Two Policies to Keep From the Cliff • The Lessons of ‘Captain Caos’

Saving programs that help workers and boost the economy

Almost lost in the fiscal cliff debate is whether to extend two programs that have helped bolster the economy over the past four years by putting more money in consumers’ pockets. The payroll-tax holiday and extended federal unemployment benefits will end in January absent congressional action. Their expiration would save the U.S. about $145 billion next year — but shave about 1 percentage point off economic growth.

The U.S. economy is too fragile to withdraw support cold turkey. About 12 million people are unemployed, and 40 percent have been out of work six months or longer. The Federal Reserve expects the 7.7 percent unemployment rate to decline only slightly, if at all, in 2013.

A more prudent course would be to continue the programs for another year on a smaller scale. The payroll tax cut could be scaled back. The U.S. now deducts 4.2 percent from paychecks, down from the standard 6.2 percent. A 5.2 percent tax would halve the program’s estimated $114 billion annual cost while still letting workers take home more pay.

And if the payroll cut went away entirely? More than 122 million workers would see an immediate tax increase of $920 on average, according to the nonpartisan Tax Policy Center.

Ending extended unemployment benefits would be similarly misguided. States can bolster their roughly 26 weeks of jobless benefits with up to 47 additional weeks through two federal programs. The duration of benefits, which are pegged to a state’s jobless rate, has been declining as the employment situation improves. In 10 states, benefits have already gone from a maximum of 99 weeks to as few as 40.

The number of weeks will continue to fall in tandem with the jobless rate. The Congressional Budget Office estimates that extending federal insurance another year would cost the U.S. about $30 billion in 2013, down from $159 billion in 2010.

The biggest knock against extending unemployment coverage is that it provides an incentive to remain outside the workforce. One economist at the University of California at Berkeley found the jobless rate in December 2010 would have been about 0.2 percentage point lower, absent extended benefits. A paper by economists at the Federal Reserve Bank of San Francisco concluded that 99-week benefits pushed up the jobless rate even more — as much as 0.8 percentage point.

While extended benefits may dissuade some from taking jobs or engaging in more intensive searches, the primary cause of long-term unemployment is a slack labor market. And jobless benefits are a powerful form of stimulus: The money is likely to be spent on food, rent, gas, and other immediate needs. Cutting off the program would hurt demand and slow economic output in 2013 by about 0.35 percentage point, according to various estimates. It would be folly if lawmakers, in their zeal for immediate fiscal tightening, eliminated extensions to the payroll tax cut and unemployment insurance only to see the economy go wobbly again — and the deficit shoot back up.

Big banks behaving badly

Just when it appeared global banks’ transgressions couldn’t get worse, UBS has broken new ground. In its $1.5 billion settlement with various countries, UBS admitted to thousands of instances of interest-rate manipulation, involving more than 100 employees and managers, in currencies including the yen, the pound, the Swiss franc, the U.S. dollar, and the euro. The actions affected the London interbank offered rate, the global benchmark that influences the value of hundreds of trillions of dollars in mortgages, corporate loans, and derivatives.

What sets UBS apart is not only the extent of the behavior but also the level of collusion with traders at other banks and the outright bribery of brokers who helped coordinate the manipulation.

One instance, which we’ll call the “captain caos” scheme, deserves its place in the hall of fame of financial chicanery. According to the final notice from Britain’s Financial Services Authority, traders at UBS colluded with their peers at other banks “by entering into facilitation trades that aligned their respective commercial interests” so they could all benefit from manipulating interest rates in the yen.

According to the FSA notice, one UBS trader promised the following to a broker aiding in the conspiracy: “I’ll pay you, you know, 50,000 dollars, 100,000 dollars ... whatever you want ... I’m a man of my word.” The spelling-challenged traders and brokers who took part in the scheme came to address one another with monikers such as “the three muscateers” and “captain caos.”

Some lower-level traders and brokers in the U.K. have already been arrested, and charges have been brought against two individuals in the U.S. Investigators would do well to pay closer attention to the involvement of executives: Given the pervasiveness of the misbehavior and how long it lasted, it’s hard to imagine executives were clueless. The FSA notice says at least five senior UBS managers were aware of the manipulations to benefit the bank’s trading positions. In the U.S., conspiracy to commit fraud is a crime, carrying a prison term of as much as five years.

The $1.5 billion in fines for UBS, more than triple the amount U.K. bank Barclays agreed to pay in a settlement in June, brings the total levied this year on big European banks for various misdeeds to $6.1 billion, according to Bloomberg News. Making banks pay handsomely for their sins is an entirely appropriate way to signal that such behavior won’t be tolerated. Criminal indictments, though, would do more to change the culture at big banks and to restore faith in markets.

To read Cass Sunstein on “loss aversion” and budget reform and Jonathan Alter on gun legislation, go to:


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