Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • Are High College Costs Redistributive?

    Dec 11, 2012Mike Konczal

    Aaron Bady has a fantastic piece on the boosters who argue that MOOCs and other forms of online education will fundamentally transform higher education, addressed as a response to Clay Shirky. There's a few important moves to watch when people make this line of argument. Many who prize the "disruptive innovation" of higher education usually concede that what it will mostly do is provide a cheaper but poorer alternative to the large number of non-elite public institutions that educate the majority of those who seek higher education. The talk is all "Watch out Harvard and Yale! This online education company is going to take you down like Napster took down the record companies." Then it quickly reverts to the idea of providing "access," which gets much of its power through the ongoing dismantling of mass public higher education.

    Note that, given that online education's success will be a function of the weakness of public education, there's a huge incentive for for-profit higher education firms to participate in that dismantling project. And sure enough, there's a great new article by Sarah Pavlus at the American Independent, "University of Phoenix fought against community college expansion." There's "so much money to be made online, and [for-profit schools] didn’t want community colleges coming in at a much lower tuition rate,” she writes. Public institutions are attempting to innovate and provide better services to citizens, but for-profit schools are trying to stop them to bolster their own bottom lines.

    This is why the debate about the actual quality of online education is important. Online education can succeed not by providing a better service at a cheaper price, but instead by just providing "access" if public education slowly becomes unavailable. If there's no public option, then the quality issue becomes moot - then it is just about providing the now missing access to meet the large demand our country has for higher-level education.

    Also watch for when online education boosters make an argument of higher education decline rather than online success. They do a rhetorical move to argue that the problems in the non-profit private education institutions extend to public ones. Kevin Carey, for instance, argues that "college spending is the driving force behind affordability or lack thereof in the long run" before noting several paragraphs later that "Inflation-adjusted per-student spending at private research universities, in particular, increased sharply." He quickly notes that "private universities set the aspirational standards for the industry as a whole," but public higher education cost inflation is driven mostly by declining public support, not a competitive war with private schools.

    As Josh Mason pointed out, this is the equivalent of saying that since the private savings vehicle of 401(k)s have turned out to be a bit of a bust, we should scale back the public retirement vehicle of Social Security. That's not the case at all! And, if anything, we should view the public option as a version that works.

    Tuition as Redistribution

    But maybe higher tuition isn't a real problem. Maybe higher costs are driven by the rich paying more to help out the poor in a private form of egalitarian redistribution. A few weeks ago, Evan Soltas at Bloomberg wrote a version of this argument, which Matt Bruenig picked up on his blog (and here as well). Soltas argues that the huge rise in the advertised ("sticker") price of colleges is misleading, because the actual cost people pay ("net cost") is much lower and has been increasing at a lower rate. Soltas argues that "what has happened is a shift toward price discrimination -- offering multiple prices for the same product. Universities have offset the increase in sticker price for most families through an expansion of grant-based financial aid and scholarships." Bruenig and Soltas both emphasize that the rich pay more while the poorest pay less. They use data from the most recent Trends in College Pricing.

    There are a few critical points to bring up about this analysis. Contrary to Soltas, this is driven as much, if not more, by public policy, specifically the effect of of a significant expansion in public funding, notably in Pell Grants and military grants. (I believe Soltas' graph also uses data that includes the extensive network of tax credits, which add up to a lot of money; the cross-section graphs in Bruenig's graphs does not.) From Trends in Student Aid:

    This is one way of providing public funding. Another would be to drive down tuition directly. I took up the idea of supporting public provisioning directly, instead of coupons that provide targeted support, in my recent New America paper. If there are market imperfections, incumbents can capture some of the subsidy while driving up the price for all those who aren't getting the coupons. Public provisioning, in these cases, lowers the cost for everyone.

    Now if you look at the net price by income, you also see those in the top income bracket, here being those with incomes over $100K a year, paying more than the poor, those under $33,000. From Bruenig's piece:

    Soltas argues that "the cost burden of college has become significantly more progressive since the 1990s. Students from wealthier families not only now pay more for their own educations but also have come to heavily subsidize the costs of the less fortunate." He argues that differences in price reflects an institutional goal of cross-subsidization, where private firms make the rich pay more to compensate the poor. This didn't strike me as obvious from the data or other resources. In general, price discrimination should be thought of as a transfer from consumers to producers' surplus. Meanwhile, businesses usually don't cross-subsidize, and as we saw from the Pell Grant information, a big driver of this is poor people's payments beng compensated through public funding.

    Just to confirm that higher tuition wasn't redistribution, I emailed one of the authors of the study, Sandy Baum, who told me that "very few students pay more than the actual cost of their education. Affluent students are generally subsidized less than low-income students, but they aren't actually paying any part of the cost of education for low-income students. Taxpayers generally are subsidizing Pell Grant recipients. But that's quite different from students paying more than their educational costs to cross-subsidize low-income students."

    Another technical note worth making: Bruenig's graph also assumes that the poor are attending the same institutions as those who are better off. But they are almost certainly attending schools part-time instead of full-time, and cheaper institutions compared to more expensive ones. One can see this by just looking at the sticker cost of tuition. The sticker price by income has large differences that are slowly increasing.

    (Net room and board and other costs has a similar dynamic.)

     Making sure that the poor can access education through grants could work as a plan over the future, though we must understand that it is a plan, specifically government planning. There are other plans we could do as well.

     

    Follow or contact the Rortybomb blog:
      

    Aaron Bady has a fantastic piece on the boosters who argue that MOOCs and other forms of online education will fundamentally transform higher education, addressed as a response to Clay Shirky. There's a few important moves to watch when people make this line of argument. Many who prize the "disruptive innovation" of higher education usually concede that what it will mostly do is provide a cheaper but poorer alternative to the large number of non-elite public institutions that educate the majority of those who seek higher education. The talk is all "Watch out Harvard and Yale! This online education company is going to take you down like Napster took down the record companies." Then it quickly reverts to the idea of providing "access," which gets much of its power through the ongoing dismantling of mass public higher education.

    Note that, given that online education's success will be a function of the weakness of public education, there's a huge incentive for for-profit higher education firms to participate in that dismantling project. And sure enough, there's a great new article by Sarah Pavlus at the American Independent, "University of Phoenix fought against community college expansion." There's "so much money to be made online, and [for-profit schools] didn’t want community colleges coming in at a much lower tuition rate,” she writes. Public institutions are attempting to innovate and provide better services to citizens, but for-profit schools are trying to stop them to bolster their own bottom lines.

    This is why the debate about the actual quality of online education is important. Online education can succeed not by providing a better service at a cheaper price, but instead by just providing "access" if public education slowly becomes unavailable. If there's no public option, then the quality issue becomes moot - then it is just about providing the now missing access to meet the large demand our country has for higher-level education.

    Also watch for when online education boosters make an argument of higher education decline rather than online success. They do a rhetorical move to argue that the problems in the non-profit private education institutions extend to public ones. Kevin Carey, for instance, argues that "college spending is the driving force behind affordability or lack thereof in the long run" before noting several paragraphs later that "Inflation-adjusted per-student spending at private research universities, in particular, increased sharply." He quickly notes that "private universities set the aspirational standards for the industry as a whole," but public higher education cost inflation is driven mostly by declining public support, not a competitive war with private schools.

    As Josh Mason pointed out, this is the equivalent of saying that since the private savings vehicle of 401(k)s have turned out to be a bit of a bust, we should scale back the public retirement vehicle of Social Security. That's not the case at all! And, if anything, we should view the public option as a version that works.

    Tuition as Redistribution

    But maybe higher tuition isn't a real problem. Maybe higher costs are driven by the rich paying more to help out the poor in a private form of egalitarian redistribution. A few weeks ago, Evan Soltas at Bloomberg wrote a version of this argument, which Matt Bruenig picked up on his blog (and here as well). Soltas argues that the huge rise in the advertised ("sticker") price of colleges is misleading, because the actual cost people pay ("net cost") is much lower and has been increasing at a lower rate. Soltas argues that "what has happened is a shift toward price discrimination -- offering multiple prices for the same product. Universities have offset the increase in sticker price for most families through an expansion of grant-based financial aid and scholarships." Bruenig and Soltas both emphasize that the rich pay more while the poorest pay less. They use data from the most recent Trends in College Pricing.

    There are a few critical points to bring up about this analysis. Contrary to Soltas, this is driven as much, if not more, by public policy, specifically the effect of of a significant expansion in public funding, notably in Pell Grants and military grants. (I believe Soltas' graph also uses data that includes the extensive network of tax credits, which add up to a lot of money; the cross-section graphs in Bruenig's graphs does not.) From Trends in Student Aid:

    This is one way of providing public funding. Another would be to drive down tuition directly. I took up the idea of supporting public provisioning directly, instead of coupons that provide targeted support, in my recent New America paper. If there are market imperfections, incumbents can capture some of the subsidy while driving up the price for all those who aren't getting the coupons. Public provisioning, in these cases, lowers the cost for everyone.

    Now if you look at the net price by income, you also see those in the top income bracket, here being those with incomes over $100K a year, paying more than the poor, those under $33,000. From Bruenig's piece:

    Soltas argues that "the cost burden of college has become significantly more progressive since the 1990s. Students from wealthier families not only now pay more for their own educations but also have come to heavily subsidize the costs of the less fortunate." He argues that differences in price reflects an institutional goal of cross-subsidization, where private firms make the rich pay more to compensate the poor. This didn't strike me as obvious from the data or other resources. In general, price discrimination should be thought of as a transfer from consumers to producers' surplus. Meanwhile, businesses usually don't cross-subsidize, and as we saw from the Pell Grant information, a big driver of this is poor people's payments beng compensated through public funding.

    Just to confirm that higher tuition wasn't redistribution, I emailed one of the authors of the study, Sandy Baum, who told me that "very few students pay more than the actual cost of their education. Affluent students are generally subsidized less than low-income students, but they aren't actually paying any part of the cost of education for low-income students. Taxpayers generally are subsidizing Pell Grant recipients. But that's quite different from students paying more than their educational costs to cross-subsidize low-income students."

    Another technical note worth making: Bruenig's graph also assumes that the poor are attending the same institutions as those who are better off. But they are almost certainly attending schools part-time instead of full-time, and cheaper institutions compared to more expensive ones. One can see this by just looking at the sticker cost of tuition. The sticker price by income has large differences that are slowly increasing.

    (Net room and board and other costs has a similar dynamic.)

     Making sure that the poor can access education through grants could work as a plan over the future, though we must understand that it is a plan, specifically government planning. There are other plans we could do as well.

     

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  • What Does the New Community Reinvestment Act (CRA) Paper Tell Us?

    Dec 11, 2012Mike Konczal

    There are two major, critical questions that show up in the literature surrounding the 1977 Community Reinvestment Act (CRA).

    The first question is how much compliance with the CRA changes the portfolio of lending institutions. Do they lend more often and to riskier people, or do they lend the same but put more effort into finding candidates? The second question is how much did the CRA lead to the expansion of subprime lending during the housing bubble. Did the CRA have a significant role in the financial crisis?
     
    There's a new paper on the CRA, Did the Community Reinvestment Act (CRA) Lead to Risky Lending?, by Agarwal, Benmelech, Bergman and Seru, h/t Tyler Cowen, with smart commentary already from Noah Smith. (This blog post will use the ungated October 2012 paper for quotes and analysis.) This is already being used as the basis for an "I told you so!" by the conservative press, which has tried to argue that the second question is most relevant. However, it is important to understand that this paper answers the first question, while, if anything, providing evidence against the conservative case for the second.
     
    Where is the literature on these two questions? One starting point is the early 2009 research of two Federal Reserve economists, Neil Bhutta and Glenn B. Canner, also summarized in this Randy Kroszner speech. On the first question Kroszner summarizes research by the Federal Reserve, the latest being from 2000, arguing that "lending to lower-income individuals and communities has been nearly as profitable and performed similarly to other types of lending done by CRA-covered institutions." The CRA didn't cause changes to banks' portfolios, but instead required them to find better opportunities. More on this in a minute.
     
    What about the second question? Here the Bhutta/Canner research notes that only six percent of higher-priced loans (their proxy for subprime loans) were extended by CRA-covered lenders to lower-income borrowers or CRA neighborhoods. 94 percent of these loans were either made by non-traditional banks not covered by the CRA (the "shadow banking system"), or not counted towards CRA credits. As Kroszner noted, "the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis."
     
    How did those loans do? Here the research compared the performance of subprime and alt-A loans in neighborhoods right above and right below the CRA's income threshold, and found that there was no difference in how the loans performed. Hence the idea that a CRA-driven subprime bubble isn't found in the data. (The FCIC's final report, starting at page 219, has more on this and other research.)
     
    So what does this new research do? It takes banks that were undergoing a normal examination to see if they were in compliance with the CRA, and thus under heightened regulatory scrunity, and compares their loan portfolios with banks that were not undergoing a CRA examination. It finds that the CRA exam increases loans 5 percent every quarter surrounding the event and those loans default 15 percent more often, under the idea that those banks were ramping up their loans to pass the CRA exam.
     
    But this is question 1 territory. 94 percent of higher priced loans came outside CRA firms and outside CRA loans, and this research doesn't really change that. Since we are talking about regular mortgages - more on that in a second - that higher default isn't that scary. To put that in perspective, loans made in the quarter following the initiation of a CRA exam in a non-CRA tract are 8.3 percent more likely to be 90 days delinquent. That sounds scary, but it is an increase of 0.1, from 1.2 percent to 1.3 percent. In the CRA tract it is 33 percent more likely to default, going from 1.2 percent to 1.6 percent. FICO scores drop 7 points from 713.9 to 706.9. That's an increase I wouldn't want in my portfolio, but it is light-years away from 25%+ default rates, and very low FICO scores, on actual subprime.
     

    This research, if anything, pushes against movement conservative CRA arguments. In light of the evidence in question 2, many conservatives argue that regulators used CRA to push down lending standards, which then impacted other firms. But this paper finds that extra loans aren't more likely to have higher interest rates, lower loan-to-value, or be balloon/interest-only/jumbo/buy-down mortgages, although there is a slight increase in undocumented loans. And their borrowers aren't more likely to have risky characteristics themselves. The authors conclude that "this pattern is consistent with banks’ strategic attempts to convince regulators that the loans they extend that meet CRA criteria are not overtly risky."

    Read that again. The authors argue, from their empirical evidence, that regulators were trying to make sure these loans had high standards, and CRA banks tried to comply with that as best they could on the major, visible risks of their loans. This is the opposite argument made by people like John Carney, who believes the CRA "encourag[ed] lenders to adopt loose standards for mortgages." It also pushes against people like Peter Wallison, who, in his FCIC dissent, argued that CRA loans were more likely to have subprime characteristics or riskier borrowers in ways not captured by a higher-price variable. Not the case.

    It also finds that loan volume and risk increases the most during 2004-2006, and points to the private securitization market as an important channel. This, along with characteristics above, pushes back against the idea that the CRA primed a subprime pump in the late 1990s and early 2000s, another favorite of movement conservative finance writers. If anything, banks undergoing CRA exams were caught up in the same mechanisms that were causing the housing bubble itself.

    I'm not sure I buy all of the research. If CRA banks take on too many loans during examination, why wouldn't they just loan less afterwards, balancing out? The paper jumps to argue the opposite, as it is worried that "adjustment costs may cause banks to keep elevated lending rates even after the CRA exam is formally completed." This is meant to establish their results as a lower-bound, rather than an upper-bound. But really? They managed to ramp up their lending in enough time during this time. Either way it would throw a very different set of interpretations on their research. I'm interested in seeing how other researchers react to these problems. But for now these results don't change the way we approach the financial crisis.

     

    Follow or contact the Rortybomb blog:
      

     

    There are two major, critical questions that show up in the literature surrounding the 1977 Community Reinvestment Act (CRA).

    The first question is how much compliance with the CRA changes the portfolio of lending institutions. Do they lend more often and to riskier people, or do they lend the same but put more effort into finding candidates? The second question is how much did the CRA lead to the expansion of subprime lending during the housing bubble. Did the CRA have a significant role in the financial crisis?
     
    There's a new paper on the CRA, Did the Community Reinvestment Act (CRA) Lead to Risky Lending?, by Agarwal, Benmelech, Bergman and Seru, h/t Tyler Cowen, with smart commentary already from Noah Smith. (This blog post will use the ungated October 2012 paper for quotes and analysis.) This is already being used as the basis for an "I told you so!" by the conservative press, which has tried to argue that the second question is most relevant. However, it is important to understand that this paper answers the first question, while, if anything, providing evidence against the conservative case for the second.
     
    Where is the literature on these two questions? One starting point is the early 2009 research of two Federal Reserve economists, Neil Bhutta and Glenn B. Canner, also summarized in this Randy Kroszner speech. On the first question Kroszner summarizes research by the Federal Reserve, the latest being from 2000, arguing that "lending to lower-income individuals and communities has been nearly as profitable and performed similarly to other types of lending done by CRA-covered institutions." The CRA didn't cause changes to banks' portfolios, but instead required them to find better opportunities. More on this in a minute.
     
    What about the second question? Here the Bhutta/Canner research notes that only six percent of higher-priced loans (their proxy for subprime loans) were extended by CRA-covered lenders to lower-income borrowers or CRA neighborhoods. 94 percent of these loans were either made by non-traditional banks not covered by the CRA (the "shadow banking system"), or not counted towards CRA credits. As Kroszner noted, "the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis."
     
    How did those loans do? Here the research compared the performance of subprime and alt-A loans in neighborhoods right above and right below the CRA's income threshold, and found that there was no difference in how the loans performed. Hence the idea that a CRA-driven subprime bubble isn't found in the data. (The FCIC's final report, starting at page 219, has more on this and other research.)
     
    So what does this new research do? It takes banks that were undergoing a normal examination to see if they were in compliance with the CRA, and thus under heightened regulatory scrunity, and compares their loan portfolios with banks that were not undergoing a CRA examination. It finds that the CRA exam increases loans 5 percent every quarter surrounding the event and those loans default 15 percent more often, under the idea that those banks were ramping up their loans to pass the CRA exam.
     
    But this is question 1 territory. 94 percent of higher priced loans came outside CRA firms and outside CRA loans, and this research doesn't really change that. Since we are talking about regular mortgages - more on that in a second - that higher default isn't that scary. To put that in perspective, loans made in the quarter following the initiation of a CRA exam in a non-CRA tract are 8.3 percent more likely to be 90 days delinquent. That sounds scary, but it is an increase of 0.1, from 1.2 percent to 1.3 percent. In the CRA tract it is 33 percent more likely to default, going from 1.2 percent to 1.6 percent. FICO scores drop 7 points from 713.9 to 706.9. That's an increase I wouldn't want in my portfolio, but it is light-years away from 25%+ default rates, and very low FICO scores, on actual subprime.
     

    This research, if anything, pushes against movement conservative CRA arguments. In light of the evidence in question 2, many conservatives argue that regulators used CRA to push down lending standards, which then impacted other firms. But this paper finds that extra loans aren't more likely to have higher interest rates, lower loan-to-value, or be balloon/interest-only/jumbo/buy-down mortgages, although there is a slight increase in undocumented loans. And their borrowers aren't more likely to have risky characteristics themselves. The authors conclude that "this pattern is consistent with banks’ strategic attempts to convince regulators that the loans they extend that meet CRA criteria are not overtly risky."

    Read that again. The authors argue, from their empirical evidence, that regulators were trying to make sure these loans had high standards, and CRA banks tried to comply with that as best they could on the major, visible risks of their loans. This is the opposite argument made by people like John Carney, who believes the CRA "encourag[ed] lenders to adopt loose standards for mortgages." It also pushes against people like Peter Wallison, who, in his FCIC dissent, argued that CRA loans were more likely to have subprime characteristics or riskier borrowers in ways not captured by a higher-price variable. Not the case.

    It also finds that loan volume and risk increases the most during 2004-2006, and points to the private securitization market as an important channel. This, along with characteristics above, pushes back against the idea that the CRA primed a subprime pump in the late 1990s and early 2000s, another favorite of movement conservative finance writers. If anything, banks undergoing CRA exams were caught up in the same mechanisms that were causing the housing bubble itself.

    I'm not sure I buy all of the research. If CRA banks take on too many loans during examination, why wouldn't they just loan less afterwards, balancing out? The paper jumps to argue the opposite, as it is worried that "adjustment costs may cause banks to keep elevated lending rates even after the CRA exam is formally completed." This is meant to establish their results as a lower-bound, rather than an upper-bound. But really? They managed to ramp up their lending in enough time during this time. Either way it would throw a very different set of interpretations on their research. I'm interested in seeing how other researchers react to these problems. But for now these results don't change the way we approach the financial crisis.

     

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  • Another Reason to Kill the Debt Ceiling: Conservative Think Tanks' Responses to Default

    Dec 5, 2012Mike Konczal

    House Republicans are looking to weaponize the debt ceiling again, while the Obama administration is trying to make removing the threat of default part of any agreement.

    Here's one reason why the debt ceiling needs to go: the conservative intellectual infrastructure cheered on a potential default. I had imagined that there would be a good cop/bad cop dynamic to the right. Very conservative political leaders would be the bad cop, saying that they weren't afraid to default on the debt, while conservative think tanks would play a version of the good cop, warning of the dire consequences of a default for the economy if their bad cop friend didn't get his way.

    For instance, here's bad cop Sen. Pat Toomey (R-PA) saying that the markets "would actually accept even a delay in interest payments on the Treasuries," especially "if it meant that Congress would right this ship, address this fiscal imbalance, and put us on a sustainable path, and that the bond market would rally if it saw we were making real progress towards this." Missing interest payments is fine; in fact, it is great for the country if it is used to pass the Ryan Plan.

    Financial analysts, to put it mildly, disagreed. JP Morgan analysts wrote that "any delay in making a coupon or principal payment by Treasury would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the US economy."

    Here's where the think tanks are fascinating. You could image them saying "our partner Toomey is nuts, we can't control him, and you better do what he says or there's going to be real damage." But that's not what they did. It's best to split the work they did on the debt ceiling in two directions:

    1. Technical Default Ain't No Thang. The first is arguing, like Toomey, that a "technical default" wouldn't matter, and in fact it could be a great thing if the Ryan Plan passed as a result. How did James Pethokoukis, then of Fortune and now of AEI, deal with a Moody's report arguing a "short-lived default" would hurt the economy? Pethokoukis: "I guess I would care more about what Moody’s had to say if a) they hadn’t missed the whole financial crisis, b) didn’t want to see higher taxes as part of any fiscal fix and c) if they made any economic sense." Default doesn't matter because Pethokoukis doesn't want taxes to go up, and there's no economic sense because of an interview he read in the Wall Street Journal.

    Others went even further, arguing that the real defaulters are those who, umm, don't want to default on the debt. Here's the conservative think tank e21 with a staff editorial arguing that "policymakers need to stay focused on the real default issue: whether the terms of the debt limit increase this summer will be sufficiently tough to ensure that the nation’s debt-to-GDP ratio is stabilized and eventually sharply reduced." All these people who want a clean debt ceiling increase are causing the real default issue. As someone who used to do a lot of credit risk modeling, this is my favorite: "Indeed, those demanding the toughest concessions today actually have a strong pro-creditor bias." S&P disagreed with whoever wrote that editorial and increased the credit risk (downgraded) based on the threat of this technical default.

    Heritage wrote a white paper saying that you could just "hold the debt limit in place, thereby forcing an immediate reduction in non-interest spending averaging about $125 billion each month," and that "refusing to raise the debt limit would not, in and of itself, cause the United States to default on its public debt." Dana Milbank noted that these kinds of shuffling plans would still leave the government short and likely cause a recession. Milbank: "Without borrowing, we’d have to cut Obama’s budget for 2012 by $1.5 trillion. That means even if we shut down the military and stopped writing Social Security checks, the government would still come up about $200 billion short." Cato also jumped in with the technical default crowd here.

    But that was the reaction from the number-crunching analysts. What about the bosses?

    2. Civilization Hangs in the Balance of the Debt Ceiling Fight. Here's the president of AEI, Arthur C. Brooks, in July 2011: "The battle over the debt ceiling...is not a political fight between Republicans and Democrats; it is a fight against 50-year trends toward statism...No one deserves our political support today unless he or she is willing to work for as long as it takes to win the moral fight to steer our nation back toward enterprise and self-governance."

    Even better, the president of the Heritage Foundation, also in July 2011, compares Democrats to Japan during World War II and then argues: "We must win this fight. The debate over raising the debt limit seems complicated, but it is really very simple. Look beyond the myriad details of the awkward compromises, and you see an epic struggle between two opposing camps....Congress should not raise the debt limit without getting spending under control."

    So the the conservative intellectual infrastructure, which consumes hundreds of millions of dollars a year, looked at the possibility of a debt default and determined it was both inconsequential and also the only way to stop statism in our lifetimes. No wonder the time period around the debt ceiling in 2011 was such a disaster for our economy, killing around 250,000 jobs that should have been created. There's no reason to assume all the same players won't play an even worse cop this time around.

    There's no good reason for the debt ceiling, and now there are really bad consequences for its existence. Time to end it.

    Follow or contact the Rortybomb blog:
      

    House Republicans are looking to weaponize the debt ceiling again, while the Obama administration is trying to make removing the threat of default part of any agreement.

    Here's one reason why the debt ceiling needs to go: the conservative intellectual infrastructure cheered on a potential default. I had imagined that there would be a good cop/bad cop dynamic to the right. Very conservative political leaders would be the bad cop, saying that they weren't afraid to default on the debt, while conservative think tanks would play a version of the good cop, warning of the dire consequences of a default for the economy if their bad cop friend didn't get his way.

    For instance, here's bad cop Sen. Pat Toomey (R-PA) saying that the markets "would actually accept even a delay in interest payments on the Treasuries," especially "if it meant that Congress would right this ship, address this fiscal imbalance, and put us on a sustainable path, and that the bond market would rally if it saw we were making real progress towards this." Missing interest payments is fine; in fact, it is great for the country if it is used to pass the Ryan Plan.

    Financial analysts, to put it mildly, disagreed. JP Morgan analysts wrote that "any delay in making a coupon or principal payment by Treasury would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the US economy."

    Here's where the think tanks are fascinating. You could image them saying "our partner Toomey is nuts, we can't control him, and you better do what he says or there's going to be real damage." But that's not what they did. It's best to split the work they did on the debt ceiling in two directions:

    1. Technical Default Ain't No Thang. The first is arguing, like Toomey, that a "technical default" wouldn't matter, and in fact it could be a great thing if the Ryan Plan passed as a result. How did James Pethokoukis, then of Fortune and now of AEI, deal with a Moody's report arguing a "short-lived default" would hurt the economy? Pethokoukis: "I guess I would care more about what Moody’s had to say if a) they hadn’t missed the whole financial crisis, b) didn’t want to see higher taxes as part of any fiscal fix and c) if they made any economic sense." Default doesn't matter because Pethokoukis doesn't want taxes to go up, and there's no economic sense because of an interview he read in the Wall Street Journal.

    Others went even further, arguing that the real defaulters are those who, umm, don't want to default on the debt. Here's the conservative think tank e21 with a staff editorial arguing that "policymakers need to stay focused on the real default issue: whether the terms of the debt limit increase this summer will be sufficiently tough to ensure that the nation’s debt-to-GDP ratio is stabilized and eventually sharply reduced." All these people who want a clean debt ceiling increase are causing the real default issue. As someone who used to do a lot of credit risk modeling, this is my favorite: "Indeed, those demanding the toughest concessions today actually have a strong pro-creditor bias." S&P disagreed with whoever wrote that editorial and increased the credit risk (downgraded) based on the threat of this technical default.

    Heritage wrote a white paper saying that you could just "hold the debt limit in place, thereby forcing an immediate reduction in non-interest spending averaging about $125 billion each month," and that "refusing to raise the debt limit would not, in and of itself, cause the United States to default on its public debt." Dana Milbank noted that these kinds of shuffling plans would still leave the government short and likely cause a recession. Milbank: "Without borrowing, we’d have to cut Obama’s budget for 2012 by $1.5 trillion. That means even if we shut down the military and stopped writing Social Security checks, the government would still come up about $200 billion short." Cato also jumped in with the technical default crowd here.

    But that was the reaction from the number-crunching analysts. What about the bosses?

    2. Civilization Hangs in the Balance of the Debt Ceiling Fight. Here's the president of AEI, Arthur C. Brooks, in July 2011: "The battle over the debt ceiling...is not a political fight between Republicans and Democrats; it is a fight against 50-year trends toward statism...No one deserves our political support today unless he or she is willing to work for as long as it takes to win the moral fight to steer our nation back toward enterprise and self-governance."

    Even better, the president of the Heritage Foundation, also in July 2011, compares Democrats to Japan during World War II and then argues: "We must win this fight. The debate over raising the debt limit seems complicated, but it is really very simple. Look beyond the myriad details of the awkward compromises, and you see an epic struggle between two opposing camps....Congress should not raise the debt limit without getting spending under control."

    So the the conservative intellectual infrastructure, which consumes hundreds of millions of dollars a year, looked at the possibility of a debt default and determined it was both inconsequential and also the only way to stop statism in our lifetimes. No wonder the time period around the debt ceiling in 2011 was such a disaster for our economy, killing around 250,000 jobs that should have been created. There's no reason to assume all the same players won't play an even worse cop this time around.

    There's no good reason for the debt ceiling, and now there are really bad consequences for its existence. Time to end it.

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  • Should Plummeting Interest Rates Change Deficit Hawks' Arguments?

    Dec 5, 2012Mike Konczal

    Several deficit reduction plans came out at the end of 2010, including a proposal of the co-chairs of the Simpson-Bowles comission and another by Pete Domenici and Alice Rivlin. Since then, the economic recovery has been sluggish, with unemployment stubbornly high. The Republicans threatened what they called a "technical default" during the debt ceiling fight, a move which led to a ratings downgrade for the United States and months of subpar growth. Rather than balancing the budget, the deficit was 8.7 percent of GDP in 2011, and is projected to be 7.3 percent of GDP for 2012.

    What else has happened? Borrowing costs for the United States have plummeted. While real interest rates for borrowing 10 years out were still positive in late 2010 when these plans came out, they have since gone negative and stayed there. Investors are paying us to borrow money for the next 10 years.

    If you were concerned about our nation's deficits in late 2010 and you follow this crucial market signal, you should be significantly less worried now, right? It's important to note that this fall in our borrowing costs hasn't been incorporated into any of the debt discussion happening right now, discussions which still use frameworks created in 2010.

    Take Version 2.0 of the Domenici-Rivlin Plan, released on Monday. Defenders argue that this plan calls for stimulus right away, and even has an "economic growth" checkbox in its slideshow to prevent immediate austerity. However, there are two big things in Version 2.0 that don't incorporate collapsing interest rates.

    1. It Cuts Its Stimulus Plan by 80 Percent. When I brought this up on Twitter, several people noted that Version 2.0, much like Version 1.0, contains stimulus. However, it wasn't noted that it recommends significantly less stimulus in the second version, even though borrowing costs are significantly cheaper and getting to full employment is equally crucial for dealing with our deficits.

    The first version recommends a payroll tax holiday of $650 billion. The new version calls for an income tax rebate of just $120 billion dollars (line 34). That's 80 percent less stimulus than in the original version, even though the price of providing stimulus has plummeted. Is getting to full employment suddenly less of a priority? We are still quite a ways away from there.

    2. It Reuses "Down Payment" and Credibility Theories. A popular theory in 2010 was that any short-term stimulus needed to be paired with long-term deficit reduction. Why? Not for political reasons, like that being the only way to get either through Congress. It was because of strictly economic reasons. Without deficit reduction, the upfront stimulus would panic the financial markets, raising interest rates and canceling out the stimulus. (This ignores that rates would rise because the economy was getting stronger, but forget that.)

    Here's Version 1.0, recommending "a short-term jump-start to growth and a commitment to long-term deficit reduction that makes stimulus credible." In Version 2.0 we get a similar claim: "Of course, this and any other policies that add to the short-term deficit should be paired with a long-term debt reduction agreement rather than be enacted in isolation." The authors also think that removing the fiscal cliff requires a "down payment" to satiate the markets for the time being.

    Once again, it isn't clear what macroeconomic theory is animating the "of course" here other than a vague sense of credibility. To whatever extent that theory made sense in 2010, it's significantly less, ahem, credible now. The end of 2010 saw an increase in stimulus through extensions of the Bush tax cuts, unemployment insurance, and the payroll tax without any long-term deficit reduction, and there's no evidence it caused a market panic. Indeed, one of the sadder moments for President Obama's economic team was them walking through confidence fairy arguments during the debt ceiling fight in summer 2011, the logical end results of this credibility argument.

    If we can pass stimulus right now, why don't we do it? Certainly Version 2.0 doesn't think Medicare changes must go with, say, their plans to adjust the COLA of Social Security. I'd say it's because making it clear that these are two separate issues with very different solutions keeps the Very Serious People from using manufactured short-term crises and mass unemployment to reengineer social insurance programs to do the things they want them to do. Regardless of whether you like those ideas, there's no reason to hold our current unemployed hostage in the process. And unfortunately for them, the capital markets for U.S. debt, one of the most liquid and transparent markets in the history of modern capitalism, agree. I'm still not hearing good reasons to ignore this big market movement from those still worried about the deficit as the major priority.

    Follow or contact the Rortybomb blog:
      

    Several deficit reduction plans came out at the end of 2010, including a proposal of the co-chairs of the Simpson-Bowles comission and another by Pete Domenici and Alice Rivlin. Since then, the economic recovery has been sluggish, with unemployment stubbornly high. The Republicans threatened what they called a "technical default" during the debt ceiling fight, a move which led to a ratings downgrade for the United States and months of subpar growth. Rather than balancing the budget, the deficit was 8.7 percent of GDP in 2011, and is projected to be 7.3 percent of GDP for 2012.

    What else has happened? Borrowing costs for the United States have plummeted. While real interest rates for borrowing 10 years out were still positive in late 2010 when these plans came out, they have since gone negative and stayed there. Investors are paying us to borrow money for the next 10 years.

    If you were concerned about our nation's deficits in late 2010 and you follow this crucial market signal, you should be significantly less worried now, right? It's important to note that this fall in our borrowing costs hasn't been incorporated into any of the debt discussion happening right now, discussions which still use frameworks created in 2010.

    Take Version 2.0 of the Domenici-Rivlin Plan, released on Monday. Defenders argue that this plan calls for stimulus right away, and even has an "economic growth" checkbox in its slideshow to prevent immediate austerity. However, there are two big things in Version 2.0 that don't incorporate collapsing interest rates.

    1. It Cuts Its Stimulus Plan by 80 Percent. When I brought this up on Twitter, several people noted that Version 2.0, much like Version 1.0, contains stimulus. However, it wasn't noted that it recommends significantly less stimulus in the second version, even though borrowing costs are significantly cheaper and getting to full employment is equally crucial for dealing with our deficits.

    The first version recommends a payroll tax holiday of $650 billion. The new version calls for an income tax rebate of just $120 billion dollars (line 34). That's 80 percent less stimulus than in the original version, even though the price of providing stimulus has plummeted. Is getting to full employment suddenly less of a priority? We are still quite a ways away from there.

    2. It Reuses "Down Payment" and Credibility Theories. A popular theory in 2010 was that any short-term stimulus needed to be paired with long-term deficit reduction. Why? Not for political reasons, like that being the only way to get either through Congress. It was because of strictly economic reasons. Without deficit reduction, the upfront stimulus would panic the financial markets, raising interest rates and canceling out the stimulus. (This ignores that rates would rise because the economy was getting stronger, but forget that.)

    Here's Version 1.0, recommending "a short-term jump-start to growth and a commitment to long-term deficit reduction that makes stimulus credible." In Version 2.0 we get a similar claim: "Of course, this and any other policies that add to the short-term deficit should be paired with a long-term debt reduction agreement rather than be enacted in isolation." The authors also think that removing the fiscal cliff requires a "down payment" to satiate the markets for the time being.

    Once again, it isn't clear what macroeconomic theory is animating the "of course" here other than a vague sense of credibility. To whatever extent that theory made sense in 2010, it's significantly less, ahem, credible now. The end of 2010 saw an increase in stimulus through extensions of the Bush tax cuts, unemployment insurance, and the payroll tax without any long-term deficit reduction, and there's no evidence it caused a market panic. Indeed, one of the sadder moments for President Obama's economic team was them walking through confidence fairy arguments during the debt ceiling fight in summer 2011, the logical end results of this credibility argument.

    If we can pass stimulus right now, why don't we do it? Certainly Version 2.0 doesn't think Medicare changes must go with, say, their plans to adjust the COLA of Social Security. I'd say it's because making it clear that these are two separate issues with very different solutions keeps the Very Serious People from using manufactured short-term crises and mass unemployment to reengineer social insurance programs to do the things they want them to do. Regardless of whether you like those ideas, there's no reason to hold our current unemployed hostage in the process. And unfortunately for them, the capital markets for U.S. debt, one of the most liquid and transparent markets in the history of modern capitalism, agree. I'm still not hearing good reasons to ignore this big market movement from those still worried about the deficit as the major priority.

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  • New Inquiry's Drive; Twilight of the Bureaucratic Elite

    Dec 3, 2012Mike Konczal

    The New Inquiry is running a subscription drive for their $2/month pdf magazine and for keeping the site running and free. Given that their project is very different than this blog, I'm not sure how to recommend them. So here are some of my favorite 2012 items from them, which should give you a sense of whether or not you'd enjoy subscribing yourself.

    Given that the project emphasizes younger voices outside institutions currently circling their wagons, a lot of their writing is more interesting and closer to the issues at hand than what you'd normally read. Atossa Abrahamian's piece on Going Lebron and Malcolm Harris' review of Julia Leigh’s film Sleeping Beauty are two of the more interesting pieces on youth unemployment I've read, particularly since they approach it from a much different angle than the normal stories. David Noriega's piece on serving as a Civilian Complaint Review Board investigator for the NYPD is again another way of understanding NYPD abuses outside the regular critique of abuses. I found Kate Redburn's piece on the GLBTQ case against hate crimes laws convincing and well-argued. Molly Knefel's piece reflecting on teaching and her brother's arrest was a fascinating look into dealing with the realities of policing and privilege. Freddie DeBoer's review of Twilight of the Elites was an aggressive, left-wing review unlikely to be seen at other venues. This excerpt (and interview) from Kate Zambreno's Heroines on the role of madness, gender and genius is brilliant. And Lili Loofbourow's review of the movie Brave was the best read of it I've seen.

    There's a blogging sabermetrics element to the site, either publishing writers who are up-and-coming, giving talented people in other fields a space to write with good editing, or providing a more prominent home for some of the Internet's better bloggers. Aaron Bady, who had the best take on the Mike Daisey flap, found a new home for his zunguzungu blog there, as did other blogs I enjoy like those of Rob Horning and Austerity Kitchen. If you find this or other articles by them interesting, and are looking for new places to read, consider subscribing.

    ====

    While going through those New Inquiry articles, I re-read Freddie DeBoer's review of Chris Hayes's Twilight of the Elites. One of the challenges of the book is that Hayes doesn't actually want to tear down the meritocracy period or wage war against all institutions -- there's no "and good riddance" subtitle. I noticed that this is a postiive tension in my review of the book for Dissent, because it allows the book to come up with a model of how the meritocratic elite function in society and ways in which it fails, pointing to possible better ways.

    But why the ambivalence? Freddie argues that mainstream liberals can't cope with the implications. They are used to proposing "a moderate, capitalism-sustaining set of policy proposals" because, either professionally or ideologically, "alternatives to capitalism are beyond the realms of acceptable discussion."

    Maybe. Post-Dworkin, there's been a lot of energy in fleshing out a liberal project that is, to use the jargon, "ambition-sensitive and endowment-insensitive," so I don't think it is a complete blindspot. The book argues, following Robert Michels' arguments in Political Parties, that some level of stratification and power is inevitable to any sufficiently large and important enterprise. The important part is to have that stratification best embody democratic principles, particularly by resisting ossification, and keep the project as a search for and a process of democracy.

    But I think the book gives a very clear and specific reason I haven't seen emphasized on why it thinks a meritocratic elite is necessary - we need it to combat global warming. From Twilight:

    Certain political issues do not require elite mediation...that doesn't hold for global warming, which I would argue is the single most pressing challenge our civilization faces...Here, we need elites and experts to tell us it's happening and that we have to take steps to prevent it. Implementing corrective policy on the scale necessary requires, as a precondition, a robust and widely shared level of pubic trust that climate scientists and the political leaders who favor a carbon policy are telling us the truth. But the crisis of authority makes that impossible...

    Progress is dependent upon a productive and dynamic tension between institutionalism and insurrectionism. Insurrectionists keep our institutions honest. Institutionalists are stewards of our collective public life...without the social cohesion that trusted institutions provide, we cannot produce the level of consensus necessary to confront our greatest challenges. I believe the most important of these is climate change.

    Without functioning institutions, trustworthy because some ideal of merit is guiding credentials and access, we can't tackle global warming. We can't trust the scientists to diagnosis the problem, or the bureaucrats to carry out the policy solutions.

    Abstracting away from the specifics of the book, I wonder how much a meritocratic elite is necessary for social democratic liberalism generally. If you are going to have a bureaucratic system determining access and pricing of health insurance, projecting the costs of old age pensions, determining what kinds of activities count as market-making for financial regulations, figuring out the costs of pollution, etc., you'll need some way of ensuring that this system is accountable and competent.

    But, and here I think the book misses the opportunity to discuss this, does that require a meritocracy as we understand it? How does the need for good government policy carried out well square with, or contrast against, the winner-take-all form of meritocracy, where everything is collapsable into a combination of wealth and IQ? Competence, accountability, a spirit of public service, and dependability are missing from our elite, though they are values that are, or should be, prized in a bureaucracy.

    I think I'm going to have to spend some time in 2013 coming up with a better working theory of the bureaucracy, especially how we want it to be. What features does it take from our meritocracy and, more importantly, in what ways can it serve as a corrective? Several people noted to me that the ethos of public service is one of the things missing from the paper I just wrote on the general case for public options, as a public service ethic is exactly what you don't get from private provisioning. What should I be reading?

     

    Follow or contact the Rortybomb blog:
      

    The New Inquiry is running a subscription drive for their $2/month pdf magazine and for keeping the site running and free. Given that their project is very different than this blog, I'm not sure how to recommend them. So here are some of my favorite 2012 items from them, which should give you a sense of whether or not you'd enjoy subscribing yourself.

    Given that the project emphasizes younger voices outside institutions currently circling their wagons, a lot of their writing is more interesting and closer to the issues at hand than what you'd normally read. Atossa Abrahamian's piece on Going Lebron and Malcolm Harris' review of Julia Leigh’s film Sleeping Beauty are two of the more interesting pieces on youth unemployment I've read, particularly since they approach it from a much different angle than the normal stories. David Noriega's piece on serving as a Civilian Complaint Review Board investigator for the NYPD is again another way of understanding NYPD abuses outside the regular critique of abuses. I found Kate Redburn's piece on the GLBTQ case against hate crimes laws convincing and well-argued. Molly Knefel's piece reflecting on teaching and her brother's arrest was a fascinating look into dealing with the realities of policing and privilege. Freddie DeBoer's review of Twilight of the Elites was an aggressive, left-wing review unlikely to be seen at other venues. This excerpt (and interview) from Kate Zambreno's Heroines on the role of madness, gender and genius is brilliant. And Lili Loofbourow's review of the movie Brave was the best read of it I've seen.

    There's a blogging sabermetrics element to the site, either publishing writers who are up-and-coming, giving talented people in other fields a space to write with good editing, or providing a more prominent home for some of the Internet's better bloggers. Aaron Bady, who had the best take on the Mike Daisey flap, found a new home for his zunguzungu blog there, as did other blogs I enjoy like those of Rob Horning and Austerity Kitchen. If you find this or other articles by them interesting, and are looking for new places to read, consider subscribing.

    ====

    While going through those New Inquiry articles, I re-read Freddie DeBoer's review of Chris Hayes's Twilight of the Elites. One of the challenges of the book is that Hayes doesn't actually want to tear down the meritocracy period or wage war against all institutions -- there's no "and good riddance" subtitle. I noticed that this is a postiive tension in my review of the book for Dissent, because it allows the book to come up with a model of how the meritocratic elite function in society and ways in which it fails, pointing to possible better ways.

    But why the ambivalence? Freddie argues that mainstream liberals can't cope with the implications. They are used to proposing "a moderate, capitalism-sustaining set of policy proposals" because, either professionally or ideologically, "alternatives to capitalism are beyond the realms of acceptable discussion."

    Maybe. Post-Dworkin, there's been a lot of energy in fleshing out a liberal project that is, to use the jargon, "ambition-sensitive and endowment-insensitive," so I don't think it is a complete blindspot. The book argues, following Robert Michels' arguments in Political Parties, that some level of stratification and power is inevitable to any sufficiently large and important enterprise. The important part is to have that stratification best embody democratic principles, particularly by resisting ossification, and keep the project as a search for and a process of democracy.

    But I think the book gives a very clear and specific reason I haven't seen emphasized on why it thinks a meritocratic elite is necessary - we need it to combat global warming. From Twilight:

    Certain political issues do not require elite mediation...that doesn't hold for global warming, which I would argue is the single most pressing challenge our civilization faces...Here, we need elites and experts to tell us it's happening and that we have to take steps to prevent it. Implementing corrective policy on the scale necessary requires, as a precondition, a robust and widely shared level of pubic trust that climate scientists and the political leaders who favor a carbon policy are telling us the truth. But the crisis of authority makes that impossible...

    Progress is dependent upon a productive and dynamic tension between institutionalism and insurrectionism. Insurrectionists keep our institutions honest. Institutionalists are stewards of our collective public life...without the social cohesion that trusted institutions provide, we cannot produce the level of consensus necessary to confront our greatest challenges. I believe the most important of these is climate change.

    Without functioning institutions, trustworthy because some ideal of merit is guiding credentials and access, we can't tackle global warming. We can't trust the scientists to diagnosis the problem, or the bureaucrats to carry out the policy solutions.

    Abstracting away from the specifics of the book, I wonder how much a meritocratic elite is necessary for social democratic liberalism generally. If you are going to have a bureaucratic system determining access and pricing of health insurance, projecting the costs of old age pensions, determining what kinds of activities count as market-making for financial regulations, figuring out the costs of pollution, etc., you'll need some way of ensuring that this system is accountable and competent.

    But, and here I think the book misses the opportunity to discuss this, does that require a meritocracy as we understand it? How does the need for good government policy carried out well square with, or contrast against, the winner-take-all form of meritocracy, where everything is collapsable into a combination of wealth and IQ? Competence, accountability, a spirit of public service, and dependability are missing from our elite, though they are values that are, or should be, prized in a bureaucracy.

    I think I'm going to have to spend some time in 2013 coming up with a better working theory of the bureaucracy, especially how we want it to be. What features does it take from our meritocracy and, more importantly, in what ways can it serve as a corrective? Several people noted to me that the ethos of public service is one of the things missing from the paper I just wrote on the general case for public options, as a public service ethic is exactly what you don't get from private provisioning. What should I be reading?

     

    Follow or contact the Rortybomb blog:
      

    Share This

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