Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • The IMF Goes All-Out on Balance-Sheet Recessions, Providing Sanity on Economic Policy

    Jul 3, 2012Mike Konczal

    The literature summary I just put out on balance-sheet recessions examines the recent April 2012 World Economic Report by the IMF. It is remarkable how important this report is. The relevant part is Chapter 3, Dealing with Household Debt.

    The literature summary I just put out on balance-sheet recessions examines the recent April 2012 World Economic Report by the IMF. It is remarkable how important this report is. The relevant part is Chapter 3, Dealing with Household Debt. This IMF report is well to the Keynesian side of almost all major US debate, and its recommedations and observations are incredibly sensible. You should read it all, but I want to point out five few high-level arguments they make:

    1. A run-up in household debt and leverage explains the economic collapse across countries.

    Here's a graph they include, comparing increases in household debt-to-income ratios from 2002-2006 against consumption collapses in 2010.

    Implicit here is that the problems aren't labor "inflexiblity" or whatever the latest faddish argument is. It's household leverage.

    You see the same exact relationship across the states in the United States, where the biggest increases in household leverage ratios (i.e. the places with the biggest housing collapses) have the worst unemployment and consumption collapses. In the United States monetary policy and transfers help mitigate this. We send checks to Arizona and Florida, where housing is a disaster. As Paul Krugman and others have pointed out, there are no equivalent transfers across these countries, especially in the Euro.

    2. Financial crises are not a driver of prolongued recessions. If anything they are a symptom.

    There's a common wisdom among many elites that prolongued recessions are just what happens in the aftermath of a financial crisis. Most people who argue this derive it from Kenneth Rogoff and Carmen Reinhart's This Time It's Different. These arguments have always been a bit difficult to justify. Usually people who invoke them call for inaction, as if there isn't anything to be done but let the recession run its course.

    The IMF report looks at OECD data on housing busts over the past 30 years and compares housing busts with large household leverage ratios with those with low ratios. Busts with large household leverage ratios have much bigger drops in consumptions years out, just like what we see in our recession. What is important is that this holds with or without financial crises:

    They don't discuss it, but this implies that the causation runs the other way; countries that have giant drops in housing values and/or increases in debt-to-income ratios probably create financial crises. But this means that having a financial crisis, like we did, doesn't change the game; it just amplifies the case for normal demand-side stimulus.

    III. HAMP is a failed program.

    I remember when saying that HAMP was a failed program that was making the situation worse was a controversial opinion. At the recent Netroots Nation I was chatting with David Dayen and we talked about his portrait of HAMP series from fall 2010, which included the title that HAMP "makes your financial situation worse." That was an argument that had to be built, one data dump and one blog post at a time, over Treasury trying hard to convince people otherwise.

    We bloggers ringing the bell about HAMP also argued two additional points: that Treasury wasn't actually spending the money Congress told it to spend on homeowners. This was at a point where trying to find additional funding for stimulating the economy was the highest priority. And it was also well after the second round of TARP funding went out based on promises by Larry Summers of spending that allocated money on homeowners. And, secondly, that these problems weren't going away, because they were fundamental to how HAMP was designed.

    Here's the IMF: "HAMP had significant ambitions but has thus far achieved far fewer modifications than envisaged....By the same token, the amount disbursed under MHA as of December 2011 was only $2.3 billion, well below the allocation of $30 billion (0.2 percent of GDP). Issues with HAMP’s design help explain this disappointing performance." All three points, taken for granted in the report.

    IV. Foreclosures are a problem.

    It's never been clear whether Treasury views mass foreclosures as a macroeconomic problem. Well, the IMF does:
    A further negative effect on economic activity of high household debt in the presence of a shock, postulated by numerous models, comes from the forced sale of durable goods (Shleifer and Vishny, 1992; Mayer, 1995; Krishnamurthy, 2010; Lorenzoni, 2008)...The associated negative price effects in turn reduce economic activity through a number of self-reinforcing contractionary spirals.
     
    The IMF staff notes that “distress sales are the main driving force behind the recent declines in house prices—in fact, excluding distress sales, house prices had stopped falling” and that “there is a risk of house price undershooting” (IMF, 2011b, p. 20)...Overall, debt overhang and the deadweight losses of foreclosures can further depress the recovery of housing prices and economic activity. These problems make a case for government involvement to lower the cost of restructuring debt, facilitate the writing down of household debt, and help prevent foreclosures (Philippon, 2009).
    Couldn't put it better myself. Ironically I had first heard the theoretical financial-macroeconomic arguments about preventing the fireselling of assets into a depressed market from Shleifer/Vishny's 1992 paper that the IMF cites. Shleifer is a protégé of Larry Summers, so I assumed Summers might have gone a bit harder about preventing the mass fireselling of the largest consumer asset, an asset which just has a gigantic collapse in value, into the largest economic downturn since the Great Depression. Alas.
     
    V. Demand demand-side stimulus. Across the board. Now.
     
    One has good reason to dread hearing the policies the IMF recommends for a country in a crisis. Maximal labor "flexiblity"? Cat food for old people? Picking government functions out of a hat to privatize? What does the IMF recommend here? Ok, brace yourself:

    Temporary macroeconomic policy stimulus...simulations of policy models developed at six policy institutions suggest that, in the current environment, a temporary (two-year) transfer of 1 percent of GDP to financially constrained households would raise GDP by 1.3 percent and 1.1 percent in the United States and the European Union, respectively...Monetary stimulus can also provide relief to indebted households by easing the debt service burden...A social safety net can automatically provide targeted transfers to households with distressed balance sheets and a high marginal propensity to consume, without the need for additional policy deliberation...

    Support for household debt restructuring: Finally, the government may choose to tackle the problem of household debt directly by setting up frameworks for voluntary out-of-court household debt restructuring—including write-downs—or by initiating government-sponsored debt restructuring programs. Such programs can help restore the ability of borrowers to service their debt, thus preventing the contractionary effects of unnecessary foreclosures and excessive asset price declines.

    There's then a major discussion about what went right in the United State's Great Depression and Iceland's recent collapse on comphrensive housing policy.

    Huh. That's actually an amazing set of polices. When can we start? And can we get the IMF advising US economic policy if this is what they are suggesting?

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  • New Report: A Literature Summary on New Balance-Sheet Recession Research

    Jul 3, 2012Mike Konczal

    In the last 8 months there's been a ton of research validating the theory and arguments of the "balance-sheet recession." I wrote up a literature summary of this research as a Roosevelt Institute white paper: "How Mortgage Debt is Holding Back the Recover

    In the last 8 months there's been a ton of research validating the theory and arguments of the "balance-sheet recession." I wrote up a literature summary of this research as a Roosevelt Institute white paper: "How Mortgage Debt is Holding Back the Recovery." You can download a PowerPoint presentation on the paper as well.

    This paper was designed to give some background for those interested in understanding this powerful theory, backed by the latest empirical research, and needed to be caught up. I noticed that the latest Economic Report of the President and the latest IMF World Economic report were backing this theory and these researchers. It is important for activists to understand that elite opinion is moving on the conneciton of the housing bubble collapse and slow growth and mass unemployment, and this will have implications for those arguing against foreclosures and for debtor relief.

    The key of the report is the following graph, which summarizes the four papers I dig into:

    I'll be discussing the individual reports in the future. I had previously interviewed Amir Sufi on the first two papers last fall.

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  • O Christmas Tree: Why Scalia's Dissent is More Activist Than the Roberts Decision

    Jul 3, 2012Mike Konczal

    Roberts's decision to uphold the individual mandate as a tax was based on solid and established legal arguments, but the dissent's justification for throwing the whole law out was pure radicalism.

    CHIEF JUSTICE ROBERTS: You're telling me they thought of it as a tax, they defended it on the tax power. Why didn't they say it was a tax?

    Roberts's decision to uphold the individual mandate as a tax was based on solid and established legal arguments, but the dissent's justification for throwing the whole law out was pure radicalism.

    CHIEF JUSTICE ROBERTS: You're telling me they thought of it as a tax, they defended it on the tax power. Why didn't they say it was a tax?

    GENERAL VERRILLI: They might have thought, Your Honor, that calling it a penalty as they did would make it more effective in accomplishing its objective. But it is — in the Internal Revenue Code it is collected by the IRS on April 15th. I don't think this is a situation in which you can say -
     
    CHIEF JUSTICE ROBERTS: Well, that's the reason. They thought it might be more effective if they called it a penalty.
     
    -Supreme Court arguments, March 27th, 2012 (transcript)

    Last week, the Supreme Court found in a 5-4 vote that the individual mandate survives under the taxing power instead of the Commerce Clause. Here is the decision, authored by Chief Justice Roberts. I've noticed two responses from conservatives:

    The first is that Roberts, by looking to the taxing power in the Constitution, found something liberals had never argued. Related is the argument that liberals took the constitutionality of the mandate for granted and never built out the framework necessary to argue for it, especially in the form of a tax.

    I haven't followed health care closely, but I do try to keep up with Jack Balkin's work, and he's been on the taxing power since forever ago. Here's two amicus briefs (h/t Incidental Economist for the actual brief links, who also gives them "most influential" status) that come from the team of Jack Balkin at Yale Law School and Gillian Metzger and Trevor Morrison at Columbia Law School. Their Fourth Circuit brief covers this (Argument 1: "The minimum coverage free provision is a permissible exercise of Congress's taxing power"), as does the Supreme Court brief (Argument 1: "The minimum coverage provision falls within Congress's expansive tax power and is not an impermissible direct tax").

    In "The Lawfulness of Health-Care Reform," Akhil Amar writes that Obamacare "is proper under at least six different theories, each one of which has deep roots in constitutional text and common sense." The very first one? "It is outlandish to think that [Obamacare's] provisions exceed the sweeping power that the Constitution confers upon Congress to 'lay and collect Taxes, Duties, Imposts, and Excises.'" And Andrew Koppelman, in "Bad News for Mail Robbers: The Obvious Constitutionality of Health Care Reform," noted that "Even if you somehow suppose that the health care mandate exceeds the commerce power, it would be valid anyway as an exercise of the power to tax," which is now the law of the land. These thinkers are at the forefront of elite liberal legal scholarship, and they all made this argument. It showed up in the oral arguments as well, with Roberts paying particular attention to it, as Brian Beutler of TPM caught at the time.

    The second response conservatives have is that Roberts found something Congress never intended. National Review's editors, immediately after the decision, argued that one "distinguishes, though, between construing a law charitably and rewriting it. The latter is what Chief Justice John Roberts has done." The dissent itself argues that "to say that the Individual Mandate merely imposes a tax is not to interpret the statute but to rewrite it."

    But in terms of rewriting a bill and judicial activism, I haven't seem any conservatives deal with the "Christmas Tree" doctrine. Given that the dissenting judges found the mandate and related major parts of the bill unconstitutional, what should they do with the rest of the bill? For instance, what should be done about the student loan reform, a major and obviously constitutional provision that was included with the ACA?

    The dissenting judges would overturn it. They'd overturn the entire bill, including the student loan provisions. But why? Here is their logic, from the dissent (my bold):

    Such [minor] provisions validate the Senate Majority Leader’s statement, “‘I don’t know if there is a senator that doesn’t have something in this bill that was important to them. . . . [And] if they don’t have something in it important to them, then it doesn’t speak well of them.  That’s what this legislation is all about: It’s the art of compromise.’ ” [Quote from New York Times article.] Often, a minor provision will be the price paid for support of a major provision.  So, if the major provision were unconstitutional, Congress would not have passed the minor one.
     
    The Court has not previously had occasion to consider severability in the context of an omnibus enactment like the ACA, which includes not only many provisions that are ancillary to its central provisions but also many that are entirely unrelated—hitched on because it was a quick way to get them passed despite opposition, or because their proponents could exact their enactment as the quid pro quo for their needed support. 
     
    When we are confronted with such a so called “Christmas tree,” a law to which many nongermane ornaments have been attached, we think the proper rule must be that when the tree no longer exists the ornaments are superfluous. We have no reliable basis for knowing which pieces of the Act would have passed on their own.

    Notice how this dissent comes up with an elaborate theory of how and why Congress passed the pieces of the bill they did, rewriting the history of how and why health care reform passed. With no previous case law, they turn to a quote from a New York Times article, of all things, to determine the constitutionality of things like student loan reform.

    And this history strikes me as ideologically predicated on a third-rate "Public Choice" criticism, which is that all the minor provisions were "quid pro quo" bribes needed to secure passage. It reads like when Scalia brought up the Cornhusker Kickback during legal arguments. So it isn't derived from case law, or a theory of the courts or the law, but on an ideological, right-wing vision of how political actors behave.

    Which is to say that the dissent took a maximal course of rewriting and assuming not only the intent but the counterfactual of congressional action and the ACA, including what it does, why it does it, and how it came to be, in their Christmas Tree doctrine. This is the very definition of judicial activism.

    If Roberts was interested in minimizing his activism and rewriting of congressional action, as well as maintaining a baseline of presuming the legitmacy and constitutionality of congressional action, wouldn't he have gone with the liberals instead of the conservative dissent?

    Now that CBS News has revealed that Roberts changed his vote from siding with the conservatives to siding with the liberals, everyone is trying to figure out why. I wonder if it is because the dissenters wouldn't back down from their Christmas Tree doctrine and Roberts called foul on its absurdity.

    Mike Konczal is a Fellow at the Roosevelt Institute.

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  • A Note on Free Market Fairness: Is "Economic Liberty" Incoherent?

    Jun 20, 2012Mike Konczal

    There's a fantastic symposium on the book Free Market Fairness going on over at the Bleeding Heart Libertarian website. Make sure to check out Sam Freeman and Elizabeth Anderson, as well as Tomasi's replies to both.

    There's a fantastic symposium on the book Free Market Fairness going on over at the Bleeding Heart Libertarian website. Make sure to check out Sam Freeman and Elizabeth Anderson, as well as Tomasi's replies to both. I'm going to add my thoughts on reading the book; note that I'm an amateur when it comes to many of these political theory debates but something strikes me as missing.

    One of the core parts of Free Market Fairness' theory of "market democracy" is enshrining economic liberty at the level of basic liberties protected by the constitution, like free speech, the right to a trial or political participation.

    In Rawls' formulation, it means that economic liberties would be protected by the first principle of justice. This is the principle that each "person has an equal claim to a fully adequate scheme of equal basic rights and liberties, which scheme is compatible with the same scheme for all." These basic liberties are “inalienable,” and “any undertakings to waive or to infringe them are void ab initio [to be treated as invalid from the outset].” Citizens cannot bargain or trade their basic liberties away.

    Many on the left point out how economic liberty isn't true liberty unless it is a fair value liberty, or a liberty that isn't just formally equal but also is substantively equal. To see examples using Rawls' framework, political equality is of the substantive variety, as it matters whether you can actually vote and participate, but religion is only formally equal, as you don't have a right to an expensive church for your personal, elaborate religious ceremonies. The left says economic liberty isn't really liberty unless there's substantive equal ability to participate in the economy.

    I'm all for that critique as far as it goes, but I think it is important to go a step further and argue that formulating economic liberty as a basic liberty is, practically speaking, incoherent.

    The Department of Stabilization

    Rawls described a stabilization branch of the state in Theory of Justice, tasked with bringing about full employment. In practice a lot of our economic debates are focused on what to do about mass unemployment in this crisis.  Let's do a quick map of economic agents in our current Great Recession and how the downturn has impacted them:

    There are workers, many of whom are unemployment, and they have sluggish wage growth and low quit rates. Incumbent managers and owners are experiencing big profits and large bargaining power over their workforce. Capital owners have benefitted from disinflationary trends. Entrepreneurs find it difficult to start new businesses amidst mass unemployment. The government could lean against all these trends by doing stimulus, but taxpayers would be on the line if it didn't work out.

    Now here's what I mean by incoherent: treating economic issues as a basic liberty tells us nothing about how to address stabilization one way or the other and substantially confuses our intuitions about how to approach the problem - which is one of tradeoffs. The first principle would only allows certain breaches of inalienable economic liberty in order to make the most extensive set of liberties, compatible with similar liberty for others. Now I understand that the regulation of basic liberties (like free speech) is problematic for Rawls, but it dissolves into nothingness here under market democracy.

    Basic liberties can't guide us, because liberty for one comes at the expense of liberty for others. Which economic liberties are we to preserve? The one of the unemployed to work, the entrepreneur to have customers, bosses to their profits or rentiers to their capital income? All of these liberties are part of the economic realities of each agent, and these are fundamentally in tension with each other. There's no way to view them as "compatible" with each other as a sufficient condition to animate decision-making.

    The only way to address them as a matter of policy is to balance them against each other according to some principle. Full employment? Price stability? Deflation and the Gold Standard? Bringing in the concept of liberty prevents the ability to discuss these in terms of tradeoffs, as the whole point of basic liberties is that groups of citizens can't have their basic liberties traded off each other.

    One could say that the only system is thus one of no stabilization. But this is a policy choice, no different than emphasizing full employment at all costs. There's nothing about mass unemployment that must contain more inalienable liberty than full employment - it is just a different set of actors who benefit. And this would look suspiciously like bringing in one set of arguments for how the economy should work and whom it should work for through the courts, rather than democratically through argument in the public sphere.

    This incoherence exists more broadly. For instance, uses of basic liberties aren't up for being traded. I can't sell you my vote, and I can't ask the government to enforce a contract where you've sold me your right to a fair trial. Yet economic transactions are all about trading off economic rights. When I sell you my labor I'm accepting serious limitations on what I can do with my labor - it now belongs to you.

    Thus economic liberty is often, at any moment, zero-sum: a more extensive liberty for the boss comes at limiting the liberty of the worker. The same for the creditor and the debtor. One of the first big "liberty of contract" cases was Pennsylvania's state court's 1886 Godcharles v. Wigeman, which struck down a state act prohibiting payment of wages in scrip. Here the benefit of the boss (and the company) came at the expense of the worker in the form of the means of payment. This may be a pareto-optimal trade when it happens - market democracy would presume that it must be by definition of it happening - but assuming I'm giving away a liberty for my ultimate long-term benefit, as well as the benefit of the economy as a whole, is way off the reservation of how we consider the other basic liberties.

    The best way to conceptualizing it is within a framework of justifying inequalities, which is what Rawls' second principle tries to do. The second principle's difference principle could be the wrong approach - we might want to maximize growth regardless of its impact on the poor - but it is the right spot on the lexical framework to approach such a question. Pushing these questions into the highest lexical position leaves us with nothing coherent to say on the matters, it disrupts our normal thinking about liberty and stops our ability to see these issues as what they fundamentally are, which is balancing private forms of power and providing rules that bend them towards the greater good of the economy. Rules that are, I'd argue, best constructed through democratic argument; but rules that are in no way clarified by referring to more abstract notions of liberty.

     

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  • Should the Federal Reserve Go into the Muni Market?

    Jun 18, 2012Mike Konczal

    It seems likely that the Federal Reserve will provide additional easing in reponse to a declining economic environment when it meets later this week. But what form will this easing take? Tim Duy does the Lord's work in trying to read the tea leaves here. He ultimately concludes that nobody has any idea, and that this is a major communications failure on the part of the Federal Reserve.

    It seems likely that the Federal Reserve will provide additional easing in reponse to a declining economic environment when it meets later this week. But what form will this easing take? Tim Duy does the Lord's work in trying to read the tea leaves here. He ultimately concludes that nobody has any idea, and that this is a major communications failure on the part of the Federal Reserve. "We really have no idea what the Fed is going to do or why they are going to do it.  Reasonable analysis ranges from nothing to massive quantitative easing."

    Cardiff Garcia of FT Alphaville also tries to make sense of the possibilities, including discussing this decision tree (why aren't there more decision trees on blogs?) from Credit Suisse:

    That's a pretty good list of ideas; Garcia has more, including a chart with pros/cons of each option.

    What else could it do? Here's a suggestion Richard Clayton, the Research Director of Change To Win, emailed me after my interview with Joe Gagnon, that I haven't seen as part of the discussion:

    One question that Gannon doesn’t deal with directly: under Section 14 b 1 the Fed has the authority to purchase any obligation of a state or local government of 6 months maturity or less. This provision seems clearly to permit a mass refinancing of state and local government debt at the current 6 month interest rate (very close to 0), which would save state and local gov’ts approximately $75 billion a year (going by the flow of funds #s for state and local interest payments). Moreover, since state and local govts do the bulk of infrastructure investing, the fed could create a program to fully fund such investment through purchases of newly issued 6 month bonds, for projects that meet criteria the Fed sets out (such as being approved by a small committee of civil engineers appointed by the regional fed branches for that purpose). Finally, under section 24 of the Act, the fed can buy from national banks loans to finance residential construction, which in effect would give the fed the ability to spur new multi-family construction (sorely needed, as evinced by rising rents) by enabling lending banks to effectively sell the loans off their books.

    Should we be pushing the Federal Reserve to purchase from the muni market, buying short-term state or local government debt? Asking around, a big practical issue is how much to buy from each state, but the Federal Reserve could come up with a solution. If the estimate is correct, that $75 billion would make a major difference to weak state and local budgets, which is a major form of austerity and a major check to recovery during this Great Recession. Clayton's other suggestion is similar to buying MBS, which has a high probability of going through in the flowchart above. The mortgage rate is low but could be much lower, and the Federal Reserve can make that happen.
     
    But I haven't heard this discussed much. What is your take - should the Federal Reserve purchase short-term state and local government debt?
     
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