Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • 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.

    Follow or contact the Rortybomb blog:

      

     

    (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.

    Follow or contact the Rortybomb blog:

      

     

    College graduation banner image via Shutterstock.com

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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?

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  • Whatever Happened to the Economic Policy Uncertainty Index?

    Aug 6, 2013Mike Konczal

    Jim Tankersley has been doing the Lord’s work by following up on questionable arguments people have made about our current economic weakness being something other than a demand crisis. First, he asked Alberto Alesina about how all that expansionary austerity is working out from the vantage point of this year. Now he looks at the Economic Policy Uncertainty (EPU) index (Baker, Bloom, Davis) as it stands halfway into 2013.

    And it has collapsed. The EPU index has been falling at rapid speeds, hitting 2008 levels. Yet the recovery doesn’t seem to be speeding up at all. Wasn’t that supposed to happen?

    I’ve been meaning to revisit this index from when I looked at it last fall, and this is a good time to do so. It’s worth unpacking what actually drove the increase in EPU during the past five years, and understanding why there was little reason to believe it reflected uncertainty causing a weak economy. If anything, the relationship is clearly the other way around.

    Let’s make sure we understand the uncertainty argument: the increase in EPU “slowed the recovery from the recession by leading businesses and households to postpone investment, hiring and consumption expenditure.” (To give you a sense, in 2011 the authors argued in editorials that this index showed that the NLRB, Obamacare and "harmful rhetorical attacks on business and millionaires" were the cause of prolongued economic weakness.)

    As commenters pointed out, it would be easy to construct an index that gets the causation to be spurious or even go the other way. If weak growth could cause the Economic Policy Uncertainty index to skyrocket, then it’s not clear the narrative holds up as well. “There’s uncertainty over whether or not Congress and the Federal Reserve will aggressively fight the downturn” isn’t what the index is trying to measure, but that’s what it seems to be doing.

    Let’s take a look at the graph of EPU. When most people discuss this, they argue that the peaks tell them the index is onto something, as it peaks during periods of major confusion (9/11, Lehman bankruptcy, debt ceiling showdown).

    But what is worth noting, and what drives the results in a practical way, is the increase in the level during this time period. And that happens immediately in January 2009:

    How does economic policy uncertainty jump the first day in 2009? The index has three parts. The first is a newspaper search of people using the phrase “economic policy uncertainty.” I discussed that last fall, arguing that it was mostly capturing Republican talking points and the discipline of the GOP machine rather than actual analysis.

    The second is relevant here, and that’s the number of tax provisions set to expire in the near future. (In the first version of the paper this was total number of tax provisions, while in the current version it’s total dollar amount of those provisions.) It’s heavily discounted, so tax cuts that are expiring in a year or two are weighted at a much higher level than those that are further in the future.

    What does this look like over the past few years?

    So what happened starting in early 2009? The stimulus, of course. And the stimulus was in large part tax provisions that were set to expire in two years. This mechanically increased economic policy uncertainty, even though it was a policy response designed to boost automatic stabilizers. Also, the Bush tax cuts were approaching their endgame, and the algorithm gave a disproportionate weight to them as they entered their last two years.

    Then, in late 2010, the Bush tax cuts and some tax provisions from the stimulus were extended to provide additional stimulus to the economy while it was still weak.

    Here’s how the creators of the index describe this move: “Congress often decides whether to extend them at the last minute, undermining stability of and certainty about the future path of the tax code... Similarly, the 2010 Payroll Tax Cut was a large tax decrease initially set to expire in 1 year but was twice extended just weeks before its expiration.”

    But this decision was not orthogonal to the state of the economy. A major reason the administration waited and then extended the Bush Tax Cuts and the payroll tax cut was the fact that the economy was still weak, and they wanted to boost demand. The only policy uncertainty here was how aggressive and successful the administration would be in securing additional stimulus, which itself was a function of the weakness of the economy. To retroactively argue that the government’s actions in securing additional demand were creating the crisis they are trying to fight requires an additional level of argument not present.

    The third part of their index has the same issue. They draw on a literature (e.g. here) that uses disagreements (dispersion of predictions) among professional forecasters as a proxy for uncertainty -- disagreements about the predicted growth in inflation, and predictions of both state and federal spending, one year in advance.

    The problem comes from trying to push their definition of EPU onto these disagreements. Debates over how much the federal government will spend through stimulus, how rough the austerity will be at the state level, or how well Bernanke will be able to hit his inflation target, which drives this index, are really debates about the reaction to the crisis. The dispersion will increase if people can’t figure out how aggressively the state will respond to a major collapse in spending. But this is a function of a collapsing economy and how well the government responds to it, not the other way around.

    This is why we should ultimately be careful with studies that take this index and plop it into, say, a Beveridge Curve analysis. As Tankersley notes, the government decided to fight a major downturn with stimulus, and the subsequent move away from stimulus before full employment hasn’t helped the economy. In other breaking news, if you carry an umbrella because it is raining, and then toss the umbrella, it doesn’t make it stop raining.

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    Jim Tankersley has been doing the Lord’s work by following up on questionable arguments people have made about our current economic weakness being something other than a demand crisis. First, he asked Alberto Alesina about how all that expansionary austerity is working out from the vantage point of this year. Now he looks at the Economic Policy Uncertainty (EPU) index (Baker, Bloom, Davis) as it stands halfway into 2013.

    And it has collapsed. The EPU index has been falling at rapid speeds, hitting 2008 levels. Yet the recovery doesn’t seem to be speeding up at all. Wasn’t that supposed to happen?

    I’ve been meaning to revisit this index from when I looked at it last fall, and this is a good time to do so. It’s worth unpacking what actually drove the increase in EPU during the past five years, and understanding why there was little reason to believe it reflected uncertainty causing a weak economy. If anything, the relationship is clearly the other way around.

    Let’s make sure we understand the uncertainty argument: the increase in EPU “slowed the recovery from the recession by leading businesses and households to postpone investment, hiring and consumption expenditure.” (To give you a sense, in 2011 the authors argued in editorials that this index showed that the NLRB, Obamacare and "harmful rhetorical attacks on business and millionaires" were the cause of prolongued economic weakness.)

    As commenters pointed out, it would be easy to construct an index that gets the causation to be spurious or even go the other way. If weak growth could cause the Economic Policy Uncertainty index to skyrocket, then it’s not clear the narrative holds up as well. “There’s uncertainty over whether or not Congress and the Federal Reserve will aggressively fight the downturn” isn’t what the index is trying to measure, but that’s what it seems to be doing.

    Let’s take a look at the graph of EPU. When most people discuss this, they argue that the peaks tell them the index is onto something, as it peaks during periods of major confusion (9/11, Lehman bankruptcy, debt ceiling showdown).

    But what is worth noting, and what drives the results in a practical way, is the increase in the level during this time period. And that happens immediately in January 2009:

    How does economic policy uncertainty jump the first day in 2009? The index has three parts. The first is a newspaper search of people using the phrase “economic policy uncertainty.” I discussed that last fall, arguing that it was mostly capturing Republican talking points and the discipline of the GOP machine rather than actual analysis.

    The second is relevant here, and that’s the number of tax provisions set to expire in the near future. (In the first version of the paper this was total number of tax provisions, while in the current version it’s total dollar amount of those provisions.) It’s heavily discounted, so tax cuts that are expiring in a year or two are weighted at a much higher level than those that are further in the future.

    What does this look like over the past few years?

    So what happened starting in early 2009? The stimulus, of course. And the stimulus was in large part tax provisions that were set to expire in two years. This mechanically increased economic policy uncertainty, even though it was a policy response designed to boost automatic stabilizers. Also, the Bush tax cuts were approaching their endgame, and the algorithm gave a disproportionate weight to them as they entered their last two years.

    Then, in late 2010, the Bush tax cuts and some tax provisions from the stimulus were extended to provide additional stimulus to the economy while it was still weak.

    Here’s how the creators of the index describe this move: “Congress often decides whether to extend them at the last minute, undermining stability of and certainty about the future path of the tax code... Similarly, the 2010 Payroll Tax Cut was a large tax decrease initially set to expire in 1 year but was twice extended just weeks before its expiration.”

    But this decision was not orthogonal to the state of the economy. A major reason the administration waited and then extended the Bush Tax Cuts and the payroll tax cut was the fact that the economy was still weak, and they wanted to boost demand. The only policy uncertainty here was how aggressive and successful the administration would be in securing additional stimulus, which itself was a function of the weakness of the economy. To retroactively argue that the government’s actions in securing additional demand were creating the crisis they are trying to fight requires an additional level of argument not present.

    The third part of their index has the same issue. They draw on a literature (e.g. here) that uses disagreements (dispersion of predictions) among professional forecasters as a proxy for uncertainty -- disagreements about the predicted growth in inflation, and predictions of both state and federal spending, one year in advance.

    The problem comes from trying to push their definition of EPU onto these disagreements. Debates over how much the federal government will spend through stimulus, how rough the austerity will be at the state level, or how well Bernanke will be able to hit his inflation target, which drives this index, are really debates about the reaction to the crisis. The dispersion will increase if people can’t figure out how aggressively the state will respond to a major collapse in spending. But this is a function of a collapsing economy and how well the government responds to it, not the other way around.

    This is why we should ultimately be careful with studies that take this index and plop it into, say, a Beveridge Curve analysis. As Tankersley notes, the government decided to fight a major downturn with stimulus, and the subsequent move away from stimulus before full employment hasn’t helped the economy. In other breaking news, if you carry an umbrella because it is raining, and then toss the umbrella, it doesn’t make it stop raining.

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  • What did FDR Write Inside His Copy of the Proto-Keynesian Road to Plenty?

    Aug 2, 2013Mike Konczal

    File under: Marginalia Fridays.

    In 1928 William Foster and Waddill Catchings wrote The Road to Plenty. A university president and a Goldman Sachs financier, respectively, these two had a serious interest in studying business cycles, and had an idea of what they thought might be happening. This book presented a theory that was proto-Keynesian eight years before the General Theory.

    Let's get a summary of that book from Elliot A. Rosen's Roosevelt, the Great Depression, and the Economics of Recovery: "[The Road to Prosperity] claimed that sustained production required sustained consumer demand, a counter to Say's law of market, or classical theory, which held that consumer demand followed automatically from capital consumption. Foster and Catchings explained underconsumption partly in terms of consumer reluctance to spend when prices fell and also in terms of price distortions, maldistribution of income, and the tendency of business to finance capital requirements from earnings, thus sterilizing savings. The result was industrial overcapacity as consumer purchasing power declined. Public works would be required periodically to stimuluate purchasing power."

    Franklin Delano Roosevelt, before he was President, had a copy of the book. What did he write in his copy of the book in 1928, right as the Great Depression was gearing up?

    Thankfully, our friends at the FDR Presidential Library, who do an excellent job of keeping the records of the 20th Century's greatest President, were able to snap a picture and sent it to me:

    FDR's writing:

    In case you can't see it, it says "Too good to be true - you can't get something for nothing." Hmmm.

    Though Roosevelt didn't buy it at first, he thankfully later evolved on the issue. One lucky reason is because a big fan of the book was a Utah banker who read it intensely starting in 1931, when the Depression seemed like it would never end, much less recover. That man's name was Marriner Stoddard Eccles. The rest, as they say, is history. (Except it's not, because we are currently fighting this all over again.)

    The book itself is a series of conversations among strangers on a Pullman-car over what is going on in the economy. A typical page:

    'But I cannot see,' objected the Professor, 'how the savings, either of corporations or of individuals, cause the shortage of which you speak. The money which industry receives from consumers and retains as undsitributed profits is not locked up in strong boxes. Most of it is deposited in banks, where other men may borrow it and pay it out. So it flows on to consumers. [....] Once you take account of the fact that money invested is money spent, you see that both individuals and corporations can save all they please without causing consumer buying to lag behind the production of consumers' goods.'

    'Yes,' the Business Man replied, 'I am familiar with that contention, but it seems to me unsound. Of course it is true that a considerable part of money savings are deposited in banks, where the money is available for borrowers. But the fact that somebody may borrow the money and pay it out as wages, is immaterial as long as nobody does borrow it. Such money is no more a stimulus to business than is gold in the bowels of the earth.'

    (Seem familiar?)

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    File under: Marginalia Fridays.

    In 1928 William Foster and Waddill Catchings wrote The Road to Plenty. A university president and a Goldman Sachs financier, respectively, these two had a serious interest in studying business cycles, and had an idea of what they thought might be happening. This book presented a theory that was proto-Keynesian eight years before the General Theory.

    Let's get a summary of that book from Elliot A. Rosen's Roosevelt, the Great Depression, and the Economics of Recovery: "[The Road to Prosperity] claimed that sustained production required sustained consumer demand, a counter to Say's law of market, or classical theory, which held that consumer demand followed automatically from capital consumption. Foster and Catchings explained underconsumption partly in terms of consumer reluctance to spend when prices fell and also in terms of price distortions, maldistribution of income, and the tendency of business to finance capital requirements from earnings, thus sterilizing savings. The result was industrial overcapacity as consumer purchasing power declined. Public works would be required periodically to stimuluate purchasing power."

    Franklin Delano Roosevelt, before he was President, had a copy of the book. What did he write in his copy of the book in 1928, right as the Great Depression was gearing up?

    Thankfully, our friends at the FDR Presidential Library, who do an excellent job of keeping the records of the 20th Century's greatest President, were able to snap a picture and sent it to me:

    FDR's writing:

    In case you can't see it, it says "Too good to be true - you can't get something for nothing." Hmmm.

    Though Roosevelt didn't buy it at first, he thankfully later evolved on the issue. One lucky reason is because a big fan of the book was a Utah banker who read it intensely starting in 1931, when the Depression seemed like it would never end, much less recover. That man's name was Marriner Stoddard Eccles. The rest, as they say, is history. (Except it's not, because we are currently fighting this all over again.)

    The book itself is a series of conversations among strangers on a Pullman-car over what is going on in the economy. A typical page:

    'But I cannot see,' objected the Professor, 'how the savings, either of corporations or of individuals, cause the shortage of which you speak. The money which industry receives from consumers and retains as undsitributed profits is not locked up in strong boxes. Most of it is deposited in banks, where other men may borrow it and pay it out. So it flows on to consumers. [....] Once you take account of the fact that money invested is money spent, you see that both individuals and corporations can save all they please without causing consumer buying to lag behind the production of consumers' goods.'

    'Yes,' the Business Man replied, 'I am familiar with that contention, but it seems to me unsound. Of course it is true that a considerable part of money savings are deposited in banks, where the money is available for borrowers. But the fact that somebody may borrow the money and pay it out as wages, is immaterial as long as nobody does borrow it. Such money is no more a stimulus to business than is gold in the bowels of the earth.'

    (Seem familiar?)

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