Grading PolitiFact: Mike Pence and the job-killing financial regulation bill

What is it with these Republicans and their violent rhetoric?


The issue:

PolitiFact.com

Note the date of the statement from Pence.  July 15, 2010.  Such a timely fact check!  What brings this on?

The fact checkers:

Louis Jacobson:  writer, researcher
Morris Kennedy:  editor

Analysis:

The subject, as noted above, is the Dodd-Frank financial regulation bill that was passed with very little help from Republicans.

PolitiFact:

The law is complex -- here is a summary assembled by the Senate Banking, Housing and Urban Affairs Committee -- but in general, the bill created an independent consumer protection agency, established new ways to liquidate failed financial firms, created a council to warn about systemic risks to the financial system and tighten regulatory scrutiny of the financial system while increasing transparency.

The portions of the summary mentioned by PolitiFact all come from the "Highlights of the bill" section of the summary.  The summary also includes stuff such as this:

Costs to Financial Firms, Not Taxpayers: Charges the largest financial firms $50 billion for an upfront fund, built up over time, that will be used if needed for any liquidation. Industry, not the taxpayers, will take a hit for liquidating large, interconnected financial companies.

The pledge that industry rather than taxpayers take the hit for bailout costs is laughable, by the way.  Such costs are always passed on to the consumer.  That even includes people who don't ordinarily pay federal taxes, like a person below poverty level who has late charges levied on their bank account.  In short, the bill sets up a tax that is embedded in the cost of doing banking.

On July 15, 2010, shortly after the Senate passed the measure, then-House Republican Conference Chairman Mike Pence, R-Ind., released a statement critical of the bill. In part, it said, "This so-called financial reform bill will kill jobs, raise taxes, restrict the flow of credit, make bailouts permanent and turn the Democrats’ disastrous too-big-to-fail approach into federal law."

(...)

As part of our look at the range of bills that have been attacked as "job-killing," we thought we'd look at whether the charge is accurate when leveled against the Dodd-Frank bill.

 So there's the fact they're checking.  On with the fact check:

One of Pence's statements said the bill "would discourage lending to those on Main Street. By draining capital out of the financial system and wasting it on misguided government spending and double-digit unemployment, the albatross weighing down the economy gets even heavier."

In an interview, Satya Thallam, director of the Financial Markets Working Group at George Mason University's Mercatus Center, elaborated on what Pence meant. "Micro-level access to credit for consumers and small businesses will be severely constricted, hampering basic purchases and small-business creation," Thallam said. "Individuals who need access to credit will inevitably substitute to whatever form is available (check bouncing, loan sharks, other high interest methods) which is like adding a tax on these transactions, which in turn will reduce the number of productive purchases, investments, and allocations."

Thallam's explanation magnifies the cost to consumers that I mentioned above.  I take her to say that the capital tied up in the fund is no longer available to consumers, thus tightening the supply of money for lending.  Meanwhile, the banks make up some of the cost of the fund by charging more for banking transactions, such as overdraft fees.

The story goes on to acknowledge that the price of the legislation to business will be "substantial" and from there draws a reasonable preliminary conclusion:

While the CBO didn't go as far as to project job losses, most analysts we spoke to agreed that they could have a direct impact on the number of people employed by financial companies. In 2009, the financial and insurance sectors employed about 6.8 million Americans.

In addition, the bill amounts to passing a tax increase, increasing the burden on the weak economy (just as Pence noted):

CBO estimates that the net increase in the deficit as a result of the changes in revenues and direct spending would total $19.7 billion over the 2011-2020 period.

That $19.7 billion shortfall occurs in spite of an estimated $35.5 billion in revenue under the bill (including an estimated $1.8 billion in revenue for 2011).  The PolitiFact presentation seems to downplay the impact of the bill on the economy.

That's not all PolitiFact downplays:

But the analysis of job losses quickly gets tricky. Between 2008 and 2009, the financial and insurance industry shed about 450,000 jobs, or 6 percent of its workforce -- most, presumably, due to the economic crisis and the resulting meltdown that the Dodd-Frank bill is designed to prevent. Should the number of jobs "killed" because of Dodd-Frank be offset by the 450,000 jobs in the financial sector that might have been saved had Dodd Frank been in place earlier? For that matter, what about the 7.2 million jobs lost in the larger economy between the peak employment of December 2007 and today, a drop that was caused to a significant (though not exclusive) degree by excesses in the financial sector?

Doesn't it kind of change the entire historical context of the bill if we imagine its implementation at a different time in history?  No, the number of jobs killed by Dodd-Frank should not be offset by 450,000 based on a hypothetical scenario from the past.  The effect of the bill now is the effect of the bill now, not the effect of the bill at some other time.  And, importantly, the now to which we refer counts as economic hard times in which raising taxes is an especially questionable move.

PolitiFact fudges on that context with one of its story blurbs:

Uh, yeah, what about all those jobs saved by the bill?  In the event of a future hypothetical repeat financial meltdown, that is?  And represented with the past tense verb "saved," of course.

Back to the text of the story, PolitiFact subsequently quotes J.D. Foster, an economist with the Heritage Foundation, saying that the bill, in effect, creates a banking insurance scheme--one that he does not expect to work.  PolitiFact then counterbalanced that view with an allegedly contrary one:

Others, such as the Basel Committee on Banking Supervision -- an international panel of high-level banking officials that serves as a forum to discuss regulatory issues -- have projected that Dodd-Frank has a decent shot at succeeding.

If there were "others" apart from the Basel Committee on Banking Supervision then PolitiFact should have made one of them the featured example.  This one doesn't check out, as the report does not assess Dodd-Frank but rather a set of capital and liquidity recommendations coming from the Basel committee itself:

This report provides an analysis of the long-term economic impact (LEI) of the Basel Committee’s proposed capital and liquidity reforms.

Searching both reports for "Dodd" or "Frank" yields no results.  Was PolitiFact's account misleading?  You betcha.  The Dodd-Frank bill goes way beyond the recommendations made by the Basel Committee.  The reports do not address the insurance scheme aspect of the bill that Foster talked about, so PolitiFact's claim that the Basel Committee provides a counterpoint to Foster is false.

It is probably significant that PolitiFact included no reference having to do with the content of the Basel Committee recommendations.  The existing reference could almost pass for an effort to undercut Foster's testimony, especially since the swipe at Foster drifts from the topic of job loss.

Getting back to the topic of job loss, PolitiFact brings us an expert supportive of the financial regulation bill:

"It requires an exceptional degree of chutzpah to suggest that new regulation of the financial sector represents 'job-killing' legislation," said Gary Burtless, an economist with the centrist-to-liberal Brookings Institution. "If any private industry in the United States can be legitimately identified as a 'job-killing' machine, the financial sector would seem be that industry. The nation is still trying to pick of the pieces from a devastating economic crisis brought about by the financial industry’s hubris and recklessness."

Foster had argued that the bill would kill jobs because of "the direct and indirect costs to the financial system, and because of the degradation in the ability of the financial sector to support the non-financial sector."  Burtless, the way PolitiFact uses his words, replies with an argument based on ad hominem (the argument from the other side represents "chutzpah" on the part of advocates) and the tu quoque fallacy.  The citation of Burtless is bizarre because the quotation contains no relevant argument.  That is not to say that Burtless had no support for his position.  It is incumbent on the responsible journalist to capture the sense of that argument in the context of a fact check story, however.  We don't see that in this case.

Taxation and other monies removed from the lending pool hurt the job market.  Against that PolitiFact places job savings from a second financial crisis that has not materialized--unless we count the irrelevant comments from Burtless.

It must be time for PolitiFact's two-paragraph conclusion:

As we concluded our research on this item, we noticed that the information on how financial reform will affect the labor supply is speculative. While the CBO noted that the cost for the private sector would be substantial, it didn't estimate how much that would affect job numbers. (By contrast, CBO said the health care law would restrict the labor supply by .5 percent.) Most analysts agree that the financial regulations will restrict job growth by some amount, but nobody has detailed estimates on just how much.
(blue highlights added)

1)  Labor supply is pretty much irrelevant.  The demand for labor is the important thing in our current historical context, and the costs of the bill will decrease the demand for labor, on balance, unless we factor in an uncertain future event and assume the Dodd-Frank bill will save jobs on balance if that event occurs.

2)  The blue highlighted portion helps confirm the accuracy of Pence's statement.  It is unclear from the story whether any analysts disagreed with the proposition as opposed to withholding an opinion.  We get more of the same in the second paragraph of the conclusion:

Ultimately, even the supporters of the bill we spoke to acknowledged that some jobs will likely be lost, or never created, due to passage of Dodd-Frank. However, many of the experts we spoke to agreed that not passing the bill would put even more jobs in the greater economy at risk, not to mention countless nest-eggs, homes and other non-job-related concerns. Would potential job savings offset job costs? Unfortunately, there is no way to know. Still, Pence's comment ignores the principle that preventing financial shocks is job-saving. On balance, we rate the statement Barely True.
(blue highlights added)

PolitiFact apparently establishes a consensus of opinion that the bill would hurt the job picture. The caveat is that the bill might offset the job losses at some point in the future.  PolitiFact faults Pence for ignoring that potential benefit.

Under some circumstances the PolitiFact criticism would be fair.  But in this case, it is PolitiFact that is guilty of not telling the whole story.  Pence made his statement in the midst of a severe economic downturn.  It is common knowledge that raising taxes on a soft economy prolongs the soft economy.  And that is the context in which Pence made his statement.  If Pence is "Barely True" for not taking future job protection into account then PolitiFact is "Barely True" for ignoring the historical context of Pence's statement.

The takeaway is this:  We have no imminent forecast of another global meltdown.  The problem is historically rare and for that reason there was no need to pass such a bill while the current economic problems persist.  Democrats had the option of passing a bill that kept to the recommendations of the Basel Committee.  Instead, they established new taxes and a bailout/liquidation pool even though those provisions put an additional (job-killing) drag on the weak economy.

Ignoring the historical context allowed PolitiFact to give Pence's statement less than the charitable interpretation it deserved and made PolitiFact guilty of the same type of sin it points out in others.

The grades:

Louis Jacobson:  F
Morris Kennedy:  F

The failure to offer statements a properly charitable interpretation remains a chronic problem at PolitiFact.  The misuse of the Basel Committee reports provides sufficient reason all by itself for a pair of failing grades.



Jan. 26, 2011:  Changed "jobs" to "labor" in two instances in the first paragraph in reply to the first section of PolitiFact's conclusion.  It was more clear to contrast labor supply with labor demand rather than contrasting labor supply with job demand.