Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • Rioting Mainly for Fun and Profit: The Neoconservative Origins of Our Police Problem

    Aug 15, 2014Mike Konczal

    Before it was anything else, the neoconservative movement was a theory of the urban crisis. As a reaction to the urban riots of the 1960s, it put an ideological and social-scientific veneer on a doctrine that called for overwhelming force against minor infractions -- a doctrine that is still with us today, as people are killed for walking down the street in Ferguson and allegedly selling single cigarettes in New York. But neoconservatives also sought, rather successfully, to position liberalism itself as the cause of the urban crisis, solvable only through the reassertion of order through the market and the police.

    (Image by Jamelle Bouie.)

    Edward Banfield was one of the first neoconservative thinkers who started writing in the 1960s and '70s and was a prominent figure in the movement, though he isn’t remembered as well as his close friends Milton Friedman or Leo Strauss, or his star student James Q. Wilson. Banfield contributed to the beginning of neoconservative urban crisis thinking, the Summer 1969 "Focus on New York" issue of The Public Interest, which began to formalize neoconservatives’ framing of the urban crisis as the result of not just the Great Society in particular but the liberal project as a whole.

    In his major book The Unheavenly City (pdf here), Banfield set the tone for much of what would come in the movement. Commentary described the book as “a political scientist’s version of Milton Friedman’s Capitalism and Freedom” at the time. It sold 100,000 copies, and gathered both extensive news coverage and academic interest.

    The Unheavenly City’s most infamous chapter is “Rioting Mainly for Fun and Profit.” Fresh off televised riots in Watts, Detroit, and Newark, Banfield argued that it was "naive to think that efforts to end racial injustice and to eliminate poverty, slums, and unemployment will have an appreciable effect upon the amount of rioting that will be done in the next decade or two.” Absolute living standards had been rising rapidly. For Banfield, this was entirely the result of market and social forces rather than the state, and the poor, with their short time-horizons and desire for immediate gratification, would largely be left behind and always be prone to rioting. Today’s classic, if often implicit, repudiations of poor people’s humanity were clearly expressed here.

    Rather than political protests or rebellions, Banfield argued that riots were largely opportunistic displays of violence and theft. He broke down four types of riots: (1) rampages, where young men are simply looking for trouble and act out violently; (2) pillaging, where theft is the main focus, and the riot serves as a solution for a type of collective action problem for thieves; (3) righteous indignation, where people act against an insult against their community; and (4) demonstrations, which are neither spontaneous nor violent but instead designed for a specific political purpose.

    Banfield argued that the poor mainly engaged in the first two types of riots. Righteous indignation riots were a feature of the working class, because the “lower-class individual is too alienated to be capable of much indignation.” Demonstrations were largely the focus of the middle and upper classes, as they ran organizations and were able to make coherent claims on the state.

    At this point Banfield’s text reads like a list of cranky, armchair reactionary observations about riots. It received considerable blowback at the time. What was innovative, for a neoconservative agenda, was where he put the blame. Young men will be young men, the text seems to suggest. The problem is what enables them to riot.

    The initial perpetrators included the media, whose neutral (or even sensationalistic) coverage “recruited rampagers, pillagers, and others to the scene.” They also made the rioting more dangerous by expanding the knowledge base of the rioters. The larger academic community was also at fault since, to Banfield’s ear, “explaining the riots tended to justify them.” Upper-class demonstrators were also responsible for raising expectations of what the poor could demand from the state and from society writ large.

    But according to Banfield, the core problem was modern liberalism, and in an interesting way. The big issue was the “professionalism” and bureaucratization of city services. The rioters had nothing to fear from the police, who were blocked from exercising their own judgement on the ground by an administrative layer of police administrators. In the logic that would form the basis of Broken Windows policing, the poor learning “through experience that an infraction can be done leads, by an illogic characteristic of childish thought, to the conclusion that it may be done.” And potential rioters were learning this because “the patrolman’s discretion in the use of force declined rapidly” with the growth of the modern liberal state.

    Returning, therefore, to a “pre-professional” model of policing is one of the stated goals of Broken Windows. As James Q. Wilson explained in the 1982 Atlantic Monthly article that popularized the topic, “the police in this earlier period assisted in that reassertion of authority by acting, sometimes violently, on behalf of the community.”

    Before the modern liberal state of accountability and due process, the police force wasn't judged by “its compliance with appropriate procedures” but instead by its success in maintaining order. Since the 1960s, “the shift of police from order maintenance to law enforcement has brought them increasingly under the influence of legal restrictions… The order maintenance functions of the police are now governed by rules developed to control police relations with suspected criminals,” writes Wilson. According to this theory, order is preserved by the police out there, acting in the moment against minor infractions with a strong display of force, not by liberal notions of accountability and fairness.

    This neoconservative vision that started in the 1960s and continues into today doesn’t just inform local arguments about policing, but rather the entire policy debate. So much of the debate over the (neo)conservative movement emphasizes suburban warriors, or evangelicals, or the Sun Belt, or the South. But as Alice O’Connor demonstrates in her paper "The Privatized City: The Manhattan Institute, the Urban Crisis, and the Conservative Counterrevolution in New York," there was a distinct urban character to this thinking as well. Rather than a crisis of race relations, police violence, poverty, or anything else, rioting and the broader urban crisis were framed by the neoconservative movement as a crisis of values and culture precipitated by liberalism.

    The broader urban crisis, in this story, hinges not on structural issues but on personal morality and behavior that can be restored by the extension of the market. Crime and urban “disorder” fit right next to social engineering and failing state institutions as a corrupt legacy of the liberal project and its bureaucratic, administrative governing state. Only the conservative agenda, as O'Connor puts it, of “zero-tolerance law enforcement, school ‘choice,’ hard-nosed implementation of welfare reform, and the large-scale privatization of municipal and social services” is capable of dismantling it. Only through the market, individual responsibility, and freedom from government “interference” can order result from the restoration of “political and cultural authority to a resolutely anti-liberal elite.” This legacy harnesses police excess to the triumph of the market. And as we see, it will be hard to dislodge one while the other reigns supreme.

    Follow or contact the Rortybomb blog:
     
      

     

    Before it was anything else, the neoconservative movement was a theory of the urban crisis. As a reaction to the urban riots of the 1960s, it put an ideological and social-scientific veneer on a doctrine that called for overwhelming force against minor infractions -- a doctrine that is still with us today, as people are killed for walking down the street in Ferguson and allegedly selling single cigarettes in New York. But neoconservatives also sought, rather successfully, to position liberalism itself as the cause of the urban crisis, solvable only through the reassertion of order through the market and the police.

    (Image by Jamelle Bouie.)

    Edward Banfield was one of the first neoconservative thinkers who started writing in the 1960s and '70s and was a prominent figure in the movement, though he isn’t remembered as well as his close friends Milton Friedman or Leo Strauss, or his star student James Q. Wilson. Banfield contributed to the beginning of neoconservative urban crisis thinking, the Summer 1969 "Focus on New York" issue of The Public Interest, which began to formalize neoconservatives’ framing of the urban crisis as the result of not just the Great Society in particular but the liberal project as a whole.

    In his major book The Unheavenly City (pdf here), Banfield set the tone for much of what would come in the movement. Commentary described the book as “a political scientist’s version of Milton Friedman’s Capitalism and Freedom” at the time. It sold 100,000 copies, and gathered both extensive news coverage and academic interest.

    The Unheavenly City’s most infamous chapter is “Rioting Mainly for Fun and Profit.” Fresh off televised riots in Watts, Detroit, and Newark, Banfield argued that it was "naive to think that efforts to end racial injustice and to eliminate poverty, slums, and unemployment will have an appreciable effect upon the amount of rioting that will be done in the next decade or two.” Absolute living standards had been rising rapidly. For Banfield, this was entirely the result of market and social forces rather than the state, and the poor, with their short time-horizons and desire for immediate gratification, would largely be left behind and always be prone to rioting. Today’s classic, if often implicit, repudiations of poor people’s humanity were clearly expressed here.

    Rather than political protests or rebellions, Banfield argued that riots were largely opportunistic displays of violence and theft. He broke down four types of riots: (1) rampages, where young men are simply looking for trouble and act out violently; (2) pillaging, where theft is the main focus, and the riot serves as a solution for a type of collective action problem for thieves; (3) righteous indignation, where people act against an insult against their community; and (4) demonstrations, which are neither spontaneous nor violent but instead designed for a specific political purpose.

    Banfield argued that the poor mainly engaged in the first two types of riots. Righteous indignation riots were a feature of the working class, because the “lower-class individual is too alienated to be capable of much indignation.” Demonstrations were largely the focus of the middle and upper classes, as they ran organizations and were able to make coherent claims on the state.

    At this point Banfield’s text reads like a list of cranky, armchair reactionary observations about riots. It received considerable blowback at the time. What was innovative, for a neoconservative agenda, was where he put the blame. Young men will be young men, the text seems to suggest. The problem is what enables them to riot.

    The initial perpetrators included the media, whose neutral (or even sensationalistic) coverage “recruited rampagers, pillagers, and others to the scene.” They also made the rioting more dangerous by expanding the knowledge base of the rioters. The larger academic community was also at fault since, to Banfield’s ear, “explaining the riots tended to justify them.” Upper-class demonstrators were also responsible for raising expectations of what the poor could demand from the state and from society writ large.

    But according to Banfield, the core problem was modern liberalism, and in an interesting way. The big issue was the “professionalism” and bureaucratization of city services. The rioters had nothing to fear from the police, who were blocked from exercising their own judgement on the ground by an administrative layer of police administrators. In the logic that would form the basis of Broken Windows policing, the poor learning “through experience that an infraction can be done leads, by an illogic characteristic of childish thought, to the conclusion that it may be done.” And potential rioters were learning this because “the patrolman’s discretion in the use of force declined rapidly” with the growth of the modern liberal state.

    Returning, therefore, to a “pre-professional” model of policing is one of the stated goals of Broken Windows. As James Q. Wilson explained in the 1982 Atlantic Monthly article that popularized the topic, “the police in this earlier period assisted in that reassertion of authority by acting, sometimes violently, on behalf of the community.”

    Before the modern liberal state of accountability and due process, the police force wasn't judged by “its compliance with appropriate procedures” but instead by its success in maintaining order. Since the 1960s, “the shift of police from order maintenance to law enforcement has brought them increasingly under the influence of legal restrictions… The order maintenance functions of the police are now governed by rules developed to control police relations with suspected criminals,” writes Wilson. According to this theory, order is preserved by the police out there, acting in the moment against minor infractions with a strong display of force, not by liberal notions of accountability and fairness.

    This neoconservative vision that started in the 1960s and continues into today doesn’t just inform local arguments about policing, but rather the entire policy debate. So much of the debate over the (neo)conservative movement emphasizes suburban warriors, or evangelicals, or the Sun Belt, or the South. But as Alice O’Connor demonstrates in her paper "The Privatized City: The Manhattan Institute, the Urban Crisis, and the Conservative Counterrevolution in New York," there was a distinct urban character to this thinking as well. Rather than a crisis of race relations, police violence, poverty, or anything else, rioting and the broader urban crisis were framed by the neoconservative movement as a crisis of values and culture precipitated by liberalism.

    The broader urban crisis, in this story, hinges not on structural issues but on personal morality and behavior that can be restored by the extension of the market. Crime and urban “disorder” fit right next to social engineering and failing state institutions as a corrupt legacy of the liberal project and its bureaucratic, administrative governing state. Only the conservative agenda, as O'Connor puts it, of “zero-tolerance law enforcement, school ‘choice,’ hard-nosed implementation of welfare reform, and the large-scale privatization of municipal and social services” is capable of dismantling it. Only through the market, individual responsibility, and freedom from government “interference” can order result from the restoration of “political and cultural authority to a resolutely anti-liberal elite.” This legacy harnesses police excess to the triumph of the market. And as we see, it will be hard to dislodge one while the other reigns supreme.

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  • The Score, a New Monthly Column, is Now Live!

    Aug 9, 2014Mike Konczal

    I'm excited to tell you about The Score, a new monthly economics column page in The Nation magazine, that I'll be writing with Bryce Covert. Each month will have a lead essay based on a chart, along with sidebars of information related to the economy as a whole. Check it out in print if you can, because the formatting of the page itself is very sharp.

    It will also be online, and our first column on wealth inequality went up this week. Given so much interest in wealth inequality (it is the basis of the two best works from the left in 2014), what would a wealth equality agenda look like?

    The Nation also recently launched The Curve, a great blog on the intersection of feminism and economics, spearheaded by Kathy Geier. It's great to see The Nation moving in this direction, and I hope you check it all out!

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    I'm excited to tell you about The Score, a new monthly economics column page in The Nation magazine, that I'll be writing with Bryce Covert. Each month will have a lead essay based on a chart, along with sidebars of information related to the economy as a whole. Check it out in print if you can, because the formatting of the page itself is very sharp.

    It will also be online, and our first column on wealth inequality went up this week. Given so much interest in wealth inequality (it is the basis of the two best works from the left in 2014), what would a wealth equality agenda look like?

    The Nation also recently launched The Curve, a great blog on the intersection of feminism and economics, spearheaded by Kathy Geier. It's great to see The Nation moving in this direction, and I hope you check it all out!

    Follow or contact the Rortybomb blog:
     
      

     

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  • The Pragmatic Libertarian Case for a Basic Income Doesn't Add Up

    Aug 8, 2014Mike Konczal

    Cato Unbound has a symposium on the “pragmatic libertarian case” for a Basic Income Guarantee (BIG), as argued by Matt Zwolinski. What makes it pragmatic? Because it would be a better alternative to the welfare state we now have. It would be a smaller, easier, cheaper (or at least no more expensive) version of what we already do, but have much better results.

    Fair enough. But for the pragmatic case to work, it has to be founded on an accurate understanding of the current welfare state. And here I think Zwolinski is wrong in his description in three major ways.

    He describes a welfare state where there are over a hundred programs, each with their own bureaucracy that overwhelms and suffocates the individual. This bureaucracy is so large and wasteful that simply removing it and replacing it with a basic income can save a ton of money. And we can get a BIG by simply shuffling around the already existing welfare state. Each of these assertions are misleading if not outright wrong.

    Obviously, in an essay like this, it is normal to exaggerate various aspects of the reality in order to convince skeptics and make readers think in a new light. But these inaccuracies turn out to invalidate his argument. The case for a BIG will need to be built on a steadier footing.

    Too Many Programs?

    Zwolinski puts significant weight on the idea that there are, following a Cato report, 126 welfare programs spending nearly $660 billion dollars. That’s a lot of programs! Is that accurate?

    Well, no. The programs Zwolinski describes can be broken down into three groups. First you have Medicaid, where the feds pay around $228 billion. Then you have the six big programs that act as “outdoor relief” welfare, providing cash, or cash-like compensation. These are the Earned Income Tax Credit, Temporary Assistance for Needy Families, Supplemental Security Income, Supplemental Nutrition Assistance Program (food stamps), housing vouchers and the Child Tax Credit. Ballpark figure, that’s around $212 billion dollars.

    So only 7 programs are what we properly think of as welfare, or cash payments for the poor. Perhaps we should condense those programs, but there aren't as many as we originally thought. What about the remaining 119 programs?

    These are largely small grants to local institutions of civil society to provide for the common good. Quick examples involve $2.5 billion to facilitate adoption assistance, $500 million to help with homeless shelters, $250 million to help provide food for food shelters (and whose recent cuts were felt by those trying to fight food insecurity), or $10 million for low income taxpayer clinics.

    These grants go largely to nonprofits who carry out a public purpose. State funding and delegation of public purpose has always characterized this “third sector” of civil institutions in the United States. Our rich civil society has always been built alongside the state. Perhaps these are good programs or perhaps they are bad, but the sheer number of programs have nothing to do with the state degrading the individual through deadening bureaucracy. If you are just going after the number of programs, you are as likely to bulldoze our nonprofit infrastructure that undergirds civil society as you are some sort of imagined totalitarian bureaucracy.

    Inefficient, out-of-control bureaucracy?

    But even if there aren’t that many programs, certainly there are efficiencies to reducing the seven programs that do exist. Zwolinski writes that “[e]liminating a large chunk of the federal bureaucracy would obviously...reduce the size and scope of government” and that “the relatively low cost of a BIG comes from the reduction of bureaucracy.”

    So are these programs characterized by out of control spending? No. Here they are calculated by Robert Greenstein and CBPP Staff.

    The major programs have administrative costs ranging between 1 percent (EITC) and 8.7 percent (housing vouchers), each proportionate to how much observation of recipients there is. Weighted, the average administrative cost is about 5 percent. To put this in perspective, compare it with private charity. According to estimates by Givewell, their most favored charities spend 11 percent on administrative costs, significantly more than is spent on these programs.

    More to the point, there isn’t a lot of fat here. If all the administrative costs were reduced to 1 percent, you’d save around $25 billion dollars. That’s not going to add enough cash to create a floor under poverty, much less a BIG, by any means.

    Pays for Itself?

    So there are relatively few programs and they are run at a decent administrative cost. In order to get a BIG, you’ll need some serious cash on the table. So how does Zwolinski argues that “a BIG could be considerably cheaper than the current welfare state, [or at least it] would not cost more than what we currently spend”?

    Here we hit a wall with what we mean by the welfare state. Zwolinski quotes two example plans. The first is from Charles Murray. However, in addition to the seven welfare programs mentioned above, he also collapses Social Security, Medicare, unemployment insurance, and social insurance more broadly into his basic income. If I recall correctly, it actually does cost more to get to the basic income he wants when he wrote the book in 2006, but said that it was justified because Medicare spending was projected to skyrocket a decade out, much faster than the basic income.

    His other example is a plan by Ed Dolan. Dolan doesn’t touch health care spending, and for our purposes doesn’t really touch Social Security. How does he get to his basic income? By wiping out tax expenditures without lowering tax rates. He zeros out tax expenditures like the mortgage interest deduction, charitable giving, and the personal exemption, and turns the increased revenue into a basic income.

    We have three distinct things here. We have the seven programs above that are traditionally understood as welfare programs of outdoor relief, or cash assistance to the poor. We have social insurance, programs designed to combat the Four Horsemen of “accident, illness, old age, loss of a job” through society-wide insurance. And we have tax expenditures, the system that creates an individualized welfare state through the tax code.

    Zwolinski is able to make it seem like we can get a BIG conflict-free by blurring each of these three things together. But social insurance isn’t outdoor relief. People getting Social Security don’t think that they are on welfare or a public form of charity. Voters definitely don’t like the idea of scratching Medicare and replacing it with (a lot less) cash, understanding them as two different things. And social insurance, like all insurance, is able to get a lot of bang for the buck by having everyone contribute but only take out when necessary, for example they are too old to work. Public social insurance, through its massive scale, has an efficiency that beats out private options. If Zwolinski wants to go this route, he needs to make the full case against the innovation of social insurance itself.

    Removing tax expenditures, which tend to go to those at the top of the income distribution, certainly seems like a good way to fund a BIG. However we’ll be raising taxes if we go this route. Now, of course, the idea that there is no distribution of income independent of the state is common sense, so the word “redistribution” is just a question-begging exercise. However the top 20 percent of income earners will certainly believe their tax bill is going up and react accordingly.

    So?

    Zwolinski is trying to make it seem like we can largely accomplish a BIG by shuffling around the things that state does, because the state does them poorly. But the numbers simply won’t add up. Or his plan will hit a wall when social insurance is on the chopping block, or when the rich revolt when their taxes go up.

    The case for the BIG needs to be made from firmer ground. Perhaps it is because the effects of poverty are like a poison. Or maybe it will provide real freedom for all by ensuring people can pursue their individual goals. Maybe it is because the economy won’t produce jobs in the capital-intensive robot age of the future, and a basic income will help ensure legitimacy for this creatively destructive economy. Heck, maybe it just compensates for the private appropriation of common, natural resources.

    But what won’t make the case is the idea that the government already does this, just badly. When push comes to shove, the numbers won’t be there.

    Follow or contact the Rortybomb blog:
     
      

     

    Cato Unbound has a symposium on the “pragmatic libertarian case” for a Basic Income Guarantee (BIG), as argued by Matt Zwolinski. What makes it pragmatic? Because it would be a better alternative to the welfare state we now have. It would be a smaller, easier, cheaper (or at least no more expensive) version of what we already do, but have much better results.

    Fair enough. But for the pragmatic case to work, it has to be founded on an accurate understanding of the current welfare state. And here I think Zwolinski is wrong in his description in three major ways.

    He describes a welfare state where there are over a hundred programs, each with their own bureaucracy that overwhelms and suffocates the individual. This bureaucracy is so large and wasteful that simply removing it and replacing it with a basic income can save a ton of money. And we can get a BIG by simply shuffling around the already existing welfare state. Each of these assertions are misleading if not outright wrong.

    Obviously, in an essay like this, it is normal to exaggerate various aspects of the reality in order to convince skeptics and make readers think in a new light. But these inaccuracies turn out to invalidate his argument. The case for a BIG will need to be built on a steadier footing.

    Too Many Programs?

    Zwolinski puts significant weight on the idea that there are, following a Cato report, 126 welfare programs spending nearly $660 billion dollars. That’s a lot of programs! Is that accurate?

    Well, no. The programs Zwolinski describes can be broken down into three groups. First you have Medicaid, where the feds pay around $228 billion. Then you have the six big programs that act as “outdoor relief” welfare, providing cash, or cash-like compensation. These are the Earned Income Tax Credit, Temporary Assistance for Needy Families, Supplemental Security Income, Supplemental Nutrition Assistance Program (food stamps), housing vouchers and the Child Tax Credit. Ballpark figure, that’s around $212 billion dollars.

    So only 7 programs are what we properly think of as welfare, or cash payments for the poor. Perhaps we should condense those programs, but there aren't as many as we originally thought. What about the remaining 119 programs?

    These are largely small grants to local institutions of civil society to provide for the common good. Quick examples involve $2.5 billion to facilitate adoption assistance, $500 million to help with homeless shelters, $250 million to help provide food for food shelters (and whose recent cuts were felt by those trying to fight food insecurity), or $10 million for low income taxpayer clinics.

    These grants go largely to nonprofits who carry out a public purpose. State funding and delegation of public purpose has always characterized this “third sector” of civil institutions in the United States. Our rich civil society has always been built alongside the state. Perhaps these are good programs or perhaps they are bad, but the sheer number of programs have nothing to do with the state degrading the individual through deadening bureaucracy. If you are just going after the number of programs, you are as likely to bulldoze our nonprofit infrastructure that undergirds civil society as you are some sort of imagined totalitarian bureaucracy.

    Inefficient, out-of-control bureaucracy?

    But even if there aren’t that many programs, certainly there are efficiencies to reducing the seven programs that do exist. Zwolinski writes that “[e]liminating a large chunk of the federal bureaucracy would obviously...reduce the size and scope of government” and that “the relatively low cost of a BIG comes from the reduction of bureaucracy.”

    So are these programs characterized by out of control spending? No. Here they are calculated by Robert Greenstein and CBPP Staff.

    The major programs have administrative costs ranging between 1 percent (EITC) and 8.7 percent (housing vouchers), each proportionate to how much observation of recipients there is. Weighted, the average administrative cost is about 5 percent. To put this in perspective, compare it with private charity. According to estimates by Givewell, their most favored charities spend 11 percent on administrative costs, significantly more than is spent on these programs.

    More to the point, there isn’t a lot of fat here. If all the administrative costs were reduced to 1 percent, you’d save around $25 billion dollars. That’s not going to add enough cash to create a floor under poverty, much less a BIG, by any means.

    Pays for Itself?

    So there are relatively few programs and they are run at a decent administrative cost. In order to get a BIG, you’ll need some serious cash on the table. So how does Zwolinski argues that “a BIG could be considerably cheaper than the current welfare state, [or at least it] would not cost more than what we currently spend”?

    Here we hit a wall with what we mean by the welfare state. Zwolinski quotes two example plans. The first is from Charles Murray. However, in addition to the seven welfare programs mentioned above, he also collapses Social Security, Medicare, unemployment insurance, and social insurance more broadly into his basic income. If I recall correctly, it actually does cost more to get to the basic income he wants when he wrote the book in 2006, but said that it was justified because Medicare spending was projected to skyrocket a decade out, much faster than the basic income.

    His other example is a plan by Ed Dolan. Dolan doesn’t touch health care spending, and for our purposes doesn’t really touch Social Security. How does he get to his basic income? By wiping out tax expenditures without lowering tax rates. He zeros out tax expenditures like the mortgage interest deduction, charitable giving, and the personal exemption, and turns the increased revenue into a basic income.

    We have three distinct things here. We have the seven programs above that are traditionally understood as welfare programs of outdoor relief, or cash assistance to the poor. We have social insurance, programs designed to combat the Four Horsemen of “accident, illness, old age, loss of a job” through society-wide insurance. And we have tax expenditures, the system that creates an individualized welfare state through the tax code.

    Zwolinski is able to make it seem like we can get a BIG conflict-free by blurring each of these three things together. But social insurance isn’t outdoor relief. People getting Social Security don’t think that they are on welfare or a public form of charity. Voters definitely don’t like the idea of scratching Medicare and replacing it with (a lot less) cash, understanding them as two different things. And social insurance, like all insurance, is able to get a lot of bang for the buck by having everyone contribute but only take out when necessary, for example they are too old to work. Public social insurance, through its massive scale, has an efficiency that beats out private options. If Zwolinski wants to go this route, he needs to make the full case against the innovation of social insurance itself.

    Removing tax expenditures, which tend to go to those at the top of the income distribution, certainly seems like a good way to fund a BIG. However we’ll be raising taxes if we go this route. Now, of course, the idea that there is no distribution of income independent of the state is common sense, so the word “redistribution” is just a question-begging exercise. However the top 20 percent of income earners will certainly believe their tax bill is going up and react accordingly.

    So?

    Zwolinski is trying to make it seem like we can largely accomplish a BIG by shuffling around the things that state does, because the state does them poorly. But the numbers simply won’t add up. Or his plan will hit a wall when social insurance is on the chopping block, or when the rich revolt when their taxes go up.

    The case for the BIG needs to be made from firmer ground. Perhaps it is because the effects of poverty are like a poison. Or maybe it will provide real freedom for all by ensuring people can pursue their individual goals. Maybe it is because the economy won’t produce jobs in the capital-intensive robot age of the future, and a basic income will help ensure legitimacy for this creatively destructive economy. Heck, maybe it just compensates for the private appropriation of common, natural resources.

    But what won’t make the case is the idea that the government already does this, just badly. When push comes to shove, the numbers won’t be there.

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  • Progress, Yet No Progress: The Two Lines of Defense Against Too-Big-To-Fail

    Aug 7, 2014Mike Konczal

    It’s been a week of whiplash when it comes to the issue of Too Big To Fail (TBTF). First the GAO released a report saying that it is difficult to find any bailout subsidy for the largest banks, implying that there's been progress on ending TBTF. Then, late Tuesday, the FDIC and Federal Reserve released a small bombshell saying that the living wills submitted by the 11 largest banks “are not credible and do not facilitate an orderly resolution under the U.S. Bankruptcy Code.” These living wills were designed to make sure that banks could fail without causing chaos in the economy, and this report implies TBTF is still with us.

    One of them has to be wrong, right? In order to understand this contradiction it's important to map out where the actual disagreement is. Doing so will also help explain how the battle over TBTF will play out in the near future.

    So look - a large, systemically risky financial firm is collapsing! Oh noes! What has happened and will happen?

    There are two levels of defense when it comes to ending this firm. The first is through a bankruptcy court, and the second is through the FDIC taking over the firm, much like what it does to a failing regular bank. The next several paragraphs give some technical details (skip ahead if your eyes are already glazing over).

    <technical>

    As you can see in the graphic above, before the failure, regulators will have failed to use “prompt corrective action” to guide the firm back to solvency. These are efforts regulators use to push a troubled firm to fix itself before a collapse. For example, if bank capital falls below a certain point, the bank can’t pay out bonuses or make capital purchases in order to attempt to make it more secure.

    Once a failure happens, there are two lines of defense. The default course of action is putting the firm in bankruptcy, similar to what happened with Lehman Brothers. Why might this be a problem for a major financial firm? The Bankruptcy Code is slow and deliberate, when financial firms often need to be resolved fast. It isn't designed to preserve ongoing firm business, which is a problem when those businesses are essential to the economy as a whole. It can’t prevent runs by favoring short-term creditors. There is no guaranteed funding available to keep operations running and to help with the relaunch. And there are large problems handling the failure of a firm operating in many different countries.

    With these concerns in mind, Dodd-Frank sets up a second line of defense. Regulators can direct the FDIC to take over the failed firm and do an emergency resolution (OLA), like they do with commercial banks. In order to active the OLA, there’s a comically complicated procedure in which the Treasury Secretary, the Federal Reserve Board, and the FDIC all have to turn their metaphoric keys.

    OLA, particularly with its new "single point of entry" (SPOE) framework, solves many of the problems mentioned above. OLA comes with a line of emergency funding from Treasury to facilitate resolution if private capital isn’t available, as it likely won’t be in a crisis. OLA would also be able to prioritize speed, as well as protect derivatives and short-term credit, stopping potential runs. SPOE, by focusing its energy at the bank's holding company level, also helps to deal with coordinating the failure internationally. However, OLA would be executed by administrators instead of judges, and it could put taxpayer money at risk. (More on all of this here.)

    </technical>

    The Contradiction

    So, what is the battle over? How are we making progress yet also making no progress?

    All the innovation in the past 18 months in combating TBTF has taken place at the second line of defense. When Sheila Bair, for instance, says there’s been significant progress in ending taxpayer bailouts, or the Bipartisan Policy Institute releases a statement saying adopting an SPOE approach has the potential to eliminate TBTF, they are referencing the progress that is taking place at this second line of defense.

    But there's no progress at the first line of defense. The living wills that regulators found insufficient are, by statute, part of the first line of defense. Dodd-Frank says that if the living will “would not facilitate an orderly resolution of the company under title 11, [Bankruptcy]” then the FDIC and the Fed “may jointly impose more stringent capital, leverage, or liquidity requirements, or restrictions on the growth, activities, or operations of the company.” They purposefully didn't drop the hammer in their announcement, instead telling the banks to go back to the drawing board rather than enforcing stricter requirements. But they can get as aggressive as they want here. 

    So the FDIC and the Fed are drawing a line in the sand here - the first line of defense needs to work. The regulators call out the banks for their “failure to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for orderly resolution.” So making this line of defense work will not be a trivial endeavor.

    If the first line of defense doesn’t work, why don’t we just rely on the second line? Thomas Hoenig, Vice Chairman of the FDIC and an aggressive opponent of TBTF, released a statement accompanying the regulators' release, specifically saying that they would not find this argument convincing. It’s worth noting how clear he is about this:

    “Some parties nurture the view that bankruptcy for the largest firms is impractical because current bankruptcy laws won’t work given the issues just noted. This view contends that rather than require that these most complicated firms make themselves bankruptcy compliant, the government should rely on other means to resolve systemically important firms that fail. This view serves us poorly by delaying changes needed to assert market discipline and reduce systemic risk, and it undermines bankruptcy as a viable option for resolving these firms. These alternative approaches only perpetuate 'too big to fail.'”

    That’s a strong statement that they are going to hold the first line.

    Note here that the GAO results could still stand. The market's lack of a subsidy could reflect the second line of defense. Or it could reflect that even if they both fail, Congress, which is gridlocked, would not pass a bailout. It's not clear what would happen if a major bank failed, but the market is right not to assume the banks are permanently safe.

    Politics

    It will be interesting to see how this shakes out. Those who think reform didn’t go far enough like the idea of fighting on the first line, because there is significant leeway to push for more systemic changes to Wall Street. To get a sense of the stakes, Sheila Bair told Tom Braithwaite back in 2010 that she would break up an institution that couldn’t produce a credible living will.

    This will also animate the Right, but in a different way. From the get-go, their preferred approach to TBTF was just to create a special new bankruptcy code Chapter, removing any type of independent regulatory administrative state like the FDIC from the issue. It’s not clear if they’ll support regulators pushing aggressively to restructure firms so they can go through the bankruptcy code as it is written right now.

    The administration appears to be silent for now. It’s also not clear whether it will see this as a second bite to get higher capital requirements, or if they is happy enough with the second line of denfense as it is. If the second is true, that would be unfortunate. The banks remain undercapitalized and too complex for bankruptcy, and regulators have a responsiblity to make sure each line of defense is capable of stopping the panic of 2008.

    Follow or contact the Rortybomb blog:
     
      

     

    It’s been a week of whiplash when it comes to the issue of Too Big To Fail (TBTF). First the GAO released a report saying that it is difficult to find any bailout subsidy for the largest banks, implying that there's been progress on ending TBTF. Then, late Tuesday, the FDIC and Federal Reserve released a small bombshell saying that the living wills submitted by the 11 largest banks “are not credible and do not facilitate an orderly resolution under the U.S. Bankruptcy Code.” These living wills were designed to make sure that banks could fail without causing chaos in the economy, and this report implies TBTF is still with us.

    One of them has to be wrong, right? In order to understand this contradiction it's important to map out where the actual disagreement is. Doing so will also help explain how the battle over TBTF will play out in the near future.

    So look - a large, systemically risky financial firm is collapsing! Oh noes! What has happened and will happen?

    There are two levels of defense when it comes to ending this firm. The first is through a bankruptcy court, and the second is through the FDIC taking over the firm, much like what it does to a failing regular bank. The next several paragraphs give some technical details (skip ahead if your eyes are already glazing over).

    <technical>

    As you can see in the graphic above, before the failure, regulators will have failed to use “prompt corrective action” to guide the firm back to solvency. These are efforts regulators use to push a troubled firm to fix itself before a collapse. For example, if bank capital falls below a certain point, the bank can’t pay out bonuses or make capital purchases in order to attempt to make it more secure.

    Once a failure happens, there are two lines of defense. The default course of action is putting the firm in bankruptcy, similar to what happened with Lehman Brothers. Why might this be a problem for a major financial firm? The Bankruptcy Code is slow and deliberate, when financial firms often need to be resolved fast. It isn't designed to preserve ongoing firm business, which is a problem when those businesses are essential to the economy as a whole. It can’t prevent runs by favoring short-term creditors. There is no guaranteed funding available to keep operations running and to help with the relaunch. And there are large problems handling the failure of a firm operating in many different countries.

    With these concerns in mind, Dodd-Frank sets up a second line of defense. Regulators can direct the FDIC to take over the failed firm and do an emergency resolution (OLA), like they do with commercial banks. In order to active the OLA, there’s a comically complicated procedure in which the Treasury Secretary, the Federal Reserve Board, and the FDIC all have to turn their metaphoric keys.

    OLA, particularly with its new "single point of entry" (SPOE) framework, solves many of the problems mentioned above. OLA comes with a line of emergency funding from Treasury to facilitate resolution if private capital isn’t available, as it likely won’t be in a crisis. OLA would also be able to prioritize speed, as well as protect derivatives and short-term credit, stopping potential runs. SPOE, by focusing its energy at the bank's holding company level, also helps to deal with coordinating the failure internationally. However, OLA would be executed by administrators instead of judges, and it could put taxpayer money at risk. (More on all of this here.)

    </technical>

    The Contradiction

    So, what is the battle over? How are we making progress yet also making no progress?

    All the innovation in the past 18 months in combating TBTF has taken place at the second line of defense. When Sheila Bair, for instance, says there’s been significant progress in ending taxpayer bailouts, or the Bipartisan Policy Institute releases a statement saying adopting an SPOE approach has the potential to eliminate TBTF, they are referencing the progress that is taking place at this second line of defense.

    But there's no progress at the first line of defense. The living wills that regulators found insufficient are, by statute, part of the first line of defense. Dodd-Frank says that if the living will “would not facilitate an orderly resolution of the company under title 11, [Bankruptcy]” then the FDIC and the Fed “may jointly impose more stringent capital, leverage, or liquidity requirements, or restrictions on the growth, activities, or operations of the company.” They purposefully didn't drop the hammer in their announcement, instead telling the banks to go back to the drawing board rather than enforcing stricter requirements. But they can get as aggressive as they want here. 

    So the FDIC and the Fed are drawing a line in the sand here - the first line of defense needs to work. The regulators call out the banks for their “failure to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for orderly resolution.” So making this line of defense work will not be a trivial endeavor.

    If the first line of defense doesn’t work, why don’t we just rely on the second line? Thomas Hoenig, Vice Chairman of the FDIC and an aggressive opponent of TBTF, released a statement accompanying the regulators' release, specifically saying that they would not find this argument convincing. It’s worth noting how clear he is about this:

    “Some parties nurture the view that bankruptcy for the largest firms is impractical because current bankruptcy laws won’t work given the issues just noted. This view contends that rather than require that these most complicated firms make themselves bankruptcy compliant, the government should rely on other means to resolve systemically important firms that fail. This view serves us poorly by delaying changes needed to assert market discipline and reduce systemic risk, and it undermines bankruptcy as a viable option for resolving these firms. These alternative approaches only perpetuate 'too big to fail.'”

    That’s a strong statement that they are going to hold the first line.

    Note here that the GAO results could still stand. The market's lack of a subsidy could reflect the second line of defense. Or it could reflect that even if they both fail, Congress, which is gridlocked, would not pass a bailout. It's not clear what would happen if a major bank failed, but the market is right not to assume the banks are permanently safe.

    Politics

    It will be interesting to see how this shakes out. Those who think reform didn’t go far enough like the idea of fighting on the first line, because there is significant leeway to push for more systemic changes to Wall Street. To get a sense of the stakes, Sheila Bair told Tom Braithwaite back in 2010 that she would break up an institution that couldn’t produce a credible living will.

    This will also animate the Right, but in a different way. From the get-go, their preferred approach to TBTF was just to create a special new bankruptcy code Chapter, removing any type of independent regulatory administrative state like the FDIC from the issue. It’s not clear if they’ll support regulators pushing aggressively to restructure firms so they can go through the bankruptcy code as it is written right now.

    The administration appears to be silent for now. It’s also not clear whether it will see this as a second bite to get higher capital requirements, or if they is happy enough with the second line of denfense as it is. If the second is true, that would be unfortunate. The banks remain undercapitalized and too complex for bankruptcy, and regulators have a responsiblity to make sure each line of defense is capable of stopping the panic of 2008.

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  • The GAO Can't Distinguish Between a Good and a Bad Liquidation

    Aug 1, 2014Mike Konczal

    To emphasize a point I made yesterday, we need to think of ending Too Big To Fail (TBTF) as a continuum rather a simple yes-no binary. The process of failing a large financial firm through the Orderly Liquidation Authority (OLA) can go very well, or it could go very poorly. It's important to understand that the recent GAO report, arguing that the TBTF subsidy has largely diminished, is incapable of telling the difference.

    What would make for a successful termination of a failed financial firm under OLA? To start, bankruptcy court would be a serious option as a first response. Assuming that didn't work, capital in the firm is structured in such a way that facilitates a successful process. There's sufficient loss-absorbing capital both to take losses and give regulators options in the resolution. There's also sufficient liquidity, both within the firm due to strong new capital requirements and through accountable lender-of-last-resort lending, that prevents a panic from destroying whatever baseline solvency is in the firm. As a result, less public funding is necessary to achieve the goals.

    Living wills actually work, and allow the firm to be resolved in a quick and timely manner. The recapitalization is sufficient to repay any public funding without having to assess the financial industry as a whole. There's no problems with international coordination, and the ability of the FDIC to act as a receiver for derivatives contracts is standardized and clear in advance, reducing legal uncertainty.

    That's a lot! And it's a story about what could go right or wrong that is becoming more and more prevalent in the reform community [1]. Let's chart it out, along with the opposite happening.

    Again, from the point of view of the GAO report, these are identical scenarios. Both would impose credit losses on firms. Thus the GAO's empirical model, scanning and predicting interest rates spreads to imply credit risk, picks up both scenarios the same way. Whether OLA goes smoothly or is a disaster doesn't matter. But from the point of view of taxpayers, those trying to deal with the uncertainty and panic that would come with such a scenario, and the economy as a whole, the bad scenario is a major disaster. And we are nowhere near the point where success can be taken for granted. Tightening the regulations we have is necessary to making the successful scenario more likely, and the apparent lack of a subsidy should not distract us from this.

     

    [1] Note the common similarities along these lines in the critical discussion of OLA from across the entire reform spectrum. You can see this story in different forms in Stephen Lubben's "OLA After Single Point of Entry: Has Anything Changed?" for the Unfinished Mission project,  the comment letter from the Systemic Risk Council, Too Big to Fail: The Path to a Solution from the Bipartisan Policy Center, and the "Failing to End Too Big to Fail" report from the Republican Staff of the House Committee on Financial Services.

    Follow or contact the Rortybomb blog:
     
      

     

    To emphasize a point I made yesterday, we need to think of ending Too Big To Fail (TBTF) as a continuum rather a simple yes-no binary. The process of failing a large financial firm through the Orderly Liquidation Authority (OLA) can go very well, or it could go very poorly. It's important to understand that the recent GAO report, arguing that the TBTF subsidy has largely diminished, is incapable of telling the difference.

    What would make for a successful termination of a failed financial firm under OLA? To start, bankruptcy court would be a serious option as a first response. Assuming that didn't work, capital in the firm is structured in such a way that facilitates a successful process. There's sufficient loss-absorbing capital both to take losses and give regulators options in the resolution. There's also sufficient liquidity, both within the firm due to strong new capital requirements and through accountable lender-of-last-resort lending, that prevents a panic from destroying whatever baseline solvency is in the firm. As a result, less public funding is necessary to achieve the goals.

    Living wills actually work, and allow the firm to be resolved in a quick and timely manner. The recapitalization is sufficient to repay any public funding without having to assess the financial industry as a whole. There's no problems with international coordination, and the ability of the FDIC to act as a receiver for derivatives contracts is standardized and clear in advance, reducing legal uncertainty.

    That's a lot! And it's a story about what could go right or wrong that is becoming more and more prevalent in the reform community [1]. Let's chart it out, along with the opposite happening.

    Again, from the point of view of the GAO report, these are identical scenarios. Both would impose credit losses on firms. Thus the GAO's empirical model, scanning and predicting interest rates spreads to imply credit risk, picks up both scenarios the same way. Whether OLA goes smoothly or is a disaster doesn't matter. But from the point of view of taxpayers, those trying to deal with the uncertainty and panic that would come with such a scenario, and the economy as a whole, the bad scenario is a major disaster. And we are nowhere near the point where success can be taken for granted. Tightening the regulations we have is necessary to making the successful scenario more likely, and the apparent lack of a subsidy should not distract us from this.

     

    [1] Note the common similarities along these lines in the critical discussion of OLA from across the entire reform spectrum. You can see this story in different forms in Stephen Lubben's "OLA After Single Point of Entry: Has Anything Changed?" for the Unfinished Mission project,  the comment letter from the Systemic Risk Council, Too Big to Fail: The Path to a Solution from the Bipartisan Policy Center, and the "Failing to End Too Big to Fail" report from the Republican Staff of the House Committee on Financial Services.

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