Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • Mitt Romney, Reactionary Keynesian

    Nov 6, 2012Mike Konczal

    I meant to develop this into a larger work on the Right and economic stimulus but it never happened, and with the election today favoring President Obama, it is likely I won't get a chance. So here's part of it for the blog.

    I meant to develop this into a larger work on the Right and economic stimulus but it never happened, and with the election today favoring President Obama, it is likely I won't get a chance. So here's part of it for the blog.

    In December 2008 Mitt Romney wrote "A Republican Stimulus Plan" at the National Review, announcing "this is surely the time for economic stimulus." What should be in a Republican stimulus plan? First up, tax cuts. Tax cuts for capital income and corporations, and tax cuts overalls. But tax cuts aren't sufficient to the task, and some sort of direct spending will be required. However, since most infrastructure takes too long to get off the ground, "[s]pending to refurbish and modernize our military equipment is urgently needed, and it has a more immediate impact on the economy."

    In 2008 Mitt Romney wanted to stimulate the economy with tax cuts and military spending. It's worth noting that two of the central planks in Mitt Romney's currently underdeveloped economic policy are a series of tax cuts and a dramatic $2 trillion dollar increase in military spending. But don't call it stimulus! Mitt's National Defense Plan wants to "modernize and replace the aging inventories of the Air Force, Army, and Marines," as in the stimulus plan, but this is now to address "Obama's failure" in foreign policy.

    Mitt Romney's tax plan is meant to offset tax cuts by cutting tax expenditures. But the tax plan currently looks like an unassembled game of Mousetrap where you know several of the pieces are missing. It could work, but it isn't clear how it would. But even if Mitt Romney did offset his tax cuts by cutting expenditures, those expenditure cuts would likely be put into place over a period of years, years where the deficit would balloon further. (The Ryan Plan also balloons the deficit in the short term dramatically.) This would still work as stimulus.

    So Keynesianism through tax cuts and the military. The military stuff really does add to what John Kenneth Galbraith referred to as "a new and reactionary form of Keynesianism with which to contend" where "Tax reduction would then become a substitute for increased outlays on urgent social needs." Or as Michael Harrington wrote, in a 1966 Encounter article titled "Reactionary Keynesianism," "in the United States it is quite possible to envisage a conservative Keynesian policy which substitutes tax cuts for social investments, increases the maldistribution of income (the rich and the corporations gain more from tax cuts than the workers and the poor) and maintains a prosperity as that term would be defined by business."

    Liberals like to point out the contradiction of Republicans attacking economic stimulus while arguing that defense cuts will tank the economy, and they are right to do that. But I'm still having difficulty thinking through where the distributional impact of various ways of managing the economy, the type of society it builds, connects into the political ideology. I imagine we'll have more opportunities to see this in the aftermath of the election.

     

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  • Guest Post: Heather Boushey on Inequality and Growth

    Nov 6, 2012Mike Konczal

    Mike here: Special guest post by Heather Boushey of the Center for American Progress, responding to a recent citation of her work with Adam Hersh on inequality and growth (work we discussed here). The launch of this post was delayed on my end as a result of Sandy-induced work/email chaos.

    Mike here: Special guest post by Heather Boushey of the Center for American Progress, responding to a recent citation of her work with Adam Hersh on inequality and growth (work we discussed here). The launch of this post was delayed on my end as a result of Sandy-induced work/email chaos. Hope you check it out, as well as their excellent report that is discussed within.

    Inequality does appear to affect economic growth

    by Heather Boushey

    It is now a well-known fact that the United States has the highest levels of inequality among developed countries. Increasingly, the economics profession is questioning how this affects our economy, not only in terms of what it means for those at the bottom of the income distribution, but in terms of how high inequality affects economic growth and stability.

    The New York Times recently published a thoughtful piece on the relationship of rising U.S. inequality to long-term economic growth. In the wake of that article, they published a Room for Debate online forum on this topic and Scott Winship, a scholar a the Brooking’s Institution was among those participating. Mr. Winship cites our report on the topic to discuss what he argues is inadequate evidence linking inequality and growth.

    We are grateful that Mr. Winship acknowledges CAP's central role in this debate, but grossly mischaracterizes our conclusions. The quote he pulled from our report gives the false impression that our research supports the conclusionthat inequality is not a problem for economic growth.

    Our argument is that we need to look specifically at the channels through which inequality affects economic growth, specifically in the U.S. context. For example, there is evidence that documents how the rich don’t spend as much of their income as the non-rich. If inequality keeps rising and the rich pull in a larger and larger share of national income, this stunts demand, the lifeblood of the economy.

    Another mechanism is through entrepreneurship, which is often portrayed as the dynamic force in a capitalist economy. Yet, most entrepreneurs come from the middle class. The middle class provides both the economic security and access to education and credit that entrepreneursneed.

    If inequality is due to the top pulling far away from the rest of the economy,which creates a very wealthy elite, this is often associated with a well-known economic phenomenon of “rent-seeking.” The wealthy will tend to use their outsized resources to garner a bigger piece of the pie, rather than on investments that will increase productivity and make the whole pie bigger. And, there is growing evidence that this is exactly what is happening to our economy, threatening long-term growth. For example, economists have been finding that as money has flowed into the financial sector, that industry has increasingly used its resources to promote policies that benefit itself only.

    In opposition to Mr. Winship’s claim, the preponderance of evidence does supports the conclusion that inequality can hamper economic growth. We conducted a thorough review of the literature and in the quote he took, we were highlighting methodological limitations in a specific class of empirical studies. We also pointed out that cross-country panel data studies look at reduced form equations for growth and we argue that we should be thinking instead about a structural model.

    Others have found our report to be data-driven. Jim Tankersley, journalist with the National Journal encouraged his readers to consume the report “in its entirety,” describing is as a “The bulk of Boushey and Hersh's sources aren't partisan in any way - just detailed, data-driven analysis from top economists.” This blog called it “the best up-to-date arguments that progressives discussing inequality should understand inside out.” And in a lengthy discussion on the subject last month by Jared Bernstein, former chief economist to the vice president, our work was used to frame a summary of the latest research on this topic. 

    We are typically pleased to have our research cited in the paper of record, the New York Times. However, it is no fun to have our work grossly misrepresented.

     

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  • What Explains Wall Street's Shift Away From Obama: Fat Cat Comments or Dodd-Frank?

    Nov 1, 2012Mike Konczal

    In an interesting column on President Obama as the last of the "New Democrats" presidents, Michael Lind brings up the idea that the financial sector has permanently moved away from Democrats. "In 2012, most Wall Street donors, offended by Obama’s mild criticism and alarmed by the support shown by many Democrats for Occupy Wall Street, have swung their support away from the Democrats to the Republicans. It is unlikely that most of them will ever come back.

    In an interesting column on President Obama as the last of the "New Democrats" presidents, Michael Lind brings up the idea that the financial sector has permanently moved away from Democrats. "In 2012, most Wall Street donors, offended by Obama’s mild criticism and alarmed by the support shown by many Democrats for Occupy Wall Street, have swung their support away from the Democrats to the Republicans. It is unlikely that most of them will ever come back. In the aftermath of the Great Recession, moderate as well as progressive Democrats are going to emphasize deficit reduction through tax increases far more than even moderate Republicans...Any such reform will cut deeply into the incomes of many Wall Street rentiers whose 'progressivism' extends only to cost-free support for gay rights and abortion rights."

    It'll be interesting to see if the political coalitions permanently shift in this manner. One reason for a shift is if Wall Street is leaving President Obama less for rhetorical reasons and more for economic and regulatory ones, especially when it comes to Dodd-Frank, which Democrats will continue to defend and Republicans will look to overturn.

    When people discuss why Wall Street has turned against President Obama, it is usually a story about personalities and ego. Obama once said, “I did not run for office to be helping out a bunch of fat cat bankers on Wall Street,” and that particularly stung them. Or maybe Obama is terrible with fundraising and managing the egos of rich donors. Or maybe it runs deeper psychologically. As an investor who voted for Obama in 2008 told Gayle Tzemach Lemmon, "There is just this feeling across the financial services community, across the business community, that this guy hates us."

    There is a lot to the lost feeling of proper stewardship over the economy, but as Matt Yglesias points out, it likely goes beyond the fat cats line. These conversations almost always put Dodd-Frank in the far background, even though it is a major reform of the financial sector that will reduce Wall Street's power and profits. Let's look at a few reforms.

    Derivatives. One of the goals of Dodd-Frank is to bring transparency and standardization to the derivatives markets by requiring derivatives to go through a clearinghouse with pricing transparency. According to the FT's Michael Mackenzie and Tracy Alloway in "Swaps profits threatened by Dodd-Frank," "Analysts at Standard & Poor’s expect an annual drop in revenues for large dealers of between $4bn and $4.5bn once rules that include...mandatory central clearing of OTC swaps are fully implemented... But for smaller broker dealers and others, the future looks brighter as competition potentially opens across the OTC arena."

    In the article, CFTC chairman Gensler recognizes "all [the] benefit[s] from the lower costs and greater pricing information of a more transparent, accessible and competitive swaps market.” But not everybody actually does. Those who cornered the market pre-reform lose out on rents they were collecting from dominating the information in the market. Dodd-Frank is tackling the market in a way that expands access and transparency and reduces the pricing power of powerful incumbents. That's fantastic, unless you are one of those incumbents who will lose billions of dollars.

    Interchange. Even the little things challenge the power of the financial sector over the real economy. Take interchange, the fees the financial sector charges to the real economy for using debit and credit cards. That now resembles a public utility after Dodd-Frank, which rationalizes the system in much the same way that personal checks were rationalized by the Federal Reserve in the early 20th century. S&P estimates that "the Durbin Amendment's immediate financial impact for the banking industry is a $6.5 billion to $7 billion annual reduction in debit card-related revenue... Bank of America, JPMorgan Chase, and Wells Fargo have absorbed the majority of these losses, considering the size of their debit card businesses relative to peers." This balances the playing field between the real economy and the financial sector while taking away a powerful set of contracts the banks were using to squeeze merchants.

    CFPB. Meanwhile, consumer financial protection used to be the orphan mission of 10 different agencies, a number that encourages race-to-the-bottom regulatory arbitrage, none of which had the incentives to build expertise in this area or directly fight for consumers over other mission priorities. Now that mission is squarely placed in the CFPB, an agency whose funding and organizational structure is designed to prevent capture. The CFPB is already successfully going after illegal and deceptive practices at places like American Express, Discover, and Capital One, winning damages in the hundreds of millions of dollars. The financial sector is noticing that there is now an agency designed to enforce accountability.

    (One might note that hedge funds don't fall under these requirements, yet they are very mad. Some of that is the result of the push to remove special tax breaks, which is a direct economic issue. Some might be the result of other financial regulations.)

    These are just items with visible price tags, so it doesn't include things like the Volcker Rule, extra-prudential regulations of larger and riskier firms, trying to tackle the ratings agencies, the presumption that the FDIC will need to resolve and liquidate large firms and will require those firms to prepare for that event, and the other new regulations of the financial sector. With billions of dollars a year in profits on the line in repealing Dodd-Frank (and with those who benefit from regulation dispersed across the entire economy), it isn't surprising that we are seeing a lot of donations go to those saying they will substantially weaken reform. And the GOP is specifically targeting these kinds of reforms.

    Notice that though these regulations have a large price tag, they aren't "soak the rich" or "let's get the fat cats" regulations. They are all designed to make the financial markets run better by bringing transparency, a level playing field, and accountability to the system. We haven't seen how they'll be fully implemented, and a lot is still at risk even without a Republican victory in the presidental election. But right now there are billions of reasons Wall Street should want to stop the Democratic Party and Dodd-Frank beyond hurt feelings.

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    Angry cat image via Shutterstock.com.

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  • Live at Dissent Magazine with "From Master Plan To No Plan"

    Oct 24, 2012Mike Konczal

    I have an article in the latest Dissent Magazine, co-written with Aaron Bady, titled "From Master Plan to No Plan: The Slow Death of Public Higher Education." It's now live and kicking off their newly redesigned webpage. It starts with Ronald Reagan in California in the 1960s, does a history of the creation and strengths of the University of California's Master Plan system and its dissembly, and ends with what John Aubrey Douglass calls the the Brazilian Effect. It's full of riot cops, occupations, moderate Republicans, thoughts on elasticities of supply, for-profit schools and more.

    I have an article in the latest Dissent Magazine, co-written with Aaron Bady, titled "From Master Plan to No Plan: The Slow Death of Public Higher Education." It's now live and kicking off their newly redesigned webpage. It starts with Ronald Reagan in California in the 1960s, does a history of the creation and strengths of the University of California's Master Plan system and its dissembly, and ends with what John Aubrey Douglass calls the the Brazilian Effect. It's full of riot cops, occupations, moderate Republicans, thoughts on elasticities of supply, for-profit schools and more.

    I hope this starts to move the conversation forward on higher education outside a specific focus on student debt, because that is likely to reach its limits outside a broader vision of what needs to be accomplished. Andy Kroll wrote a similar piece that went live earlier this month, so I think there's a lot of interest in this topic. In March, Catherine Rampell wrote about the Brazilian Effect in economix. Andrew Ross wrote a fantastic piece for Dissent's series on education on the aggressive expansion of NYU and other universities as part of a conscious urban planning framework, combining growth models based on the FIRE industires with those in the ICE (intellectual, cultural and educational) industries, which is an important part of the puzzle.

    This may be my favorite written thing with my name on it and, as I've been given opportunities I wouldn't have had without public higher education, this political and economic battle means a lot to me. Hope you check it out.

     

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

    Oct 22, 2012Mike Konczal

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

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

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

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

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

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

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

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

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

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

    It's still a failure.

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

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

    Compared to the number of possible refinancing?

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

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

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

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

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

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

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

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

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

    Thank you for your time.

    ==========

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

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

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

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