Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • The 1 Percent Took Home the Largest Share of Income Since 1928 Last Year

    Sep 12, 2013Mike Konczal

    Are our rich content? It's a question that bounces back and forth in the blogosphere. Are elites, economic and otherwise, happy with the pace of the weak recovery? Are they indifferent? Or are they actively worse off than they would be if unemployment were lower?

    This question comes up when Emmanuel Saez updates his data on the incomes of the top 1 percent. Most of the coverage has focused on the rate of change for incomes of the top 1 percent, particularly the fact that the top 1 percent have enjoyed 95 percent of all income growth from 2009 to 2012. But I want to focus on levels. I'm going to modify one of Saez's charts to show something I don't think has been pointed out:

    This is the percentage of all income, excluding capital gains, that goes to the top 1 percent. And as you can see, it's not just back where it was before the recession; it's far exceeded that benchmark. And it's exceeded all the years on record, with the one exception of 1928.

    Over the past 20 years, this percentage dropped after each recession. If you look, you can see it drop in the early 1990s and 2000s. However, it then recovered and exceeded the old rates.

    We saw this rate fall in the Great Recession. The obvious question was whether this would be a permanent break or whether it would recover and exceed the old rate. That question is now answered. As noted, the only year on record in which the top 1 percent took home a larger piece of the economic pie was in 1928, and then only barely.

    This excludes volatile capital income, in part to see a cleaner trend and in part because tax changes from the fiscal cliff and Obamacare probably influenced the 2012 results. But the trend is nearly the same with capital gains, where this year's 22.4 percent share for the top 1 percent is closing in on 2007's 23.5 percent share (and 1928's record high 23.9 percent). This pattern is also true when using average incomes.

    But this one chart is something I've particularly watched during the Great Recession. Because you could, at one point, say that the rich had taken a huge fall in the Great Recession, and therefore it was in everyone's interest to get the economy back on track. That is harder to say today, and it will be harder to say next year as these trends continue in the absence of policy action.

    Follow or contact the Rortybomb blog:

      

     

    Are our rich content? It's a question that bounces back and forth in the blogosphere. Are elites, economic and otherwise, happy with the pace of the weak recovery? Are they indifferent? Or are they actively worse off than they would be if unemployment were lower?

    This question comes up when Emmanuel Saez updates his data on the incomes of the top 1 percent. Most of the coverage has focused on the rate of change for incomes of the top 1 percent, particularly the fact that the top 1 percent have enjoyed 95 percent of all income growth from 2009 to 2012. But I want to focus on levels. I'm going to modify one of Saez's charts to show something I don't think has been pointed out:

    This is the percentage of all income, excluding capital gains, that goes to the top 1 percent. And as you can see, it's not just back where it was before the recession; it's far exceeded that benchmark. And it's exceeded all the years on record, with the one exception of 1928.

    Over the past 20 years, this percentage dropped after each recession. If you look, you can see it drop in the early 1990s and 2000s. However, it then recovered and exceeded the old rates.

    We saw this rate fall in the Great Recession. The obvious question was whether this would be a permanent break or whether it would recover and exceed the old rate. That question is now answered. As noted, the only year on record in which the top 1 percent took home a larger piece of the economic pie was in 1928, and then only barely.

    This excludes volatile capital income, in part to see a cleaner trend and in part because tax changes from the fiscal cliff and Obamacare probably influenced the 2012 results. But the trend is nearly the same with capital gains, where this year's 22.4 percent share for the top 1 percent is closing in on 2007's 23.5 percent share (and 1928's record high 23.9 percent). This pattern is also true when using average incomes.

    But this one chart is something I've particularly watched during the Great Recession. Because you could, at one point, say that the rich had taken a huge fall in the Great Recession, and therefore it was in everyone's interest to get the economy back on track. That is harder to say today, and it will be harder to say next year as these trends continue in the absence of policy action.

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  • What Policy Do We Want Out of the Next Fed Chair?

    Sep 5, 2013Mike Konczal

    What a difference a year makes. Last year, the Jackson Hole conference was focused on how monetary policy and central banks were still effective at the zero lower bound if they were willing to take chances. It provided the intellectual basis for several "asks," including targeting states, allowing for conditional higher inflation under the Evans Rule, alongside a commitment to open-ended purchases in QE3. These asks were executed that winter.

    This year it isn’t clear what “asks” there are for the Federal Reserve. Stop the taper? A higher inflation target? Targeting something else? More purchases? The Evans Rule and state-targeting established a specific goal that allowed us to measure whether or not the Federal Reserve was taking its responsibility seriously. There isn’t the same ask for this year.

    Which is a problem, because there’s going to be a new Federal Reserve chair nominated in a few weeks. Last year, asking if the candidates supported the Evans Rule and QE3 would have helped us figure out if they took their role seriously. This year, the questions are more vague.

    This hasn’t been helped by the lack of concrete writing on monetary policy during the crisis by the presumed frontrunner for the position, Larry Summers. As such, it’s hard to connect commentary on Summers with specific demands from monetary policy in the Great Recession. And much of Summers’ writings on financial reform are from before Dodd-Frank, so it is tough to link them to the specifics of what is happening right now.

    Zachary Goldfarb at Wonkblog has a post, ”Here’s what Larry Summers would do at the Fed, that tries to determine what Summers would emphasize. It’s “based on interviews with some of the people who know him best, primarily sources who have worked closely with him, along with parsing his public comments,“ which Goldfarb found while researching a longer piece on the politics of Obama nominating Summers.

    You should read it, as I want to comment on four things that stand out from it. I hate formatting a post this way, but I want to use Goldfarb’s bullet points to emphasize what questions people should have of Summers if his name goes forward. Bold is Goldfarb:

    “Summers wouldn’t be any more dovish or hawkish than Ben Bernanke… While he’s likely to focus on employment while inflation remains low, he’ll be a hawk if inflation starts to rise much beyond the 2 percent target.”

    If Summers would get aggressive if inflation started to rise above 2 percent, that would be significantly more hawkish than current policy, which has the Federal Reserve willing to tolerate inflation until 2.5 percent if it’s seen as controlled. If it became an important part of his policy, the Fed could reinstate a de facto 2 percent ceiling on inflation.

    Bernanke spent 2011-2012 moving the FOMC to endorse the Evans Rule. On the first read, it’s not clear that Summers would have done that if he had been appointed back in 2010, especially if he was skeptical of QE in general. If this is the case, it’s a major abandonment of what was hard fought for by doves like Bernanke and Janet Yellen.

    More generally, many economists are calling for a move to a higher inflation target, both as a means to deal with our current recession and to prevent future episodes at the zero lower bound. If Summers is excluding this possibility out of hand, that’s a problem.

    “He thinks capital is king.”

    The biggest question in town is whether or not U.S. regulators should raise capital requirements over what is required in Basel III. Daniel Tarullo thinks so. So does the FDIC. The administration is currently seen as being opposed to this. As Undersecretary for Domestic Finance Mary Miller said in a recent speech pouring cold water on the idea, “It is important to consider the totality of what the Dodd-Frank Act and Basel reforms do and give existing reforms time to take both shape and effect.”

    If Summers agrees with Treasury, then expect him to make life difficult for Daniel Tarullo. If he agrees with Tarullo, that’s great for Tarullo. But if that’s the case, why hasn’t Summers done anything to publicly support him while Tarullo has stuck his neck out?

    “He would use the Fed to pressure global banks to be more transparent and accurate.”

    Summers is concerned about foreign financial institutions and their regulatory status. If you are concerned about foreign regulators and foreign standards for the financial sector, the biggest issue, by far, is cross-border derivatives. Should foreign subsidiaries of U.S. financial firms follow United States rules or weaker European rules?

    As Gary Gensler, the chair of the CFTC, has argued, “All of these common-sense reforms Congress mandated [in Dodd-Frank], however, could be undone if the overseas guaranteed affiliates and branches of U.S. persons are allowed to operate outside of these important requirements.”

    The administration did not agree. According to a blockbuster story by Silla Brush and Robert Schmidt at Bloomberg, Treasury Secretary Jack Lew put pressure on Gensler to back off this part of Dodd-Frank. According to the story, Gensler had “been hearing the same request from lobbyists seeking to slow the process, and he told the Treasury chief it felt like his adversary bankers were in the room.”

    As a potential member of FSOC, Summers would have a lot of influence in supporting or stopping the CFTC. As with capital requirements, does Summers support the administration and the Treasury Department seeking to cool Dodd-Frank rule-writing, or does he support people like Tarullo and Gensler seeking to write more aggressive rules?

    As a reminder, Summers does not have a great track record of respectfully dealing with regulatory heads who want more aggressive reforms than he wants while in public office. And, oddly, his connections to the administration could cause him to fight, rather than support (or just ignore), these regulatory heads pushing more aggressively.

    “If a crisis did occur, he’d be no-holds-barred.”

    Minor aside point, but I haven’t seen whether or not Summers supports the limits to the 13(3) powers the Federal Reserve invoked in 2008. Section 13(3) of the Federal Reserve Act was amended under Dodd-Frank so that "any emergency lending program or facility is for the purpose of providing liquidity to the financial system, and not to aid a failing financial company," and any such lending program has to have "broad-based eligibility.” The Federal Reserve will also need permission from the Treasury Secretary before proceeding in some cases.

    This is designed to prevent the Federal Reserve from being no-holds-barred in rescuing an individual firm (like AIG) instead of an entire market (like commercial paper). This may be a big wake-up call come the next financial crisis, and I'm curious if the Fed would simply push in ways that try to circumvent the rule.

    This is just a baseline, but it shows how much is still open when it comes to the future of monetary policy and financial reform. Or the two biggest things the next Fed Chairman will have to deal with.

    Follow or contact the Rortybomb blog:

      

     

    What a difference a year makes. Last year, the Jackson Hole conference was focused on how monetary policy and central banks were still effective at the zero lower bound if they were willing to take chances. It provided the intellectual basis for several "asks," including targeting states, allowing for conditional higher inflation under the Evans Rule, alongside a commitment to open-ended purchases in QE3. These asks were executed that winter.

    This year it isn’t clear what “asks” there are for the Federal Reserve. Stop the taper? A higher inflation target? Targeting something else? More purchases? The Evans Rule and state-targeting established a specific goal that allowed us to measure whether or not the Federal Reserve was taking its responsibility seriously. There isn’t the same ask for this year.

    Which is a problem, because there’s going to be a new Federal Reserve chair nominated in a few weeks. Last year, asking if the candidates supported the Evans Rule and QE3 would have helped us figure out if they took their role seriously. This year, the questions are more vague.

    This hasn’t been helped by the lack of concrete writing on monetary policy during the crisis by the presumed frontrunner for the position, Larry Summers. As such, it’s hard to connect commentary on Summers with specific demands from monetary policy in the Great Recession. And much of Summers’ writings on financial reform are from before Dodd-Frank, so it is tough to link them to the specifics of what is happening right now.

    Zachary Goldfarb at Wonkblog has a post, ”Here’s what Larry Summers would do at the Fed, that tries to determine what Summers would emphasize. It’s “based on interviews with some of the people who know him best, primarily sources who have worked closely with him, along with parsing his public comments,“ which Goldfarb found while researching a longer piece on the politics of Obama nominating Summers.

    You should read it, as I want to comment on four things that stand out from it. I hate formatting a post this way, but I want to use Goldfarb’s bullet points to emphasize what questions people should have of Summers if his name goes forward. Bold is Goldfarb:

    “Summers wouldn’t be any more dovish or hawkish than Ben Bernanke… While he’s likely to focus on employment while inflation remains low, he’ll be a hawk if inflation starts to rise much beyond the 2 percent target.”

    If Summers would get aggressive if inflation started to rise above 2 percent, that would be significantly more hawkish than current policy, which has the Federal Reserve willing to tolerate inflation until 2.5 percent if it’s seen as controlled. If it became an important part of his policy, the Fed could reinstate a de facto 2 percent ceiling on inflation.

    Bernanke spent 2011-2012 moving the FOMC to endorse the Evans Rule. On the first read, it’s not clear that Summers would have done that if he had been appointed back in 2010, especially if he was skeptical of QE in general. If this is the case, it’s a major abandonment of what was hard fought for by doves like Bernanke and Janet Yellen.

    More generally, many economists are calling for a move to a higher inflation target, both as a means to deal with our current recession and to prevent future episodes at the zero lower bound. If Summers is excluding this possibility out of hand, that’s a problem.

    “He thinks capital is king.”

    The biggest question in town is whether or not U.S. regulators should raise capital requirements over what is required in Basel III. Daniel Tarullo thinks so. So does the FDIC. The administration is currently seen as being opposed to this. As Undersecretary for Domestic Finance Mary Miller said in a recent speech pouring cold water on the idea, “It is important to consider the totality of what the Dodd-Frank Act and Basel reforms do and give existing reforms time to take both shape and effect.”

    If Summers agrees with Treasury, then expect him to make life difficult for Daniel Tarullo. If he agrees with Tarullo, that’s great for Tarullo. But if that’s the case, why hasn’t Summers done anything to publicly support him while Tarullo has stuck his neck out?

    “He would use the Fed to pressure global banks to be more transparent and accurate.”

    Summers is concerned about foreign financial institutions and their regulatory status. If you are concerned about foreign regulators and foreign standards for the financial sector, the biggest issue, by far, is cross-border derivatives. Should foreign subsidiaries of U.S. financial firms follow United States rules or weaker European rules?

    As Gary Gensler, the chair of the CFTC, has argued, “All of these common-sense reforms Congress mandated [in Dodd-Frank], however, could be undone if the overseas guaranteed affiliates and branches of U.S. persons are allowed to operate outside of these important requirements.”

    The administration did not agree. According to a blockbuster story by Silla Brush and Robert Schmidt at Bloomberg, Treasury Secretary Jack Lew put pressure on Gensler to back off this part of Dodd-Frank. According to the story, Gensler had “been hearing the same request from lobbyists seeking to slow the process, and he told the Treasury chief it felt like his adversary bankers were in the room.”

    As a potential member of FSOC, Summers would have a lot of influence in supporting or stopping the CFTC. As with capital requirements, does Summers support the administration and the Treasury Department seeking to cool Dodd-Frank rule-writing, or does he support people like Tarullo and Gensler seeking to write more aggressive rules?

    As a reminder, Summers does not have a great track record of respectfully dealing with regulatory heads who want more aggressive reforms than he wants while in public office. And, oddly, his connections to the administration could cause him to fight, rather than support (or just ignore), these regulatory heads pushing more aggressively.

    “If a crisis did occur, he’d be no-holds-barred.”

    Minor aside point, but I haven’t seen whether or not Summers supports the limits to the 13(3) powers the Federal Reserve invoked in 2008. Section 13(3) of the Federal Reserve Act was amended under Dodd-Frank so that "any emergency lending program or facility is for the purpose of providing liquidity to the financial system, and not to aid a failing financial company," and any such lending program has to have "broad-based eligibility.” The Federal Reserve will also need permission from the Treasury Secretary before proceeding in some cases.

    This is designed to prevent the Federal Reserve from being no-holds-barred in rescuing an individual firm (like AIG) instead of an entire market (like commercial paper). This may be a big wake-up call come the next financial crisis, and I'm curious if the Fed would simply push in ways that try to circumvent the rule.

    This is just a baseline, but it shows how much is still open when it comes to the future of monetary policy and financial reform. Or the two biggest things the next Fed Chairman will have to deal with.

    Follow or contact the Rortybomb blog:

      

     

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  • How Ronald Coase Demolished Current Libertarian Ideas About Property

    Sep 3, 2013Mike Konczal

    Property isn’t a vertical relationship between a person and an object, but instead is a horizontal, reciprocal relationship of exclusions between people. Since the benefit of one person in regard to property comes at the expense of someone else, there’s no logical or coherent way to invoke liberty or classical liberal principles of “do no harm” when it comes to how the law determines the shape of property. All we can do is pick among competing systems that try to achieve shared social goals.

    That’s not an idea normally associated with the economist Ronald Coase, who died yesterday at 102. But it’s a very important part of his landmark paper, ”The Problem of Social Cost (1960), that goes missing when the right-wing celebrates his legacy. Let’s unpack it.

    The paper is meant to address the issue of externalities, or when a third party pays a price (or get a benefit) as a result of market transactions he or she isn’t engaged with. Pollution is the classic example.

    The normal Coase Theorem argues that in the ethereal world of perfect markets, clear property rights, and no transaction costs, legal regulations would only impact the distribution but not the outcomes of externalities.

    Obligatory example, this one from Coase: someone purchases land next to a train to farm. The train throws off sparks, which damage the crops. The railroad company could remodel the train to stop the sparks. What difference would liability law and regulations make?

    Let’s say it cost $100 to put on spark guards that would stop $120 worth of crop damage. In this case, the spark guards would get installed. If liability fell on the train company, they’d pay the $100. If it didn’t, the farmer would pay the train company $100 to install the spark guards. If those numbers were reversed, the spark guard wouldn’t get installed. The train company would just pay $100 for the crop damages to prevent the lawsuit if they faced liability. If they didn’t, the farmer would eat the $100 loss. In both cases, the law didn’t change what decision would be made if they just bargained together. The only thing that would change would be the cash payments. (This does not pan out well in the real world [1].)

    What does this have to do with libertarianism? As Barbara Fried notes, Coase is defining the social costs as being “the joint costs of conflicting desires in a world of scarce resources.” This move brings the progressive legal realism of the early 20th century law into the economics field.

    What Coase is overturning is the idea that the scenario above is simply the railroad damaging the crops, and thus the issue is how to stop or punish the railroad company. Instead, there are multiple, valid claims, claims that necessarily put restrictions on others, and the issue is how to balance them.

    As Coase says early on about externalities, “The question is commonly thought of as one in which A inflicts harm on B and what has to be decided is: how should we restrain A? But this is wrong. We are dealing with a problem of a reciprocal nature. To avoid the harm to B would inflict harm on A. The real question that has to be decided is: should A be allowed to harm B or should B be allowed to harm A?”

    Indeed, the very first thing Coase does in the paper is to argue the “reciprocal” nature of social cost. The cost of the crop damage isn’t a question. The problem comes out of two people’s desire to utilize their property rights: for the train to run as is, and for the farmer to grow crops near the tracks. The question is, whose property rights do we privilege: the railroad’s or the farmer’s? People in law and economics usually dodge this by arguing that bargaining will take care of the (non-distributional) issues, but in the regular world, which is full of transaction costs, these decisions will need to be made.

    And this is where Coase is a major problem for current libertarian thinking. Today’s libertarians draw almost their entire philosophy from the idea of “self-ownership” and think that the only role of government is to enforce a minimal, classical liberal version of “do no harm.”

    But notice how ideas like non-aggression makes no sense in the Coase world. The ideal of self-ownership and minimal government can’t get us out of this problem, because it is precisely what ownership entails that is under question. And to realize one person’s ownership would necessarily entail limiting the ownership claims of someone else. (You can read the hostility that anarcho-capitalist Murray Rothbard had for the Coase Theorem’s “social engineering” here.)

    Or as Coase concludes, “We may speak of a person owning land and using it as a factor of production but what the land-owner in fact possesses is the right to carry out a circumscribed list of actions…in choosing between social arrangements within the context of which individual decisions are made, we have to bear in mind that a change in the existing system which will lead to an improvement in some decisions may well lead to a worsening of others.”

    The question of which social arrangements are best is the problem we face. Some, however, can’t even see the question.

    [1] Three quick examples of the Coase Theorem not panning out in the real world:

    Where Do We Send Unemployment Checks? John Donohue looked at a natural experiment from a pilot program in Illinois that would send out a bonus unemployment check of $500 for people who successfully found a job. But some people in the pilot program had the checks sent to them, while others, randomly, had the checks sent to their employers. This was a great test for the Coase Theorem, as the people in question had to bargain a contract to get employed in the first place, so there were no transaction costs.

    It turned out there was a significant effect. People were much less likely to participate if their employers received the check. So policy design does matter.

    Actual Cattle, Actual Society. In 1989, Robert Ellickson of Yale Law School investigated how rural landowners in California handled livestock trespassing under different liability regimes. What did he find? “The field evidence I gathered suggests that a change in animal trespass law indeed fails to affect resource allocation, not because transaction costs are low, but because transaction costs are high. Legal rules are costly to learn and enforce. Trespass incidents are minor irritations between parties who typically have complex continuing relationships that enable them readily to enforce informal norms.”

    Norms and social accounts of obligations are important basic sources of entitlements, as opposed to just abstract bargaining models.

    Institutions Matter Too. Much of the more interesting work in cross-country growth has been focused on relative strengths and weaknesses of public institutions like courts, something that shouldn’t matter from the Coase world. For one example from someone in that field, Simon Johnson had a great summary about financial regulation and economic conditions. They key point is that securities law has a strong correlation with economic outcomes, which shouldn’t happen. But it does.

    Follow or contact the Rortybomb blog:

      

     

    Property isn’t a vertical relationship between a person and an object, but instead is a horizontal, reciprocal relationship of exclusions between people. Since the benefit of one person in regard to property comes at the expense of someone else, there’s no logical or coherent way to invoke liberty or classical liberal principles of “do no harm” when it comes to how the law determines the shape of property. All we can do is pick among competing systems that try to achieve shared social goals.

    That’s not an idea normally associated with the economist Ronald Coase, who died yesterday at 102. But it’s a very important part of his landmark paper, ”The Problem of Social Cost (1960), that goes missing when the right-wing celebrates his legacy. Let’s unpack it.

    The paper is meant to address the issue of externalities, or when a third party pays a price (or get a benefit) as a result of market transactions he or she isn’t engaged with. Pollution is the classic example.

    The normal Coase Theorem argues that in the ethereal world of perfect markets, clear property rights, and no transaction costs, legal regulations would only impact the distribution but not the outcomes of externalities.

    Obligatory example, this one from Coase: someone purchases land next to a train to farm. The train throws off sparks, which damage the crops. The railroad company could remodel the train to stop the sparks. What difference would liability law and regulations make?

    Let’s say it cost $100 to put on spark guards that would stop $120 worth of crop damage. In this case, the spark guards would get installed. If liability fell on the train company, they’d pay the $100. If it didn’t, the farmer would pay the train company $100 to install the spark guards. If those numbers were reversed, the spark guard wouldn’t get installed. The train company would just pay $100 for the crop damages to prevent the lawsuit if they faced liability. If they didn’t, the farmer would eat the $100 loss. In both cases, the law didn’t change what decision would be made if they just bargained together. The only thing that would change would be the cash payments. (This does not pan out well in the real world [1].)

    What does this have to do with libertarianism? As Barbara Fried notes, Coase is defining the social costs as being “the joint costs of conflicting desires in a world of scarce resources.” This move brings the progressive legal realism of the early 20th century law into the economics field.

    What Coase is overturning is the idea that the scenario above is simply the railroad damaging the crops, and thus the issue is how to stop or punish the railroad company. Instead, there are multiple, valid claims, claims that necessarily put restrictions on others, and the issue is how to balance them.

    As Coase says early on about externalities, “The question is commonly thought of as one in which A inflicts harm on B and what has to be decided is: how should we restrain A? But this is wrong. We are dealing with a problem of a reciprocal nature. To avoid the harm to B would inflict harm on A. The real question that has to be decided is: should A be allowed to harm B or should B be allowed to harm A?”

    Indeed, the very first thing Coase does in the paper is to argue the “reciprocal” nature of social cost. The cost of the crop damage isn’t a question. The problem comes out of two people’s desire to utilize their property rights: for the train to run as is, and for the farmer to grow crops near the tracks. The question is, whose property rights do we privilege: the railroad’s or the farmer’s? People in law and economics usually dodge this by arguing that bargaining will take care of the (non-distributional) issues, but in the regular world, which is full of transaction costs, these decisions will need to be made.

    And this is where Coase is a major problem for current libertarian thinking. Today’s libertarians draw almost their entire philosophy from the idea of “self-ownership” and think that the only role of government is to enforce a minimal, classical liberal version of “do no harm.”

    But notice how ideas like non-aggression makes no sense in the Coase world. The ideal of self-ownership and minimal government can’t get us out of this problem, because it is precisely what ownership entails that is under question. And to realize one person’s ownership would necessarily entail limiting the ownership claims of someone else. (You can read the hostility that anarcho-capitalist Murray Rothbard had for the Coase Theorem’s “social engineering” here.)

    Or as Coase concludes, “We may speak of a person owning land and using it as a factor of production but what the land-owner in fact possesses is the right to carry out a circumscribed list of actions…in choosing between social arrangements within the context of which individual decisions are made, we have to bear in mind that a change in the existing system which will lead to an improvement in some decisions may well lead to a worsening of others.”

    The question of which social arrangements are best is the problem we face. Some, however, can’t even see the question.

    [1] Three quick examples of the Coase Theorem not panning out in the real world:

    Where Do We Send Unemployment Checks? John Donohue looked at a natural experiment from a pilot program in Illinois that would send out a bonus unemployment check of $500 for people who successfully found a job. But some people in the pilot program had the checks sent to them, while others, randomly, had the checks sent to their employers. This was a great test for the Coase Theorem, as the people in question had to bargain a contract to get employed in the first place, so there were no transaction costs.

    It turned out there was a significant effect. People were much less likely to participate if their employers received the check. So policy design does matter.

    Actual Cattle, Actual Society. In 1989, Robert Ellickson of Yale Law School investigated how rural landowners in California handled livestock trespassing under different liability regimes. What did he find? “The field evidence I gathered suggests that a change in animal trespass law indeed fails to affect resource allocation, not because transaction costs are low, but because transaction costs are high. Legal rules are costly to learn and enforce. Trespass incidents are minor irritations between parties who typically have complex continuing relationships that enable them readily to enforce informal norms.”

    Norms and social accounts of obligations are important basic sources of entitlements, as opposed to just abstract bargaining models.

    Institutions Matter Too. Much of the more interesting work in cross-country growth has been focused on relative strengths and weaknesses of public institutions like courts, something that shouldn’t matter from the Coase world. For one example from someone in that field, Simon Johnson had a great summary about financial regulation and economic conditions. They key point is that securities law has a strong correlation with economic outcomes, which shouldn’t happen. But it does.

    Follow or contact the Rortybomb blog:

      

     

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  • Can President Obama's New Metrics Curb College Costs?

    Aug 23, 2013Mike Konczal

    (Photo Source: White House)

    President Obama just announced a major initiative on higher education. Will it contain or reverse rising costs?

    I want to discuss the part of it that seems most tailored to containing costs, which is creating new higher education metrics to compare schools. These metrics will be created by 2015, which will be used to determine access to federal dollars such as student loans and Pell grants by 2018.

    From the fact sheet, the to-be-determined rankings will be based on three things: access, affordability, and outcomes. Access includes “percentage of students receiving Pell grants,” affordability includes “average tuition, scholarships, and loan debt,” and outcomes includes graduation rates and earnings.

    Here are my initial thoughts as I try to understand this. The tl;dr version is that it is important that these metrics are used to drive down private costs relative to public, expose administrative bloat, put pressure on the states, and bring accountability to the for-profits. If they don’t do that, they’re a waste on the cost-containment front. Now, here are six more detailed points to consider about how the metrics will be implemented and what effects they will have:

    1. The Goals Will Run Counter to Each Other. The efforts to increase graduation rates and have better post-graduation outcomes may require more spending by colleges. Some colleges in each of the meta-categories are likely to be booted for bad performance, or the metrics will make attending the worst-performing colleges so expensive as to drag them into a death spiral. Good as that may be for education, it will collapse the supply of higher education in the short term, putting more price pressure on existing institutions.

    Which is to say that we should distinguish efforts to increase quality through access and outcomes from efforts to contain costs. Students graduating on time will make colleges de facto more affordable, and perhaps that is mainly what the president is looking for.  But that is not entirely cost containment.

    2. The Student-Consumer or the Government? What’s different here? As Sara Goldrick-Rab and others argue, one reason cost containment has failed in the past “may stem from the financial aid system’s strong focus on the behaviors of ‘student-consumers’ rather than education providers.”

    It’s not clear to me why empowering these “student-consumers,” who go about rationally analyzing disclosed data in the marketplace for education, would give them the ability to make the demands necessary to contain costs at universities as a whole. One could see them driving out obviously underperforming institutions from the landscape, but it’s much harder to imagine them forcing institutions to contain costs, at least without political struggle.

    Students themselves are quite aware of the increasing costs in the past few years, with endless “click here to know what you are borrowing” measures that likely don’t do much. There’s really little evidence that an additional range of disclosures would make the institutions here more accountable or force them to contain their costs.

    Which is to say that we should focus less on disclosure and the consumer regime for cost containment, and more on how the government will force changes itself by making aid less available unless an affordability metric is met.

    3 The Obvious Information to Disclose. Talking about “the problem of higher education costs” is a major category error, as they vary by institution. The factors that cause community colleges to raise tuition (decreasing public support) are different than those facing for-profits (maximizing aid extraction) or private not-for-profits (maximizing prestige and consumer experience).

    Consistent across all of these is the idea that increasing administrative costs are a major driver of costs. This strikes me as the obvious, and perhaps only, metric where the consumer-student could force containment and best practices.

    So a very obvious thing to inform consumers of is “how much of my tuition goes to instruction?” If consumer-students want to force down football coach salaries and investment in extravagant non-instructional benefits, this is the most obvious way to do it and can be plastered across every disclosure form.

    (Another question I think is important, which would be great to deal with for-profits, is to disclose “how much of my tuition will be paid out to shareholders?” Consumers may or may not be happy with paying extra to build a more gigantic football stadium; they are probably not happy paying money that leaves the educational institution entirely.)

    4. Taking on Private Universities. It’s worth noting here that these metrics will be applied to private schools as well, using all of the government’s Title IV money (grants and student loans and everything else) as the leverage. And this is probably the major challenge, as private schools will not like this, and they have a lot of political coverage. Who among the elite hasn’t gone to a prominent private university?

    In a recent editorial on these new metrics, Sara Goldrick-Rab notes the danger that President Obama will “cave to the private higher-education lobby.” For if private higher education’s “expenses are so merited, we should see bigger gains at private elites than at we do at less-expensive institutions, not just higher graduation rates. None of that is happening now.”

    I’m curious how the metrics will “compare colleges with similar missions.” Will they compare public schools and private schools on the issue of cost containment at a given a level of quality? They should, as directly funded public options can drive down the costs of privately allocated goods, but if they do, that will necessarily put a lot of pressure on private schools.

    Interestingly, this could lead to a situation where private universities just leave the federal support system. Harvard, for instance, could just say “forget you” to the federal government and fund whatever aid it wants out of its own endowment. This move might split reformers, even though it would likely be for the best.

    5. Taking on the States. This is the most incoherent part of Obama’s pitch about the metrics. In the fact sheet, President Obama noted that “[d]eclining state funding has forced students to shoulder a bigger proportion of college costs; tuition has almost doubled as a share of public college revenues over the past 25 years from 25 percent to 47 percent.” Yet at the same time he talks about bloat and waste as drivers. Both could be true, but if the first is a main driver then individual rankings of schools will have a problem.

    One way to balance this would be to rank states themselves alongside schools. Demos proposes “an additional ratings system: why don’t we rate state legislatures on their per-student investment in higher education?” This could be useful in giving people in different states a much better sense of what their public higher education looks like. Crucially, it would also adjust for the fact that state education systems function as a continuum with multiple levels and transfers up and down the educational ladder.

    6. Political Battles. A lot of commentators are arguing this is a battle between President Obama and liberal professors, so it is unlikely to trigger GOP opposition. I’m not sure about that. The real people who will disproportionately end up in the crosshairs if this is done well, as listed above, are (a) administrators taking inflated salaries, (b) private and flagship schools that provided little value at very high costs, and c) for-profits.

    I think Josh Barro misses that for-profit schools are a major GOP constituency. George W. Bush’s Assistant Secretary for Postsecondary Education, Sally Stroup, was a former University of Phoenix lobbyist, and led a successful effort to remove restrictions on for-profit schools. On the campaign trail, Mitt Romney name-dropped a for-profit school that happened to donate to him. Insofar as the Obama administration will try to use these metrics to get a second bite at curbing the for-profit industry as it failed to do in its first term, that will set off alarm bells.

    Meanwhile, as noted above, basically every elite within 100 yards of D.C. politics, particularly in elite media and Democratic politics (e.g. “He was my professor actually at Harvard”), functions like a member of a private higher education lobby. How will they react if the hammer comes down there?

    There’s a lot of emphasis on getting poor students on Pell grants into high-end schools. That is a good goal. However, the issues with costs and higher education go far beyond this and affect families who are not rich but don’t qualify for means-tested aid. They are the ones who will increasingly demand cost containment.

    Something will eventually give. The question remains as to whether or not these metrics will be used to drive down private costs relative to public, expose administrative bloat, put pressure on the states, and bring accountability to the for-profits. If they do, it’s a positive sign; if not, a waste or worse when it comes to cost containment.

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    (Photo Source: White House)

    President Obama just announced a major initiative on higher education. Will it contain or reverse rising costs?

    I want to discuss the part of it that seems most tailored to containing costs, which is creating new higher education metrics to compare schools. These metrics will be created by 2015, which will be used to determine access to federal dollars such as student loans and Pell grants by 2018.

    From the fact sheet, the to-be-determined rankings will be based on three things: access, affordability, and outcomes. Access includes “percentage of students receiving Pell grants,” affordability includes “average tuition, scholarships, and loan debt,” and outcomes includes graduation rates and earnings.

    Here are my initial thoughts as I try to understand this. The tl;dr version is that it is important that these metrics are used to drive down private costs relative to public, expose administrative bloat, put pressure on the states, and bring accountability to the for-profits. If they don’t do that, they’re a waste on the cost-containment front. Now, here are six more detailed points to consider about how the metrics will be implemented and what effects they will have:

    1. The Goals Will Run Counter to Each Other. The efforts to increase graduation rates and have better post-graduation outcomes may require more spending by colleges. Some colleges in each of the meta-categories are likely to be booted for bad performance, or the metrics will make attending the worst-performing colleges so expensive as to drag them into a death spiral. Good as that may be for education, it will collapse the supply of higher education in the short term, putting more price pressure on existing institutions.

    Which is to say that we should distinguish efforts to increase quality through access and outcomes from efforts to contain costs. Students graduating on time will make colleges de facto more affordable, and perhaps that is mainly what the president is looking for.  But that is not entirely cost containment.

    2. The Student-Consumer or the Government? What’s different here? As Sara Goldrick-Rab and others argue, one reason cost containment has failed in the past “may stem from the financial aid system’s strong focus on the behaviors of ‘student-consumers’ rather than education providers.”

    It’s not clear to me why empowering these “student-consumers,” who go about rationally analyzing disclosed data in the marketplace for education, would give them the ability to make the demands necessary to contain costs at universities as a whole. One could see them driving out obviously underperforming institutions from the landscape, but it’s much harder to imagine them forcing institutions to contain costs, at least without political struggle.

    Students themselves are quite aware of the increasing costs in the past few years, with endless “click here to know what you are borrowing” measures that likely don’t do much. There’s really little evidence that an additional range of disclosures would make the institutions here more accountable or force them to contain their costs.

    Which is to say that we should focus less on disclosure and the consumer regime for cost containment, and more on how the government will force changes itself by making aid less available unless an affordability metric is met.

    3 The Obvious Information to Disclose. Talking about “the problem of higher education costs” is a major category error, as they vary by institution. The factors that cause community colleges to raise tuition (decreasing public support) are different than those facing for-profits (maximizing aid extraction) or private not-for-profits (maximizing prestige and consumer experience).

    Consistent across all of these is the idea that increasing administrative costs are a major driver of costs. This strikes me as the obvious, and perhaps only, metric where the consumer-student could force containment and best practices.

    So a very obvious thing to inform consumers of is “how much of my tuition goes to instruction?” If consumer-students want to force down football coach salaries and investment in extravagant non-instructional benefits, this is the most obvious way to do it and can be plastered across every disclosure form.

    (Another question I think is important, which would be great to deal with for-profits, is to disclose “how much of my tuition will be paid out to shareholders?” Consumers may or may not be happy with paying extra to build a more gigantic football stadium; they are probably not happy paying money that leaves the educational institution entirely.)

    4. Taking on Private Universities. It’s worth noting here that these metrics will be applied to private schools as well, using all of the government’s Title IV money (grants and student loans and everything else) as the leverage. And this is probably the major challenge, as private schools will not like this, and they have a lot of political coverage. Who among the elite hasn’t gone to a prominent private university?

    In a recent editorial on these new metrics, Sara Goldrick-Rab notes the danger that President Obama will “cave to the private higher-education lobby.” For if private higher education’s “expenses are so merited, we should see bigger gains at private elites than at we do at less-expensive institutions, not just higher graduation rates. None of that is happening now.”

    I’m curious how the metrics will “compare colleges with similar missions.” Will they compare public schools and private schools on the issue of cost containment at a given a level of quality? They should, as directly funded public options can drive down the costs of privately allocated goods, but if they do, that will necessarily put a lot of pressure on private schools.

    Interestingly, this could lead to a situation where private universities just leave the federal support system. Harvard, for instance, could just say “forget you” to the federal government and fund whatever aid it wants out of its own endowment. This move might split reformers, even though it would likely be for the best.

    5. Taking on the States. This is the most incoherent part of Obama’s pitch about the metrics. In the fact sheet, President Obama noted that “[d]eclining state funding has forced students to shoulder a bigger proportion of college costs; tuition has almost doubled as a share of public college revenues over the past 25 years from 25 percent to 47 percent.” Yet at the same time he talks about bloat and waste as drivers. Both could be true, but if the first is a main driver then individual rankings of schools will have a problem.

    One way to balance this would be to rank states themselves alongside schools. Demos proposes “an additional ratings system: why don’t we rate state legislatures on their per-student investment in higher education?” This could be useful in giving people in different states a much better sense of what their public higher education looks like. Crucially, it would also adjust for the fact that state education systems function as a continuum with multiple levels and transfers up and down the educational ladder.

    6. Political Battles. A lot of commentators are arguing this is a battle between President Obama and liberal professors, so it is unlikely to trigger GOP opposition. I’m not sure about that. The real people who will disproportionately end up in the crosshairs if this is done well, as listed above, are (a) administrators taking inflated salaries, (b) private and flagship schools that provided little value at very high costs, and c) for-profits.

    I think Josh Barro misses that for-profit schools are a major GOP constituency. George W. Bush’s Assistant Secretary for Postsecondary Education, Sally Stroup, was a former University of Phoenix lobbyist, and led a successful effort to remove restrictions on for-profit schools. On the campaign trail, Mitt Romney name-dropped a for-profit school that happened to donate to him. Insofar as the Obama administration will try to use these metrics to get a second bite at curbing the for-profit industry as it failed to do in its first term, that will set off alarm bells.

    Meanwhile, as noted above, basically every elite within 100 yards of D.C. politics, particularly in elite media and Democratic politics (e.g. “He was my professor actually at Harvard”), functions like a member of a private higher education lobby. How will they react if the hammer comes down there?

    There’s a lot of emphasis on getting poor students on Pell grants into high-end schools. That is a good goal. However, the issues with costs and higher education go far beyond this and affect families who are not rich but don’t qualify for means-tested aid. They are the ones who will increasingly demand cost containment.

    Something will eventually give. The question remains as to whether or not these metrics will be used to drive down private costs relative to public, expose administrative bloat, put pressure on the states, and bring accountability to the for-profits. If they do, it’s a positive sign; if not, a waste or worse when it comes to cost containment.

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  • Denialism and Bad Faith in Policy Arguments

    Aug 14, 2013Mike Konczal

    Here’s the thing about Allan Meltzer: he knows. Or at least he should know. It’s tough to remember that he knows when he writes editorials like his latest, "When Inflation Doves Cry." This is a mess of an editorial, a confused argument about why huge inflation is around the corner. “Instead of continuing along this futile path, the Fed should end its open-ended QE3 now... Those who believe that inflation will remain low should look more thoroughly and think more clearly. ”

    But he knows. Because here’s Meltzer in 1999 with "A Policy for Japanese Recovery": “Monetary expansion and devaluation is a much better solution. An announcement by the Bank of Japan and the government that the aim of policy is to prevent deflation and restore growth by providing enough money to raise asset prices would change beliefs and anticipations.”

    He knows that there’s an actual debate, with people who are “thinking clearly,” about monetary policy at the zero lower bound as a result of Japan. He participated in it. So he must have been aware of Ben Bernanke, Paul Krugman, Milton Friedman, Michael Woodford, and Lars Svensson all also debating it at the same time. But now he’s forgotten it. In fact, his arguments for Japan are the exact opposite of what they are now for the United States.

    This is why I think the Smithian “Derp” concept needs fleshing out as a diagnosis of our current situation. (I’m not a fan of the word either, but I’ll use it for this post.) For those not familiar with the term, Noah Smith argues that a major problem in our policy discussions is “the constant, repetitive reiteration of strong priors.” But if that was the only issue, Meltzer would support more expansion like he did for Japan!

    Simply blaming reiteration of priors is missing something. The problem here isn’t that Meltzer may have changed his mind on his advice for Japan. If that’s the case, I’d love to read about what led to that change. The problem is one of denialism, where the person refuses to acknowledge the actually existing debate, and instead pantomimes a debate with a shadow. It involves the idea of a straw man, but sometimes it’s simply not engaging at all. For Meltzer, the extensive debate about monetary policy at the zero lower bound is simply excised from the conversation, and people who only read him will have no clue that it was ever there.

    There’s also another dimension that I think is even more important, which is whether or not the argument, conclusions, or suggestions are in good faith. Eventually, this transcends the “reiteration of strong priors” and becomes an updating of the case but a reiteration of the conclusion. Throughout 2010 and 2011, an endless series of arguments about how a long-term fiscal deal would help with the current recession were made, without any credible evidence that this would help our short-term economy. But that’s what people want to do, and so they acknowledge the fresh problem but simply plug in their wrong solutions. The same was true with Mitt Romney’s plan for the economy, which wasn’t specific to 2012 in any way.

    Bad faith solutions don’t have to be about things you wanted to do anyway. Phillip Mirowski’s new book makes a fascinating observation about conservative think tanks when it comes to global warming. On the one hand, they have an active project arguing global warming isn’t happening. But on the other hand, they also have an active project arguing global warming can be solved through geoengineering the atmosphere. (For an example, here’s AEI arguing worries over climate change are overblown, but also separately hosting a panel on geoengineering.)

    So global warming isn’t real, but if it is, heroic atmospheric entrepreneurs will come in at the last minute and save the day. Thus, you can have denialism and bad-faith solutions in play at the same time.

    The fact that we can get to the denial and bad-faith corner makes me think this can be made generalizable and charted on a grid, but I still feel it’s missing some dimensions. What Smith identifies is real, but I’m not sure how to place it on these axes. What do you make of it?

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    Here’s the thing about Allan Meltzer: he knows. Or at least he should know. It’s tough to remember that he knows when he writes editorials like his latest, "When Inflation Doves Cry." This is a mess of an editorial, a confused argument about why huge inflation is around the corner. “Instead of continuing along this futile path, the Fed should end its open-ended QE3 now... Those who believe that inflation will remain low should look more thoroughly and think more clearly. ”

    But he knows. Because here’s Meltzer in 1999 with "A Policy for Japanese Recovery": “Monetary expansion and devaluation is a much better solution. An announcement by the Bank of Japan and the government that the aim of policy is to prevent deflation and restore growth by providing enough money to raise asset prices would change beliefs and anticipations.”

    He knows that there’s an actual debate, with people who are “thinking clearly,” about monetary policy at the zero lower bound as a result of Japan. He participated in it. So he must have been aware of Ben Bernanke, Paul Krugman, Milton Friedman, Michael Woodford, and Lars Svensson all also debating it at the same time. But now he’s forgotten it. In fact, his arguments for Japan are the exact opposite of what they are now for the United States.

    This is why I think the Smithian “Derp” concept needs fleshing out as a diagnosis of our current situation. (I’m not a fan of the word either, but I’ll use it for this post.) For those not familiar with the term, Noah Smith argues that a major problem in our policy discussions is “the constant, repetitive reiteration of strong priors.” But if that was the only issue, Meltzer would support more expansion like he did for Japan!

    Simply blaming reiteration of priors is missing something. The problem here isn’t that Meltzer may have changed his mind on his advice for Japan. If that’s the case, I’d love to read about what led to that change. The problem is one of denialism, where the person refuses to acknowledge the actually existing debate, and instead pantomimes a debate with a shadow. It involves the idea of a straw man, but sometimes it’s simply not engaging at all. For Meltzer, the extensive debate about monetary policy at the zero lower bound is simply excised from the conversation, and people who only read him will have no clue that it was ever there.

    There’s also another dimension that I think is even more important, which is whether or not the argument, conclusions, or suggestions are in good faith. Eventually, this transcends the “reiteration of strong priors” and becomes an updating of the case but a reiteration of the conclusion. Throughout 2010 and 2011, an endless series of arguments about how a long-term fiscal deal would help with the current recession were made, without any credible evidence that this would help our short-term economy. But that’s what people want to do, and so they acknowledge the fresh problem but simply plug in their wrong solutions. The same was true with Mitt Romney’s plan for the economy, which wasn’t specific to 2012 in any way.

    Bad faith solutions don’t have to be about things you wanted to do anyway. Phillip Mirowski’s new book makes a fascinating observation about conservative think tanks when it comes to global warming. On the one hand, they have an active project arguing global warming isn’t happening. But on the other hand, they also have an active project arguing global warming can be solved through geoengineering the atmosphere. (For an example, here’s AEI arguing worries over climate change are overblown, but also separately hosting a panel on geoengineering.)

    So global warming isn’t real, but if it is, heroic atmospheric entrepreneurs will come in at the last minute and save the day. Thus, you can have denialism and bad-faith solutions in play at the same time.

    The fact that we can get to the denial and bad-faith corner makes me think this can be made generalizable and charted on a grid, but I still feel it’s missing some dimensions. What Smith identifies is real, but I’m not sure how to place it on these axes. What do you make of it?

    Follow or contact the Rortybomb blog:

      

     

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