federal Deposit Insurance Corp. labeled certain businesses “high risk,” including firearms and ammunition dealers, check-cashers, payday lenders and fireworks vendors. Unelected regulators, not Congress or courts, marked these industries as “dirty business” and made it “unacceptable for an insured depository institution” to offer them banking services.

The Trump administration ended Operation Choke Point. But some members of Congress have joined political activists in a new effort to block credit from going to legal, creditworthy enterprises through political intimidation. “There’s more than one way to skin a cat, and not everything has to be done through legislation explicitly” said Rep. Alexandria Ocasio-Cortez last year.

At a congressional hearing with the then-CEO of Wells Fargo, she demonstrated how this political skinning works by asking, “Why was the bank involved in the caging of children?” He responded that “for a period of time, we were involved in financing one of the firms” that built federal immigration detention centers, but “we’re not anymore.” Under political pressure, JPMorgan Chase and Bank of America joined this boycott of the detention-center company.

With Democrats unable to ban guns legislatively, Rep. Carolyn Maloney admonished banks at a recent hearing to not “finance gun slaughter.” When she urged JPMorgan to deny credit for legal firearm sales as other banks had done, the CEO responded, “We can certainly consider that. Yes.” At the same hearing, Rep. Rashida Tlaib challenged bank CEOs: “Will any of your banks make a commitment to phase out your investments in fossil fuels and dirty energy?” The CEOs declined to defend fossil fuels, even though they power 90% of U.S. transportation and provide two million jobs in energy extraction alone.

If these CEOs sound weak-kneed, it is important to understand that corporate leaders are entrusted with the stewardship of trillions of dollars, the life savings of millions of workers and retirees. Their congressional intimidators hold the power of subpoena and adverse publicity over their banks today, and could be one election away from having the power to take over their banks.

Democrats on the Senate Banking Committee have now joined the effort, calling on the nation’s largest banks to align their business strategies with the Paris climate agreement, from which the U.S. has withdrawn.

Letting political intimidation dictate the availability of private credit endangers freedom and stifles productivity growth and job creation. Had banks been intimidated out of making oil and gas loans a decade ago, fracking would have been impeded, America wouldn’t have achieved energy independence, and economic growth and wages would be lower. Americans would also be using less natural gas, burning more coal and generating higher carbon emissions.

Moreover, the practice of creating lists of political undesirables could be adopted on both sides of the aisle. How would today’s intimidators react if some future administration or Congress added abortion clinics, labor unions or disfavored media companies to a government hit list? Circumventing the legislative process to limit the freedom of some endangers the freedom of all.

In addition to supporting the comptroller’s reforms, Mr. Trump should use his executive authority to issue regulatory guidance to enforce the CRA by guaranteeing that legal, creditworthy borrowers not be denied banking services. The use of political intimidation to allocate capital is an assault on economic efficiency and freedom. The Constitution protects desirables and undesirables alike.

Mr. Gramm is a former chairman of the Senate Banking Committee. Mr. Solon is a partner of US Policy Metrics.

Sept. 10, 2019 6:41 pm ET

Who owns the vast wealth of America? Old folks. According to the Federal Reserve, households headed by people over the age of 55 own 73% of the value of domestically owned stocks, and the same share of America’s total wealth. Households of ages 65 to 74 have an average of $1,066,000 in net worth, while those between ages 35 and 44 have less than a third as much on average, at $288,700.

You can watch the video here.

Aug. 3, 2016 

Donald Trump has been criticized by Democrats and Republicans alike for saying that “the American dream is dead.” But instead of slaying the messenger, critics on both sides of the aisle should be examining why so many Americans agree with Mr. Trump and why the Obama “recovery” has been so painful for so many.

When President Obama took office during the 2007-09 recession no president was ever better positioned to lead a strong recovery. With an impressive electoral mandate, Mr. Obama enjoyed a filibuster-proof Senate supermajority, a 79-vote House majority and a nation ready for change. History too seemed to smile on Mr. Obama’s endeavor. The recession ended just six months into his first term and, with the sole exception of the Great Depression, every severe recession since 1870—when reliable annual data were first collected—had been followed by a vigorous recovery.

In his capacity to implement his program, Mr. Obama stood as a colossus with the fates on his side, the vast power of government at his disposal and no one—not Congress, the Supreme Court or the Federal Reserve—willing or able to deny his will. No resources were spared. The Obama $836 billion stimulus exceeded all previous U.S. economic stimulus programs combined. The Treasury borrowed over $1 trillion a year for four years in a row, according to Office of Management and Budget data. The Federal Reserve injected $3 trillion of new reserves into the banking system, generating record-low interest rates.

By PHIL GRAMM And THOMAS R. SAVING

Oct. 14, 2015 6:27 p.m. ET

The Federal Reserve enjoys extraordinary independence from the elected branches of government, based on the well-founded fear that politicians cannot be trusted with the power to print money and manipulate interest rates. While the Fed should be independent in setting monetary policy, its ever expanding regulatory powers, which have the force of law, entail a level of discretion that requires democratic accountability enforced by bipartisan oversight and transparency.

Because the U.S. was on the gold standard when the Federal Reserve was established in 1913, the Fed had limited control of the aggregate money supply. It acquired control with the effective demise of the gold standard in 1933. Recognizing the political implications of the central bank’s new power, Congress removed the secretary of the Treasury and the Comptroller of the Currency from the Federal Reserve Board in 1935.

During World War II, the Fed agreed to buy government debt to maintain a ceiling of 0.375% for Treasury bills and 2.5% for Treasury bonds. The inflation following the war—and the effort of the Truman administration to force the Fed to buy the bonds it issued to fund the Korean War—brought to a head the conflict between preserving stable prices and the Fed’s function as an agent of the Treasury. An agreement among Congress, the Treasury and the Fed produced the Accord of 1951, freeing the Fed from the necessity of supporting the market for federal debt.

The massive quantitative easing during the current recovery has led the Fed to purchase debt on a scale that far exceeds anything that occurred before the 1951 Accord. The Fed bought less than 12% of the $1.9 trillion World War II debt as measured in 2009 dollars. Since the fall of 2009, when the recovery began, the Fed has purchased $1.7 trillion of Treasurys and $1 trillion of mortgage-backed securities, directly and indirectly funding more than 55% of federal debt issued during the recovery.

Debate continues to rage over what benefits have accrued to the economy from the Fed’s near-zero interest-rate policy. But there is no debating the fact that Fed policy has made it possible for the federal debt held by the public to double, while the cost to the Treasury of servicing that debt has actually fallen—lowering the federal deficit by some half a trillion dollars a year.

No matter how pure the Fed board’s motives may have been, the fact remains that today every member of the Board of Governors is anObama appointee. This has occurred because—while the Federal Reserve Act provides terms of 14 years—the average tenure of members appointed in the past two decades has fallen to less than five years. As long as board members choose to serve short terms, there will always be a real question about how independent and nonpartisan the board is.

The independence of the Board of Governors could be strengthened by mandating that no more than four of the seven members can be from any one political party. The central bank’s independence could be further enhanced by increasing the number of the Fed’s regional bank presidents serving in rotation on the Fed’s monetary policy-setting body, the 12-member Open Market Committee, from four to seven.

The U.S. has long recognized that the accountability of federal regulatory agencies is best enforced by bipartisanship, transparency and oversight. The 1887 Interstate Commerce Commission had a five-member bipartisan board with no more than three members from the same party; and the agency was funded by annual congressional appropriations. Bipartisan boards funded by congressional appropriations have been the norm from the Federal Trade Commission in 1914, the International Trade Commission in 1916 and the Securities and Exchange Commission in 1934, down to the Commodity Futures Trading Commission in 1975 and the Federal Energy Regulatory Commission in 1977.

The Fed’s regulatory powers have grown since the 1930s, and thanks to the 2010 Dodd-Frank financial reform, the Fed is now the country’s most powerful regulatory agency. The central bank has hundreds of regulators embedded in the front offices and board rooms of the nation’s major financial institutions. It dictates business practices, imposes regulations—some written by foreign regulators—and exercises broad and unaccountable discretionary powers that could determine the success or failure of virtually any financial institution in America.

The Fed’s independence in conducting monetary policy should be strengthened, recognizing the dramatic change in the tenures of board members, but a bipartisan board is indispensable for the nation’s most powerful regulator. The Fed’s regulatory and supervisory activities should be subject to the transparency and public comment provisions of the Administrative Procedure Act and the same constraints that hold other regulatory agencies accountable. All Fed regulatory activities should be subject to rigorous cost-benefit analysis and the Congressional Review Act, which enables Congress to disapprove agency rules that would have a major impact on the economy.

The Fed’s lack of accountability as the nation’s dominant regulator is at odds with our commitment to the rule of law and the principle of checks and balances, and is a growing threat to our economic freedom.

Mr. Gramm, a former chairman of the Senate Banking Committee, is a visiting scholar at the American Enterprise Institute. Mr. Saving is an economics professor and the director of the Private Enterprise Research Center at Texas A&M University.

According to the Federal Deposit Insurance Corp., 1,341 commercial banks have disappeared since 2010. Remarkably, only two new banks have been chartered. By comparison, in the quarter century before the financial crisis, roughly 2,500 new banks were chartered. Even during the Great Depression of the 1930s, an average of 19 new banks a year were chartered.

A Mercatus Center survey found that while community banks have hired 50% more compliance officers to deal with Dodd-Frank, overall industry employment has increased only 5% and remains below precrisis levels. Industrial, consumer and mortgage finance continue to flee the banking system, as the American Bankers Association reported this week that the law’s regulatory burden has led almost half of banks to reduce offerings of financial products and services.

New financial-services technology, such as online and mobile payment systems, has continued to blossom, but almost exclusively outside the banking system. The massive resources of, and talent in, banks have been sidetracked, rather than being employed to make loans and boost the economy.

Worst of all, Dodd-Frank has empowered regulators to set rules on their own, rather than implement requirements set by Congress. This has undermined a vital condition necessary to put money and America back to work—legal and regulatory certainty.

It is true that a certain amount of regulatory flexibility is necessary in many laws. But in the Securities Exchange Act of 1934, and most subsequent banking law before Dodd-Frank, the powers Congress granted to regulators were fairly limited and generally implemented by bipartisan commissions.

Major decisions were debated and voted on in the clear light of day. Precedents and formal rules were knowable by the regulated. And regulators generally had to be responsive to Congress, which controlled agency appropriations. These checks and balances, while imperfect, did promote general consistency and predictability in federal regulatory policy.

This process has been undermined. For example, Dodd-Frank’s Consumer Financial Protection Bureau is not run by a bipartisan commission. And the CFPB’s funding is automatic, virtually eliminating any real ability for elected officials to check its policies. Consistency and predictability are being replaced by uncertainty and fear.

Over the years the Federal Trade Commission and the courts defined what constituted “unfair and deceptive” financial practices. Dodd-Frank added the word “abusive” without defining it. The result: The CFPB can now ban services and products offered by financial institutions even though they are not unfair or deceptive by long-standing precedent.

Regulators in the Dodd-Frank era impose restrictions on financial institutions never contemplated by Congress, and they push international regulations on insurance companies and money-market funds that Congress never authorized. The law’s Financial Stability Oversight Council meets in private and is made up exclusively of the sitting president’s appointed allies. Dodd-Frank does not say what makes a financial institution systemically important and thus subject to stringent regulation. The council does. Banks so designated have regulators embedded in their executive offices to monitor and advise, eerily reminiscent of the old political officers who were placed in every Soviet factory and military unit.

Dodd-Frank’s Volcker rule prohibits proprietary trading by banks. And yet, despite years of delay and hundreds of pages of new rules, no one knows what the rule requires—not even Paul Volcker.

Then there is the “living will,” a plan that banks deemed to be systemically important must submit to the Fed and the FDIC on how they would be liquidated if they fail. The Fed and the FDIC have almost total discretion in deciding whether the plan is acceptable and therefore whether to institute a variety of penalties, including the divestiture of assets.

Large banking firms must undergo stress tests to see if they could survive market turmoil. But what does the stress test test? No one knows. The Fed’s vice chairman,Stanley Fischer, said in a speech last month that giving banks a clear road map for compliance might make it “easier to game the test.” Compliance is indeed easier when you know what the law requires, but isn’t that the whole point of the rule of law?

To limit abuse by the rulers, ancient Rome wrote down the law and permitted citizens to read it. Under Dodd-Frank, regulatory authority is now so broad and so vague that this practice is no longer followed in America. The rules are now whatever regulators say they are.

Most criticism of Dodd-Frank focuses on its massive regulatory burden, but its most costly and dangerous effects are the uncertainty and arbitrary power it has created by the destruction of the rule of law. This shackles economic growth but more important, it imperils our freedom.

Mr. Gramm is a former chairman of the Senate Banking Committee and a visiting scholar at the American Enterprise Institute.

By Phil Gramm And Michael Solon

Nov. 11, 2014 6:50 p.m. ET

What the hockey-stick portrayal of global temperatures did in bringing a sense of crisis to the issue of global warming is now being replicated in the controversy over income inequality, thanks to a now-famous study by Thomas Piketty and Emmanuel Saez, professors of economics at the Paris School of Economics and the University of California, Berkeley, respectively. Whether the issue is climate change or income inequality, however, problems with the underlying data significantly distort the debate.

The chosen starting point for the most-quoted part of the Piketty-Saez study is 1979. In that year the inflation rate was 13.3%, interest rates were 15.5% and the poverty rate was rising, but economic misery was distributed more equally than in any year since. That misery led to the election of Ronald Reagan, whose economic policies helped usher in 25 years of lower interest rates, lower inflation and high economic growth. But Messrs. Piketty and Saez tell us it was also a period where the rich got richer, the poor got poorer and only a relatively small number of Americans benefited from the economic booms of the Reagan and Clinton years.

If that dark picture doesn’t sound like the country you lived in, that’s because it isn’t. The Piketty-Saez study looked only at pretax cash market income. It did not take into account taxes. It left out noncash compensation such as employer-provided health insurance and pension contributions. It left out Social Security payments, Medicare and Medicaid benefits, and more than 100 other means-tested government programs. Realized capital gains were included, but not the first $500,000 from the sale of one’s home, which is tax-exempt. IRAs and 401(k)s were counted only when the money is taken out in retirement. Finally, the Piketty-Saez data are based on individual tax returns, which ignore, for any given household, the presence of multiple earners.

And now, thanks to a new study in the Southern Economic Journal, we know what the picture looks like when the missing data are filled in. Economists Philip Armour and Richard V. Burkhauser of Cornell University and Jeff Larrimore of Congress’s Joint Committee on Taxation expanded the Piketty-Saez income measure using census data to account for all public and private in-kind benefits, taxes, Social Security payments and household size.

The result is dramatic. The bottom quintile of Americans experienced a 31% increase in income from 1979 to 2007 instead of a 33% decline that is found using a Piketty-Saez market-income measure alone. The income of the second quintile, often referred to as the working class, rose by 32%, not 0.7%. The income of the middle quintile, America’s middle class, increased by 37%, not 2.2%.

By omitting Social Security, Medicare and Medicaid, the Piketty-Saez study renders most older Americans poor when in reality most have above-average incomes. The exclusion of benefits like employer-provided health insurance, retirement benefits (except when actually paid out in retirement) and capital gains on homes misses much of the income and wealth of middle- and upper-middle income families.

Messrs. Piketty and Saez also did not take into consideration the effect that tax policies have on how people report their incomes. This leads to major distortions. The bipartisan tax reform of 1986 lowered the highest personal tax rate to 28% from 50%, but the top corporate-tax rate was reduced only to 34%. There was, therefore, an incentive to restructure businesses from C-Corps to subchapter S corporations, limited-liability corporations, partnerships and proprietorships, where the same income would now be taxed only once at a lower, personal rate. As businesses restructured, what had been corporate income poured into personal income-tax receipts.

So Messrs. Piketty and Saez report a 44% increase in the income earned by the top 1% in 1987 and 1988—though this change reflected how income was taxed, not how income had grown. This change in the structure of American businesses alone accounts for roughly one-third of what they portray as the growth in the income share earned by the top 1% of earners over the entire 1979-2012 period.

An equally extraordinary distortion in the data used to measure inequality (the Gini Coefficient) has been discovered by Cornell’s Mr. Burkhauser. In 1992 the Census Bureau changed the Current Population Survey to collect more in-depth data on high-income individuals. This change in survey technique alone, causing a one-time upward shift in the measured income of high-income individuals, is the source of almost 30% of the total growth of inequality in the U.S. since 1979.

Simple statistical errors in the data account for roughly one third of what is now claimed to be a “frightening” increase in income inequality. But the weakness of the case for redistribution does not end there. America is the freest and most dynamic society in history, and freedom and equality of outcome have never coexisted anywhere at any time. Here the innovator, the first mover, the talented and the persistent win out—producing large income inequality. The prizes are unequal because in our system consumers reward people for the value they add. Some can and do add extraordinary value, others can’t or don’t.

How exactly are we poorer because Bill Gates , Warren Buffett and the Walton family are so rich? Mr. Gates became rich by mainstreaming computer power into our lives and in the process made us better off. Mr. Buffett’s genius improves the efficiency of capital allocation and the whole economy benefits. Wal-Mart stretches our buying power and raises the living standards of millions of Americans, especially low-income earners. Rich people don’t “take” a large share of national income, they “bring” it. The beauty of our system is that everybody benefits from the value they bring.

Yes, income is 24% less equally distributed here than in the average of the other 34 member countries of the OECD. But OECD figures show that U.S. per capita GDP is 42% higher, household wealth is 210% higher and median disposable income is 42% higher. How many Americans would give up 42% of their income to see the rich get less?

Vast new fortunes were earned in the 25-year boom that began under Reagan and continued under Clinton. But the income of middle-class Americans rose significantly. These incomes have fallen during the Obama presidency, and not because the rich have gotten richer. They’ve fallen because bad federal policies have yielded the weakest recovery in the postwar history of America.

Yet even as the recovery continues to disappoint, the president increasingly turns to the politics of envy by demanding that the rich pay their “fair share.” The politics of envy may work here as it has worked so often in Latin America and Europe, but the economics of envy is failing in America as it has failed everywhere else.

Mr. Gramm, a former Republican senator from Texas, is a visiting scholar at the American Enterprise Institute. Mr. Solon was a budget adviser to Senate Republican Leader Mitch McConnell and is a partner of US Policy Metrics.