Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • A Post-Debate Interview with Glenn Hubbard on Housing Policy

    Oct 22, 2012Mike Konczal

    There were no serious housing questions at any of the presidental debates. Given how important the housing market is for both voters and the economy, this is surprising and disappointing. As Zachary Goldfarb noted, "here are a few words that surprisingly have not shown up through much of this debate: housing, mortgage, refinance, underwater." 

    There were no serious housing questions at any of the presidental debates. Given how important the housing market is for both voters and the economy, this is surprising and disappointing. As Zachary Goldfarb noted, "here are a few words that surprisingly have not shown up through much of this debate: housing, mortgage, refinance, underwater." 

    I attended last Tuesday's presidential debate at Hofstra University as press for Al-Jazeera English, providing TV commentary on economic issues. It was my first debate, so I took some time to wander around. While exploring after the debate was over, I found the Spin Alley area, which is the area where politicians and campaign people stand by to give quick media responses. Handlers held large signs advertising the people in question. I saw a "Hubbard, Glenn" sign in the air, and the Columbia economist and Romney economic advisor standing by to give spin on the debate.

    I decided to get some housing questions on the table. When some people, notably Josh Barro, argue Romney has a secret economic plan, and in particular a secret housing plan, they cite Hubbard, who has been very vocal on boosting demand through interventions in the housing market. I've noted that his plans might not be that different from what Obama is currently doing.

    Below is a transcript of what I got a chance to ask him:

    Mike Konczal: In 2008 you co-wrote a plan with Chris Mayer on the housing market that called for mass refinancing and principal reduction through the GSE. In 2011 you released another plan with Mayer that just featured the mass refinancing. Why was there the change?

    Glenn Hubbard: It wasn't principal reduction; it was setting up a Home Owners' Loan Corporation model.

    There was a debt-to-equity swap in your proposal.

    Right. What we focused on in 2011 was trying to give direction to the Obama administration, which was bungling the mass refinancing so badly. That's why we focused on that. I still think it would be a good idea to have a Home Owners' Loan Corporation. But the point of that piece was that the Obama administration had bungled every housing plan, so we were trying to provide some guidance.

    Earlier this year, HARP, the Home Affordable Refinancing Program, was relaunched as HARP 2.0.

    It's still a failure.

    After the relaunch, we are seeing a large increase in refinancing on very underwater homes, particularly those with loan-to-value over 125 percent.

    It's still a failure. If you compare it to the number that Chris Mayer and I had argued, it's trivial.

    Compared to the number of possible refinancing?

    Yes. The reason is the GSEs have stood in the way, and the Obama Treasury has not managed the GSEs in such a way as to facilitate its own policies. It's really quite sad.

    But that's an FHFA problem, is it not?

    I'm sorry, but you can't duck the FHFA.

    So you think President Obama should have done a recess appointment [to replace Ed DeMarco] at the FHFA?

    I don't manage the Obama appointments, but I do know that the FHFA has mismanaged the president's own plan.

    What would a President Romney put forward in the housing market?

    What Governor Romney wisely is focused on is the long term in housing. We need to wind down the portfolios of the GSEs and reassess the government's role in such a way to get more private capital back into housing.

    In 2008 you argued that cramdown, or some sort of bankruptcy reform, was a bad idea because it could impact long-term growth. In retrospect, do you still think that?

    Yes. I still believe that. I absolutely think that was the correct call.

    Thank you for your time.

    ==========

    Mike here, with a few notes. According to the latest data from FHFA, there have been 118,470 refinances of mortgages with an LTV over 125 percent between February, when HARP 2.0 allows for these seriously underwater refinancings, and now. Here's a graph from Dan Green's Mortgage report:

    Matt Zeitlin has more on the initial successes of HARP 2.0 at the Daily Beast. Rather than the legal issues at FHFA, it seems that the next big blockages in turning record low mortgage rates into increased consumer demand through refinancing are applications overwhelming banks, the financial sector collecting oligopolistic rents from not passing along low rates to consumers via their pricing power, and lack of competition on HARP refinances.

    Hubbard is correct that Ed DeMarco is blocking principal reduction at FHFA, preventing the adminstration from pursuing their own plans. I was surprised to see Hubbard pushing for a a Home Owners' Loan Corporation (HOLC) structure now, and I wonder if he'd fight for what Senator Merkley is currently proposing. An HOLC model could bypass some of these new blockage problems we are seeing on record low interest rates, benefiting homeowners.

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  • New Article at The American Prospect on Full Employment

    Oct 10, 2012Mike Konczal

    I have a new article at The American Prospect - Full Employment Is the Best Social Program - about the potential future battle among liberal economists over NAIRU, full employment and when to st

    I have a new article at The American Prospect - Full Employment Is the Best Social Program - about the potential future battle among liberal economists over NAIRU, full employment and when to start to back off efforts to boost the economy as unemployment falls. There's also a discussion about policy in the 1990s, using this Stephanie Kelton paper and this Dean Baker paper for reference. I hope you check it out.

     
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  • Worried About TBTF Banks? Ignore Romney's Attacks in the Debate.

    Oct 5, 2012Mike Konczal

    The big question is not whether to dismantle Dodd-Frank, but whether it gets implemented correctly.

    Wednesday's presidential debate had a relatively detailed discussion of the Dodd-Frank financial reform bill. From a transcript, this is how President Obama described what the bill does:

    The big question is not whether to dismantle Dodd-Frank, but whether it gets implemented correctly.

    Wednesday's presidential debate had a relatively detailed discussion of the Dodd-Frank financial reform bill. From a transcript, this is how President Obama described what the bill does:

    We said you've got -- banks, you've got to raise your capital requirements. You can't engage in some of this risky behavior that is putting Main Street at risk. We've going to make sure that you've got to have a living will so -- so we can know how you're going to wind things down if you make a bad bet so we don't have other taxpayer bailouts. [...] And, you know, I appreciate and it appears we've got some agreement that a marketplace to work has to have some regulation. But in the past, Governor Romney has said he just want to repeal Dodd- Frank, roll it back.
     
    And so the question is: Does anybody out there think that the big problem we had is that there was too much oversight and regulation of Wall Street? Because if you do, then Governor Romney is your candidate. But that's not what I believe.
    The sleepy delivery aside, this is a good description. I would have liked to seen a reference to the CFPB ("cops on the beat protecting consumers") and derivatives reform ("making sure our financial markets are transparent"), since they are both under serious attack from conservatives. But it's not bad for a high-level overview.
     
    What was Mitt Romney's critique of Dodd-Frank?
    One is it designates a number of banks as too big to fail, and they're effectively guaranteed by the federal government. This is the biggest kiss that's been given to -- to New York banks I've ever seen. This is an enormous boon for them....We need to get rid of that provision because it's killing regional and small banks. They're getting hurt.
     
    Let me mention another regulation in Dodd-Frank. You say we were giving mortgages to people who weren't qualified. That's exactly right. It's one of the reasons for the great financial calamity we had. And so Dodd-Frank correctly says we need to have qualified mortgages, and if you give a mortgage that's not qualified, there are big penalties, except they didn't ever go on and define what a qualified mortgage was.
     
    It's been two years. We don't know what a qualified mortgage is yet. So banks are reluctant to make loans, mortgages. Try and get a mortgage these days. It's hurt the housing market because Dodd-Frank didn't anticipate putting in place the kinds of regulations you have to have. It's not that Dodd-Frank always was wrong with too much regulation. Sometimes they didn't come out with a clear regulation.

    First off, as Adam Levitin notes, the reason that we don't have a QM definition is because that requires having a CFPB director. And who has been blocking a CFPB director consistently from the beginning? Senate Republicans. President Obama had to recess appoint a director in order to get this rule started, much to the chagrin of Republicans. So it is a bit much to block the nominee necessary to start the agency and then complain the agency isn't getting things done.

    That said, there are two major complaints here. The first is that Dodd-Frank's "resolution authority" and regulations for systemically important financial institutions (SIFI) are a "wet kiss" to the banks, and the second is that qualified mortgages are holding up the financial market. Let's take them in turn.

    SIFI and Too Big To Fail

    Part of Dodd-Frank's approach involves creating a graduated system of regulatory burdens for risky financial firms, combined with special resolution authority powers housed at the FDIC to resolve these firms when they fail. This gets attacked by conservatives, an attack Mitt Romney reiterated, because, they believe, it has three problems: (1) it picks a handful of winners, (2) protects those winners from competition through regulations that have no teeth, and (3) gives a signal to the market that these firms will be bailed out again in the future.

    To address complaint (1), all bank holding companies with $50 billion or more in consolidated assets are included without a necessary designation, and systemically important financial institutions (SIFI) are included as well after a determination process. So it isn't just the top five firms, but instead the 35 plus that are all larger in size. If it were an advantage to be declared systemically important, SIFI financial firms would be fighting to get the designation. By all accounts they are not, and indeed they are fighting against this status.

    For (2), it makes sense that they are fighting the designation because Dodd-Frank requires more capital and includes more requirements for riskier firms. Take Sec. 165, which requires "large, interconnected financial institutions" to be subject to "prudential standards...more stringent than the standards and requirements applicable to nonbank financial companies and bank holding companies that do not present similar risks to the financial stability of the United States."

    Or Sec. 171, which requires that capital requirements scale with "concentrations in market share for any activity that would substantially disrupt financial markets if the institution is forced to unexpectedly cease the activity." The idea is that if a firm wants to get bigger or engage in riskier activity, the normal prudential requirements to hold more capital and plan for a failure should scale as well.

    For (3), the question is whether it will work or whether the market will think there will be endless bailouts. As I've described at length elsewhere, the resolution authority in Dodd-Frank is designed to precommit against bailouts. You need three institutions to approve resolution, who must consider the decision with a bias toward the market and the bankruptcy code. If there's a liquidation, the FDIC has to wipe out shareholders, hit creditors, fire management and board members, and can't buy equity in the firm to keep it alive. The problem we face isn't Dodd-Frank, but Congress and the executive branch passing "TARP: Part Two."

    So how is the market reacting? Jennie Bai, Christian Cabanilla, and Menno Middeldorp of the Federal Reserve Bank of New York wrote a great paper recently that used "Moody’s KMV credit default swap (CDS) implied probability of default to gauge changes in the market perception of the risk that senior bondholders will not be completely repaid." (Disclosure: In the past, I worked at Moody’s KMV, a well regarded credit risk firm founded as KMV by three old-school quants, as a financial engineer. As a result, I'm biased towards their probability of default methodologies as a metric.)

    What did they find?

    Using the results from this regression and the shift in Bloomberg resolution news over our sample, we estimate that the anticipated and actual changes in resolution regime have increased the CDS market’s expectations of default by approximately 20 basis points, which is around a fifth of the average CDS-implied default probability for G-SIFIs in March 2012. While this doesn’t necessarily mean that markets are no longer pricing in any possibility of government support, it does suggest that the new laws have resulted in the CDS market taking into account the view that senior bondholders run a higher risk that they’ll need to share in the costs of bank resolution.

    The market is starting to price in the risk that senior bondholders at risky, major financial firms will take hits, and those risks are priced in alongside movements in the resolution authority law. Given that the rules aren't completed yet and that there are additional ways to bolster them, this is a good sign. Mitt Romney's attack on the overall plan embodied in Dodd-Frank isn't the right approach for people serious about tackling Too Big To Fail. The problems we should be worried about are whether there is a good implementation of the law and if it is sufficient for taking down a major firm.

    QM

    In addition to Adam Levitin's piece, you should read John Griffith and Julia Gordon of Center for American Progress, writing over at Think Progress, who have a piece on the QM issue.

    We’re thrilled to hear Romney give such a full-throated defense of the ability-to-repay rule. It’s a welcomed about-face from his recent calls to repeal Dodd-Frank and dismantle the Consumer Financial Protection Bureau, the federal agency that’s responsible for enforcing the rule. That said, Romney has a few key facts wrong.

    As Romney points out, the ability-to-repay rule has not yet taken effect as regulators are still defining the “Qualified Mortgage” exemption. But the Republican candidate neglected to mention that the final rule isn’t due until January 2013 — a deadline regulators appear to be on pace to meet. The Consumer Financial Protection Bureau submitted its proposed rule back in April and is currently hashing through public comments.

    Romney seems to imply some sort of negligence or malfeasance from the Obama administration that is preventing the rule from being completed. Alas, no scandal here. The Dodd-Frank law is actually quite clear about what type of loan should be considered a “Qualified Mortgage.” The loan must be well-underwritten with verified income, employment, and debt information. Loan payments can’t exceed a certain percentage of the borrower’s net monthly income. The loan can’t contain risky feature like negative amortization, interest-only payments, or balloon payments. The list goes on.

    It's a shame the debates didn't include anything on foreclosures or the housing market more generally, but the Dodd-Frank discussion was a pleasant surprise.

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  • State and Local Education Funding Declined (Again) in 2011

    Sep 28, 2012Mike Konczal

    Here's something that might put larger trends into perspective. Earlier this month, the Bureau of Economic Analysis released data on state and local spending for the 2011 year. Here's how spending looks for state and local spending on elementary and secondary education:

    Here's something that might put larger trends into perspective. Earlier this month, the Bureau of Economic Analysis released data on state and local spending for the 2011 year. Here's how spending looks for state and local spending on elementary and secondary education:

    This isn't adjusted for inflation, so the decline is even worse. The dotted line is the seven-year pre-recession average projected forward. I'm pretty cynical about these things and knew that spending had declined in 2010, but I had expected it to even out or go up in 2011. Instead, it has declined further.

    There's been yearly increases in spending on elementary and secondary education going back decades. We didn't develop some sort of technology that made educating young people cheaper in 2009 - instead, states were hit hard by a housing crash and liquidity issues that come with having to maintain a balanced budget in light of the worst downturn since the Great Depression. This also comes on top of the mass layoffs of teachers, some 200,000 during this recession. Rather than firing teachers while spending more elsewhere, we are just spending less educating our children, period. This is the worst kind of disinvestment, made at the worst possible time.

    To bring in teachers' unions, the anti-teacher's union agitprop film "Won't Back Down" is getting negative reviews, including Liza Featherstone in Dissent and Dana Goldstein in The Nation. When you see examples of parents filling in for a failing school system, notice that this will increasingly be the case with declining funding for education. That gap in the graph above is being filled by parents and teachers for free or with children getting less education. Megan Erickson wrote about this trend in Jacobin, noting, "parents and kids are increasingly being asked to pitch in and paint the building or hawk candy bars to fill budget gaps. That’s because the values of freedom, autonomy, and choice are in perfect accordance with market-based 'reforms,' and with the neoliberal vision of society on which they’re based."

    And this graph is why you need some organization at the front lines fighting for better spending on education, which is part of what teachers' unions do. There's been some great write-ups of the successes of the teachers' union strike in Chicago, including Richard D. Kahlenberg at The New Republic, Hamiltion Nolan at Gawker, and Josh Eidelson at Salon. A significant part of the strike was over broader and better educational outcome and more resources for schools. As this graph shows, it is a battle that will continue to be important.

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  • Is Taxing Capital Income Fair?

    Sep 28, 2012Mike Konczal

    In light of Mitt Romney's recent tax returns, the economic blogosphere has been kicking around the issue of capital taxation. Ryan Chittum at Columbia Journalism Review has an excellent overview of what people have been writing with "The capital gains preference." This is a response to Dylan Matthews and Matt Yglesias, who each present arguments from economists that capital gains taxes should be lower than other taxes, even potentially set at zero percent.

    Many economic arguments are about tradeoffs, but the argument for the zero tax rate of savings, also similar to the arguments for a consumption tax, is usually phrased as an argument about fairness. In order to frame the fairness argument, economists bring up a story of two similar individuals with one as a saver and one as a spender. Yglesias has the framework in his post:

    You imagine two prosperous but not outrageously so working people living somewhere—two doctors, say, living in nearby small towns. They're both pulling in incomes in the low six figures. One doctor chooses to spend basically 100 percent of his income on expensive non-durables. He goes on annual vacations to expensive cities and eats in a lot of fancy restaurants. The other doctor is much more frugal, not traveling much and eating modestly. Instead, he spends a lot of his money on hiring people to build buildings around town. Those buildings become houses, offices, retail stores, factories, etc. In other words, they're capital. And capital earns a return, so over time the second doctor comes to have a much higher income than the first doctor. [...]

    In the world where investment income is taxed like labor income, the first doctor says to the second "man you're a sucker—not only are you deferring enjoyment of the fruits of your labor (boring) but when the money you've saved comes back to you, it gets taxed all over again. Live in the now.  And the thinking is that world number one where people with valuable skills take a large share of their labor income and transform it into capital goods is ultimately a richer world...

    Taxing savings by having an income tax punishes the Saver Doctor relative to the Spender Doctor. If you just taxed what they consumed, they would be treated equally.

    Yglesias leans on the idea that we'll be a richer world without taxing savings, because people will respond to the incentives against savings here. I don't believe the research bears this out. I'm not an expert, but I believe the impact, if any, is small. In their excellent summary book on taxation, Taxing Ourselves (2004, 3rd edition), Joel Slemrod and Jon Bakija conclude that a "large number of studies have attempted to address these problems to some degree, and they generally come to the conclusion that saving is not very responsive to incentives."

    But if the efficiency argument is weak evidence, the fairness argument is assumed to make the case, and make it for zero percent taxation. It is unfair to tax the Saver Doctor even a penny more than the Spender Doctor. Scott Sumner gives a similar example at The Economist: "The proper tax rate on capital income is zero [...] To see why this is so, consider twin brothers who each make $100,000 in wage income. Most people would regard these two people as equally well off, even if one freely chose to consume his income now, while the other chose to consume later. But not advocates of the income tax. They insist the more patient twin brother is 'richer' and deserves to be taxed at a higher income tax rate." Gilles Saint-Paul argues in the same forum that fairness requires that we shouldn't "penalise future consumption relative to current consumption."

    In Joanathan Gruber's popular undergraduate textbook Public Finance and Public Policy, the two people are actually Homer Simpson and Ned Flanders!

    Consider two individuals, Homer and Ned, who are identical except for their preferences for saving. Both live for two periods, earning $100 in the first period and nothing in the second period. Homer is impatient: he wants to consume his entire income in the first period and nothing in the second period. Ned is more patient; he wants to consume in both periods. Initially, they are both subject to an income tax, which taxes all labor earnings and interest income at 50%.The interest rate earned on savings is 10%. [...]  In present discounted value (PDV) terms, Homer pays only $50 in taxes across both periods, but Ned pays $51.11. Thus, savers such as Ned are penalized in an income tax regime.This tax treatment of savings is both horizontally inequitable (because Ned is taxed more simply for making a different choice) and inefficient because it may reduce the incentive to save (because savings leads to higher tax payments).

    Let's stick with Homer and Ned. Is this fairness argument against the "inequitable" treatment of Ned either impressive or conclusive? I'd argue no. I'm going to rely on arguments from Barbara Fried's excellent "Fairness and the Consumption Tax" for the following to identify some problems, and I'd recommend her essay if you are interested in learning more.

    The first issue is the assumption that Homer and Ned should pay in accordance with their consumption, or that equal spenders should have equal tax burdens, or, technically, that the present value of their tax burdens should be identical. This presupposes what is up for debate, which is what the appropriate tax base is. If the tax base is explicit wealth, then income from savings should also be taxed. There are significant advantages to owning wealth, including security, peace of mind, power, the ability to direct private investment, political control, and much more. It isn't clear why these shouldn't be part of the tax base.

    A second issue is that it assumes that all income from savings is the result of delayed compensation, when much of it doesn't even come from the individuals themselves. We don't know how much of the United States' capital stock comes from the gifts, bequests, or inheritance that constitute intergenerational transfer, though averages of studies say about 50 percent. Fairness arguments become a lot more complicated here.
     
    A third issue is the assumption that, since Homer and Ned are equally ranked in well-being in a no-tax world, they should be equally ranked after any tax comes into play. This equal ranking is the engine behind a lot of the fairness arguments -- as Gruber says, we don't want to penalize Ned for "making a different choice." Since a tax on savings would fall on Ned the Saver but not Homer the Spender, they would no longer be equally ranked, as Homer would end up better off than Ned with an income tax. It isn't clear how much savers would be disadvantaged relative to spenders, as some of that tax will fall to borrowers. But the general point remains.
     
    But even granting this, a new question arises: why do we care about maintaining equal ranking from a "no-tax" world, and why would it be unfair to change it? This is only a claim to fairness if Homer and Ned, or savers and spenders more generally, have a claim to their relative ranking in a "no-tax" world. It's not clear that they do. They certainly don't under an entitlement theory, as the value the saver gets in this example is just the random quirk of his or her preference structure. It also presumes that the ranking in a "no-tax" world was just in-and-of-itself and thus worth preserving, which requires a lot of libertarian heavy lifting.
     
    It also presumes a myth of ownership, or the idea that you can conceptualize the economy without the government or that tax policy isn't just one of many ways that the government affects interest rates. Sumner and Yglesias, for instance, believe the Federal Reserve should do some major things to raise nominal GDP, which would have a dramatic effect on the relative ranking of savers and spenders compared to a non-Federal Reserve world. How are they any different from this tax policy, other than the fact that they justify it within a larger set of social institutions, especially ones that produce the patterned world of full employment?
     
    fourth thing to consider is the issue of generalizing this critique to other examples. Another way of reading the fairness issue in the example is that since both Homer and Ned start off equal, and had equal capability to generate wealth, they should have an equal tax burden, akin to an endowment or faculty tax.
     
    If a tax on savings is removed, taxes on wages would have to go up. Now imagine that, in addition to Homer and Ned, there's Barney at time zero. Barney hates working but loves leisure, so he doesn't work at all but enjoys just as much utility as Homer and Ned when they consume their net present value of $100. Raising taxes on wages leaves Homer and Ned equally well off but punishes them both relative to Barney. Should taxes on wages therefore be set to maintain their ordering? Would we have to abolish taxes on consumption then? If so, then it isn't clear we can have a coherent tax policy period.
     
    But we could have a coherent tax policy, especially if we focus on what kind of economy we want to build and use tax policy as one of many levers, working in concert with all the others, to create it.
     
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    Simpsons images used without permission from 20th Century Fox.

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