Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • What's the Best Liberal Case Against Principal Reduction?

    Aug 21, 2012Mike Konczal

    Binyamin Appelbaum has an article in the New York Times about the administration’s terrible response to the housing crisis.

    Binyamin Appelbaum has an article in the New York Times about the administration’s terrible response to the housing crisis. The administration “tried to finesse the cleanup of the housing crash, rejecting unpopular proposals for a broad bailout of homeowners facing foreclosure in favor of a limited aid program — and a bet that a recovering economy would take care of the rest.” This has several responses, including David Dayen at firedoglake, as well as Ezra Klein writing about the administration's response from a balance-sheet recession and housing point of view. That got a response from Dean Baker arguing that this balance-sheet recession point of view, and the subsequent focus on mortgage debt reduction, is a distraction from better policy.

    With President Obama pushing for a wider refinancing plan and the debate over refinancing and principal reduction back in the headlines due to the book Bailout and the fight over the GSEs, it might be useful to formalize the best liberal case against principal reduction. It'll give us a set of arguments to wrestle with so that we can then work backwards toward better arguments. So what is the best case? I see three broad arguments.

    1. Wealth Effect Means It Doesn't Matter

    This is the approach Dean Baker takes, and I think it is influential among many liberal wonks. The housing crashed destroyed a lot of housing value, leaving us feeling poorer, which means we spend less. An important way to understand this argument is that if every house during the housing bubble was paid for with cash instead of a mortgage, and we had the same housing bubble and crash but no mortgage debt overhang, our recession and slow recovery would look virtually identical. Reducing housing debt in our situation won't help the economy as a whole (though it will help the individuals involved), because housing debt hanging on the economy isn't the drag.

    Foreclosures are still bad in this argument (and Dean has been at the forefront of fighting against foreclosures), but they only need to be stopped in the sense that all bad things should be stopped; housing crisis policy will help some and hurt some, but it isn't a check on the recovery. It is not necessary and isn't effective in getting us back to full employment.

    I think there are some empirical problems with this argument. The elasticities people are finding are an order of magnitude bigger than realistic expectations. Declines in housing prices are nonlinear against wealth distribution. Something else is in play. See this interview or this paper for more on these arguments. The administration seems to be moving in this balance-sheet direction. Let's say we reject this wealth effect argument -- should we change policy?

    2. Fiscal and Monetary Uber Alles

    Christina Romer would say no. She, like many, would argue that housing debt is probably a drag on demand, but we should respond to it with fiscal and monetary stimulus. She would stay out of the policy in the purple circle above, which is the mapping I use around here to approach how people think of the recession. Romer, from September 2011:

    [One argument is that the] bubble and bust in house prices has left households burdened with too much debt. Until we deal with this problem — perhaps by providing principal relief to the 11 million households whose mortgages are larger than the current value of their homeswe’ll never get the economy going.

    The premise of this argument is probably true: recent evidence suggests that high debt is holding back consumer demand. But it doesn’t follow that the government needs to directly lower debt burdens to stimulate job growth.

    Recent research shows that government spending on infrastructure or other investments raises demand even in an economy beset by over-indebted consumers. Another effective approach is to aim tax cuts and government payments at households that would like to spend, but can’t borrow because of their debt loads (such as the poor and the unemployed).

    History actually suggests that the “tackle housing first” crowd may have the direction of causation backwards. In the recovery from the Great Depression, economic growth, which raised incomes and asset prices, played a big role in lowering debt burdens. I strongly suspect that fiscal stimulus will be more cost effective at speeding deleveraging and recovery than government-paid policies aimed directly at reducing debt.

    There's a general critique of the president's stimulus program that argues it was too focused on tax cuts instead of long-term investments, which have a better bang for the buck. The same critique can be used on spending money on principal reduction. It's money that by definition isn't spent (it was already spent), so you need second-order effects for it to go. We'd prefer just giving people money (tax cuts) over principal reduction in the same sense that we'd prefer infrastructure over tax cuts.

    And one doesn't need to be a conservative worried about helping the "losers" or someone who is uncomfortable with the fairness of mortgage debt reduction to think there are better ways to spend this money. Consider having $250 billion dollars to spend, one benchmark put forward as the amount of money that could have been spent from TARP. You could hand it out in some manner to pay off underwater debts, perhaps a matching scheme with the banks. That wouldn't reduce overall mortgage debt that much because there is a lot of it.

    Meanwhile, with $250 billion dollars, you could build 5,000 miles of high-speed rail. You could fund universal pre-K for a decade. You could take the 13 million people unemployed under the traditional unemployment measure and give them a basic income of almost $10,000 for two years. You could build infrastructure, create social goods designed to foster egalitarianism, or tackle poverty. These are all better investments for us to make, plus they build a better society and they get us to full employment faster. Tackling mortgage debt produces none of these benefits.

    When Geithner's argued against principal reduction, saying that it would be "dramatically more expensive for the American taxpayer, harder to justify, [and] create much greater risk of unfairness," he followed it up by saying "The whole foreclosure crisis across the country now is really driven by what happened to unemployment and what happened to the income of Americans. The best things we can do now to help mitigate that risk is to help get the economy. growing again, bring unemployment down as quickly as we can, put people back to work." I view that as in line with Romer's argument.

    By itself, I think this is correct. But one important response to that is that principal reduction can often pay for itself, especially in situations where a borrower is at risk. A lender will want a consistent, if lower, payment stream rather than to take ownership of an abandoned house in a depressed market. As Lew Ranieri said, "You are almost always better off restructuring a loan in a crisis with a borrower than going to a foreclosure." So it is good economics, especially in a distressed market. Another response is that few people propose just giving money away, but instead want to tie it to some sense of risk and reward, or reaccounting of the banks' balance sheets. So how does that play out?

    3. Upsides and Downsides

    One reason giving away money to pay off underwater debts is a bailout, and thus politically unpopular, is that there would be a disconnect between who absorbed the costs on the downside and who gains the potential value from the upside. If taxpayers just paid off mortgage debts, banks and homeowners would gain a windfall that isn't directly shared with taxpayers. One way to deal with this is either to force creditors to eat a cost upfront -- they absorb the downside and then can benefit from the upside. The other is for taxpayers to gain from the upside, usually through the mass purchase and/or refinancing of mortgages. Let's look at the first way.

    Why aren't bank servicers doing writedowns? There's a mix of bad incentives and poor resources that result in bad practices. The administration hasn't been aggressive with using financial fraud, like the range of practices including robosigning and documentation fraud, to force reform here, instead focusing on removing legal liabilities from the banks. Maybe that task force will someday do something, but from my read even sympathetic observers think it was a wasted opportunity. 

    But even if policy is centered on forcing servicers to clean up their fraud, there's a lot of creditor free-riding in ad hoc debt writedowns that becomes problematic. Is writing down first mortgages good policy even if junior mortgages, often held by the biggest banks, are untouched? If home equity lines of credit are acting as a last line of income maintenance and credit for households in this weak recovery, is it wise to push policy to extinguish them to adjust first mortgages? If you wipe out both, isn't that a giant transfer to other creditors like auto lenders, private student loans, and credit card companies? Should we be concerned about moral hazard from the debtor's side? You need some mechanism to coordinate and bind the collective behavior of creditors while preventing free riding and also bringing in impartial adjudication, which is a traditional function of bankruptcy. Bankruptcy reform was famously not pushed by the administration, and to me that was its biggest mistake.

    The other approach to avoid a bailout is for the government to gain a share of the upside for taking on the downside. This is one reason writedowns for the GSEs make sense: we gain the upside, as we own the GSEs, and we're already on the hook for the downside, so the risk on the downside isn't a "bailout" but prudent policy.

    When it comes to dealing with the broader housing market, a lot of the programs proposed, like revitalizing HOLC or Senator Merkley's plan on refinancing, would have taxpayers put up money but gain in the upside. Even the IMF is now encouraging the United States and other countries to investigate bringing back something like an HOLC. The two counter-arguments would be that HOLC still had a high redefault rate, a rate that would have a lot of people crying foul. The second is the problem of what to pay for the mortgages. Recent attempts to use eminent domain to purchase mortgages at below-market rate in order to compensate taxpayers for absorbing these risks in a terrible market also have a lot of people crying foul.

    My general thought is that moral hazard can be a problem, but the misery and wasted lives of mass unemployment is a much bigger problem. That said, bankruptcy and these government programs eliminate most moral hazard concerns. Bankruptcy can be done in such a way to hit homeowners as well; for the government program you'd want people to be trying to take advantage of them. That's why so many people have been shocked that the administration hasn't pushed on either.

    What I find interesting is that all these articles about what could have been done with housing take the way TARP played out as given. But starting a HOLC program, rebooting the broken servicing model, or otherwise writing down mortgage principal would have been significantly easier if the banks were put into a receivership in early 2009. TARP policy, which was to protect the banks' balance sheets at all costs, worked counter-productively, putting administration resistence to enacting even the lowest-hanging policy fruit. Receivership would have cost more upfront, but it would have been significantly easier to tackle these problems. There is a major debate to have on this topic.

     

    Mike Konczal is a Fellow at the Roosevelt Institute. Follow or contact the Rortybomb blog:

      

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  • How Does Education Help in the Great Recession?

    Aug 21, 2012Mike Konczal

    There's a new report from Anthony Carnevale, Tamara Jayasundera, and Ban Cheah, "Weathering the College Storm," that has attracted some attention in the economic blogs.

    There's a new report from Anthony Carnevale, Tamara Jayasundera, and Ban Cheah, "Weathering the College Storm," that has attracted some attention in the economic blogs. Dylan Matthews wrote about it here and again here, with Dean Baker and Larry Mishel adding in critical commentary.

    The report looks at who has gained the most jobs since the "recovery" started, a period they benchmark to January 2010. They find that people with bachelor's degrees and some college have gained all the jobs, while people with just a high-school diploma or less haven't gained any jobs over this time period. They also find that about 80 percent of the new jobs created since January 2010 have gone to men.

    What should one conclude? Well, one conclusion is that we wouldn't have any unemployment if we had fewer women and more men. Since men are gaining all the jobs, it stands to reason that if we, on net, had more men and fewer women, we'd have a lot more people employed. Public policy should involve job-training programs where unemployed women get boyish haircuts and study movies like the cult 1980s hit Just One of the Guys and other high school movies loosely based on Twelfth Night. They should learn about swagger, sports metaphors, and that thing where dudes treat job requirements as suggestions when they apply for them, while women don't apply unless they have all of the requirements.

    You might point out that I must have skipped a step somewhere. When we are so far away from full employment, does this analysis make sense? Instead of actually reflecting the proper allocation of labor this is just reflecting the fact that, for a variety of reasons including discrimination, men are jumping to the front of the queue to take all of the new jobs that are created. But the report seems to go in the other direction and argue that if there were a lot more college-educated workers we'd have more employment; alternatively, the lack of properly educated workers is a check on recovery.

    Dean Baker and Larry Mishel focus on the fact that unemployment rates have gone up for college-educated workers and that most of the big net job increases have gone to those with post-bachelor degrees. I'm interested in the issue of line-jumping. How much does growing employment for college-educated workers in this recession have to do with being prepared for a variety of new, cutting-edge jobs that require a high level of education? And how much is education like a zero-sum hedge that puts the person in question at the front of the line for the limited jobs the economy is creating, even if those jobs require less education?

    This chart from the report is interesting:

    These are numbers since the recovery began in January 2010. Here people with bachelor's degrees have substantial growth in "high education" occupations. But they also have substantial growth in middle-education ones as well. Meanwhile, those with associate degress have significant growth in "low education" occupations. All the while those with high school diplomas are falling out of middle-education occupations. So two big trends are those with a high-school diploma being kicked out of middle-education (and presumably middle-class) jobs, combined with a down-tier move in education -- those with bachelor's degrees taking middle-education jobs and those with associate degrees taking low education jobs.

    The 866,000 jobs lost in middle-education for those with a high school diploma or less are largely a function of the job category "office and administrative support occupations" (see Table 9 of the main report). There were 502,000 jobs lost for high-school diploma or less education in this category; if this is excluded it is a significantly different analysis. Bryce Covert and I flagged this category of work as explaining a lot of missing jobs for women and a broader change in the work environment for GOOD Magazine (data supplement here). This is a function of both longer-term trends and a speedup that has taken place in workplaces since the recession, where people are expected to do more with less. Workplaces keep the same amount of work even as they lose their support staff. So these changes aren't just the result of technological change, but reflect the way that recessions are reworking office environments to put more pressure on workers.

    There's no denominator in the graphic above. Is the percentage of those with an associate degree working in the low-education occupations increasing, or has it held constant? What do these changes look like? Though not definitive, it would give us a clue as to whether or not this hedge aspect of education, the ability to jump to the front of the line for jobs, even crappy jobs, is in play in this weak recovery. I take education by occupation for all workers over 25, first quarter 2010 and first quarter 2012, from BLS/CPS, using the reports division of education levels, and compare the percentage of each education group in an occupation before and after to see how they are changing:

    As we can see, there is a movement downward in education. BAs gain in their share of medium-education jobs, while AAs and some college gain in the low-education jobs.

    In a buried part of the report, the authors anticipate this, noting "increased hiring of more educated workers in low- and middle-education occupations raises a valid concern about whether the workers need more education to perform the tasks or whether workers are being 'underemployed' in a slack labor market. This concern is addressed in detail in the Center on Education and the Workforce report, The Undereducated American....The analysis found a Bachelor’s degree wage premium in jobs at all education levels. The simple fact that employers are willing to pay more for educated workers suggests that they see added benefit in such workers."

    I'm willing to believe this, though it still wouldn't directly address the underemployment issue. However, the analysis cited (page 28) only looks at 2007 through 2009, and doesn't look at people specifically hired in that period, much less the recovery. That premium has a lot to do with differentiation within occupations that analysis isn't capturing, like rookie cops and veteran detectives falling under the same occupation, but the second more likely to have more education and pay. But to the extent that premium exists, it isn't clear that it is going to people who now require some college to get even the most menial jobs our economy is producing.

    When the economy is stalled, the limited number of new jobs will create certain winners and certain losers. But the first priority for us isn't to make sure that we help people fight for the scraps of a weak economy; it's that we grow the economy and demand full employment to provide for all.

    Mike Konczal is a Fellow at the Roosevelt Institute. Follow or contact the Rortybomb blog:

      

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  • Paul Ryan Really Doesn't Like Dodd-Frank

    Aug 13, 2012Mike Konczal

    Beyond thinking Dodd-Frank generally was a bad bill, he's voted against most of its individual pieces.

    The entirety of Romney's plan for financial reform in the wake of the 2008 crisis is contained in the following sentence: "Repeal Dodd-Frank and replace with streamlined, modern regulatory framework." One might argue that this is vague enough to cause some of the dreaded economic policy uncertainty, but either way it is very unclear about what exactly financial regulation should involve.

    Beyond thinking Dodd-Frank generally was a bad bill, he's voted against most of its individual pieces.

    The entirety of Romney's plan for financial reform in the wake of the 2008 crisis is contained in the following sentence: "Repeal Dodd-Frank and replace with streamlined, modern regulatory framework." One might argue that this is vague enough to cause some of the dreaded economic policy uncertainty, but either way it is very unclear about what exactly financial regulation should involve.

    This might change with Paul Ryan. Not only is Ryan well known for his wonky style, but he voted for TARP, the Wall Street bailout. He also went to the floor of the House and asked his fellow Republicans to vote for TARP. One would imagine he would think that the status quo is flawed if he had to vote for TARP to save the economy. Alas, Paul Ryan voted against the Dodd-Frank Wall Street Reform and Consumer Protection Act, the major financial regulatory response to the crisis.

    (It might be worth noting that Public Citizen did an analysis that found that House members who voted for TARP and against Dodd-Frank, a club Paul Ryan belongs to and consists mostly of Republicans, received three times as much campaign money from the financial industry as those that voted the opposite in both cases. As Zach Carter pointed out in an analysis back in 2010, of the 60 Republican House members who voted for TARP and against Dodd-Frank, Paul Ryan received the ninth highest donation from the financial industry in 2010, with a haul of at least $531,500 for the year.)

    So Paul Ryan is against Dodd-Frank as an overall bill. He also seeks to repeal it in his budget. But what does Ryan think of the individual parts of Dodd-Frank? One could be opposed to Dodd-Frank as a whole while still thinking individual parts are good ideas. In order to isolate that question, we can look at a series of Dodd-Frank amendments Ryan voted on, as well as subsequent actions and statements.

    Consumer Protection: While the bill that became Dodd-Frank was going through the House, Ryan voted to scrap the Consumer Financial Protection Agency and replace it with a plan proposed by the Chamber of Commerce. Right before Dodd-Frank came up for a vote in the House, there was an amendment proposed by Rep. Walt Minnick (D-ID) to replace the CFPA with a council of existing regulators. According to reports from the time, this was modeled off suggestions from the Chamber of Commerce. The amendment failed, though Paul Ryan voted for it. Beyond concerns of accountability or funding of the CFPB, Paul Ryan would likely rather see the entire thing go.

    Derivatives Regulation: Part of Dodd-Frank requires that derivative contracts trade through a clearinghouse. We don't have a clear vote from Ryan that shows what he thought of derivatives at the time, but he did vote against the Lynch amendment. Stephen Lynch (D-Mass) proposed a simple amendment stating that a financial firm can't own more than 20 percent of a derivatives clearinghouse to prevent conflicts of interest. Later, Ryan also voted to delay the implementation of derivative regulations for one year in June 2011, signaling he doesn't approve of the aggressive derivatives reforms people like Gensler are championing at the CFTC. This contrasts him sharply with someone like John Hunstman, who had very strong derivatives reform as part of his broad, serious financial reform ideas during the Republican primary.

    Resolution Authority: Ryan voted for the repeal of resolution authority -- indeed, he sponsored the legsliation to repeal it. Resolution authority, or orderly liquidation authority, is a new set of legal abilities that allow the FDIC to take over and wind down a failing financial firm. When Barney Frank says that his bill actually has a death panel in it, he's referring to this part.

    We can get a bit specific with why Ryan likely did this. In his Path to Prosperity, Ryan makes two points in argument against resolution authority. The first is that it "intensifies the problem of too-big-to-fail by giving large, interconnected financial institutions advantages that small firms will not enjoy." As Barney Frank and others point out, there's not evidence that banks are actively seeking to be designated as systemically risky. The general read is that business are going out of their way to avoid that designation, even restructuring away from risky activities. Which is the point.

    The second critique is that "Federal Deposit Insurance Corporation (FDIC) now has the authority to access taxpayer dollars in order to bail out the creditors" and will presumably use it, preserving Too Big to Fail. Depending on who is talking, this usually refers to either the FDIC’s ability to provide “an immediate source of liquidity for an orderly liquidation, which allows continuation of essential functions and maintains asset values” or its ability to repay creditors.

    Dodd-Frank requires that the FDIC's responsibilities include ensuring "that unsecured creditors bear losses in accordance with the priority of claim,” that shareholders receive nothing "until after all other claims and the Fund are fully paid" and that any losses remaining afterward that could impact Treasury are repaid through assesments on systemically risky financial institutions. In order to avoid situations like AIG, the FDIC is explicitly prohibited from taking "an equity interest in or become a shareholder of any covered financial company or any covered subsidiary" during resolution. Management has to be fired. Taxpayer money is recouped and bailouts avoided.

    Title II is built to avoid looking like a bailout, self-consciously so. If the critique is about the powers to differentiate payments, those powers, as Douglas G. Baird and Edward R. Morrison noted about the powers, look like critical vendor orders or other parts of bankruptcy powers. By all accounts the FDIC rules are being written in this manner.

    Bankruptcy: Speaking at a town hall, Ryan has seemingly proposed modifying the bankruptcy code, perhaps in line with plans from the Hoover Institute, in order to handle financial firms. (He also seemed to endorse the Volcker Rule in that town hall, but I haven't seen that from him anywhere else.) This would mean the FDIC would lose the special powers it has been given, which are believed to be important for resolution, including advance planning and living wills, debtor-in-possession financing and liquidity, making payments to creditors based on expected recoveries, keeping operations running, having graduated regulations based on size and riskiness, the ability to transfer qualified financial contracts without termination, and the ability to turn up or down regulations going into a potential resolution based on prompt corrective action. If that is the plan, and those powers are unnecessary to tackle TBTF, Ryan should spell it out more clearly.

    At the same time, Ryan has proposed policies that were already in or based on Dodd-Frank. He has told CNBC and Ezra Klein that he was interested in using Luigi Zingales' approach to taking down a financial firm as outlined in a National Affairs article. This approach uses credit default swap measures, a financial derivative designed to gauge the risk of collapse, to judge when to take a financial firm into an orderly liquidation.

    As I noted at the time, this is a form of resolution authority. It is specifically a form of prompt corrective action, which requires regulators to go ahead and collapse a firm based on market signals instead of regulator judgement. For it to work, you'd need legal powers to carry out a resolution, which Ryan has voted against, as well as sufficient regulation of dervatives to make sure the price signal is clear, which Ryan also voted against. And it seems to stand in contrast to the bankruptcy approach he has talked about elsewhere.

    At this point there are some allusions to specifics in what Ryan talks about when it comes to taking down a large financial firm, though it often contradicts itself. But he hasn't offered anything specific on derivatives, consumer financial protection, insurance, securitization, ratings agencies, and the shadow-banking industry more broadly -- all of which would be up for grabs if Dodd-Frank was repealed under the Path to Prosperity.

    Mike Konczal is a Fellow at the Roosevelt Institute. Follow or contact the Rortybomb blog:

      

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  • Romney's Failed Unemployment Strategy and the Bizarro Stimulus of Paul Ryan

    Aug 13, 2012Mike Konczal

    Mitt Romney aired an ad last summer titled "Bump in the Road." It attacked President Obama's record on mass unemployment by linking it to a comment he made about there being bumps in the road to economic recovery. A group of people stood on a road in a desert, holding signs explaining their years of unemployment, their student debts, and their struggling families (something not dissimilar to the We Are the 99% Tumblr that started later that year).

    Mitt Romney aired an ad last summer titled "Bump in the Road." It attacked President Obama's record on mass unemployment by linking it to a comment he made about there being bumps in the road to economic recovery. A group of people stood on a road in a desert, holding signs explaining their years of unemployment, their student debts, and their struggling families (something not dissimilar to the We Are the 99% Tumblr that started later that year). They pointed to the real suffering that goes on beyond numerical aggregates like the unemployment rate.

    I remember this ad, because I remember several liberals being worried about this type of Romney campaign. Why? Because the liberals in question basically agreed with it. President Obama was trying to make a Grand Bargain with unemployment above 9 percent. The weak recovery was accepted as a given by the administration instead of the problem that had to be tackled. There was a lot of debate over what could be done and how, but at that point unemployment was off the table. President Obama would pivot back to jobs that fall, but it would remain a quiet priority, especially after so much time had been wasted. And it was a worry that if Mitt Romney ran a campaign that was all about unemployment all the time, President Obama would lose. I thought this was correct at the time.

    That has changed with Paul Ryan now announced as Romney's vice presidential running mate. This appears to signal that the Romney campaign will move away from the previous focus on unemployment towards arguing for the conservative transformation of the federal government and the social safety net. This move is being interpreted as a sign of weakness from the campaign, one where they are worried that their previous strategy was failing. But why was the unemployment message failing? The economy isn't much stronger, so it hasn't lost its potency. Mitt Romney's job creation record was being attacked, but that only gets you so far. I think a major reason why is because of an odd contradiction one can see from the recent "Romney Program for Economic Recovery, Growth, and Jobs" released by Romney's economics team. Romney has no actual interest in trying to bring unemployment down faster, which blunts the ability to really say anything about unemployment, but his economics team also wasn't signing off on the far-right's bizarro stimulus plans.

    There's already been a lot written on how the paper distorts the research it cites. The paper claims to "speed up the recovery in the short run." How? "By changing course from the policies of the current administration and ending economic uncertainty." What are the bold policies to help those unemployed people President Obama ignored? Tax code reform, block-granting Medicaid, and repealing Dodd-Frank and Obamacare while making "cost-benefit analysis important features of regulation."

    Which is to say that Romney wanted to focus on unemployment, but had no real serious plan on how to get unemployed people jobs. I can, quickly, come up with a set of conservative stimulus ideas on how to get the economy going again, but the wide range of these programs are missing from Romney's economics report. They aren't going to hire market monetarists to run the Federal Reserve. Mitt Romney just publicly said the Federal Reserve shouldn't go ahead with another round of quantitive easing [1]. There isn't the argument that the government should just not collect taxes for a year or two with borrowing costs so low, which will also make it that much harder to raise taxes to Clinton-era rates afterwards. There's nothing in the paper about housing, even though one of Romney's advisors is well known for his mass refinancing program to help boost demand. And there's no conditional lending to states to prevent layoffs on the condition that they dismantle public sector unions, or privatize certain government services, or whatever.

    Ideas have consequences, and the fact that Romney has no actual ideas for how to get the unemployed jobs means that making unemployment a big issue is only going to have so much traction with the electorate. "The long-term unemployed should vote for me so I can go after financial regulations," or "Vote for me, because I'll just ignore mass unemployment outright rather than not do enough and then pivot away" aren't political strategies that capitalize on the big vunerability Obama has on economic weakness.

    Given the number of policy entrepreneurs on the right, it's almost shocking how little effort I've seen to get creative with getting unemployment down. The policy for unemployment is just a set of conservative reforms conservatives would want to see anyway regardless of the economy. And the general message seems to be that unemployment is unfortunate, but the downside risks of trying to combat it are far too high. Better to just get through this period and focus on the long-term economy. The unemployed are, in fact, just bumps in the road.

    But the Romney Program document is interesting because it avoids embracing something I'll call "bizarro stimulus." These are arguments that doing things traditionally thought of as the opposite of economic stimulus will be the real stimulus and help bring unemployment down. Romney's economics team doesn't seem to want to go in that direction, yet that is the direction of the House Republicans and of Paul Ryan.

    Many economists believe that the Federal Reserve should lower rates, but that a "zero lower bound" holds conventional monetary policy in check. The debate is whether and how unconventional monetary policy can help. In bizarro stimulus, the problem is that the rate is at zero. If you were to raise that rate, you would get capital going again. Here's Paul Ryan from Summer 2010, arguing that "I think literally that if we raised the federal funds rate by a point, it would help push money into the economy, as right now, the safest play is to stay with the federal money and federal paper." This is usually thought of as incorrect by most economists, but that's why it is bizarro stimulus. Ryan has also promoted bills to drop the dual mandate of the Federal Reserve, even though the problem is the Federal Reserve not taking its dual mandate seriously enough.

    When the economy is weak and we are far away from full employment, we should run a larger deficit in order to boost demand. Austerity and the slashing of government spending will actually make the economy worse in these times. Unless you are in bizarro economics, under which austerity can expand the economy. David Brook wrote back in 2010, in an article called "Prune and Grow," that “Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions.” Though this research has many serious problems, it became part of the core of the new conservatives in the House, a group Paul Ryan is influential with. Republicans' economic policy in 2011 was all about expansionary austerity, with their JEC report making several references to the possibility of austerity being offset by confidence and certainty. Romney actually pointed out the absurdity of expansionary austerity back in May of this year, noting "I don’t want to have us go into a recession in order to balance the budget." Nobody could tell if Romney was going off message with that statement.

    It's interesting that Romney's advisors don't touch either of these ideas, yet they are an important part of how the House Republicans approach the economy. Will the Ryan pick also signal that Romney will move much further to the right on economic issues? We've rarely ever had to ask if a presidential candidate agrees with the views of his vice-presidential running mate, rather than the other way around, but that is now a relevant question.

    [1] Can you imagine the debate and coverage that would happen if President Obama encouraged Bernanke to move with QE3? Yet Mitt Romney calling out against QE3 doesn't get noticed, and certainly isn't thought of as "politicizing the Federal Reserve," even though it obviously is.

    Mike Konczal is a Fellow at the Roosevelt Institute. Follow or contact the Rortybomb blog:

      

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  • What is the Economic Policy Uncertainty Index Really Telling Us?

    Aug 8, 2012Mike Konczal

    Conservatives have crafted a measurement that uses their own rhetoric as evidence to support their economic talking points.

    Do you want to see a magic trick? It doesn't involves cards, fire, or anyone levitating. Instead I'm going to show you a set of Republican talking points magically turn into an economic index -- an index that Republicans then use to argue for their policies.

    Mitt Romney's economics team of Hubbard, Mankiw, Taylor, and Hassett have rapidly turned around an economic policy sheet titled "The Romney Program for Economic Recovery, Growth, and Jobs." Matt Yglesias has a post on the issue of sluggish growth and Dylan Matthews has one on their review of the stimulus literature. Brad DeLong takes the deep dive through the entire piece here.

    I'm interested in something I haven't seen people critically discuss enough, and that is the "policy uncertainty index." The Romney plan argues that "uncertainty over policy - particularly over tax and regulatory policy - limited both the recovery and job creation. One recent study by Scott Baker and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago found that this uncertainty reduced GDP by 1.4 percent in 2011 alone, and that restoring pre-crisis levels of uncertainty would add 2.3 million jobs in 19 months." This appears to be a new talking point for the candidate's team, as the same language was in a Wall Street Journal editorial by Hubbard over the weekend.

    Let's take a critical look at this paper, "Measuring Economic Policy Uncertainty," which also has its own website, as it is likely to come up again in the election season. There are two sets of issues, one related to what the index actually shows and another related to the construction of the index itself.

    Interpreting the Index

    First off, does the paper show what Romney's team claims? Matt O'Brien notes that the big run-up in uncertainty in 2011 is a function of the battle over the debt ceiling. This is very obvious from the graph of their index:

     

     

    I personally think we can blame that fiasco on House Republicans. But even if you think the Democrats share some of the blame, it has nothing to do with Dodd-Frank or Obamacare. But Romney's team is using this uncertainty issue to call for repealing both.

    That said, the rate is elevated starting around 2009. Why is that? The uncertainty index consists of three parts. The first a news search for articles on policy uncertainty, which we'll return to in a minute. The second part has to do with disagreements among economic forecasters. And the last part is "the number of federal tax code provisions set to expire in future years." Tax code provisions set to expire are weighted by the formula 0.5^((T+1)/12), where T is the number of months until the tax code expires. That means these provisions weigh more in the analysis as they get closer to expiring -- those with more time left have weights approaching 0, and those close to expiration approach 1.

    And of course, as the paper notes, "An important recent example involves the Bush-era income tax cuts originally set to expire at the end of 2010." The way the weighting works is that it jumps in the two years before expiration, which means the tax cuts scheduled to expire at the end of 2010 really start to matter for the index starting in late 2008, when President Obama is elected.

    Watch that again. George W. Bush's economic advisors, like Glenn Hubbard, pass a series of tax cuts in the early 2000s that are set to expire 10 years out. When Obama gets into office the deadline starts to approach, creating "uncertainty" in this index. Then people like Hubbard blame President Obama for all that uncertainty caused by the design of the Bush tax cuts. Brilliant.

    A Magic Trick

    But now for that magic trick. How do they construct the search of newspaper articles for their index, which generates a lot of the movement?

    Their news search index is constructed with four steps. They first isolate their search to a set of articles from 10 major newspapers (USA Today, the Miami Herald, the Chicago Tribune, the Washington Post, the Los Angeles Times, the Boston Globe, the San Francisco Chronicle, the Dallas Morning News, the New York Times, and the Wall Street Journal). They then search articles for the term "uncertainty" or "uncertain." They then filter again for the word "economic" or "economy." With economic uncertainty flagged, they then filter again for one of the following words to identify government policy: "policy," "'tax," "spending," "regulation," "federal reserve," "budget," or "deficit."

    See the problem? We don't know what specific stories are in their index; however, we can use their search terms listed above to find which articles would have likely qualified. Let's take a story from their first listed paper, USA Today"Obama taking aim at GOP pledge on campaign trail," from August 28, 2010 (for the rest of this post, I'm going to underline the words in quotes that would trigger inclusion in their policy uncertainty index):

    Brendan Buck, a spokesman for the House GOP lawmakers who crafted the pledge, said "it's laughable that the president would try to lecture anyone on spending." [....] Buck said the pledge was developed to address voter worries about high unemployment and record levels of government spending and debt.

    "While the president has exploded federal spending and ignored Americans who are asking, 'Where are the jobs?', the pledge offers a plan to end the economic uncertainty and create jobs, as well as a concrete plan to rein in Washington's runaway spending spree," Buck said.
    Spokespeople for the conservative movement tell reporters that President Obama's policies are causing economic uncertainty. Reporters write it down and publish it. Economic researchers search newspapers for stories about economic uncertainty and policy, and create a policy uncertainty index out of those talking points. The conservative movement then turns around and points to the policy uncertainty index as scientifically justifying their initial talking points about Obama and uncertainty as well as the need to implement their policies. Taa-daa! Magic.
     
    Two Other Issues
     

    It's amazing how much of the GOP rhetoric you find when trying to replicate this index. With that in mind, there are two additional issues with the index, one empirical and the other theoretical. Let's start with this story, likely caught in their index, USA Today's "Minority leader accuses Obama, aides of 'job-killing,'" from August 28, 2010: "House Minority Leader John Boehner of Ohio used a speech in Cleveland to blame Obama's spendingtax and regulatory policies for creating uncertainty and stalling economic growth."

    Let's pretend, after this story came out, that reporters follow up by asking a lot of experts what they think, and those experts say "There's little evidence to support Boehner's idea that uncertainty over regulation and policy are contributing to economic weakness." What happens? Do they cancel? No, the uncertainty index flags it as more economic uncertainty.

    If Boehner, upon reading that story, went out the next day and gave a quote to a reporter that said "I no longer think that uncertainty caused by regulation is contributing to our economic problems," that would be flagged as more uncertainty!

    Which is to say that the empirical problems with this measure of policy uncertainty always bias the results upward. Data is never perfect, so it is important to understand which way it is likely to bias. The noise machine of talking points biases this index upwards, but any stories pushing back against this uncertainty meme would also push the index upwards.

    There's also the theoretical issue. Their story is one of a weak economy created by government policy uncertainty, of "taxes, government spending and other policy matters." Last fall, the authors wrote an editorial for Bloomberg arguing that their model showed that "harmful rhetorical attacks on business and millionaires," the NLRB's actions against Boeing, and Obamacare were all major factors in the weak recovery. These all point to the supply side of the economy.

    But what about uncertainty from lack of demand? Consider a story that begins with "Keynesian economists argue that the economy today is weak because businesses are uncertain about future customers and workers are uncertain about their future jobs, and the textbook response to this situation is expansionary monetary and fiscal policy." This would be flagged in their index as a problem of government policy, though it is a story of weak aggregate demand.

    This isn't a hypothetical. Let's look at another story likely captured by their index, USA Today, "Retail sales drop for first time in 5 months," August 13, 2008:

    Retail sales fell in July, the weakest performance in five months, as shoppers shunned autos and other big ticket items. [....] Analysts said the poor showing in July, the last month for bulk mailings of stimulus checks, raised concerns about consumer spending going forward.

    "Cautious and uncertain consumers are watching their wallets and with the back-to-school shopping season under way, that does not bode well for retailers," said Joel Naroff, chief economist for Naroff Economic Advisors. [....] The disappointing performance of retail sales meant that the consumer sector, which accounts for two-thirds of total economic activity, got off to a weak start at the beginning of the third quarter.

    As the economy is going into freefall, as the worst recession since the Great Depression is starting, as the Great Moderation is coming to an end and the violence of the business cycle and a prolonged downturn shows its ugly head again, consumers are reducing consumption because of economic uncertainty. Yet this index reads this as just another example of out-of-control government policy and records it as such. The index will see stories about demand uncertainty as stories about supply, which means it will have trouble telling any accurate story about the Great Recession and our current troubles.

    (I have a follow up post, taking apart the rest of the index, here.)

    Follow or contact the Rortybomb blog:

      

     

    Conservatives have crafted a measurement that uses their own rhetoric as evidence to support their economic talking points.

    Do you want to see a magic trick? It doesn't involves cards, fire, or anyone levitating. Instead I'm going to show you a set of Republican talking points magically turn into an economic index -- an index that Republicans then use to argue for their policies.

    Mitt Romney's economics team of Hubbard, Mankiw, Taylor, and Hassett have rapidly turned around an economic policy sheet titled "The Romney Program for Economic Recovery, Growth, and Jobs." Matt Yglesias has a post on the issue of sluggish growth and Dylan Matthews has one on their review of the stimulus literature. Brad DeLong takes the deep dive through the entire piece here.

    I'm interested in something I haven't seen people critically discuss enough, and that is the "policy uncertainty index." The Romney plan argues that "uncertainty over policy - particularly over tax and regulatory policy - limited both the recovery and job creation. One recent study by Scott Baker and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago found that this uncertainty reduced GDP by 1.4 percent in 2011 alone, and that restoring pre-crisis levels of uncertainty would add 2.3 million jobs in 19 months." This appears to be a new talking point for the candidate's team, as the same language was in a Wall Street Journal editorial by Hubbard over the weekend.

    Let's take a critical look at this paper, "Measuring Economic Policy Uncertainty," which also has its own website, as it is likely to come up again in the election season. There are two sets of issues, one related to what the index actually shows and another related to the construction of the index itself.

    Interpreting the Index

    First off, does the paper show what Romney's team claims? Matt O'Brien notes that the big run-up in uncertainty in 2011 is a function of the battle over the debt ceiling. This is very obvious from the graph of their index:

     

     

    I personally think we can blame that fiasco on House Republicans. But even if you think the Democrats share some of the blame, it has nothing to do with Dodd-Frank or Obamacare. But Romney's team is using this uncertainty issue to call for repealing both.

    That said, the rate is elevated starting around 2009. Why is that? The uncertainty index consists of three parts. The first a news search for articles on policy uncertainty, which we'll return to in a minute. The second part has to do with disagreements among economic forecasters. And the last part is "the number of federal tax code provisions set to expire in future years." Tax code provisions set to expire are weighted by the formula 0.5^((T+1)/12), where T is the number of months until the tax code expires. That means these provisions weigh more in the analysis as they get closer to expiring -- those with more time left have weights approaching 0, and those close to expiration approach 1.

    And of course, as the paper notes, "An important recent example involves the Bush-era income tax cuts originally set to expire at the end of 2010." The way the weighting works is that it jumps in the two years before expiration, which means the tax cuts scheduled to expire at the end of 2010 really start to matter for the index starting in late 2008, when President Obama is elected.

    Watch that again. George W. Bush's economic advisors, like Glenn Hubbard, pass a series of tax cuts in the early 2000s that are set to expire 10 years out. When Obama gets into office the deadline starts to approach, creating "uncertainty" in this index. Then people like Hubbard blame President Obama for all that uncertainty caused by the design of the Bush tax cuts. Brilliant.

    A Magic Trick

    But now for that magic trick. How do they construct the search of newspaper articles for their index, which generates a lot of the movement?

    Their news search index is constructed with four steps. They first isolate their search to a set of articles from 10 major newspapers (USA Today, the Miami Herald, the Chicago Tribune, the Washington Post, the Los Angeles Times, the Boston Globe, the San Francisco Chronicle, the Dallas Morning News, the New York Times, and the Wall Street Journal). They then search articles for the term "uncertainty" or "uncertain." They then filter again for the word "economic" or "economy." With economic uncertainty flagged, they then filter again for one of the following words to identify government policy: "policy," "'tax," "spending," "regulation," "federal reserve," "budget," or "deficit."

    See the problem? We don't know what specific stories are in their index; however, we can use their search terms listed above to find which articles would have likely qualified. Let's take a story from their first listed paper, USA Today"Obama taking aim at GOP pledge on campaign trail," from August 28, 2010 (for the rest of this post, I'm going to underline the words in quotes that would trigger inclusion in their policy uncertainty index):

    Brendan Buck, a spokesman for the House GOP lawmakers who crafted the pledge, said "it's laughable that the president would try to lecture anyone on spending." [....] Buck said the pledge was developed to address voter worries about high unemployment and record levels of government spending and debt.

    "While the president has exploded federal spending and ignored Americans who are asking, 'Where are the jobs?', the pledge offers a plan to end the economic uncertainty and create jobs, as well as a concrete plan to rein in Washington's runaway spending spree," Buck said.
    Spokespeople for the conservative movement tell reporters that President Obama's policies are causing economic uncertainty. Reporters write it down and publish it. Economic researchers search newspapers for stories about economic uncertainty and policy, and create a policy uncertainty index out of those talking points. The conservative movement then turns around and points to the policy uncertainty index as scientifically justifying their initial talking points about Obama and uncertainty as well as the need to implement their policies. Taa-daa! Magic.
     
    Two Other Issues
     

    It's amazing how much of the GOP rhetoric you find when trying to replicate this index. With that in mind, there are two additional issues with the index, one empirical and the other theoretical. Let's start with this story, likely caught in their index, USA Today's "Minority leader accuses Obama, aides of 'job-killing,'" from August 28, 2010: "House Minority Leader John Boehner of Ohio used a speech in Cleveland to blame Obama's spendingtax and regulatory policies for creating uncertainty and stalling economic growth."

    Let's pretend, after this story came out, that reporters follow up by asking a lot of experts what they think, and those experts say "There's little evidence to support Boehner's idea that uncertainty over regulation and policy are contributing to economic weakness." What happens? Do they cancel? No, the uncertainty index flags it as more economic uncertainty.

    If Boehner, upon reading that story, went out the next day and gave a quote to a reporter that said "I no longer think that uncertainty caused by regulation is contributing to our economic problems," that would be flagged as more uncertainty!

    Which is to say that the empirical problems with this measure of policy uncertainty always bias the results upward. Data is never perfect, so it is important to understand which way it is likely to bias. The noise machine of talking points biases this index upwards, but any stories pushing back against this uncertainty meme would also push the index upwards.

    There's also the theoretical issue. Their story is one of a weak economy created by government policy uncertainty, of "taxes, government spending and other policy matters." Last fall, the authors wrote an editorial for Bloomberg arguing that their model showed that "harmful rhetorical attacks on business and millionaires," the NLRB's actions against Boeing, and Obamacare were all major factors in the weak recovery. These all point to the supply side of the economy.

    But what about uncertainty from lack of demand? Consider a story that begins with "Keynesian economists argue that the economy today is weak because businesses are uncertain about future customers and workers are uncertain about their future jobs, and the textbook response to this situation is expansionary monetary and fiscal policy." This would be flagged in their index as a problem of government policy, though it is a story of weak aggregate demand.

    This isn't a hypothetical. Let's look at another story likely captured by their index, USA Today, "Retail sales drop for first time in 5 months," August 13, 2008:

    Retail sales fell in July, the weakest performance in five months, as shoppers shunned autos and other big ticket items. [....] Analysts said the poor showing in July, the last month for bulk mailings of stimulus checks, raised concerns about consumer spending going forward.

    "Cautious and uncertain consumers are watching their wallets and with the back-to-school shopping season under way, that does not bode well for retailers," said Joel Naroff, chief economist for Naroff Economic Advisors. [....] The disappointing performance of retail sales meant that the consumer sector, which accounts for two-thirds of total economic activity, got off to a weak start at the beginning of the third quarter.

    As the economy is going into freefall, as the worst recession since the Great Depression is starting, as the Great Moderation is coming to an end and the violence of the business cycle and a prolonged downturn shows its ugly head again, consumers are reducing consumption because of economic uncertainty. Yet this index reads this as just another example of out-of-control government policy and records it as such. The index will see stories about demand uncertainty as stories about supply, which means it will have trouble telling any accurate story about the Great Recession and our current troubles.

    (I have a follow up post, taking apart the rest of the index, here.)

    Follow or contact the Rortybomb blog:

      

     

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