Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • The Fed Scrambles to Save Banks, Stalls on Unemployment

    Nov 28, 2011Mike Konczal

    Side-by-side, two worst case scenarios elicit very different reactions from the Federal Reserve.

    Side-by-side, two worst case scenarios elicit very different reactions from the Federal Reserve.

    I never congratulated Charles Evans, President of the Federal Reserve Bank of Chicago, for dissenting in the most recent FOMC meeting on behalf of the unemployed. ("Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.") I'm a big fan of the Evans Rule and am surprised inflation doves haven't been more vocal about it. As Goldman Sachs noted, "This was the first 'dovish' dissent since December 2007 (President Rosengren)." Given that unemployment has turned out to be worse than the Fed's projections at any time, it is about time that those who are worried about unemployment inside the Fed start making noise.

    These first murmurs instead stand in contrast to the financial bailouts. Bloomberg just released a big story, based on its successful FOIA requests, that uncovered just how aggressive the Federal Reserve was with its emergency lender-of-last-resort powers. Kevin DrumMatthew Yglesias, and Paul Krugman argue that what is really shocking is how total the rescue and backing of the financial sector was while the real economy was left to rot. As Krugman puts it, "The real scandal isn’t so much that those banks got rescued as that the rest of the population didn’t."

    Part of why the bailouts were packaged the way they were was because Lehman Brothers' bankruptcy went a lot worse than the Federal Reserve's expectations of how the collapse of a major investment bank would go. When the collapse went far worse than its expectations, it reacted with maximum force.

    Is there an equivalent story for unemployment? I'll try to graph this using the FRB's Summary of Economic Projections. From its FAQ: "Economic projections are collected from each member of the Board of Governors and each Federal Reserve Bank president four times a year, in connection with the Federal Open Market Committee's usual two-day meetings (typically held in January, April, June, and November)... The unemployment rate is the average civilian unemployment rate in the fourth quarter of a year."

    Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

    Members of the Federal Reserve get together four times a year and project their expectations of unemployment for several years going forward. Below is that data plotted against the unemployment rate. Specifically, it has the average projected unemployment rate across the entire year and takes the average of the core tendencies that are reported as that rate. The actual unemployment is in bold red and projections from each point going forward are in shades of orange (click for larger image):

    As you can see, there's no point in which unemployment was projected to be worse than it actually was. Especially in 2009-2010 -- the actual unemployment rate was significantly higher a year or two later. Here's a zoomed in view of the 09-11 range (click for larger image):

    If we were to replace the FRB with a group of monkeys armed with darts, one would imagine that they would make at least a few projections above the actual rate of unemployment. It's funny -- the FRB tried to revise how bad unemployment is but doesn't revise it anywhere near enough to lower it to where the economy actually is.

    So to recap: Lehman Brothers goes worse than the Federal Reserve's projection and the Fed goes to the most extreme lengths it can find to extend emergency lending. Every single unemployment number turns out to be worse than all of the Federal Reserve's projections, and it finds every excuse to look the other way. Only Charles Evans has the courage to say that we should let inflation go to 3 percent while unemployment is over 7 percent to catch up to trend growth. Amazing.

    Mike Konczal is a Fellow at the Roosevelt Institute.

    Share This

  • Eight Reasons Why Extending Unemployment Benefits Will Boost the Economy

    Nov 22, 2011Mike Konczal

    Unemployment insurance will keep families -- and our economy -- afloat.

    Unemployment insurance will keep families -- and our economy -- afloat.

    In the aftermath of the super committee's collapse, Democrats are going to have to fight to get unemployment insurance benefits extended. This is one of many "orphan programs" left behind that are set to expire at the end of the year. Since it looks like there is going to be a debate over whether or not to extend the benefits, what can we say with certainty about the costs and benefits of extending unemployment benefits?

    1. Even considering the cost, unemployment benefits are a deal. Extending unemployment benefits would cost around $44 billion for one year. (Source: CBO.) Specifically, "CBO estimates...$44.1 billion would stem from the one-year extension of EUC and EB provisions. That extension would allow people who exhaust their regular unemployment compensation during calendar year 2012 to receive up to 53 weeks of EUC, and would make it easier for states to provide up to an additional 20 weeks of benefits under EB (depending on the states’ laws and unemployment rates)." Given that interest rates are so low, and real interest rates are even negative, this is a great value.

    2. Without an extension, GDP will decline. The loss of not having that $44 billion pumped into the economy would cause at least a 0.3 percent decline in GDP in 2012. (Source: JPMorgan Chase & Co. chief U.S. economist Michael Feroli.)

    3. Given spending multipliers, this will have a ripple effect. Because of a government spending multipler, that 0.3 percent decline is more like 0.5 percent, with a subsequent, significant impact on jobs. (Source: EPI.)

    Since we are in a liquidity trap, where monetary policy is made significantly more difficult by a zero lower bound, then there's a multipler to government spending. Unemployment benefits in particular have a good bang-for-the-buck effect. Heidi Shierholz and Lawrence Mishel of EPI argued this with their chart:

    4. This is about more than just GDP; it's about keeping people afloat. The stakes go beyond economic aggregates. Unemployment insurance has kept 3.2 million people out of poverty in 2010.This includes nearly a million children. (Source: Census, h/t EPI.)

    That's a lot of jobs gained and a lot of misery avoided, with or without a multipler! But those jobs also increase demand. Won't unemployment insurance decrease the supply of labor?

    5. The potential increase in unemployment from extending benefits is small. Previous credible estimates of the effects of unemployment insurance in this recession have shown that they "increased the overall unemployment rate 0.4 to 0.8 percentage points," a point where it is still a great tradeoff. (Source: Federal Reserve Bank of San Francisco.)

    Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

    One way to estimate this is to take job losers, who are eligible for UI, and measure their duration against quits, who are not eligible for UI. The San Francisco Fed source above does this, and finds the following chart:

    Even given these figures, I still think extending benefits is a fantastic idea. For more whether it is a great tradeoff, see this post from last year from WSJ's Kelly Evans and my somewhat critical response.

    6. And even those figures may be inflated. These results are found to be exaggerated by a better, more current study, which finds "UI benefit extensions raised the unemployment rate by only about 0.2–0.6 percentage points." (Source: Jesse Rothstein.) This study uses the conceptual method above but goes an extra step to break UI down by state, over time, and with individual characteristics.

    Moreover, most studies that find a 2%+ increase in unemployment don't use any of the control techniques mentioned above. (Example: Barro's WSJ editorial.) Indeed, what they all essentially do is look backwards, to data and studies from the 1980s and 1990s, and project those numbers into our current Great Recession. As Rothstein mentions, these studies all "involve extrapolations from pre-recession estimates of the effect of UI durations or from pre-recession unemployment exit rates." As a financial engineer, I respect taking data from inappropriate time periods and blindly projecting them forward without any type of diligence or attention paid to the underlying conditions. But this is not appropriate here, as we haven't had a major crisis like this in the past 30 years.

    7. Everyone is having a hard time finding a job. The overall labor market is weak, not just for the long-term unemployed. (Source: This post, from BLS data.)

    8. Other considerations make the case for extending benefits.

    The biggest counterarguments against extending benefits are concerns about structural unemployment and decreased work effort. The worry about a permanent, "structural" increase from UI extensions is subject to the Lucas critique. As Scott Sumner noted, “the maximum length of unemployment insurance is itself an endogenous variable. If stimulus were to sharply boost aggregate demand it is quite likely that Congress would return the UI limit to 26 weeks, as it has during previous recoveries.”

    Rothstein shows that at least half of this "increase" is the result of people staying in the labor force, which is a good thing, or at least a not bad and definitely not related to the major problems. As Heidi Shierholz notes, "less than 0.2 percentage points of the 4.4 percentage point increase in the unemployment rate over the Great Recession was due to an extension-induced reduction in the rate at which workers get a new job, which is the disincentive effect policy makers are actually concerned about. Moreover, even that may be a good thing -- a small UI-induced increase in the time it takes for an unemployed worker to get a new job is an asset of the UI program to the extent that it affords unemployed workers the needed space to find a new job that matches their skills and experience."

    Mike Konczal is a Fellow at the Roosevelt Institute.

    Share This

  • A Ticking Time Bomb: The Arab Spring and America's Lost Generation

    Nov 14, 2011Mike Konczal

    High unemployment pushed young people in the Middle East and North Africa to revolt. Why wouldn't it happen here?

    Is it useful to think of the Occupy movement more as a "left" movement or a "youth" movement? To answer that question, it's worth looking into data on the young, particularly as it relates to unemployment.

    High unemployment pushed young people in the Middle East and North Africa to revolt. Why wouldn't it happen here?

    Is it useful to think of the Occupy movement more as a "left" movement or a "youth" movement? To answer that question, it's worth looking into data on the young, particularly as it relates to unemployment.

    To leave the United States for a minute, one way people are trying to understand the Arab Spring is through the lens of massive youth unemployment and inequality. Given how high unemployment has been in these MENA (Middle-East and North African) countries, what else could we expect besides revolution?

    For instance, in early February then-IMF chief Dominique Strauss-Kahn told a conference, "this summer I made a speech in Morocco about the question of youth employment including Egypt, Tunisia, saying it is a kind of time bomb" and "such a high level of unemployment, especially youth unemployment, and such a high level of inequality in the country create a social situation that may end in unrest." Here is the "youth unemployment" blog tag at the IMF to give you a sense of what people there have been saying about it. In particular, they point out that it should be a major concern for the MENA and African regions.

    Interestingly enough, it was even a concern before the mass protests broke out. Regional IMF officials Ratna Sahay and Alan MacArthur gave a presentation on January 23rd, "Challenges for Egypt in the Post Crisis World," at the Egyptian Center for Economic Studies in Cairo (h/t WSJ). Protests would begin a few days later. Here's a key slide from that presentation:

    Part of you may want to immediately start pointing out differences between this country and those. Maybe you are furious at terrible, unresponsive, corrupt governments ignoring the plight of their populations. Maybe you think that if these countries only had neoliberal, "flexible" wage contracts and a leakier safety net like we have in the United States, then unemployment would be much better.

    You may then head over to our monthly unemployment numbers and note that American youth unemployment is in the same ballpark as these MENA countries.

    Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

    I've taken numbers from the IMF presentation slide above and compared them to the United States' youth unemployment averages from October 2010-October 2011 from the BLS's CPS data:

    I can't find what constitutes "youth" for "youth unemployment" in the IMF's definition, and I'm not even sure if it is consistent across the different countries they estimated. As such, I'm including ages 16-19 and ages 16-24, though I believe they are looking at 16-24. For the 16-19 age group, we are at the same level of unemployment as Egypt and well above the region as a whole. At the broader 16-24 range, we are above Syria and Morocco, which both saw large-scale movements in the Arab Spring.

    One potential explanation for the high level of youth unemployment in MENA countries is that they have huge demographic issues to deal with -- they have a massive wave of people under 35 years of age to assimilate into their economies. What's our excuse, other than confidence fairy terror spells and a desire to go after public sector workers? And given this, how could we ever say youth unemployment in the United States' Lesser Depression isn't a "time bomb"?

    I have to admit I'm a bit hardened to the various charts I'm able to put together from the Bureau of Labor Statistics' data, but this graph of the employment-to-population ratio for 16-24-year-olds going back to 1948 floored me:

    Remember that the increase from the 1950s onward reflects women entering the labor force. And notice how it doesn't improve after the early 2000s recession. Every age group has seen a substantial drop in the employment-population ratio, but no other group I've seen comes close to this plummet. For the first time in half a century, a majority of young people aren't working.

    Mike Konczal is a Fellow at the Roosevelt Institute.

    Share This

  • A Two-Step Solution to the Student Loan Crisis

    Nov 7, 2011Mike Konczal

    Let's roll back damaging bankruptcy "reforms" and give Americans the same treatment banks have experienced.

    Let's roll back damaging bankruptcy "reforms" and give Americans the same treatment banks have experienced.

    Due to legal decisions about how to structure the rules governing student debt, student loans stay forever, are virtually impossible to discharge under hardship, churn fees when they go bad, and creditors can access anything, including Social Security, in their attempts to be repaid. This is significantly more strict than the rules for other kinds of debt. Here's a great way to describe the legal frame we use to treat student loans, from Elizabeth Warren in 2007: "Why should students who are trying to finance an education be treated more harshly than someone who negligently ran over a child or someone who racked up tens of thousands of dollars gambling?"

    So what's the solution? There's a short-term and a long-term problem. The long-term problem, in my mind, can only be solved by unapologetically embracing the promise of a "public option": free public universities that are capable of constraining cost inflation. This requires us to also face and resist the corporatization and privatization of our existing public universities.

    But that doesn't get us out of the current situation. What can be done? I propose two things:

    1. Party Like It's 1989

    Instead of being so bold as to ask that people trying to invest in themselves, and ultimately the country, are treated as fairly as someone who negligently ran over a child, I'm just going to suggest we just do a mulligan on the 1990s and 2000s student loan "reforms."

    Here's a quick, high-level history of student loans and the bankruptcy code, courtesy of University of Illinois law professor Bob Lawless:

    In 1976, Congress first added an exception to the bankruptcy discharge dealing with student loan debt. That exception was continued in the 1978 Bankruptcy Code, and the exception was expressly limited to student loans from a governmental unit or nonprofit institution. Even then a student loan could be discharged if more than five years had passed since the loan first became due (typically after graduation) or if the debtor could show payment of the student loan would cause undue hardship, which is a difficult burden to show.  In 1990, five years was changed to seven years and in 1998 was dropped altogether, leaving undue hardship the only reason a court could discharge a student loan from a governmental unit or nonprofit institution. As part of the 2005 changes to the U.S. bankruptcy law, Congress again amended the student loan discharge exception to allow even loans from for-profit lenders to be excepted from the bankruptcy discharge.

    Let's put that in a chart, adding the other issues of Social Security and no statute of limitations I talked about here:

    Why not just undo the rules from the 1990s and 2000s? It is hard to see these as anything other than a giant subsidy to private agents. If you look at Sallie Mae's leaked lobbying documentation, you'll find that "[t]he number two item... wasn't increasing federal student loan limits or beating back the loan consolidation companies... It was bankruptcy; specifically, preserving the special status that private student loans gained in the broad changes to bankruptcy laws that Congress enacted in 2005. To Sallie Mae, that provision is the key to its version of 'private credit economics.'" There's little evidence these reforms increased access for anyone and functioned more as an easily captured subsidy.

    Sign up to have the Daily Digest, a witty take on the morning’s news, delivered straight to your inbox.

    We can keep nondischargeability for five years if people are concerned about moral hazard. That concern emanates from the 1970s and stories of doctors declaring bankruptcy the day after they graduated medical school. This will at least stabilize and formalize the system of indenture that is required for people to fully develop their talents and abilities in our country, instead of our system that currently keeps people for life. Let's regraph what it looks like when we go back to 1989:

    That looks way better. But how do we deal with the current affordability crisis? Getting unemployment down and incomes up are an obvious solution. Sarah Jaffe suggests mass debt forgiveness, Justin Wolfers disagrees. I have a suggestion that splits the difference.

    2. Convert the American People into a Bank

    A miraculous thing happened in late September 2008. Goldman Sachs and Morgan Stanley were reborn from investment banks into bank holding companies by a decree of the Federal Reserve. Normally getting a license like this takes a year and a half and requires following extensive regulatory rules. The Federal Reserve did it over a weekend for Goldman, Morgan Stanley, and a host of other financial firms.

    This allowed them many banking privileges that helped during the crisis, including access to the discount window, but none of the scrutiny that normally comes with them. As Alan Grayson and others noted, Goldman's CFO bragged that "our model never really changed." They got to escape normal banking regulatory rules during the subsequent time period. These "deathbed conversions" from investment bank to bank holding company were yet another part of the extensive way the bailouts worked beyond TARP, and they were proof that the firms were Too Big To Fail.

    Since regular Americans are also in crisis mode and Too Big To Fail, why not symbolically declare regular Americans a bank too? Why not also do a "deathbed conversion" on those who are suffering under the burden of heavy student debts and low incomes and let them immediately refinance all their student loan rates at the current ultra-low discount window rate? Why not mass refinance them into the current low rates the financial sector enjoys? This would give the 99% just a hint of the kind of total government support places like Goldman Sachs have experienced.

    We've thrown open the floodgates for the financial sector. Why not for regular Americans? There have been past congressional efforts to lower the interest rate, ones that passed the House, so this is feasible. And it would be the logical conclusion of the crisis we've just lived through, delivering stimulus to the economy and reducing the burden of debts on those trying to rebuild the economy. Open the discount window.

    Crisis Economics

    For the economics people, this two-step solution helps with the liquidity problem (cheaper refinancing), the solvency problem (bankruptcy), and the balance sheet problem (lower rates, more purchasing power) -- the three problems one needs to deal with in the aftermath of a financial crisis. In terms of monetary policy, those who have been carrying out QE have been begging for policymakers to find ways to get ultra-low rates to the front lines as quickly as possible, most notably in housing policy. As Bernanke said at his latest press conference:

    One area where monetary policy has been blunted, the effects have been blunted, has been the mortgage market where very tight credit standards have prevented many people from purchasing or refinancing their homes and therefore the low mortgage rates that we've achieved have not been as effective as we had hoped. So, monetary policy maybe is somewhat less powerful in the current context than it has been in the past but nevertheless it is affecting economic growth and job creation.

    That's Fed speak for the fact that the administration dropped the ball on the mortgage market (HARP, especially) and has in turn screwed up its ability to do its jobs in helping the economy. But what is good for housing is also good for student loans. Aggressive monetary policy flowing into student loans would have a similar amplification, which makes targets more credible and gets more money being spent, which makes balance-sheet repair easier and has a general virtuous cycle on demand.

    Wins all around. So what are the problems?

    Mike Konczal is a Fellow at the Roosevelt Institute.

    Share This

  • What Would a Good Jobs Report Have Looked Like?

    Nov 4, 2011Mike Konczal

    The same old miserable numbers came out today, nowhere near what we need.

    I feel like I'm in the movie Groundhog Day when it comes to the job numbers. I wake up on the first Friday each month to the same story -- subpar job growth, no budging in key indicators, the insanity of the "anti-stimulus" of bleeding government jobs -- and then wake up to it again next month. This month looks like the past dozen: 80,000 jobs were created, while the government sector shed 24,000 jobs.

    The same old miserable numbers came out today, nowhere near what we need.

    I feel like I'm in the movie Groundhog Day when it comes to the job numbers. I wake up on the first Friday each month to the same story -- subpar job growth, no budging in key indicators, the insanity of the "anti-stimulus" of bleeding government jobs -- and then wake up to it again next month. This month looks like the past dozen: 80,000 jobs were created, while the government sector shed 24,000 jobs.

    We need a list of other words because I'm exhausted with describing how disappointing the job numbers are, especially when the results are so obvious given a lack of movement on fiscal and monetary stimulus. So let me instead describe what a good jobs numbers report would have looked like.

    First of all, there would have been job growth that gets us back to full employment instead of job growth that is slightly around the rate of population growth. There would be well over 150,000 jobs created a month, ideally above 200,000 -- there's a lot of catching up to do. The key indicator to watch is the employment-population ratio, which is the percentage of the workforce that has a job. As unemployment only indicates the number of people actively searching for a job, and many are dropping out of the labor force and giving up on finding a job, the unemployment rate tells us less and less. And if the population is growing faster than the number of jobs created, we are losing out. The employment-population ratio tells us the actual rate at which we are employing people. It is currently at 58.4 percent, the same it was in January 2011.

    A tourniquet would have been applied to the bleeding of public sector jobs. This is the worst time to push government workers into the ranks of the unemployed. With slack capacity, a high number of unemployed people, and negative real interest rates, we can't afford a war against government workers. It's a war in which we've lost 250,000 government jobs since January, with 77,000 in the "local government education" category (in other words, public school teachers).

    Sign up to have the Daily Digest, a witty take on the morning’s news, delivered straight to your inbox.

    But here's President Obama in the 2010 State of the Union giving the wrong message:

    Now, I know that some in my own party will argue that we can't address the deficit or freeze government spending when so many are still hurting. And I agree -- which is why this freeze won't take effect until next year -- (laughter) -- when the economy is stronger. That's how budgeting works. (Laughter and applause.) But understand -- understand if we don't take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery -– all of which would have an even worse effect on our job growth and family incomes.

    Given that 2011 has been a lost year for the economy so far, this kind of deficit hawk aggression was the exact wrong call.

    What else would a good report include? Strong gains in wages and hours worked. This is something we'd see more of as the economy returned to full employment, but it is worth keeping an eye on. The lack of these gains is a good sign that there is a ton of slack in the economy -- and that those who have been freaking out about runaway inflation got it exactly wrong.

    The duration of unemployment would have come down, and not because people are dropping out of the labor force. We saw a large decline this past month in the duration of unemployment: 40.5 to 39.4 (mean), 22.2 to 20.8 (median). We also saw a large drop in the number of people in the long-term unemployed category. More analysis is needed, but it certainly looks like many of people in this category are simply giving up on finding a job and dropping out of the labor force altogether.

    What we really need is a healthy economy. The way we get there is a fiscal stimulus by any means necessary, aggressive monetary policy, and putting the housing market in order. What are the chances we'll see changes on any of these fronts?

    Mike Konczal is a Fellow at the Roosevelt Institute.

    Share This

Pages