Mike Konczal

Roosevelt Institute Fellow
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Recent Posts by Mike Konczal

  • Rortybomb

    Why Full Employment is the Best Medicine for Inequality

    Apr 20, 2012Mike Konczal

    We face a lot of policy challenges, but making sure Americans have jobs will make them all easier.

    One of the interesting ideas to come out of the recent Occupy Handbook is Paul Krugman and Robin Wells' argument that inequality has contributed to the lack of a serious and sustained response to the unemployment crisis of the Great Recession.

    We face a lot of policy challenges, but making sure Americans have jobs will make them all easier.

    One of the interesting ideas to come out of the recent Occupy Handbook is Paul Krugman and Robin Wells' argument that inequality has contributed to the lack of a serious and sustained response to the unemployment crisis of the Great Recession.

    Daron Acemoglu and James Robinson respond at their Why Nations Fail blog.  Two points to discuss:

    First, the distinction between “right” and “left” (or perhaps pro-elite and anti-elite) is not a natural one when it comes to Keynesian economics and policies. Many conservative politicians, and not just Nixon and Reagan, have embraced Keynesian economics. Both Fascist Italy and Nazi Germany were big-time Keynesians...Third, even in the current US context it is not clear why the wealthiest Americans should be opposed to Keynesian policies...

    Fourth, even if Krugman and Wells’s emphasis is right, we find it hard to place lack of sufficient Keynesian stimulus as one of the most corrosive effects of soaring political inequality and political polarization in the US. What about the failure of our educational institutions; the huge incarceration rate, particularly for African-Americans; erosion of civil liberties; increasingly inefficient subsidies and tax breaks to select corporations and sectors; distortions created by implicit and explicit subsidies to the financial industry? Lack of sufficient Keynesian zeal seems a little less important.
    For the first point, it's useful to distinguish between some stimulus/counter-cyclical spending and the actual policy goal of full employment. It is easy to imagine elites supporting policies that prevent system collapse -- nobody benefits from 25 percent unemployment -- but not being all that concerned with getting to full employment in two years versus 10 years (or even at all). Whether right now is a "sweet spot" of just enough aggregate demand and employment to keep the system running (and creditors paid) but not enough to give workers serious bargaining power is an ongoing topic of debate on the Internet. (Steve Waldman at interfluidity has the latest entry.) The Krugman/Wells essay brings up Kalecki in a way that I think is useful on this question; the issue of coordination and relative priorities among many eilites is also important.
     
    For the second paragraph (their fourth point), it is always difficult to rank bad things. But it is very important to remember that a policy of full employment makes it significantly easier to deal with many other problems. People have much more realistic and managed expectations for what education can do for workers' wage gains in an economy where wages are actually growing. There's good data that unemployment is linked with a lack of interest in global warming, another very important issue. When there's full employment and serious wage growth people are also probably less likely to be concerned about immigration and trade's impact on their jobs. Deincarceration will be easier if there are jobs waiting for people on the other side of the walls rather than sky-high unemployment. And so on.
     
    For all the policy fads of getting wages up -- Charles Murray's recent call for elites to shame the working class into higher wages being the latest, and probably not the worst -- the best way to get wages up is to have full employment. As Jared Bernstein notes, "the working man and woman really have no better friend than full employment."

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    A Saez/Piketty Profile and a Syllabus

    Apr 19, 2012Mike Konczal

    Annie Lowrey has a must-read New York Times profile of the two French economists who have meticulously documented changes in the income share of the 1%, Emmanuel Saez and Thomas Piketty.  We've used their research extensively at this blog.  From the profile:

    Annie Lowrey has a must-read New York Times profile of the two French economists who have meticulously documented changes in the income share of the 1%, Emmanuel Saez and Thomas Piketty.  We've used their research extensively at this blog.  From the profile:

    Both admire, even adore, the United States, they say, for its entrepreneurial drive, innovative spirit and, not least, its academic excellence: the two met while re-searchers in Cambridge, Mass. But both also express bewilderment over the current conversation about whether the wealthy, who have taken most of America’s income gains over the last 30 years, should be paying higher taxes.
     
    “The United States is getting accustomed to a completely crazy level of inequality,” Mr. Piketty said, with a degree of wonder. “People say that reducing inequality is radical. I think that tolerating the level of inequality the United States tolerates is radical.”
     
    [...]
     
    “In a way, the United States is becoming like Old Europe, which is very strange in historical perspective,” Mr. Piketty said. “The United States used to be very egalitarian, not just in spirit but in actuality. Inequality of wealth and income used to be much larger in France. And very high taxes on the very rich — that was invented in the United States,” he said.
     
    Mr. Saez added, “Absent drastic policy changes, I doubt that income inequality will decline on its own.”

    I also want to use this moment and link to the syllabus and course materials for Thomas Piketty's Paris School of Economics class on the "Economics of Inequality/Economie des inégalités."  I like reading syllabi to get a sense of where academic debates are, and these materials are going to be at the forefront of the inequality debate for some time to come.  The left-liberal space is re-examining and re-building its case on inequality in wake of the Recession and the 1% narrative, and this syllabus is a brilliant collection of the latest arguments, research and academic debate.  It's what will, in a good world, be common knowledge among all graduate students in 10 years - here you can see it argued in real time.  Check it out!

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    What Should You Know About the Quebec Student Strikes and Occupations?

    Apr 17, 2012Mike Konczal

    One thing to remember about Occupy is that it has much of its current origins, successes, and most intense interactions with authority around the spaces of college campuses. Its activism is particularly innovative when it comes to direct actions, occupations, and student strikes, all to combat college tuition increases, privatization, and the creation of student debt markets.

    One thing to remember about Occupy is that it has much of its current origins, successes, and most intense interactions with authority around the spaces of college campuses. Its activism is particularly innovative when it comes to direct actions, occupations, and student strikes, all to combat college tuition increases, privatization, and the creation of student debt markets. Here’s the Wikipedia entry on the Puerto Rico student strikes, where they were protesting massive waves of layoffs of government workers and campus faculty and an estimated 100 percent tuition hike. Here’s the Wikipedia entry on the Chilean student strikes, which date back to 2006, where students fought high application fees they couldn’t afford. And, of course, there's what is going on at University of California, with the pepper spray at Davis and the beatings both in 2009 and 2011 at Berkeley.

    But the most interesting resistance happening right now is going on in Quebec, Canada. There are, according to one representative report, over 165,000 students on strike from class out of 495,000 in the student body.

    Quebec is looking to increase its tuition 75 percent over the next several years. Students responded by starting what is now the longest strike in the province's history. It's gone on even though the government has offered to make student loans a nicer, kinder form of debt, with income-contingent repayments, while not budging on the tuition hikes.

    This image by Tina Mailhot-Roberge shows tens of thousands of people marching through Montreal on March 22nd, 2012:

    And here's an amazing video of two and a half hours of the protest time-lapsed down into 50 seconds on YouTube. And with a h/t to The Nation, here's the Real News Network's coverage of the protests.

    The strike is heading into a dangerous time. The administration isn't looking to make concessions on tuition and students are approaching the point where they won't complete the semester. This will be worth watching in the weeks ahead.

    Why are these sites so potent for activism? The college campus combines several issues into one: the privatization of public services, the dismembering of social insurance and its replacement with a regime of debt and risk-shifting, and the dismantling of the primary means of social mobility with one designed to entrench inequality, which all builds toward a lack of freedom to fully develop one's talents and abilities and be full, productive citizens.

    These students are right to fight this battle at the beginning, during the initials cuts. Privatization creates its own justification; the more public universities are defunded and reconceived as a private good, the less civic interest there is in defending them as a public good. And they are also fighting at the beginning of their lives, both for what kind of world they want to live in and against the constraints of indenture that we see when this process of privatization and debt reaches its ultimate conclusion -- a path the United States is much further along.

    Mike Konczal is a Fellow at the Roosevelt Institute.

    Image courtesy of Shutterstock.com

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    Does Expansionary Monetary Policy Primarily Benefit Finance and Rentiers?

    Apr 17, 2012Mike Konczal

    Joe Weisenthal calls it the Biggest Myth in Monetary Policy Today, and recently there's been a wave of posts about it.  Would another round of expansionary monetary policy at this point - in either a QE3, a conditional higher inflation target or NGDP targeting - primarily benefit the financial sector, rentiers and the wealthy?

    Joe Weisenthal calls it the Biggest Myth in Monetary Policy Today, and recently there's been a wave of posts about it.  Would another round of expansionary monetary policy at this point - in either a QE3, a conditional higher inflation target or NGDP targeting - primarily benefit the financial sector, rentiers and the wealthy?

    Here are Daron Acemoglu and Simon Johnson at Economix, making the case in Who Captured the Fed?:

    Thus was born the idea of independent central bankers, steering the monetary ship purely on the basis of disinterested, objective and scientific analysis. When inflation is too high, they are supposed to raise interest rates. When unemployment is too high, they should make it cheaper and easier to borrow, all the while working to make sure that inflation expectations remain under control.

    Increasingly, however, it seems that technocratic policy-making is just a myth. We have come full circle, and the Wall Street banks are calling the shots again...

    Monetary policy has an impact on inflation, output and employment. But it also has a major impact on stock market prices. Any central banker raising interest rates is reducing stock market values and thus eroding the bonuses of top bankers and other chief executives....

    Those people will lobby, asserting that higher interest rates will undermine the economy and cause us to plummet into recession, or worse....

    We have lost track of the number of research notes from major banks pleading for easier credit, lower capital requirements, delay in implementing financial reforms or all of the above...

    As the American economy begins to improve, influential people in the financial sector will continue to talk about the need for a prolonged period of low interest rates. The Fed will listen.

    I'm a huge fan of both Daron Acemoglu and Simon Johnson (I'm about to start each of their books, Why Nations Fail and White House Burning), so I want to take this argument carefully.  How to approach it?

    First off, it isn't just the financial sector calling for low rates (if they are, in fact, calling for it, as we'll see in a second).  A generic Taylor Rule, as Paul Krugman recently pointed out, calls for low rates until 2015.  Mess with the rule and the data a bit to adjust that date at the margins, but generic macroeconomic stabilization rules still see low rates for quite some time as necessary.

    I always find the following to be a useful thought exercise: imagine we wake up and find that interest rates aren't set at zero but instead at one percent.  Whoops!  Should we turn around and have the Federal Reserve lower interest rates?  Those who think that Taylor Rule is correct and that the zero lower bound is blocking monetary policy from being effective would say yes; so would people who think the Federal Reserve isn't out of ammunition at the zero lower bound, people like Christina Romer and Charles Evans.

    The post argues the Federal Reserve should, when unemployment is high, "make it cheaper and easier to borrow, all the while working to make sure that inflation expectations remain under control."  The post seems to concede that monetary policy works as normal, and unemployment is high and inflation expectations are, if anything, lower than what we want.

    But I feel the entire vibe of the article is wrong. The financial sector is calling for higher interest rates.  This is why Carmen Reinhart told Institutional Investor that “Financial repression is manifesting itself right now” alongside the notion that financial repression is like “the rape and plunder of pension funds.”  Members of the financial community complain to reporters about "low interest rates that have been 'artificially manipulated' by the Federal Reserve."

    Or take Brad Delong's six minute debate about QE with Jim Grant from last year.  As Delong summarized it (my bold):

    I found it depressing because the major unfairness Grant focused on is that, because of the Federal Reserve, investors in money market funds can get only one basis point of interest. The 9% unemployed: they are not the victims. Those who cannot sell their houses because of the foreclosure overhang: they are not the victims. Those whose businesses crash because of slack aggregate demand call they are not the victims. The real victims are the rentiers who have a right to a nice solid well above inflation safe return, and from whom the Federal Reserve is stealing that right.

    And I found what I could gauge of Jim Grant's worldview depressing as well. He seemed to be selling rentier-populist ressentiment. Grant's world is full of "takers"--and the Federal Reserve is helping them. And the biggest takers in Jim Grant's mind are the hedge fund operators of Greenwich, Connecticut. Why are they the biggest takers? Because they can borrow cheap, at low interest rates, and put the money they borrow to work making fortunes. If only the Federal Reserve would shrink the money stock and raise interest rates! Then the hedge funds would have to pay healthy interest rates for their cash! Then the profits would flow to the truly worthy: the rentier coupon-clippers now suffering with their one basis point yields.

    Never mind what a policy of monetary restraint to "normalize" interest rates would do to the unemployed...

    You can read that in the recent statement by Mohamed A. El-Erian of Pimco, who, as Karl Smith noted, wants the Federal Reserve to focus on microeconomic goals instead of the macroeconomic problem of full employment.  This isn't new.  As Keynes noted, "the most stable, and the least easily shifted, element in our contemporary economy has been hitherto, and may prove to be in future, the minimum rate of interest acceptable to the generality of wealth-owners."

    The implicit argument is that the interest rate compatible with full employment is too low for financial investors to accept.  Do we then just accept mass unemployment and the subsequent hysteresis-induced slowing of growth and human potential so Jim Grant and Pimco can make a profit they feel is worthy of their financial talents?  Of course not.

    Now if you check out Jim Grant's argument to Brad Delong, there's an argument that we should split finance in two sectors - an established one that is hurt by low interest rates and one that is more focused on intermediation and/or trading for themselves, which could benefits from low rates and bubbles is stock prices and assets.

    The stock market is following unemployment claims pretty closely, so it isn't clear to me that the stock market is broken from its function as a prediction of future economic activity (i.e. in a bubble).  I like two MIT economists arguing that we should disconnect stock prices from the real economy, but I think that requires an additional layer of explanation.  For instance, if monetary policy was constant and we passed another round of deficit-funded fiscal stimulus to rebuild infrastructure and employ people, I would expect the stock market to increase because the economy would be stronger.

    If that's the case, that there's two financial sectors and one of them benefits from monetary expansion we have to ask - so what?  If monetary policy is working, and bringing us closer to full employment, and some hedge funds and Wall Street traders make some money off of it, why should that impact our commitment to using all levers for full employment?  Monetary policy is not a morality play, and it's not about rewarding the good people and punishing the bad ones.  It’s about stabilizing growth, prices and maximum employment without overheating the system or letting it choke to death from a lack of oxygen.

    As Josh Mason's great guest post here mentioned, if we are worried about where the financial sector channels money, that's an argument for regulation instead of mass unemployment and scarce liquidity.  We should commit to better regulations as well as progressive taxes and/or financial taxes.  If those aren't in place (and I don't believe they sufficently are), those shouldn't be attempted with monetary policy, and they absolutely must not distract us from taking our eye off the goal - full employment in the wake of the Great Recession.

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    What Does "Fair Value" Accounting Say About the Government?

    Apr 16, 2012Mike Konczal

    Charles Lane had an editorial at the Washington Post while I was out about fair value accounting:

    Charles Lane had an editorial at the Washington Post while I was out about fair value accounting:

    There is general agreement that federal budgets should include a dollar figure for the estimated lifetime cost of each year’s new lending. Congress adds up all the expected cash flow associated with a particular credit program — interest and principal payments, fees, expected defaults — and calculates its “present value,” based on a notional interest rate known as the discount rate.

    Under current law, however, Congress bases these estimates on the government’s ultra-cheap cost of borrowing. That means the calculations are done as though everyone were as default-proof as Uncle Sam, which understates the costs and risks to taxpayers.

    The Congressional Budget Office believes “fair value” accounting, which adjusts the discount rate to reflect the risk of widespread defaults during downswings in the business cycle, would be more accurate.

    Yglesias responded here.  This is entirely a fight over the discount rate to use for estimating government loans and whether we should be "measur[ing] the costs of federal loans and loan guarantees at [private] market prices."  As those of you who follow the global warming economics debates closely know, slight changes in discount rates can have huge policy implications.

    Jason Delisie of New America and Economics21 also argued for fair value accounting at The Agenda Blog in light of a post I wrote; he was also kind enough to invite me to a big Economics21 panel he organized on fair value accounting which is online here.

    A few points.

    1.  I tried to make an example using swaps but it didn't convey the point well, so let's try it a different way.  Imagine two identical firms A and B, who are making identical loans.  They should use the same discount rate, correct?

    Now imagine that A has a lower borrowing cost of capital than B for whatever exogenous reasons - ratings, savings, size, etc. It must be the case, provided that cost of capital is a monotonically increasing input into the discount rate (and I know of no model in which that isn't the case), that A has a lower discount rate.  A is the government here under these circumstances.  That doesn't mean that the discount rate should be the cost of borrowing per se, but financial logic dictates we don't take the same market discount rate as B for A.  I haven't seen a sufficient answer to this argument.

    2.  It's ironic that Lane pushes the idea of "downswings" so aggressively, because the whole reason the government now stands behind the mortgage market is because the entire private market collapsed during the downswing.  Student loans weren't going to go out and the securitization channel is a swamp of fraud, missing or forged documents and bad incentives on the servicing end.  Meanwhile the government churns along without a crisis.

    I'm not sure what to make of the argument that private lending channels couldn't survive the downturn without their costs exploding and therefore the government, which is surviving fine, should use the discount rates of the private market - more prone to collapse! - because of a risk of a downturn.

    3.  Most of these arguments, especially in response to #1 above, are predicated that "shareholders" of the government, i.e. citizens, need to be compensated some amount X - equivalent to private market returns.  It's not clear to me why this is the case or how to determine it other than a normative argument about what government is. I brought up that this implies a normative argument as to what the government is supposed to do in the panel and got some really bad looks from the wonks in the audience; Yglesias also came to the same conclusion in his response to Lane.  But fair value accounting assumes that the government is just like any other firm, when in fact it has unique abilities (compulsion, scale, longevity, lack of a profit-motive, currency, etc.) that distinguish it from any private firm.

    4.  The two CBPP wonks at the panel, Richard Kogan and Paul N. Van de Water, went medieval on everyone else; it was like watching a kung-fu fight.  That whole crew is awesome.  Read their entire report, but note their points about "phantom costs" and that if we need a higher discount for risk-bearing is it weird that we don't need a lower discount for risk-mitigating programs like Social Security and unemployment insurance.

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