Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • The New Conservative Reformers Still Don't Have a Plan for Wall Street

    May 23, 2014Mike Konczal

    There’s a certain liberal fascination with the idea of conservative “reformers” showing up and recalibrating the Republican Party toward policies that would benefit working Americans and lead to potential bipartisan solutions. This fascination is on display in the reaction to the new Room to Grow report, available for free online, by the YG Network. Already being covered by liberals, this volume features various reform conservative writers addressing a range of innovative economic policy ideas, with the hope that Republicans lawmakers will pay attention.

    But if this is the best the new wave of conservatives can do on financial reform, it’s probably not the biggest worry that elected Republicans aren’t listening. The chapter that focuses on Dodd-Frank and the regulation of the financial markets after the crisis is by American Enterprise Institute’s James Pethokoukis. It’s billed as “financial reforms to combat cronyism,” but it offers little in terms of reform. The reformers should, at the very least, explain what they would repeal or replace in Dodd-Frank (a tension that exists with Obamacare as well), and this is left unclear.

    The problems start with Pethokoukis’s take on the story of what went wrong in the first place. But he also glosses over the key issues facing policymakers today. The general idea of attacking “cronyism” and promoting competition tells us nothing about what needs to be done, making it so this report is a poor guide to the actual ongoing debates happening in financial reform. And this silence on contentious matters is so deafening that it bodes poorly for any kind of genuine positive agenda for the right or bipartisan alignment with liberal reformers. Understanding where Pethokoukis goes wrong, however, can tell us why conservatives are going to have a hard time dealing with actual reform in the age of Dodd-Frank.

    The Story of What Went Wrong

    For Pethokoukis, a lack of competition in the financial markets led to the crisis of 2008. To whatever extent there were problems, those problems existed because of the government’s safety net and backstopping of deposits and commercial banks.

    A quick glance at most accounts of the financial crisis argues otherwise. The whole point of deregulation in the financial markets was to increase competition. The book that made the case for repealing Glass-Steagall argued for “an enhanced role for competition.” Economists associated with the Clinton administration also believed deregulation would lead to more competition and fix the financial sector. There was an explicit assumption that private entities like the ratings agencies would act as better regulators because they faced competition, and they explain how those agencies became so pivotal to the entire system.

    So what went wrong? All these new types of “shadow” banks turned out to have the same problems as any other banking sector. They had massive conflicts of interest, were capable of generating panics and runs with no lender-of-last-resort to fall back on, and there were no regulatory tools to wind them down. The goal of Dodd-Frank, in this version of the story, is to extend the core, tried-and-tested methods of financial reform to this shadow banking sector. Under these new regulations, the FDIC can take down shadow banks, derivatives have to be traded in an exchange, the CFPB provides transparency and accountability for consumers, and so on. Perhaps this narrative is wrong, or perhaps these are terrible policy goals that follow from it, but it goes entirely undiscussed in Pethokoukis’s account.

    No Conservative Answer to Too Big To Fail

    The problems become more obvious when you consider two of the most debated parts of Dodd-Frank: the FDIC’s ability to create a death panel for failing banks, known as resolution authority; and the Federal Reserve’s power to act as a “lender of last resort” in periods of crisis. Pethokoukis only obliquely addresses these issues, though they go to the core of Too Big To Fail.

    He argues that Dodd-Frank “explicitly permits bailouts through its resolution authority provision.” What he is referencing is sadly not cited, because Dodd-Frank in fact requires "that unsecured creditors bear losses in accordance with the priority of claim.” (If Pethokoukis would argue that the power to differentiate payments is a de facto bailout, then all of bankruptcy is a permanent bailout, as those powers look just like critical vendor orders or other parts of the bankruptcy process in the proposed FDIC rules.)

    Pethokoukis also argues against any type of lender-of-last-resort functionality for the non-commercial banking sector. Awkwardly, this in turn functions as a defense of the 2007 status quo. Take an investment bank, allow it to be subject to market panics, and have no resolution process in place other than tossing it into bankruptcy. This is the exact experiment we did with Lehman Brothers.

    In supporting materials, Pethokoukis argues that conservative reformers “have ideas to end Too Big To Fail once and for all,” but it’s not clear what they actually are, or even what they could look like. He doesn’t engage in the debate over resolution authority, and he doesn’t mention various conservative replacements to Dodd-Frank that involve a special bankruptcy code. Maybe that’s because the leading proposals make it purposely difficult to lend in a crisis by penalizing lenders, an approach that violates the wisdom of economists going back to Bagehot.

    Not a Roadmap for Our Current Debates

    Now granted, the report is about messaging and priorities rather than the intricacies of specific reforms. But even here Pethokoukis’s general guiding star of pro-competition and anti-cronyism doesn’t tell us anything about what we need to know to assess the problems on the ground.

    Derivative reforms are notably missing from this paper. I’d argue that forcing price transparency in the derivatives market is pro-competition because it leads to better information and an even playing field, and that pushing for aggressive international enforcement of those rules is anti-cronyism, because Wall Street shouldn’t get to flout the rules by cleverly housing its operations somewhere. Would conservative reformers agree? Based on this report, I have no idea.

    Is the fact that Wall Street has such an extensive presence in commodities like aluminum a cause for concern? Do we want to push back on the market mediated complex credit chains that comprise shadow banking? Did Dodd-Frank not go far enough in restructuring the financial system, or did it already go too far with the Volcker Rule and concentration limits? The fact that the conservative reformers’ framework is incapable of guiding us in any plausible direction on these major unfolding issues is very problematic. It points to an absolute void in reform conservative policy on the practical regulatory challenges of the day.

    The most promising thing in Pethokoukis’s piece is the call for higher capital requirements, perhaps on the order of 15 percent. Though a very good idea, this won’t end Too Big To Fail. And again this doesn’t engage with the current debates over capital, which involve how to balance multiple needs of capital. If you have a straight leverage requirement by itself, won’t that be gamed by firms taking on big risks? If you have a lot of capital but no liquidity, won’t you be subject to runs? Should banks hold long-term, unsecured debt, perhaps engineered to turn into equity during a failure? People often seek a silver bullet here, but one of the points of Basel is to try and balance all these needs against each other. Pethokoukis is correct that requirements should be higher, but unclear on this balancing act.

    Mediating Institutions Require Regulations

    Capital requirements aside, it’s surprising how unsurprised I am by the supposedly bold new thinking on financial reform contained in this report. The report is ideologically focused on using the government to build the spaces between the individual and state, the space of mediating institutions that include the market. But one of the best ways we can do that is by enforcing transparency and accountability among people participating in a market. Indeed, arguably the biggest blow to cronyism in 2014 has been the disclosure by the SEC of serious, widespread breaches in the private equity market – breaches that are reportable because of Dodd-Frank.

    Here’s an example of a policy I’d love to see the right embrace: fiduciary requirements updated for a landscape of 401(k)s, IRAs, and all the other personal, private, tax-exempt savings accounts that people have to deal with. The Department of Labor is trying to do this right now, in fact, and the House Tea Party is trying to stop them.

    One might expect that conservatives thinking in terms of civil society would support fiduciary requirements. They’ve existed since antiquity, going back to the Code of Hammurabi, Judeo-Christian traditions, Chinese law, and, a bonus for the right, centuries of common law. Using the state to set a guidepost for ethical norms that have existed across time and place, and thereby boosting people’s ability to take responsibility for their investments, is remarkably consistent with a richer civil society. But it’s not there in this report.

    I hope these reformers succeed in checking the furthest right-wing elements of their party, although the rehabilitation of Bush-era “compassionate conservatism” (a term whose absence is conspicuous) is a far heavier lift given the libertarian focus of today’s conservatism. But if this vision is going to be centered on mediating institutions rather than direct state action, it will be essential for reformers to understand how the state creates the market, and how it sets the terms for enforcing consumers interests, for private agents to get access to information, and for trading, prices, and risk to move throughout the economy. The core balance of transparency, accountability, stability, and innovation is not something that can simply be waved away by appeals to a “free” market as is done here.

    Follow or contact the Rortybomb blog:
      

     

    There’s a certain liberal fascination with the idea of conservative “reformers” showing up and recalibrating the Republican Party toward policies that would benefit working Americans and lead to potential bipartisan solutions. This fascination is on display in the reaction to the new Room to Grow report, available for free online, by the YG Network. Already being covered by liberals, this volume features various reform conservative writers addressing a range of innovative economic policy ideas, with the hope that Republicans lawmakers will pay attention.

    But if this is the best the new wave of conservatives can do on financial reform, it’s probably not the biggest worry that elected Republicans aren’t listening. The chapter that focuses on Dodd-Frank and the regulation of the financial markets after the crisis is by American Enterprise Institute’s James Pethokoukis. It’s billed as “financial reforms to combat cronyism,” but it offers little in terms of reform. The reformers should, at the very least, explain what they would repeal or replace in Dodd-Frank (a tension that exists with Obamacare as well), and this is left unclear.

    The problems start with Pethokoukis’s take on the story of what went wrong in the first place. But he also glosses over the key issues facing policymakers today. The general idea of attacking “cronyism” and promoting competition tells us nothing about what needs to be done, making it so this report is a poor guide to the actual ongoing debates happening in financial reform. And this silence on contentious matters is so deafening that it bodes poorly for any kind of genuine positive agenda for the right or bipartisan alignment with liberal reformers. Understanding where Pethokoukis goes wrong, however, can tell us why conservatives are going to have a hard time dealing with actual reform in the age of Dodd-Frank.

    The Story of What Went Wrong

    For Pethokoukis, a lack of competition in the financial markets led to the crisis of 2008. To whatever extent there were problems, those problems existed because of the government’s safety net and backstopping of deposits and commercial banks.

    A quick glance at most accounts of the financial crisis argues otherwise. The whole point of deregulation in the financial markets was to increase competition. The book that made the case for repealing Glass-Steagall argued for “an enhanced role for competition.” Economists associated with the Clinton administration also believed deregulation would lead to more competition and fix the financial sector. There was an explicit assumption that private entities like the ratings agencies would act as better regulators because they faced competition, and they explain how those agencies became so pivotal to the entire system.

    So what went wrong? All these new types of “shadow” banks turned out to have the same problems as any other banking sector. They had massive conflicts of interest, were capable of generating panics and runs with no lender-of-last-resort to fall back on, and there were no regulatory tools to wind them down. The goal of Dodd-Frank, in this version of the story, is to extend the core, tried-and-tested methods of financial reform to this shadow banking sector. Under these new regulations, the FDIC can take down shadow banks, derivatives have to be traded in an exchange, the CFPB provides transparency and accountability for consumers, and so on. Perhaps this narrative is wrong, or perhaps these are terrible policy goals that follow from it, but it goes entirely undiscussed in Pethokoukis’s account.

    No Conservative Answer to Too Big To Fail

    The problems become more obvious when you consider two of the most debated parts of Dodd-Frank: the FDIC’s ability to create a death panel for failing banks, known as resolution authority; and the Federal Reserve’s power to act as a “lender of last resort” in periods of crisis. Pethokoukis only obliquely addresses these issues, though they go to the core of Too Big To Fail.

    He argues that Dodd-Frank “explicitly permits bailouts through its resolution authority provision.” What he is referencing is sadly not cited, because Dodd-Frank in fact requires "that unsecured creditors bear losses in accordance with the priority of claim.” (If Pethokoukis would argue that the power to differentiate payments is a de facto bailout, then all of bankruptcy is a permanent bailout, as those powers look just like critical vendor orders or other parts of the bankruptcy process in the proposed FDIC rules.)

    Pethokoukis also argues against any type of lender-of-last-resort functionality for the non-commercial banking sector. Awkwardly, this in turn functions as a defense of the 2007 status quo. Take an investment bank, allow it to be subject to market panics, and have no resolution process in place other than tossing it into bankruptcy. This is the exact experiment we did with Lehman Brothers.

    In supporting materials, Pethokoukis argues that conservative reformers “have ideas to end Too Big To Fail once and for all,” but it’s not clear what they actually are, or even what they could look like. He doesn’t engage in the debate over resolution authority, and he doesn’t mention various conservative replacements to Dodd-Frank that involve a special bankruptcy code. Maybe that’s because the leading proposals make it purposely difficult to lend in a crisis by penalizing lenders, an approach that violates the wisdom of economists going back to Bagehot.

    Not a Roadmap for Our Current Debates

    Now granted, the report is about messaging and priorities rather than the intricacies of specific reforms. But even here Pethokoukis’s general guiding star of pro-competition and anti-cronyism doesn’t tell us anything about what we need to know to assess the problems on the ground.

    Derivative reforms are notably missing from this paper. I’d argue that forcing price transparency in the derivatives market is pro-competition because it leads to better information and an even playing field, and that pushing for aggressive international enforcement of those rules is anti-cronyism, because Wall Street shouldn’t get to flout the rules by cleverly housing its operations somewhere. Would conservative reformers agree? Based on this report, I have no idea.

    Is the fact that Wall Street has such an extensive presence in commodities like aluminum a cause for concern? Do we want to push back on the market mediated complex credit chains that comprise shadow banking? Did Dodd-Frank not go far enough in restructuring the financial system, or did it already go too far with the Volcker Rule and concentration limits? The fact that the conservative reformers’ framework is incapable of guiding us in any plausible direction on these major unfolding issues is very problematic. It points to an absolute void in reform conservative policy on the practical regulatory challenges of the day.

    The most promising thing in Pethokoukis’s piece is the call for higher capital requirements, perhaps on the order of 15 percent. Though a very good idea, this won’t end Too Big To Fail. And again this doesn’t engage with the current debates over capital, which involve how to balance multiple needs of capital. If you have a straight leverage requirement by itself, won’t that be gamed by firms taking on big risks? If you have a lot of capital but no liquidity, won’t you be subject to runs? Should banks hold long-term, unsecured debt, perhaps engineered to turn into equity during a failure? People often seek a silver bullet here, but one of the points of Basel is to try and balance all these needs against each other. Pethokoukis is correct that requirements should be higher, but unclear on this balancing act.

    Mediating Institutions Require Regulations

    Capital requirements aside, it’s surprising how unsurprised I am by the supposedly bold new thinking on financial reform contained in this report. The report is ideologically focused on using the government to build the spaces between the individual and state, the space of mediating institutions that include the market. But one of the best ways we can do that is by enforcing transparency and accountability among people participating in a market. Indeed, arguably the biggest blow to cronyism in 2014 has been the disclosure by the SEC of serious, widespread breaches in the private equity market – breaches that are reportable because of Dodd-Frank.

    Here’s an example of a policy I’d love to see the right embrace: fiduciary requirements updated for a landscape of 401(k)s, IRAs, and all the other personal, private, tax-exempt savings accounts that people have to deal with. The Department of Labor is trying to do this right now, in fact, and the House Tea Party is trying to stop them.

    One might expect that conservatives thinking in terms of civil society would support fiduciary requirements. They’ve existed since antiquity, going back to the Code of Hammurabi, Judeo-Christian traditions, Chinese law, and, a bonus for the right, centuries of common law. Using the state to set a guidepost for ethical norms that have existed across time and place, and thereby boosting people’s ability to take responsibility for their investments, is remarkably consistent with a richer civil society. But it’s not there in this report.

    I hope these reformers succeed in checking the furthest right-wing elements of their party, although the rehabilitation of Bush-era “compassionate conservatism” (a term whose absence is conspicuous) is a far heavier lift given the libertarian focus of today’s conservatism. But if this vision is going to be centered on mediating institutions rather than direct state action, it will be essential for reformers to understand how the state creates the market, and how it sets the terms for enforcing consumers interests, for private agents to get access to information, and for trading, prices, and risk to move throughout the economy. The core balance of transparency, accountability, stability, and innovation is not something that can simply be waved away by appeals to a “free” market as is done here.

    Follow or contact the Rortybomb blog:
      

     

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  • Paul Ryan and the Voluntarism Fantasy

    Apr 28, 2014Mike Konczal

    When I wrote a long piece about the Voluntarism Fantasy at Democracy Journal, several people accused me of attacking a strawman. My argument was that there's an influential, yet never clearly articulated, position on the conservative right that we jettison much of the federal government's role in providing for economic security. In response, private charities, churches and "civil society" will rush in and do a better job. Who, complained conservatives, actually argues this?

    Well, here's McKay Coppins with a quite flattering 7,000 word piece on how Paul Ryan has a "newfound passion for the poor." What is the animating core and idea of his new passion?

    Ryan’s broad vision for curing American poverty is one that conservatives have been championing for the last half-century, more or less. He imagines a diverse network of local churches, charities, and service organizations doing much of the work the federal government took on in the 20th century. Rather than supplying jobless Americans with a never-ending stream of unemployment checks, for example, Ryan thinks the federal government should funnell resources toward community-based work programs like Pastor Webster’s.

    Many are rightfully pointing out that this doesn't square with his budget, which plans to eliminate a lot of spending on the poor in order to fund tax cuts for the rich. But in the same way that budget shenanigans like dynamic scoring is supposed to make his numbers work, there's an invisible work of charity that will simply fill in however much that is cut from the federal budget.
     
    There's a dead giveaway here. Note the "in the 20th century" rather than the normal "since the War on Poverty" as when things went wrong. Ryan doesn't think the War on Poverty is a problem, or doesn't just think that. He thinks the evolution of the state during the entire 20th century is the problem, and wants to return to the freer and better 19th century.
     
    But as I emphasized in the piece, this idea is not true in history, theory or practice. The state has always played a role in providing economic security through things like poorhouses and soldier pensions well before the New Deal. When the Great Depression happened, the old system collapsed. Service organizations called on the government to take over things like old-age pensions, unemployment insurance and income support because they realized they couldn't do it themselves. Freed of the heavy lifting of these major pieces of social insurance, they could focus in a more nimble manner on individual and targeted needs.
     
    And the reasons this doesn't work out are quite clear - charity is uncoordinated, very vulnerable to stress (charitable giving fell in the recession just as it was most needed), and tied to the whims and interests of the rich. And charitable organizations aren't calling for the Ryan Budget, and they don't think that they'll run better and with better resources if Ryan's cuts happen. They know firsthand they won't have the resources to balance out the gigantic increase in need that would result.
     
    (Elizabeth Stoker has more on attempts to link this this fantasy up with Christianity broadly and Catholic subsidiarity specifically.)
     
    Ideas have consequences. The fact that Ryan's are fundamentally flawed on so many levels will have consequences too for the poor if they come to pass.
     
    Follow or contact the Rortybomb blog:
      

     

    When I wrote a long piece about the Voluntarism Fantasy at Democracy Journal, several people accused me of attacking a strawman. My argument was that there's an influential, yet never clearly articulated, position on the conservative right that we jettison much of the federal government's role in providing for economic security. In response, private charities, churches and "civil society" will rush in and do a better job. Who, complained conservatives, actually argues this?

    Well, here's McKay Coppins with a quite flattering 7,000 word piece on how Paul Ryan has a "newfound passion for the poor." What is the animating core and idea of his new passion?

    Ryan’s broad vision for curing American poverty is one that conservatives have been championing for the last half-century, more or less. He imagines a diverse network of local churches, charities, and service organizations doing much of the work the federal government took on in the 20th century. Rather than supplying jobless Americans with a never-ending stream of unemployment checks, for example, Ryan thinks the federal government should funnell resources toward community-based work programs like Pastor Webster’s.

    Many are rightfully pointing out that this doesn't square with his budget, which plans to eliminate a lot of spending on the poor in order to fund tax cuts for the rich. But in the same way that budget shenanigans like dynamic scoring is supposed to make his numbers work, there's an invisible work of charity that will simply fill in however much that is cut from the federal budget.
     
    There's a dead giveaway here. Note the "in the 20th century" rather than the normal "since the War on Poverty" as when things went wrong. Ryan doesn't think the War on Poverty is a problem, or doesn't just think that. He thinks the evolution of the state during the entire 20th century is the problem, and wants to return to the freer and better 19th century.
     
    But as I emphasized in the piece, this idea is not true in history, theory or practice. The state has always played a role in providing economic security through things like poorhouses and soldier pensions well before the New Deal. When the Great Depression happened, the old system collapsed. Service organizations called on the government to take over things like old-age pensions, unemployment insurance and income support because they realized they couldn't do it themselves. Freed of the heavy lifting of these major pieces of social insurance, they could focus in a more nimble manner on individual and targeted needs.
     
    And the reasons this doesn't work out are quite clear - charity is uncoordinated, very vulnerable to stress (charitable giving fell in the recession just as it was most needed), and tied to the whims and interests of the rich. And charitable organizations aren't calling for the Ryan Budget, and they don't think that they'll run better and with better resources if Ryan's cuts happen. They know firsthand they won't have the resources to balance out the gigantic increase in need that would result.
     
    (Elizabeth Stoker has more on attempts to link this this fantasy up with Christianity broadly and Catholic subsidiarity specifically.)
     
    Ideas have consequences. The fact that Ryan's are fundamentally flawed on so many levels will have consequences too for the poor if they come to pass.
     
    Follow or contact the Rortybomb blog:
      

     

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  • JW Mason on Disgorge the Cash

    Apr 21, 2014Mike Konczal

     

    I'm happy to have been part of the editing team on this piece by JW Mason for The New Inquiry's money and finance issue, Disgorge the Cash. It summarizes some of the issues he's been developing at his blog slackwire on the relationship between the financial sector and the real economy. As both an economic matter, with the relationship between corporate borrowing, investments and dividends before and after the early 1980s, as well as a socio-cultural matter of managers and their relationships to the firms they manage, it's fascinating stuff. It also points to a question, one Piketty doesn't touch in his new Capital book, of whether supermanagers who are creating the runaway 1% labor incomes gain should really be thought of more as part of capital income.

    Much of the rest of the finance and money issue is now online, though you should still subscribe.

    From the piece:

    In 1960, there was a strong link between borrowing and investment. A firm that was borrowing $1 million more than a typical firm of that size would usually be investing $750,000 more. [...] Before 1980, there was no statistical relationship between borrowing and payouts in the form of dividends and share repurchases at the firm level. But since then, a clear positive relationship emerged, especially at business-cycle peaks. Firms that borrow more have significantly higher payouts to shareholders. [...] It was a common trope in accounts of the housing bubble that greedy or shortsighted homeowners were extracting equity from their houses with second mortgages or cash-out refinancing to pay for extra consumption. What nobody mentioned was that the rentier class had been playing a similar game longer and on a much larger scale.

    [...]

    At the moment, finance seems to be doing its job well. The idea that corporations will spontaneously socialize themselves looks utopian and naïve. The evolution described by Keynes, Berle and Means, Galbraith, and other theorists of managerialism early in the 20th century had been halted or reversed by its end.
     
    But that doesn’t mean it wasn’t real. Just look at the scale of the financial apparatus required to keep productive enterprises focused on profit maximization, and the fear capitalists have of allowing managers discretion over corporate resources, even when their incentives have been arduously “aligned.” Isn’t it testimony to how tenuous and unnatural production for profit is? In these far from revolutionary times, radicals often fret about the difficulty of transforming the existing organization of production into socialism. But this project is nothing compared with the Sisyphean task faced by the other side, of constantly transforming the existing organization of production into capitalism.

     

    I'm happy to have been part of the editing team on this piece by JW Mason for The New Inquiry's money and finance issue, Disgorge the Cash. It summarizes some of the issues he's been developing at his blog slackwire on the relationship between the financial sector and the real economy. As both an economic matter, with the relationship between corporate borrowing, investments and dividends before and after the early 1980s, as well as a socio-cultural matter of managers and their relationships to the firms they manage, it's fascinating stuff. It also points to a question, one Piketty doesn't touch in his new Capital book, of whether supermanagers who are creating the runaway 1% labor incomes gain should really be thought of more as part of capital income.

    Much of the rest of the finance and money issue is now online, though you should still subscribe.

    From the piece:

    In 1960, there was a strong link between borrowing and investment. A firm that was borrowing $1 million more than a typical firm of that size would usually be investing $750,000 more. [...] Before 1980, there was no statistical relationship between borrowing and payouts in the form of dividends and share repurchases at the firm level. But since then, a clear positive relationship emerged, especially at business-cycle peaks. Firms that borrow more have significantly higher payouts to shareholders. [...] It was a common trope in accounts of the housing bubble that greedy or shortsighted homeowners were extracting equity from their houses with second mortgages or cash-out refinancing to pay for extra consumption. What nobody mentioned was that the rentier class had been playing a similar game longer and on a much larger scale.

    [...]

    At the moment, finance seems to be doing its job well. The idea that corporations will spontaneously socialize themselves looks utopian and naïve. The evolution described by Keynes, Berle and Means, Galbraith, and other theorists of managerialism early in the 20th century had been halted or reversed by its end.
     
    But that doesn’t mean it wasn’t real. Just look at the scale of the financial apparatus required to keep productive enterprises focused on profit maximization, and the fear capitalists have of allowing managers discretion over corporate resources, even when their incentives have been arduously “aligned.” Isn’t it testimony to how tenuous and unnatural production for profit is? In these far from revolutionary times, radicals often fret about the difficulty of transforming the existing organization of production into socialism. But this project is nothing compared with the Sisyphean task faced by the other side, of constantly transforming the existing organization of production into capitalism.

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  • The Unluckiness of the Long-Term Unemployed

    Apr 18, 2014Mike Konczal
    Ben Casselman has a fascinating dive into the long-term unemployment data at the new 538 site. He finds that the long-term unemployed are driven in large part by luck. An unemployed person is more likely to be unemployed for a long period of time when they happen to lose their job at a time of high unemployment. Here's their core chart:

    He also finds that this effect is stronger for those who are unlikely to receive unemployment insurance.

    One comment I had. There's an argument that the long-term unemployed are the weakest employees, those who were fired during the first wave of layoffs that started in 2008. These workers were going to have a hard time finding jobs not based on the labor market but because, to be blunt, they weren't good workers. (One manifestation: Tyler Cowen did a lot with this idea of zero marginal product workers, ignoring that the marginal product of labor is impacted by demand, back in 2011.) Since long-term unemployed workers look a lot like the general unemployment pool, this is thought to be driven by softer, not-quantifiable, worker characteristics.

    If that was the case, then the job losers on the upswing of unemployment, during the first wave of layoffs in 2008 when unemployment was in the 5-8% range, should be more likely to have become a member of the long-term unemployed. They should even be worse than those leaving their job when unemployment was 10% in fall 2009 (which was technically 3 months after the recession ended). But we see a pretty consistent pattern in that chart, which tentatively give evidence that it's not just the initial skill level of the workers driving the level of long-term unemployment.

     

    Ben Casselman has a fascinating dive into the long-term unemployment data at the new 538 site. He finds that the long-term unemployed are driven in large part by luck. An unemployed person is more likely to be unemployed for a long period of time when they happen to lose their job at a time of high unemployment. Here's their core chart:

    He also finds that this effect is stronger for those who are unlikely to receive unemployment insurance.

    One comment I had. There's an argument that the long-term unemployed are the weakest employees, those who were fired during the first wave of layoffs that started in 2008. These workers were going to have a hard time finding jobs not based on the labor market but because, to be blunt, they weren't good workers. (One manifestation: Tyler Cowen did a lot with this idea of zero marginal product workers, ignoring that the marginal product of labor is impacted by demand, back in 2011.) Since long-term unemployed workers look a lot like the general unemployment pool, this is thought to be driven by softer, not-quantifiable, worker characteristics.

    If that was the case, then the job losers on the upswing of unemployment, during the first wave of layoffs in 2008 when unemployment was in the 5-8% range, should be more likely to have become a member of the long-term unemployed. They should even be worse than those leaving their job when unemployment was 10% in fall 2009 (which was technically 3 months after the recession ended). But we see a pretty consistent pattern in that chart, which tentatively give evidence that it's not just the initial skill level of the workers driving the level of long-term unemployment.

     

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  • Not Just the Long-Term Unemployed: Those Unemployed Zero Weeks Are Struggling to Find Jobs

    Apr 17, 2014Mike Konczal

    Leave aside for a moment the difficulty that the long-term unemployed, those who were unlucky and have been looking for a job for more than 52 weeks, have in finding a job. Even those who have been unemployed zero weeks are having trouble finding jobs in this economy. And this is important evidence against the idea that the labor market is doing better than people realize if you just ignore the long-term unemployed.

    Here’s a data point that I’m particularly interested in: how often are employed people going straight to another job, rather than leaving their job and enduring a period of unemployment before finding new work?

    Though most people think of the employed spending some time in unemployment before starting a new job (an idea that was central to the recent theory that quit rates predicted a healthy job market), a substantial number of people move directly from one job to another without ever counting as unemployed. Since our statistics (and most of the economic models) are set up to observe people who are looking for work but are unable or unwilling to accept a job, these steadily employed workers can go missing in the discussion. That’s a shame, because historically they comprise almost half of all those who accept a new job.

    The Rortybomb blog has long been a fan of the job flows data, or the statistics that show who is moving between employment and unemployment and in and out of the labor force. However, the easiest way to access this data didn’t distinguish between those who stayed employed with a single employer and those who stayed employed but moved between different employers.

    Luckily, someone pointed me in the direction of the Employer-to-Employer Flows in the U.S. Labor Market [1], compiled by the Federal Reserve, which breaks out those who move from one employer to another without being unemployed (described as “EE transitions” for the rest of this post). This data is current through the end of 2013.

    If the economy is heating up significantly and the long-term unemployed aren’t capable of taking jobs, then the EE transition rate should be increasing. So how is it doing?

    This is the percentage of the employed who are in EE transition (the results are the same for EE transition as a percentage of the labor force). As we can see, it declined during the crisis and hasn’t recovered even as of 2013.

    Let’s also look at this from a different point of view: what percentage of those taking jobs are currently employed? If the economy was heating up and the unemployed or those out of the labor force couldn't take jobs, we would expect this to increase. Taking EE transitions as a percentage of all those who are transitioning into new jobs, we see the following:

    New hires are increasingly coming from the ranks of the unemployed and those not in the labor force rather than the currently employed. Where the employed were 40 percent in the 1990s, and 35 percent in the pre-crisis 2000s, it's down to 30 percent now.

    Why does this matter? First off, these quits also create a new job opening, which the unemployed can take. There’s a significant labor economics literature that argues that job-to-job transitions are a major driver of wage growth for workers (starting here and continuing to this day, h/t Arin Dube). If the number of people moving directly from one job to another is in decline, that’s a bad sign for wage growth, as well as inflation and monetary policy. This appears to be undertheorized and not discussed enough in academic or policy discussions.

    But why is this happening? The American Time Use Survey hasn’t been able to tell me whether the employed are spending more or less time searching for other jobs since the recession started; the sample size is too small to make conclusive predictions about changes. If potential wage gains are a primary motivation of job-to-job transitions, then lack of wage growth or even inflation could be contributing to less churn in the economy.

    When it comes down to it, the problems of those who aren’t working and want a job are similar to the problems of those who are working but want a new job. As Alan Krueger found in this chart in his recent paper (also see Ben Casselman's chart here), the rate of successful job searches is down not just for the long-term unemployed, but also for the short-term unemployed, when compared to 2007. It appears the same holds true for those with an unemployment duration of zero.

    [1] The page indicates that it was last updated in 2004, or perhaps 2011. But the excel document has data through the end of 2013. Sneaky.

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    Leave aside for a moment the difficulty that the long-term unemployed, those who were unlucky and have been looking for a job for more than 52 weeks, have in finding a job. Even those who have been unemployed zero weeks are having trouble finding jobs in this economy. And this is important evidence against the idea that the labor market is doing better than people realize if you just ignore the long-term unemployed.

    Here’s a data point that I’m particularly interested in: how often are employed people going straight to another job, rather than leaving their job and enduring a period of unemployment before finding new work?

    Though most people think of the employed spending some time in unemployment before starting a new job (an idea that was central to the recent theory that quit rates predicted a healthy job market), a substantial number of people move directly from one job to another without ever counting as unemployed. Since our statistics (and most of the economic models) are set up to observe people who are looking for work but are unable or unwilling to accept a job, these steadily employed workers can go missing in the discussion. That’s a shame, because historically they comprise almost half of all those who accept a new job.

    The Rortybomb blog has long been a fan of the job flows data, or the statistics that show who is moving between employment and unemployment and in and out of the labor force. However, the easiest way to access this data didn’t distinguish between those who stayed employed with a single employer and those who stayed employed but moved between different employers.

    Luckily, someone pointed me in the direction of the Employer-to-Employer Flows in the U.S. Labor Market [1], compiled by the Federal Reserve, which breaks out those who move from one employer to another without being unemployed (described as “EE transitions” for the rest of this post). This data is current through the end of 2013.

    If the economy is heating up significantly and the long-term unemployed aren’t capable of taking jobs, then the EE transition rate should be increasing. So how is it doing?

    This is the percentage of the employed who are in EE transition (the results are the same for EE transition as a percentage of the labor force). As we can see, it declined during the crisis and hasn’t recovered even as of 2013.

    Let’s also look at this from a different point of view: what percentage of those taking jobs are currently employed? If the economy was heating up and the unemployed or those out of the labor force couldn't take jobs, we would expect this to increase. Taking EE transitions as a percentage of all those who are transitioning into new jobs, we see the following:

    New hires are increasingly coming from the ranks of the unemployed and those not in the labor force rather than the currently employed. Where the employed were 40 percent in the 1990s, and 35 percent in the pre-crisis 2000s, it's down to 30 percent now.

    Why does this matter? First off, these quits also create a new job opening, which the unemployed can take. There’s a significant labor economics literature that argues that job-to-job transitions are a major driver of wage growth for workers (starting here and continuing to this day, h/t Arin Dube). If the number of people moving directly from one job to another is in decline, that’s a bad sign for wage growth, as well as inflation and monetary policy. This appears to be undertheorized and not discussed enough in academic or policy discussions.

    But why is this happening? The American Time Use Survey hasn’t been able to tell me whether the employed are spending more or less time searching for other jobs since the recession started; the sample size is too small to make conclusive predictions about changes. If potential wage gains are a primary motivation of job-to-job transitions, then lack of wage growth or even inflation could be contributing to less churn in the economy.

    When it comes down to it, the problems of those who aren’t working and want a job are similar to the problems of those who are working but want a new job. As Alan Krueger found in this chart in his recent paper (also see Ben Casselman's chart here), the rate of successful job searches is down not just for the long-term unemployed, but also for the short-term unemployed, when compared to 2007. It appears the same holds true for those with an unemployment duration of zero.

    [1] The page indicates that it was last updated in 2004, or perhaps 2011. But the excel document has data through the end of 2013. Sneaky.

    Follow or contact the Rortybomb blog:

      

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