Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • NY Fed Study Should Redefine How We Think About Student Loans and College Costs

    Sep 2, 2015Mike Konczal

    Sometimes you hear something that sounds so much like common sense that you end up missing how it overturns everything you were actually thinking, and points in a far more interesting and disturbing direction. That’s how I’m feeling about the coverage of a recent paper on student loans and college tuition coming out of the New York Federal Reserve, “Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs,” by David Lucca, Taylor Nadauld, and Karen Shen.

    They find that “institutions more exposed to changes in the subsidized federal loan program increased their tuition,” or for every dollar in increased student loan availability colleges increased the sticker price of their tuition 65 cents. Crucially, they find that the effect is stronger for subsidized student loans than for Pell Grants. When they go further and control for additional variables, Pell Grants lose their significance in the study, while student loans become more important.

    There’s been a lot of debate over this research, with Libby Nelson at Vox providing a strong summary. I want to talk about the theory of the paper. People have been covering this as a normal debate about whether subsidizing college leads to higher tuition, but this is a far different story. It actually overturns a lot of what we believe about higher education funding, and means that the conservative solution to higher education costs, going back to Milton Friedman, will send tuition skyrocketing. And it ends up providing more evidence of the importance of free higher education.

    To start, it’s essential to understand the difference between Pell Grants and student loans in economic terms. Pell Grants are a subsidy. They provide money that isn’t paid back and that goes entirely to aid the purchasing of more education. Student loans are a form of increasing credit supply for higher education. They allow students to borrow against future income to fund their education right now.

    There’s a large debate over whether and how much student loans are subsidized and what that would even mean. Some people who think they are really subsidized might say that their value consists of a 10–20 percent subsidy. Others, following current data, argue that they have a slight negative subsidy (the government makes a profit on them). Either way, that’s obviously nothing compared to a Pell Grant, which is a 100 percent subsidy.

    With this important difference in mind, let’s reexamine the conclusion of the New York Fed paper: Changes in the credit supply, in the form of student loans, are far more of a driver of higher education costs than subsidies, in the form of Pell Grants. That’s why the title has “credit supply" in the title. The deeper the study digs, the stronger this difference becomes. Virtually no coverage is catching this difference, grouping everything under a subsidy. (Here's an example of such a piece.) But this difference changes everything we should think about the topic.

    What’s Economics 101?

    David Boaz at the Cato Institute has a snarky post in response to the study, saying that “[u]nderstanding basic economics” would have predicted it. This is false, because economics 101 would have predicted the opposite. Economists fight a lot about this [1], but the simple economics story is clear. According to actual economics 101, letting students borrow against future earnings should have no effect on prices.

    This derives from something called the Modigliani-Miller Theorem (MM), the frustrating staple of corporate finance 101 courses. A quick way of understanding MM is that how much you value an asset or investment, be it a factory or higher education, should be independent of how you finance it. Whether you pay cash, a loan, your future equity, a complicated financial product, or some other means that doesn’t even exist yet, you ultimately value the asset by how profitable and productive it is. In this story, which requires abstract and complete markets, expanding credit supply won’t drive tuition higher.

    Now what would change your valuation, according to this theorem, is getting subsidies, say in the form of Pell Grants. This would make you willing to buy more and pay a higher price. This is one of the reasons why so much of the economics research focuses on Pell Grants instead of student loans: the story about what is happening is clearer. But, again, extensions of the credit supply, not subsidies, are doing the work here.

    Sorry Milton Friedman…..

    But this result isn’t an abstract debate. It overturns everything conservatives are currently proposing in regard to higher education.

    Ever since Milton Friedman’s Capitalism and Freedom, the proposed solution to higher college funding has been to increase the credit supply by allowing students to borrow against future earnings by selling equity in themselves. This is what Marco Rubio is proposing. Reform conservatives have gotten behind the idea that we should roll back government student loans and expand private “Income Share Agreements” (human capital contracts) instead.

    It’s funny to imagine describing such efforts as “small government” or involving “civil society” when you see what they require [2]. For our purposes, it’s enough to note that these efforts would send tuition skyrocketing because, while they involve private market actors, they are fundamentally about expanding the credit supply and making it easier to borrow against future earnings. There’s no first-order difference between human capital contracts and student loans when it comes to an expansion of the credit supply and the ability to borrow against future earnings. This type of borrowing is exactly what is driving the results in this New York Fed study, not government subsidies.

    Whether or not it would be fairer or better to reorient our student funding system toward students selling equity in themselves, we should conclude that it would do nothing to contain the costs of higher education. In fact, it would likely send them spiraling.

    You Complete Me

    Note that it isn’t clear why students borrowing more against their future is driving increases in tuition they’ll pay. It could be “rational” under arcane definitions of that word. It could be that in a winner-take-all economy, in which those at the top do fantastically and those who don’t make it do not make it at all, leveraging up and swinging for the fences is a smart play. It could be that liquidity and credit are important determinants of the economy as a whole rather than a neutral veil over real resources. It could be as simple as the fact that 18-year-olds aren’t highly calculating supercomputers solving thousands of Euler equations of their future earnings into an infinite future, but instead a bunch of kids jacked up on hormones doing the best they can with the world adults provide them.

    But no matter the cause, the conclusion of this research points in an interesting, complicated, and scary direction. I read this research as implicitly concluding that the cost of higher education is low relative to where it would be if markets were “complete.” By complete I mean a situation in which students have perfect access to borrow against future outcomes. Students can’t do this now due to financial market imperfections, which is why the government provides student lending. But as finance does a better job of providing students with these options, or the government reworks markets to create these conditions, say in the form of human capital contracts, we are talking about a widespread increase in tuition.

    This makes a lot of cutting-edge reforms more complicated for the issue of controlling tuition costs. Colleges that provide more information on outcomes might provide better education, but that increased information will jack up costs if it means more borrowing. Making sure students who might drop out borrow enough to get to graduation will lead to more cost inflation.

    Public Options

    This effect is virtually nonexistent for public universities, and really driven by non-profit private schools. Though not studied in this specific paper, it’s widely believed that this effect is strongest at for-profit schools, especially the ones expanded under the George W. Bush years in an attempt to push back on accreditation. This means the private market is the most likely to accelerate this trend if given access to an increased credit supply.

    Because if private education is able to capture pell grant subsidies that increase demand, using those resources to increase the supply directly (e.g. provide free public colleges) would drive down tuition overall. This is the logic of public options. If it is also the case that, as the financial markets become more complete, it will send private tuition skyrocketing, that makes the case for a low-cost, high-quality resource to provide an anchor against price inflation even more important. Rather than a vague indictment of government, this paper shows why the logic of free public higher education is even more compelling.

    [1] See the literature over the housing bubble, in which the question of what an increase in credit supply resulting from financial deregulation and financial engineering does to housing prices is empirically rich but theoretically underdeveloped. (This paper is a good example.) The result, if I may be blunt, has been for researchers to throw the best data and techniques at the question and leave the theory aside, hoping the journals simply blink and accept it. That’s a good strategy, and it’s now being extended to student loans.

    [2] There’s something dystopic about invoking “civil society” to describe people having to auction themselves off to hedge funds in order to get a higher education, as if this is just an extension of the town square or the church. If you dig into how these contracts would actually function, they would require a massive expansion of a joint creditor–state surveillance program, as the IRS would have to partner with private debt collectors to share all your data in real time in order for them to consistently verify your income. It’s not clear to me how the state supplying private debt collectors with all your personal information counts as “small government.”

    Follow or contact the Rortybomb blog:
     
      

     

    Sometimes you hear something that sounds so much like common sense that you end up missing how it overturns everything you were actually thinking, and points in a far more interesting and disturbing direction. That’s how I’m feeling about the coverage of a recent paper on student loans and college tuition coming out of the New York Federal Reserve, “Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs,” by David Lucca, Taylor Nadauld, and Karen Shen.

    They find that “institutions more exposed to changes in the subsidized federal loan program increased their tuition,” or for every dollar in increased student loan availability colleges increased the sticker price of their tuition 65 cents. Crucially, they find that the effect is stronger for subsidized student loans than for Pell Grants. When they go further and control for additional variables, Pell Grants lose their significance in the study, while student loans become more important.

    There’s been a lot of debate over this research, with Libby Nelson at Vox providing a strong summary. I want to talk about the theory of the paper. People have been covering this as a normal debate about whether subsidizing college leads to higher tuition, but this is a far different story. It actually overturns a lot of what we believe about higher education funding, and means that the conservative solution to higher education costs, going back to Milton Friedman, will send tuition skyrocketing. And it ends up providing more evidence of the importance of free higher education.

    To start, it’s essential to understand the difference between Pell Grants and student loans in economic terms. Pell Grants are a subsidy. They provide money that isn’t paid back and that goes entirely to aid the purchasing of more education. Student loans are a form of increasing credit supply for higher education. They allow students to borrow against future income to fund their education right now.

    There’s a large debate over whether and how much student loans are subsidized and what that would even mean. Some people who think they are really subsidized might say that their value consists of a 10–20 percent subsidy. Others, following current data, argue that they have a slight negative subsidy (the government makes a profit on them). Either way, that’s obviously nothing compared to a Pell Grant, which is a 100 percent subsidy.

    With this important difference in mind, let’s reexamine the conclusion of the New York Fed paper: Changes in the credit supply, in the form of student loans, are far more of a driver of higher education costs than subsidies, in the form of Pell Grants. That’s why the title has “credit supply" in the title. The deeper the study digs, the stronger this difference becomes. Virtually no coverage is catching this difference, grouping everything under a subsidy. (Here's an example of such a piece.) But this difference changes everything we should think about the topic.

    What’s Economics 101?

    David Boaz at the Cato Institute has a snarky post in response to the study, saying that “[u]nderstanding basic economics” would have predicted it. This is false, because economics 101 would have predicted the opposite. Economists fight a lot about this [1], but the simple economics story is clear. According to actual economics 101, letting students borrow against future earnings should have no effect on prices.

    This derives from something called the Modigliani-Miller Theorem (MM), the frustrating staple of corporate finance 101 courses. A quick way of understanding MM is that how much you value an asset or investment, be it a factory or higher education, should be independent of how you finance it. Whether you pay cash, a loan, your future equity, a complicated financial product, or some other means that doesn’t even exist yet, you ultimately value the asset by how profitable and productive it is. In this story, which requires abstract and complete markets, expanding credit supply won’t drive tuition higher.

    Now what would change your valuation, according to this theorem, is getting subsidies, say in the form of Pell Grants. This would make you willing to buy more and pay a higher price. This is one of the reasons why so much of the economics research focuses on Pell Grants instead of student loans: the story about what is happening is clearer. But, again, extensions of the credit supply, not subsidies, are doing the work here.

    Sorry Milton Friedman…..

    But this result isn’t an abstract debate. It overturns everything conservatives are currently proposing in regard to higher education.

    Ever since Milton Friedman’s Capitalism and Freedom, the proposed solution to higher college funding has been to increase the credit supply by allowing students to borrow against future earnings by selling equity in themselves. This is what Marco Rubio is proposing. Reform conservatives have gotten behind the idea that we should roll back government student loans and expand private “Income Share Agreements” (human capital contracts) instead.

    It’s funny to imagine describing such efforts as “small government” or involving “civil society” when you see what they require [2]. For our purposes, it’s enough to note that these efforts would send tuition skyrocketing because, while they involve private market actors, they are fundamentally about expanding the credit supply and making it easier to borrow against future earnings. There’s no first-order difference between human capital contracts and student loans when it comes to an expansion of the credit supply and the ability to borrow against future earnings. This type of borrowing is exactly what is driving the results in this New York Fed study, not government subsidies.

    Whether or not it would be fairer or better to reorient our student funding system toward students selling equity in themselves, we should conclude that it would do nothing to contain the costs of higher education. In fact, it would likely send them spiraling.

    You Complete Me

    Note that it isn’t clear why students borrowing more against their future is driving increases in tuition they’ll pay. It could be “rational” under arcane definitions of that word. It could be that in a winner-take-all economy, in which those at the top do fantastically and those who don’t make it do not make it at all, leveraging up and swinging for the fences is a smart play. It could be that liquidity and credit are important determinants of the economy as a whole rather than a neutral veil over real resources. It could be as simple as the fact that 18-year-olds aren’t highly calculating supercomputers solving thousands of Euler equations of their future earnings into an infinite future, but instead a bunch of kids jacked up on hormones doing the best they can with the world adults provide them.

    But no matter the cause, the conclusion of this research points in an interesting, complicated, and scary direction. I read this research as implicitly concluding that the cost of higher education is low relative to where it would be if markets were “complete.” By complete I mean a situation in which students have perfect access to borrow against future outcomes. Students can’t do this now due to financial market imperfections, which is why the government provides student lending. But as finance does a better job of providing students with these options, or the government reworks markets to create these conditions, say in the form of human capital contracts, we are talking about a widespread increase in tuition.

    This makes a lot of cutting-edge reforms more complicated for the issue of controlling tuition costs. Colleges that provide more information on outcomes might provide better education, but that increased information will jack up costs if it means more borrowing. Making sure students who might drop out borrow enough to get to graduation will lead to more cost inflation.

    Public Options

    This effect is virtually nonexistent for public universities, and really driven by non-profit private schools. Though not studied in this specific paper, it’s widely believed that this effect is strongest at for-profit schools, especially the ones expanded under the George W. Bush years in an attempt to push back on accreditation. This means the private market is the most likely to accelerate this trend if given access to an increased credit supply.

    Because if private education is able to capture pell grant subsidies that increase demand, using those resources to increase the supply directly (e.g. provide free public colleges) would drive down tuition overall. This is the logic of public options. If it is also the case that, as the financial markets become more complete, it will send private tuition skyrocketing, that makes the case for a low-cost, high-quality resource to provide an anchor against price inflation even more important. Rather than a vague indictment of government, this paper shows why the logic of free public higher education is even more compelling.

    [1] See the literature over the housing bubble, in which the question of what an increase in credit supply resulting from financial deregulation and financial engineering does to housing prices is empirically rich but theoretically underdeveloped. (This paper is a good example.) The result, if I may be blunt, has been for researchers to throw the best data and techniques at the question and leave the theory aside, hoping the journals simply blink and accept it. That’s a good strategy, and it’s now being extended to student loans.

    [2] There’s something dystopic about invoking “civil society” to describe people having to auction themselves off to hedge funds in order to get a higher education, as if this is just an extension of the town square or the church. If you dig into how these contracts would actually function, they would require a massive expansion of a joint creditor–state surveillance program, as the IRS would have to partner with private debt collectors to share all your data in real time in order for them to consistently verify your income. It’s not clear to me how the state supplying private debt collectors with all your personal information counts as “small government.”

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  • Introducing Our Latest Report: Defining Financialization

    Jul 27, 2015Mike Konczal

    We’re releasing a new report today as part of the Roosevelt Institute’s Financialization Project: Definining Financialization.

    Following the well-received Disgorge The Cash, this is really the foundational paper that outlines a working definition of financialization, some of the leading concerns, worries, and research topics in each area, and a plan for future research and action. Since this is what we are building from, we’d love feedback.

    Prior to this, I couldn’t find a definition of financialization broad enough to account for several different trends and accessible enough for a general, nonacademic audience. So we set out to create our own solid definition of financialization that can serve as the foundation for future research and policy. That definition includes four core elements: savings, power, wealth, and society. Put another way, financialization is the growth of the financial sector, its increased power over the real economy, the explosion in the power of wealth, and the reduction of all of society to the realm of finance.

    Each of these four elements is essential, and together they tell a story about the way the economy has worked, and how it hasn’t, over the past 35 years. This enables us to understand the daunting challenges involved in reforming the financial sector, document the influence of finance over society and the economy as a whole, and clarify how finance has compounded inequality and insecurity while creating an economy that works for fewer people.

    Savings: The financial sector is responsible for taking our savings and putting it toward economically productive uses. However, this sector has grown larger, more profitable, and less efficient over the past 35 years. Its goal of providing needed capital to citizens and businesses has been forgotten amid an explosion of toxic mortgage deals and the predatory pursuit of excessive fees. Beyond wasting financial resources, the sector also draws talent and energy away from more productive fields. These changes constitute the first part of our definition of financialization.

    Power: Perhaps more importantly, financialization is also about the increasing control and power of finance over our productive economy and traditional businesses. The recent intellectual, ideological, and legal revolutions that have pushed CEOs to prioritize the transfer of cash to shareholders over regular, important investment in productive expansion need to be understood as part of the expansion of finance.

    These historically high payouts drain resources away from productive investment. But beyond investment, there are broader worries about firms that are too dominated by the short-term interests of shareholders. These dynamics increase inequality and have a negative impact on innovation. Firms only interested in shareholder returns may be less inclined to take on the long-term, risky investment in innovation that is crucial to growth. This has spillover effects on growth and wages that can create serious long-term problems for our economy. This also makes full employment more difficult to achieve, as the delinking of corporate investment from financing has posed a serious challenge for monetary policy.

    Wealth: Wealth inequality has increased dramatically in the past 35 years, and financialization includes the ways in which our laws and regulations have been overhauled to protect and expand the interests of those earning income from their wealth at the expense of everyone else. Together, these factors dramatically redistribute power and wealth upward. They also put the less wealthy at a significant disadvantage.

    More important than simply creating and expanding wealth claims, policy has prioritized wealth claims over competing claims on the economy, from labor to debtors to the public. This isn’t just about increasing the power of wealth; it’s about rewriting the rules of the economy to decrease the power of everyone else.

    Society: Finally, following the business professor Gerald Davis, we focus on how financialization has brought about a “portfolio society,” one in which “entire categories of social life have been securitized, turned into a kind of capital” or an investment to be managed. We now view our education and labor as “human capital,” and we imagine every person as a little corporation set to manage his or her own investments. In this view, public functions and responsibilities are mere services that should be run for profit or privatized, or both.

    This way of thinking results in a radical reworking of society. Social insurance once provided across society is now deemphasized in favor of individual market solutions; for example, students take on an ever-increasing amount of debt to educate themselves. Public functions are increasingly privatized and paid for through fees, creating potential rent-seeking enterprises and further redistributing income and wealth upward. This inequality spiral saps our democracy and our ability to collectively address the nation’s greatest problems.

    We have a lot of future work coming from this set of definitions, including a policy agenda and FAQ on short-termism in the near future. I hope you check this out!

    Follow or contact the Rortybomb blog:
     
      

     

    We’re releasing a new report today as part of the Roosevelt Institute’s Financialization Project: Definining Financialization.

    Following the well-received Disgorge The Cash, this is really the foundational paper that outlines a working definition of financialization, some of the leading concerns, worries, and research topics in each area, and a plan for future research and action. Since this is what we are building from, we’d love feedback.

    Prior to this, I couldn’t find a definition of financialization broad enough to account for several different trends and accessible enough for a general, nonacademic audience. So we set out to create our own solid definition of financialization that can serve as the foundation for future research and policy. That definition includes four core elements: savings, power, wealth, and society. Put another way, financialization is the growth of the financial sector, its increased power over the real economy, the explosion in the power of wealth, and the reduction of all of society to the realm of finance.

    Each of these four elements is essential, and together they tell a story about the way the economy has worked, and how it hasn’t, over the past 35 years. This enables us to understand the daunting challenges involved in reforming the financial sector, document the influence of finance over society and the economy as a whole, and clarify how finance has compounded inequality and insecurity while creating an economy that works for fewer people.

    Savings: The financial sector is responsible for taking our savings and putting it toward economically productive uses. However, this sector has grown larger, more profitable, and less efficient over the past 35 years. Its goal of providing needed capital to citizens and businesses has been forgotten amid an explosion of toxic mortgage deals and the predatory pursuit of excessive fees. Beyond wasting financial resources, the sector also draws talent and energy away from more productive fields. These changes constitute the first part of our definition of financialization.

    Power: Perhaps more importantly, financialization is also about the increasing control and power of finance over our productive economy and traditional businesses. The recent intellectual, ideological, and legal revolutions that have pushed CEOs to prioritize the transfer of cash to shareholders over regular, important investment in productive expansion need to be understood as part of the expansion of finance.

    These historically high payouts drain resources away from productive investment. But beyond investment, there are broader worries about firms that are too dominated by the short-term interests of shareholders. These dynamics increase inequality and have a negative impact on innovation. Firms only interested in shareholder returns may be less inclined to take on the long-term, risky investment in innovation that is crucial to growth. This has spillover effects on growth and wages that can create serious long-term problems for our economy. This also makes full employment more difficult to achieve, as the delinking of corporate investment from financing has posed a serious challenge for monetary policy.

    Wealth: Wealth inequality has increased dramatically in the past 35 years, and financialization includes the ways in which our laws and regulations have been overhauled to protect and expand the interests of those earning income from their wealth at the expense of everyone else. Together, these factors dramatically redistribute power and wealth upward. They also put the less wealthy at a significant disadvantage.

    More important than simply creating and expanding wealth claims, policy has prioritized wealth claims over competing claims on the economy, from labor to debtors to the public. This isn’t just about increasing the power of wealth; it’s about rewriting the rules of the economy to decrease the power of everyone else.

    Society: Finally, following the business professor Gerald Davis, we focus on how financialization has brought about a “portfolio society,” one in which “entire categories of social life have been securitized, turned into a kind of capital” or an investment to be managed. We now view our education and labor as “human capital,” and we imagine every person as a little corporation set to manage his or her own investments. In this view, public functions and responsibilities are mere services that should be run for profit or privatized, or both.

    This way of thinking results in a radical reworking of society. Social insurance once provided across society is now deemphasized in favor of individual market solutions; for example, students take on an ever-increasing amount of debt to educate themselves. Public functions are increasingly privatized and paid for through fees, creating potential rent-seeking enterprises and further redistributing income and wealth upward. This inequality spiral saps our democracy and our ability to collectively address the nation’s greatest problems.

    We have a lot of future work coming from this set of definitions, including a policy agenda and FAQ on short-termism in the near future. I hope you check this out!

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  • At Vox, Dodd-Frank at 5

    Jul 27, 2015Mike Konczal

    In honor of Dodd-Frank's fifth birthday party last week, I wrote a 4,000 word summary of the major accomplishments of the financial reform act. It includes what is working as well as what is stalled, what needs to be amplified and what isn't yet tackled. There's a focus on the CFPB, derivatives, capital, and ending Too Big To Fail. It's aimed at both readers with little background as well as people with some familiarity, so I hope you check it out and share.

    Follow or contact the Rortybomb blog:
     
      

     

    In honor of Dodd-Frank's fifth birthday party last week, I wrote a 4,000 word summary of the major accomplishments of the financial reform act. It includes what is working as well as what is stalled, what needs to be amplified and what isn't yet tackled. There's a focus on the CFPB, derivatives, capital, and ending Too Big To Fail. It's aimed at both readers with little background as well as people with some familiarity, so I hope you check it out and share.

    Follow or contact the Rortybomb blog:
     
      

     

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  • On Paleo and Faith in Government

    Jul 15, 2015Mike Konczal

    Our Rewriting the Rules report is in the news as part of a debate over the more liberal push in economic thinking. Matt Yglesias argues that this report and the new agenda “reverse the neoliberal formula.” He coins the term “new paleoliberalism” to describe it. David Brooks adds to this, arguing that said paleoliberalism displays “a naïve faith” in government. I want to respond to these three points in turn.

    First, Yglesias says the new agenda breaks with the consensus. The old consensus, to him, was that “[t]he main way the government can impact the pre-tax distribution of income is by providing high-quality education,” and if that fails, “progressive taxes should fund redistributive programs to produce a better outcome.”

    I think focusing on a new consensus is correct, but I’d think about it a different way. For us, the old consensus was built around two economic folk theories: that as an economy matures, inequality will decrease and all incomes will go up; and that any efforts to combat inequality have a serious negative impact on growth. (It’s not clear whether Kuznets or Okin, respectively, would have agreed with the extreme versions of their arguments that became this consensus.)

    The new liberal economic consensus has three elements. To start, you can’t really distinguish between pre-and-post tax income the way these old arguments do. The market structures that determine final income, including taxes, also are a serious determinant of market income. This is pretty obvious if you say it in English: The rules of the economy matter. But this gets lost in the consistent idealization of abstract, perfect markets.

    Also, in a world without perfect markets, efforts to fight inequality have fewer strict tradeoffs than people imagined, especially at the margins. We certainly see this internationally, with a wide variety of efforts to change the distribution of income and no obvious impact on growth. As a result, as economies grow, inequality can do any number of things—but it is a choice determined by the market.



    Not Paleo

    The second question is whether the new liberal consensus is “paleo.” Inasmuch as the term means nostalgia, recycling old theories, and is bordering on revanchist, I like to think it is not.

    The focus is very much a reaction to the facts on the ground, including a financial system that isn’t working to channel good investments, new forms of monopoly power, lack of institutions that support the working lives of women, a criminal justice system that has become too punitive, full employment in a period of weak demand, and so on.

    The tools remain those that Franklin Roosevelt formalized: a mixed economy, a regulatory state, and social insurance as the bedrock of a thriving economy. Those are the right tools to build on. But how those tools are deployed changes with the times.

    There is a strain of liberal thinking that imagines we can wish the labor movement of the 1940s or the 1890s back into existence. Our report has a detailed labor section that I think is really important. But it doesn’t simply imagine we can recreate an economy that no longer exists. Instead, it builds from where we are now.

    As a third point, David Brooks, talking about Clinton but mentioning the same liberal economic consensus as Yglesias, asks if we have too much “unchastened faith in the power of government,” a faith that is “epistemologically naïve.”

    What strikes me about this argument is that the Republicans have no less faith in the power of government. They have faith that the government can privatize social insurance in a way that won’t involve weaker security and higher costs. They have faith that if the government gives employers wage subsidies for poorer workers, employers won’t simply pocket them in wage bargaining. They have faith, against evidence, that the government having no taxes on capital will cause a boom in private investment. They have faith that the government cutting taxes will more than make up the lost revenue. Their faith leads them to conflate building a robust civil society and economic security with laissez-faire economics.

    You could say that this is a faith in “the market.” Yet rules and institutions will always shape markets; the nature of rules is what determines what the economy will look like. The transfer of power to employers and owners isn’t “less government” in any real sense of the term. Structuring markets to give employers and owners more power based on a faith that this will usher in more prosperity is not just naïve; the past few decades have shown it to be a failure.

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    Our Rewriting the Rules report is in the news as part of a debate over the more liberal push in economic thinking. Matt Yglesias argues that this report and the new agenda “reverse the neoliberal formula.” He coins the term “new paleoliberalism” to describe it. David Brooks adds to this, arguing that said paleoliberalism displays “a naïve faith” in government. I want to respond to these three points in turn.

    First, Yglesias says the new agenda breaks with the consensus. The old consensus, to him, was that “[t]he main way the government can impact the pre-tax distribution of income is by providing high-quality education,” and if that fails, “progressive taxes should fund redistributive programs to produce a better outcome.”

    I think focusing on a new consensus is correct, but I’d think about it a different way. For us, the old consensus was built around two economic folk theories: that as an economy matures, inequality will decrease and all incomes will go up; and that any efforts to combat inequality have a serious negative impact on growth. (It’s not clear whether Kuznets or Okin, respectively, would have agreed with the extreme versions of their arguments that became this consensus.)

    The new liberal economic consensus has three elements. To start, you can’t really distinguish between pre-and-post tax income the way these old arguments do. The market structures that determine final income, including taxes, also are a serious determinant of market income. This is pretty obvious if you say it in English: The rules of the economy matter. But this gets lost in the consistent idealization of abstract, perfect markets.

    Also, in a world without perfect markets, efforts to fight inequality have fewer strict tradeoffs than people imagined, especially at the margins. We certainly see this internationally, with a wide variety of efforts to change the distribution of income and no obvious impact on growth. As a result, as economies grow, inequality can do any number of things—but it is a choice determined by the market.



    Not Paleo

    The second question is whether the new liberal consensus is “paleo.” Inasmuch as the term means nostalgia, recycling old theories, and is bordering on revanchist, I like to think it is not.

    The focus is very much a reaction to the facts on the ground, including a financial system that isn’t working to channel good investments, new forms of monopoly power, lack of institutions that support the working lives of women, a criminal justice system that has become too punitive, full employment in a period of weak demand, and so on.

    The tools remain those that Franklin Roosevelt formalized: a mixed economy, a regulatory state, and social insurance as the bedrock of a thriving economy. Those are the right tools to build on. But how those tools are deployed changes with the times.

    There is a strain of liberal thinking that imagines we can wish the labor movement of the 1940s or the 1890s back into existence. Our report has a detailed labor section that I think is really important. But it doesn’t simply imagine we can recreate an economy that no longer exists. Instead, it builds from where we are now.

    As a third point, David Brooks, talking about Clinton but mentioning the same liberal economic consensus as Yglesias, asks if we have too much “unchastened faith in the power of government,” a faith that is “epistemologically naïve.”

    What strikes me about this argument is that the Republicans have no less faith in the power of government. They have faith that the government can privatize social insurance in a way that won’t involve weaker security and higher costs. They have faith that if the government gives employers wage subsidies for poorer workers, employers won’t simply pocket them in wage bargaining. They have faith, against evidence, that the government having no taxes on capital will cause a boom in private investment. They have faith that the government cutting taxes will more than make up the lost revenue. Their faith leads them to conflate building a robust civil society and economic security with laissez-faire economics.

    You could say that this is a faith in “the market.” Yet rules and institutions will always shape markets; the nature of rules is what determines what the economy will look like. The transfer of power to employers and owners isn’t “less government” in any real sense of the term. Structuring markets to give employers and owners more power based on a faith that this will usher in more prosperity is not just naïve; the past few decades have shown it to be a failure.

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  • The Hard Work of Taking Apart Post-Work Fantasy

    Jun 29, 2015Mike Konczal

    Derek Thompson has a 10,000 word cover story for The Atlantic, “A World Without Work,” about the possibilities of “post-work” in an economy where technology and capital has largely displaced labor. Though Thompson is clear to argue that this isn’t certain, as the “signs so far are murky and suggestive,” he takes the opportunity to describe how a post-work future might look.

    There’s been a consistent trend of these stories going back decades, with a huge wave of them coming after the Great Recession. Thompson’s piece is likely to be the best of the bunch. It’s empathetic, well reported, and imaginative. I also hope it’s the last of these end-of-work stories for the time being.

    At this point, the preponderance of stories about work ending is itself doing a certain kind of labor, one that distracts us and leads us away from questions we need to answer. These stories, beyond being untethered to the current economy, distract from current problems in the workforce, push laborers to identify with capitalists while ignoring deeper transitional matters, and don’t even challenge what a serious, radical story of ownership this would bring into question.

    Unlikely

    Before we begin, I think it’s important to note how unlikely this scenario remains. We can imagine the Atlantic of the 1850s running a “The Post-Agriculture, Post-Work World” cover story, correctly predicting farming would go from 70 percent of the workforce to 20 percent over the next 100 years, yet incorrectly predicting this would end work. We don’t think of what happened afterward as “post-work.” The economy managed to continue on, finding new work and workers in the process.

    There are other minor problems. Globalization and technological advancement are treated as the same thing, when they are not. There’s also a slippage common in the critical discussion of these articles (you can see it from this tweet from Thompson here) of substituting in the argument that technology has weakened wages and excluded some workers in recent decades for an argument about the long-run trajectory of technology itself. These are two different, distinct stories, with the first just as much about institutions as actual technology, and evidence for the first certainly doesn’t prove the second.

    We’ll Still Be Working

    But what is the impact of these stories? In the short term, the most important is that they allow us to dream about a world where the current problems of labor don’t exist, because they’ve been magically solved. This is a problem, because the conditions and compensation of work are some of our biggest challenges. In these future scenarios, there’s no need to organize, seek full employment, or otherwise balance the relationship between labor and capital, because the former doesn’t exist anymore.

    This is especially a problem when it leaves the “what if” fiction writings of op-eds, or provocative calls to reexamine the nature of work in our daily lives, and melds into organizational politics. I certainly see a “why does this matter, the robots are coming” mentality among the type of liberal infrastructure groups that are meant to mobilize resources and planning to build a more just economy. The more this comforting fiction takes hold, the more problematic it becomes and easier it is for liberals to become resigned to low wages.

    Because even if these scenarios pan out, work is around for a while. Let’s be aggressive with a scenario here: Let’s say the need for hours worked in the economy caps right now. This is it; this is the most we’ll ever work in the United States. (It won’t be.) In addition, the amount of hours worked decreases rapidly by 4 percent a year so that it is cut to around 25 percent of the current total in 34 years. (This won’t happen.)

    Back of the envelope, during this time period people in the United States will work a total of around 2 billion work years. Or roughly 10,000 times as long as human beings have existed. What kinds of lives and experiences will those workers have?

    Worker power matters, ironically, because it’s difficult to imagine the productivity growth necessary to get to this world without some sense that labor is strong. If wages are stagnant or even falling, what incentive is there to build the robots to replace those workers? Nothing is certain here, but you can see periods where low unemployment is correlated with faster productivity gains. The best way forward to a post-work atmosphere will probably be to embrace labor, not hope it goes away.

    How Did We Get There?

    Another major problem of this popular genre is that it immediately places us at the end of the story, with no explanation of the transition. Work has already disappeared, it’s over, so the only question that remains is how we can envision our lives in the new world. This has two major consequences.

    First, by compressing this timeline and making it seem like only capital will be around after a short period, it preemptively identifies the interest of workers with the interests of capital and owners. If post-work is right around the corner, people won’t have any labor (or human capital, if you must) to allow them to survive, so it’s essential to turn them into miniature capitalists immediately. That’s why it’s not abnormal to see descriptions of post-work immediately call for the repeal of Sarbanes-Oxley or the privatization of Social Security.

    Secondly, this story also doesn’t explain the transition of labor among workers as it disappears. As Seth Ackerman notes, decreases in the amount of work done can result either from some people leaving the labor force (extensive margin) or from decreasing the amount of work all people do (intensive margin). In other words, do we want some people to leave the workforce entirely, or for us all to work less overall? These are two different projects, with different assumptions and actions necessary to advance them. Resolving these questions would be the fundamental problem of an actual decline in labor force participation, but they tend to be abstracted away in these discussions.

    Projecting the Past Forward

    Going further, the idea that a post-work economy would involve simply choosing between a handful of quasi-utopias strikes me as completely naive. In Thompson’s piece, for instance, the problem seems to be whether post-work people would spend their time in intellectual pursuits or as independent artisans. But it’s just as likely people would spend their days as refugees trying not to starve.

    You can get the sense that something is missing because virtually all of these articles consider radical forms of leisure instead of ownership. (Indeed, in assuming that prosperity leads to redistribution leads to leisure and public goods, it’s really a forward projection of the Keynesian-Fordism of the past.) I rarely see any of these mass media post-work scenarios tackle these issues head-on, much less talk about “post-ownership” instead of just “post-work.” (Friend of the blog Peter Frase is one of the few who does.)

    It’s just as likely that the result will be a catastrophe for those who lose the value of their human capital. It seems unlikely that the political economy would become more conducive to redistribution, as these articles usually imply, because the value of capital assets would probably skyrocket. With that value high and ownership concentrated, it would potentially lead to a political economy more favorable to fascism than to robust egalitarianism. Who owns the robots, and what that even means in such a world, will be just as much a question as what we do to occupy ourselves; the first, really, will determine the second.

    As a result, discussions of the idyllic robot future give working people a desire that is an obstacle to the actual flourishing of their lived conditions, and it remains an ideology completely divorced from the lived experiences of everyday people. I hereby nominate this as Pure Ideology. Who seconds the motion?

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    Derek Thompson has a 10,000 word cover story for The Atlantic, “A World Without Work,” about the possibilities of “post-work” in an economy where technology and capital has largely displaced labor. Though Thompson is clear to argue that this isn’t certain, as the “signs so far are murky and suggestive,” he takes the opportunity to describe how a post-work future might look.

    There’s been a consistent trend of these stories going back decades, with a huge wave of them coming after the Great Recession. Thompson’s piece is likely to be the best of the bunch. It’s empathetic, well reported, and imaginative. I also hope it’s the last of these end-of-work stories for the time being.

    At this point, the preponderance of stories about work ending is itself doing a certain kind of labor, one that distracts us and leads us away from questions we need to answer. These stories, beyond being untethered to the current economy, distract from current problems in the workforce, push laborers to identify with capitalists while ignoring deeper transitional matters, and don’t even challenge what a serious, radical story of ownership this would bring into question.

    Unlikely

    Before we begin, I think it’s important to note how unlikely this scenario remains. We can imagine the Atlantic of the 1850s running a “The Post-Agriculture, Post-Work World” cover story, correctly predicting farming would go from 70 percent of the workforce to 20 percent over the next 100 years, yet incorrectly predicting this would end work. We don’t think of what happened afterward as “post-work.” The economy managed to continue on, finding new work and workers in the process.

    There are other minor problems. Globalization and technological advancement are treated as the same thing, when they are not. There’s also a slippage common in the critical discussion of these articles (you can see it from this tweet from Thompson here) of substituting in the argument that technology has weakened wages and excluded some workers in recent decades for an argument about the long-run trajectory of technology itself. These are two different, distinct stories, with the first just as much about institutions as actual technology, and evidence for the first certainly doesn’t prove the second.

    We’ll Still Be Working

    But what is the impact of these stories? In the short term, the most important is that they allow us to dream about a world where the current problems of labor don’t exist, because they’ve been magically solved. This is a problem, because the conditions and compensation of work are some of our biggest challenges. In these future scenarios, there’s no need to organize, seek full employment, or otherwise balance the relationship between labor and capital, because the former doesn’t exist anymore.

    This is especially a problem when it leaves the “what if” fiction writings of op-eds, or provocative calls to reexamine the nature of work in our daily lives, and melds into organizational politics. I certainly see a “why does this matter, the robots are coming” mentality among the type of liberal infrastructure groups that are meant to mobilize resources and planning to build a more just economy. The more this comforting fiction takes hold, the more problematic it becomes and easier it is for liberals to become resigned to low wages.

    Because even if these scenarios pan out, work is around for a while. Let’s be aggressive with a scenario here: Let’s say the need for hours worked in the economy caps right now. This is it; this is the most we’ll ever work in the United States. (It won’t be.) In addition, the amount of hours worked decreases rapidly by 4 percent a year so that it is cut to around 25 percent of the current total in 34 years. (This won’t happen.)

    Back of the envelope, during this time period people in the United States will work a total of around 2 billion work years. Or roughly 10,000 times as long as human beings have existed. What kinds of lives and experiences will those workers have?

    Worker power matters, ironically, because it’s difficult to imagine the productivity growth necessary to get to this world without some sense that labor is strong. If wages are stagnant or even falling, what incentive is there to build the robots to replace those workers? Nothing is certain here, but you can see periods where low unemployment is correlated with faster productivity gains. The best way forward to a post-work atmosphere will probably be to embrace labor, not hope it goes away.

    How Did We Get There?

    Another major problem of this popular genre is that it immediately places us at the end of the story, with no explanation of the transition. Work has already disappeared, it’s over, so the only question that remains is how we can envision our lives in the new world. This has two major consequences.

    First, by compressing this timeline and making it seem like only capital will be around after a short period, it preemptively identifies the interest of workers with the interests of capital and owners. If post-work is right around the corner, people won’t have any labor (or human capital, if you must) to allow them to survive, so it’s essential to turn them into miniature capitalists immediately. That’s why it’s not abnormal to see descriptions of post-work immediately call for the repeal of Sarbanes-Oxley or the privatization of Social Security.

    Secondly, this story also doesn’t explain the transition of labor among workers as it disappears. As Seth Ackerman notes, decreases in the amount of work done can result either from some people leaving the labor force (extensive margin) or from decreasing the amount of work all people do (intensive margin). In other words, do we want some people to leave the workforce entirely, or for us all to work less overall? These are two different projects, with different assumptions and actions necessary to advance them. Resolving these questions would be the fundamental problem of an actual decline in labor force participation, but they tend to be abstracted away in these discussions.

    Projecting the Past Forward

    Going further, the idea that a post-work economy would involve simply choosing between a handful of quasi-utopias strikes me as completely naive. In Thompson’s piece, for instance, the problem seems to be whether post-work people would spend their time in intellectual pursuits or as independent artisans. But it’s just as likely people would spend their days as refugees trying not to starve.

    You can get the sense that something is missing because virtually all of these articles consider radical forms of leisure instead of ownership. (Indeed, in assuming that prosperity leads to redistribution leads to leisure and public goods, it’s really a forward projection of the Keynesian-Fordism of the past.) I rarely see any of these mass media post-work scenarios tackle these issues head-on, much less talk about “post-ownership” instead of just “post-work.” (Friend of the blog Peter Frase is one of the few who does.)

    It’s just as likely that the result will be a catastrophe for those who lose the value of their human capital. It seems unlikely that the political economy would become more conducive to redistribution, as these articles usually imply, because the value of capital assets would probably skyrocket. With that value high and ownership concentrated, it would potentially lead to a political economy more favorable to fascism than to robust egalitarianism. Who owns the robots, and what that even means in such a world, will be just as much a question as what we do to occupy ourselves; the first, really, will determine the second.

    As a result, discussions of the idyllic robot future give working people a desire that is an obstacle to the actual flourishing of their lived conditions, and it remains an ideology completely divorced from the lived experiences of everyday people. I hereby nominate this as Pure Ideology. Who seconds the motion?

    Follow or contact the Rortybomb blog:
     
      

     

    Share This

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