Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • 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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  • Twilight of the Elites Review Up, Plus Weekend Links

    Jun 15, 2012Mike Konczal

    I have a review of Chris Hayes' excellent new book, Twilight of the Elites, now online at Dissent Magazine.  Check it out here.

    More links:

    Elise Foley has the best writeup of the policy behind President Obama's important executive order surrounding the Dream Act.

    I have a review of Chris Hayes' excellent new book, Twilight of the Elites, now online at Dissent Magazine.  Check it out here.

    More links:

    Elise Foley has the best writeup of the policy behind President Obama's important executive order surrounding the Dream Act.

    JW Mason at Slackwire tries to find the method in the ECB's madness. Great stuff.

    The Prison Law Blog is sadly ending (though archives will be available online); long live the new project Evolving Standards of Decency.

    Monica Potts big American Prospect story on poverty, reported after living in Kentucky for several months.

    Fantastic Elizabeth Anderson Bleeding Heart Libertarian post on economic freedom. I should reread her "What is the Point of Equality?"

    A Boston Review interview with Michael Lind on his new book.

    Dark times, take comfort in the small victories. Here's a victory from Occupy Minnesota on foreclosure activism, keeping the mother of an activist in her home.

    Marcy Wheeler gives an overview of David Dayen's foreclosure fraud panel from Netroots Nation. I got a chance to talk with Neil Barofsky the night before; I'm really looking forward to his new book about the bailouts and the Obama administration.

    I love when you can see how much the Roots enjoy being in geeky Jimmy Fallon skits, like everyone singing Call Me Maybe with Carly Rae Jepsen while playing elementary school musical instruments. Also Fallon is having the best time too - I need to watch this show more often, great vibe:

     

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  • The Rent(al Income as a Percentage of GDP) Is Too Damn High, and Households Severely Burdened with Housing Costs

    Jun 15, 2012Mike Konczal

    Here's a great graph from Mike Norman Economics:

    Here's a great graph from Mike Norman Economics:

    Rental Income is "Rental Income of Persons with Capital Consumption Adjustment" (which you can find in FRED here). What's that? According to the BEA: "It consists of the net income from the rental of tenant-occupied housing by persons, the imputed net income from the housing services of owner-occupied housing, and the royalty income of persons from patents, copyrights, and rights to natural resources."

    And, starting in the late 1980s it skyrockets as a percentage of our economy. It declines in the mid-2000s (the BEA explains why here), but is returning with a vengance. (Update: This data includes imputed rents homeowners pay themselves, and that is driving a lot of the increase, and we should emphasize that it makes straightforward analysis more complicated.)

    But we are concerned with this impact on real people. What does the rental market look like on the ground, especially for people with high rents? The Joint Center for Housing Studies of Harvard University just released their 2012 State of the Nation's Housing.

    (Aside: do we have too many houses? Study: "Given that the number of new homes added in 2002–11 was lower than in any other ten-year period since the early 1970s, it is difficult to argue that overbuilding is dragging down the housing market. Instead, the excess housing supply largely reflects the sharp slowdown in average annual household growth in 2007–11 to just 568,000—less than half the pace in the first half of the 2000s or even the 1.15 million averaged in the late 1990s." This household formation drop is due to the unemployment crisis and "a sharp drop in immigration." There are some good charts that explain this.)

    For the purposes of our rentier economy, I want to look at something they emphasize: people burdened by housing expenses. They find that, from 2007 to 2010, there was an increase of 2.3 million households paying more than half of their income for housing (what they define as "severly burdened"); that brings it to a total of 20.2 million. That is no doubt impacted by the unemployment crisis, but this is a longer-term trend too. There was an increase of 4.1 million people paying more than half their income for housing from 2001-2007:

    That 20.2 million severly burdened households are equal to 18 percent of all households. 27 percent of renters fall into this severly burdened category, with homeowners roughly half that number.

    Who falls into this category? Older people are vunerable, with a rise from 12 percent to 16 percent of 55-64 year olds falling into the severly burdened category from 2007 to 2010. Metropolian areas, especially core cities, are places where this is prevalent. It impacts poorer people the most, with over 60 percent of those making less than $15,000 in this category, and 30 percent of those making between $15 and $30 thousand dollars a year as well. It's negatively correlated with education, with those with a college degree having the lowest rates - so this isn't a matter of young college graduates overpaying to live in a nice city.

    Indeed It is worth noting that poor families with children paying more than fifty percent of their income on housing spend less on other essentials. "Among families with children in the bottom expenditure quartile, those with severe housing cost burdens spend about three-fifths as much on food, half as much on clothes, and two-fifths as much on healthcare as those living in affordable housing." No doubt some of these cost burdened households love living where they do, save on transportation and don't mind the spending; others are spending much less on food for their children because they need to spend so much to keep a roof over their heads.

    This is what it looks like when working people get squeezed by rents.

     

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  • Do I Need to Get Healthy to Save For Retirement? A Response to Peter Orszag's Barbell Approach

    Jun 15, 2012Mike Konczal

    Why the argument that we can't have short-term stimulus without long-term deficit reduction doesn't hold up.

    Let's say there are two obvious things I should be doing to make my life better: being healthier now and saving more for retirement. We'll say that it is hard to disagree with these two items, and that these are obviously smart moves for me to make.

    Why the argument that we can't have short-term stimulus without long-term deficit reduction doesn't hold up.

    Let's say there are two obvious things I should be doing to make my life better: being healthier now and saving more for retirement. We'll say that it is hard to disagree with these two items, and that these are obviously smart moves for me to make.

    Given that they are the smart things to do, I should try to do both at the same time, right? I shouldn't let my failure to do one prevent my ability to do the other. It would be weird for me to tell my doctor I was going keep on eating multiple triple bacon cheeseburgers because I wasn't maxing out my 401(k) contributions; my accountant would be puzzled if I told him I wasn't going to invest my savings for retirement until I dropped some weight. There could be convoluted situations in which I could only do both -- no point in saving for retirement if I'm not going to make it there -- but it would have to be backed up by undeniable facts, since it would involve not trying to do something I believed was a good idea.

    Yet this is how elite, center-leaning policy intellectuals think on the issue of deficits. The Very Serious People, if you will. They think we need to increase the size of the short-term deficit. They also think that we need to reduce the size of the long-term deficit. But they think that these two actions can only move together and, like I told my doctor and accountant, if one doesn't happen the other can't either. This is often known as the two-deficits problem, which I last talked about in The Nation.

    Take the Domenici-Rivlin Restoring America's Future plan. In the overview it states, "First, we must recover from the deep recession that has thrown millions out of work... Second, we must take immediate steps to reduce the unsustainable debt ... These two challenges must be addressed at the same time, not sequentially." (The deficit hawk Comeback America Initiative report is similiar, with $500 billion dollars in infrastructure over two years tied to focusing on long-term deficit reduction.)

    It's never very clear why these two must move together. The more aggressive argument is that the market will panic and raise interest rates if the long-term deficit is not addressed, immediately canceling out the stimulus. The more widely used version is that stimulus now would increase the longer-term debt, hence making the longer-term challenges worse and the crises and challenges occur more quickly.

    This is why something like Delong-Summers paper "Fiscal Policy in a Depressed Economy" is so important. It finds that "under what we defend as plausible assumptions of temporary expansionary fiscal policies may well reduce long-run debt-financing burdens."

    As Seth Ackerman noted, there's something gleeful in seeing Delong-Summers, in their focus on hysteresis in Europe, dismiss the "principal alternative theory was that high unemployment in Europe in the 1980s and 1990s" as "principally a supply-side phenomenon...and rigid labor market institutions... See Krugman (1994)" in a footnote (!), as if that's not a major reversal or anything. But the argument that, from the debt-to-GDP point of view, fiscal stimulus in a depressed economy is a smart investment by itself, is important for countering the idea that it must be linked to something else in the long term.

    Here's where Peter Orszag's "Barbell Approach Only Way to Lift Heavy Economy" enters the picture. Orszag argues that that Delong-Summers approach is flawed because it ignores this two-deficits (or what he calls the barbell) problem, which argues that even if short-term stimulus is a good idea it should be linked to long-term deficit reduction. To use the opening analogy, even if getting healthy is a good idea, we should only try it if we save more for retirement. Why is this?

    But these stimulus-only proposals, by not lifting the other side of the barbell, are incomplete for three reasons: First, substantial stimulus-only proposals have no chance of being enacted. Second, even if they could be, they would accelerate the date at which we again run up against the debt limit -- and their proponents have no strategy for dealing with that impediment. Finally, even if the debt limit were simply assumed away (an ivory-tower approach that might prove appealing to some stimulus-only proponents), the impact of any stimulus would be stronger, and our international credibility enhanced, if it were combined with specific, but delayed, actions to reduce the deficit.
    The first is a political problem, not an economic one. It should be noted that the barbell strategy, as enacted in 2011 by President Obama, lead to his lowest approval ratings and the sense that he was being politically destroyed by his Republican counterparts. The Republican presidential primary debates featured all candidates saying that they wouldn't accept a 10-to-1 cut-to-tax ratio; it doesn't seem like this strategy is likely to have a political edge anytime soon. Also politics is a matter of elite opinion, and elite opinion isn't an asteroid that falls out of the sky. It is a series of assertions made and defended by elites like Orszag. He can choose to try and change that, like Summers is, if he'd like. Elite opinion is often wrong, and I believe it is wrong here. But one can't create and defend it while arguing it is a constraint.
     
    The second, referring to the debt ceiling, is also a political problem, but I'd argue that nobody seems to have a particularly good strategy for dealing with it. Even so, if the problem is Republicans refusing to vote to increase the debt ceiling in a time of crisis, that needs to be addressed as a political problem; it doesn't refute the smart economic idea of fiscal stimulus in a depressed economy. (Sometimes the limit is referred to as a debt-to-GDP limit where, once past, growth slows. See Josh Bivens tear apart those kinds of arguments here.)
     
    The third is an economic argument, which says long-term deficit reduction measures would increase the credibility of the United States. Normally that translates into lower long-term interest rates for government borrowing. Would that help? Here's Peter Orszag arguing against QE2 in December 2010: "a modest reduction in long-term interest rates will not have much effect on economic activity at a time when corporations are flush with cash and worried about the future." Would a few basis points gained through credibility help now, especially if the long-term effects were painful? Even if it did, it may bolster the case for the barbell approach, but it still doesn't necessitate it.
     
    That 2010 editorial is fascinating because it argues that we need "more fiscal expansion (read: more stimulus) now" and "much more deficit reduction, enacted now, to take effect in two to three years." It's one and a half years later, and we still need the same exact thing according, to common wisdom: more fiscal expansion now, and deficit reduction in two to three years. That a bond vigilante revolt that was scheduled starting in 2012-2013 turned into a bond vigilante rally; Treasuries are at record lows, even lower than in 2010. Which is to say that our credibility hasn't been in play -- even a ratings downgrade hasn't changed anything. Rather than being terrified of the United States' fiscal position, capital markets are desperate for the U.S. to find something productive to do and are willing to loan us the money to do it at ultra-cheap rates. It would be great for us to take advantage of this smart economic move without holding it ransom to the possibility of challenges in the distant future.
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    Mike Konczal is a Fellow at the Roosevelt Institute.

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  • Public Sector Layoffs and the Battle Between Obama and Conservative States

    Jun 12, 2012Mike Konczal

    The government job losses that are holding the recovery back are directly related to the Republican state legislators who were swept to power in 2010.

    Last Friday, both presidential candidates had a back-and-forth over the issue of public sector jobs. President Obama said that the private sector is doing fine but the public sector needs help and is threatening the recovery, and Mitt Romney attacked the idea that "we need more firemen, more policemen, more teachers.”

    The government job losses that are holding the recovery back are directly related to the Republican state legislators who were swept to power in 2010.

    Last Friday, both presidential candidates had a back-and-forth over the issue of public sector jobs. President Obama said that the private sector is doing fine but the public sector needs help and is threatening the recovery, and Mitt Romney attacked the idea that "we need more firemen, more policemen, more teachers.”

    This has lead to new interest in the decline of public sector workers over the past three years. Two major economists from Yale, Ben Polak and Peter K. Schott, just wrote a post at at Economix titled "America’s Hidden Austerity Program."

    Polak and Schott argue that "there is something historically different about this recession and its aftermath: in the past, local government employment has been almost recession-proof. This time it’s not... Without this hidden austerity program, the economy would look very different. If state and local governments had followed the pattern of the previous two recessions, they would have added 1.4 million to 1.9 million jobs and overall unemployment would be 7.0 to 7.3 percent instead of 8.2 percent."

    But why is this happening? Polak and Schott:

    One possibility is that we are witnessing a secular change in state and local politics, with voters no longer willing to pay for an ever-larger work force. An alternative explanation is that even though many state and local governments are constrained not to run deficits, they can muddle through a standard recession without cutting jobs. But when hit by a huge recession like that of 1981 or the latest one, the usual mix of creative accounting and shifting in capital expenditures cannot absorb the shock, and jobs have to go.

    This drop in public-sector workers is well documented, and it is great to get more economists ringing the bell on it. But I think there needs to be more research into how this has happened. As my colleague Bryce Covert notes over at The Nation, "the massive job loss we’ve been experiencing in the public sector is no random coincidence or unfortunate side effect. It is part of an ideological battle waged by ultra conservatives who were swept into power in the 2010 elections."

    As we've written before (article, white paper), the 11 states that the Republicans took over during the 2010 midterm elections – Alabama, Indiana, Maine, Michigan, Minnesota, Montana, New Hampshire, North Carolina, Ohio, Pennsylvania, and Wisconsin – account for 40.5 percent of the total losses. By itself, Texas accounts for an additional 31 percent of the total losses. So these 12 states account for over 70 percent of total public sector job losses in 2011. This is even more important because there was a continued decline in public sector workers in 2011 even though the economy was no longer in free fall.

    The 11 states that the Republicans took over in 2010 laid off, on average, 2.5 percent of their government workforces in a single year. This is compared to the overall average of 0.5 percent for the rest of the states. So while it is a nation-wide event, it is concentrated in states that went red in 2011:

    Wisconsin, for instance, lost nearly 3 percent of its workforce in 2011 alone, which shows how high the stakes are. Conservatives are tearing down and rebuilding state governance during this Great Recession. There is an element of state and local layoffs that is strictly budgetary, as the average for all the groups is negative. But there is also an element that is about a face-off between President Obama and new conservative state legislatures.

    There's two things worth considering about this dynamic. The first is that any stimulus offered from the federal government could be refused or re-directed to other purposes by state governments. The fighting over getting conservative states to accept stimulus money, which was a battle in 2009-2010, would have been much more heated after the 2010 election. And if money did come in under the rubric of helping retain teachers it may, without a political battle, just go to reducing corporate taxes. We are already seeing this with the AG foreclosure fraud settlement money, which is being redirected to other purposes in many states.

    The other is that this should be viewed through the lens of the series of standoffs the administration has with conservatives at the state level. The administration has been fighting with Arizona over its "papers please" immigration law, Florida over voter record purges, and several states in battles over GLBTQ rights and reproductive freedom. Trying to keep red states from slashing their workforces in a time of economic weakness is another front in this battle for those trying to steer the economy toward full employment.

    Mike Konczal is a Fellow at the Roosevelt Institute

     

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    Layoffs image via Shutterstock.

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