Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • Job Numbers Friday: Looking to the Secondary Measures

    May 4, 2012Mike Konczal

    April's job numbers were disappointing, but they'd look even worse if we accounted for those who have dropped out of the job market.

    Today featured a lackluster set of job numbers. Payroll employment was up 115,000 jobs in April, and the unemployment rate went down to 8.1 percent from 8.2 percent. Government jobs were down 15,000, including 5,200 state and local education workers.

    April's job numbers were disappointing, but they'd look even worse if we accounted for those who have dropped out of the job market.

    Today featured a lackluster set of job numbers. Payroll employment was up 115,000 jobs in April, and the unemployment rate went down to 8.1 percent from 8.2 percent. Government jobs were down 15,000, including 5,200 state and local education workers.

    There are three ways of parsing the jobs numbers. One way is to focus on the jobs created -- where are they, what industries they're in, and how much wage growth and hourly gains there are. The second is to focus on unemployment -- who is unemployed, how long have they been unemployed, and what characteristics do they have? And the third is to look at secondary unemployment characteristics, the numbers that try to interrogate the boundaries between the unemployed and those "not in the labor force."  We'll spend some time in the next week talking about how to think of this third category.

    For instance, is this even an interesting question? Matt Yglesias makes a case that it is overblown, arguing that it is really catching longer-term patterns and needs to be put in the context of the global economy. I agree in the sense that I think 8.1 percent unemployment is sufficient for serious reaction. But I think digging into this is important for both economic and political reasons. We'll start a reply with this post.

    It is the case that the size of the labor force hasn't grown (as raw number of people, not a percentage) since the recession started. Though we don't know what the "true" size of the labor force should be at full employment, it should be a bigger number than it was in 2007. That's a problem, because conventional unemployment can't capture that.

    And it is still true that the unemployed are more likely to drop out of the labor force than find a job. This is a brand-new phenomenon in the post-Great Depression economy.

    Though the drop-out rate is within a longer historical range as a percentage of the unemployed (which is in the chart above), the number of unemployed people doubled during this recession. This channel is undertheorized in normal economics -- why would someone looking for a job decide to stop looking, given that they were willing to look at one point? For those concerned about the long-term costs to our economy of hysteresis, this is a problem. We aren't seeing an uptick in those moving from "not in the labor force" to unemployed, and thus no increase in unemployment, which we had wondered if we were going to see as the economy picked up.

    Many of those who are "not in the labor force" want a job but are declining to actively search for them. This number went up in the recession and is hovering at a high rate:

    This is the categorization of "want a job now," but "U-5" unemployment also captures some of these changes. That additional 1.5 to 2 million unemployed workers would give us a higher unemployment rate. It isn't increasing in the past year, but it isn't decreasing either.

    An aging population should create decline in the employment-to-population (the percentage of people working) and labor force participation (the percentage of people working or looking for work) rates. How does this look when we just look at 25-54 year olds? Here is their labor force participation rate:

    And their employment-to-population ratio:

    There's a question as to what extent the recession is speeding up already occuring trends (retirements in an aging population, increased schooling, fewer men working) or has caused these trends to happen (or at least overshoot) as a result of being away from full employment. But retirement and schooling is less of an issue in the 25-54 year old range, and yet we see dramatic results here. Will these go back to their previous levels? Probably not. But I believe they'd go back at least a little at full employment. And that needs to be accounted for.

    Mike Konczal is a Fellow at the Roosevelt Institute.

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  • More on the Case for the Public University as a Public Option

    May 3, 2012Mike Konczal

    Josh Barro has an editorial at the Daily, Making U. Pay, about the college affordability cost crisis.  Barro:

    Josh Barro has an editorial at the Daily, Making U. Pay, about the college affordability cost crisis.  Barro:

    What the University of Florida (along with every other American college and university) really needs is cost discipline...Colleges still need to employ a lot of highly skilled workers, and college costs are tied to their wages, which rise faster than inflation...colleges and universities have failed to mitigate this phenomenon. For example, over the last few decades, the typical public four-year college has seen a sharp expansion of its support and managerial staff — from 5.5 per 100 students in 1987 to 7.5 per 100 in 2007...

    Unfortunately, consumers do not have the necessary incentives to impose cost discipline in the market. The perceived necessity of a college degree to find a middle-class job gives students few options but to pay up...State legislatures, too, should put pressure on public colleges and universities not to increase staffing relative to student populations, and to respond to budgetary strains with cost control instead of tuition hikes or reductions in enrollment...Colleges and universities should take greater advantage of technological advances that could finally improve productivity in the education sector, such as distance learning and video instruction...

    These reforms, different though they are, have one aim in common: creating incentives for all actors in the market to make higher education not just cheaper, but more efficient. That may sound unromantic, but it’s necessary to maintain educational opportunity for all.

    I agree with most of the piece.  Barro doesn't take his argument in this direction, but, with the risk of dragging Josh into a social democratic quicksand pit, it's useful to reframe this discussion as one of reclaiming a "public option" in higher education.  Much of the discussion on the technical efficiency of the public provisioning of merit goods focuses on scale and compulsion, which is relevant for higher education, but there's also advantages in cost control and baseline quality.  By holding down tuition, the public university can act as a check on runaway price inflation in the private university market.  Considerations about dynamic efficiency - improvements in quality - seem not as relevant here in the formal education market: private sector tuition is exploding as fast as public tuition.  If we are concerned that boosting demand through price subsidies is captured by incumbent suppliers, then boosting access through reducing tuition on public universities should negate those rents.

    Dynamic efficency is very important when it comes to the online and future sectors of higher education.  However public options help here as well: having a strong baseline of quality is important for vetting the actual efficiency improvements of these new institutions.  Public options solve a certain type of informational problem.  If prices are lowered, it can be difficult for the government and citizens to tell if it is because market innovations have allowed for lower cost production or because they are providing services of a cheaper quality.  The private market is more incentivized to provide new benefit options and offer greater flexibility when they have to compete against a baseline product.  This creates the incentives mentioned above, but these incentives work more towards actual quality improvements instead of rent-seeking when they are competing against a public baseline.  We know for-profit schools are a bad deal because they statistically underperform public community colleges while having larger debt burdens.  Online education at California looks to have equally high drop-out rates. This was part of the important intellectual firepower over the debate on "vanilla products" that erupted during the early parts of Dodd-Frank, brought over to the education sector.

    Tim Noah wondered to Matt Yglesias if we should impose cost controls on colleges; I think we should instead do what we know has worked - make sure a public option is available to all, and have a private market develop alongside it, filling in the efficiency gaps wherever they are.  I forgot to link to this, but Aaron Bady had a powerful defense of the California Master Plan, the mid-century public higher education model, when we did a bloggingheads a few weeks ago:

     

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  • A Majority of Those Who Claim EITC Are on it for Less Than Two Years

    May 2, 2012Mike Konczal

    Here's a datapoint I was surprised to learn. From a footnote by Bob Greenstein of CBPP, there's a paper titled 

    Here's a datapoint I was surprised to learn. From a footnote by Bob Greenstein of CBPP, there's a paper titled Income Mobility and the Earned Income Tax Credit: Short-Term Safety Net or Long-Term Income Support, by Tim Dowd and John B. Horowitz.

    Is the safety net a hammock?  And is the system fundamentally broken if some 40 percent of American don't pay an income tax? This is the brunt of the conservative attack on the welfare state.  As Paul Ryan notes, his plan will make sure the government doesn't "turn the safety net into a hammock that lulls able-bodied people to lives of dependency and complacency, that drains them of their will and their incentive to make the most of their lives." Ryan's plan is focused on cutting spending through the tax code.  Most tax code spending benefits the top 20 percent of Americans, with one exception - the set of refundable credits including the Earned Income Tax Credit (EITC).  Those mostly go to those in the bottom 40 percent of Americans.  If you have the concerns mentioned above, the EITC is the place you'd cut.

    But does the EITC represent a "hammock," a permanent class of the poor living lives of "depenency and complacency"?  For one, EITC is connected to those who work, so one would think that it would be excluded from the assault on the welfare state.  But beyond that, it appears that those claiming EITC are people going in and out of working poverty with a surprising turnover frequency.  From the Dowd/Horowitz paper (my bold):

    Sixty-one percent have spells of one or 2 years. However, at the same time, we find that 20 percent of EITC recipients starting a spell, conditional on observing the taxpayer in 1989, claim the credit 5 or more years. Therefore, for some taxpayers, the EITC acts as a temporary safety net during periods of either anticipated or unanticipated income or family structure shocks. But the EITC also acts as a long-term mechanism of providing assistance to taxpayers with children who are entrenched in the lowest- income brackets.

    Indivar Dutta-Gupta at CBPP has more on the study, also noting that (my bold):

    The EITC goes to working people — the overwhelming majority of them families with children — with incomes up to roughly $49,000.  Earlier unpublished research from Dowd and Horowitz found that EITC users pay much more in federal income taxes over time than they receive in EITC benefits.  Taxpayers who claimed the EITC at least once during the 18-year period from 1989 through 2006 paid several hundred billion dollars in net federal income tax over this period, after subtracting the EITC and any other refunds.

    Dowd and Horowitz’s new study also found that EITC use is highest when children are youngest — which is also when parents’ wages are lowest.  (Working parents’ wages rise, on average, as their children grow up.)  This finding is particularly important given the importance of income for young children’s learning and the evidence that poverty in early childhood may reduce children’s earnings as adults.

    Rather than a permanent class of non-taxpayers, EITC users do, in fact, pay more in federal taxes over time than they get in EITC benefits, which represents how many of them move in and out of working poverty over the course of several years.  The study finds that mobility is lower on the whole for this group, which makes a safety net even more of a necessary thing.  But perhaps we can cut with the hammock language, and focus on the metaphor of a trampoline, providing people much needed support when there's a sudden shock to the economy or their lives that drops their ability to provide for themselves, and also a mechanism that promotes the kind of risk-taking we want in our society.  The question is how to make that stronger.

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  • Will Ryan's Budget Take a Page From the 18th Century and End Progressive Taxation?

    May 1, 2012Mike Konczal

    Jonathan Chait has a great article on Paul Ryan in New York Magazine, which includes an important quote from anti-tax adovcate Grover Norquist: "We don’t need a president to tell us in what direction to go. We know what direction to go. We want the Ryan budget...

    Jonathan Chait has a great article on Paul Ryan in New York Magazine, which includes an important quote from anti-tax adovcate Grover Norquist: "We don’t need a president to tell us in what direction to go. We know what direction to go. We want the Ryan budget... Pick a Republican with enough working digits to handle a pen to become president of the United States.” Earlier in the year Thomas Mann and Norman Ornstein walked readers of the Washington Monthly through what it would look like to have a Republican House, Senate, and president -- and the likelihood that they would pass the Ryan budget through reconciliation.

    Degressive Taxation

    One of the centerpieces of the Ryan budget's Path to Prosperity is tax reform. The tax overhaul will cut tax expenditures (without naming any) while also reducing the current set of six tax brackets to just two. One bracket will have a tax rate of 10 percent and the other will be 25 percent. Here's a question: should we think of these two rates as a special form of a flat tax? Would this budget be the end of progressive taxation in the United States?

    There's an excellent 1908 book called Progressive Taxation in Theory and Practice (you can download a copy at that google books link). Written by Edwin Robert Anderson Seligman for the American Economic Association, it set out to catalogue every argument in history for and against progressive taxation as well as proportionate taxation (or what we'd now call a flat tax). While walking through all the arguments, he has to classify a set of arguments that aren't strictly either -- something he calls "degressive taxation."

    Degressive taxation is where you have two tax rates: Below a certain income it is one rate, and above that income it is a second, higher rate. Typically it is a zero rate of taxation for income below the poverty line, and a flat, proportionate rate for income above that.

    Arguments for degressive taxation were very common in 18th century Europe. The French political economist François Véron Duverger de Forbonnais argued in 1758 that "the object of taxation is the preservation of property; and property is nil if it does not afford subsistence. Hence, the physical subsistence of every family is a privileged part of all income. Only the surplus above this minimum can be assigned to the public for the support of government."  Zero taxes for incomes up until poverty, flat tax above poverty.

    Dean Woodward put the argument even more strongly in 1768. "Before we begin to tax any income for the poor, we must deduct from it as much as is requisite to purchase for the possessor and his family the absolute necessaries of life.  No man can be bound to give to another what is essential to his own subsistence.  To this every man has the exclusive right on which the very claim of the poor is founded."

    Even though it isn't a flat tax across the entirety of income, as there are two distinct tax brackets, none of these people viewed their project as one of progressive taxation. Lord Auckland, debating England's first income tax in 1799, exempted 60 pounds for taxation as the minimum of subsistence but rejected progressive taxation "because of the implied inference, that because a man possesses much, therefore more shall be taken from him than is proportionably taken from others." As Seligman noted, surveying the arguments, "in degression the ideal is proportional taxation, although a concession is made, through lower rates or exemptions or abatements, to the poorest classes who ought theoretically to pay the same rate but who are deemed to be unable to do so."

    How Does The Ryan Plan Stack Up Against the 18th Century?

    I think it is fair to characterize the Ryan plan as, in its ideal, a degressive taxation plan. A low rate for those with little and a flat tax for everyone else. There are a few things that complicate this picture. It isn't clear where the 10 percent bracket ends and the 25 percent bracket starts (the 25 percent bracket now runs from $35,351 - $85,650 for singles, so in theory the 10 percent could run from $0 to $35,350). As James Kwak and many others point out, the numbers don't work -- this would be a major tax cut for the rich and a major tax hike for the working and middle classes.

    However, would people making poverty wages pay ten percent under the Ryan Plan, or zero percent? People working for poverty wages now don't often pay income taxes because of the Earned Income Tax Credit (EITC). But would Ryan look to cut the EITC tax break? As this fantastic New York Times chart shows, some sets of tax expenditures tilts to the 1% and some tilt to the bottom 40 percent:

    Refundable tax credits, like the EITC, benefit the bottom 40 percent of Americans. The preferential treatment of capital gains and dividend income benefits the top 20 percent, especially the top 1%. Ryan is clear that he wants to give capital gains and dividends even better treatment. But will he look to cut the EITC, making those in poverty pay more? It's not clear from anything I can find. As Tim Noah writes, Eric Cantor looks pretty set on getting those who pay nothing in income tax to pay something, and cutting the EITC is the way to do that.

    Looking further afield, Yuval Levin's big article "Beyond the Welfare State," the intellectual firepower (Committee on Social Thought-trained) justifying something like the Ryan Plan, mentions only three exemptions "worth keeping" after the conservative new dawn: "retirement savings (which are far preferable to universal cash benefits to retirees), a unified child tax credit (to encourage parenthood and to offset the mistreatment of parents in the tax code), and the charitable-giving deduction (since a reduction in government's role in social welfare must be met with an increase in the role of civil society, which should be encouraged)." Nothing specifically targeted for supplementing the incomes of those making poverty-level wages.

    Which also means that at the turn of the 21st century, after centuries of economic growth, the conservatives in the United States are looking at tax policy potentially far more regressive at a conceptual level toward the poor than classical liberals in the mid 18th century. Forget so-called moderate Republicans of the Eisenhower-era; can we just get a handful of 18th century tax scholars in the Republican party?

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  • Is There a Good Case For Doubling Student Loan Interest Rates?

    Apr 25, 2012Mike Konczal

    Sarah Jaffe recently wrote a story about how yesterday was the estimated day student debt would hit $1 trillion dollars. President Obama has called for Congress to keep interest rates on subsidized student loans at 3.4 percent instead of letting them revert back to 6.8 percent as per the law passed in 2007.

    Sarah Jaffe recently wrote a story about how yesterday was the estimated day student debt would hit $1 trillion dollars. President Obama has called for Congress to keep interest rates on subsidized student loans at 3.4 percent instead of letting them revert back to 6.8 percent as per the law passed in 2007. He has even started a twitter hastag for it, #dontdoublemyrate. It looks like Mitt Romney is also against letting the rate go up.

    Is there any good arguments for letting interest rates on student loans double? I've been trying to find some, so let's take a tour through the right-wing.

    Douglas Holtz-Eakin essentially punts at National Review Online, saying that it is a distraction. "Americans would be better able to afford college if their budgets were less pressured by gasoline, food, and health-insurance premiums."  Umm, sure, I guess, though the rate matters quite a bit to those who will be impacted by it. What does that have to do with what the rate should be?

    "Artificially" Low Rates?

    Heritage quotes Eakins and adds a fun "None of this is to say that the federal government should be doing more to bail out students. It shouldn’t... But the current debate’s origins are in separate legislation passed in 2007 whereby the federal government set interest rates on student loans artificially low." Bailouts! Yes, bailouts.

    Are rates "artifically low," thus bailing out student debtors? Right now, the United States can borrow for 10 years at real, or inflation-adjusted, interest rates that are negative. The 30-year conventional mortgage rate is the lowest its been in over 40 years. The market is using ultra-low interest rates to beg anyone who can make productive use of capital to borrow it  Educating our young citizens in universities that are the envy of the world certainly seems like a productive use of capital. So how is not jacking up interest rates when 10 year government debt yields are at ultra-low 2 percent rates the equivalent of paying AIG creditors at par during the financial bailouts?

    The implication is that they are below market rates. "Below-market" here is a troublesome phrase, as the private market for student loans is incomplete, prone to collapse, thin, and exists either through previous credit guarentees or a reworking of the various rules that govern debt in this country. This constitutes the government stepping up to do the things that the private market won't. As Keynes said, "The important thing for government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all."

    Cost to Taxpayers

    Cato tries harder to make a case if you can cut through a tangled web of metaphors about being "good parents" to kids. Neal McCluskey argues, "Finally, there’s the cost to taxpayers."

    I like how he doesn't mention that this actually runs a profit for taxpayers. From the Department of Education student loan overview (R-10): "For Direct Loans, the overall weighted average subsidy rate was estimated to be -13.91 percent in FY 2011; that is, the overall program on average was projected to earn about 13.91 percent on each dollar of loans made, thereby providing savings to the Federal Government.” Unless you start making up discount rates, these loans make a profit for taxpayers.

    As Alan White notes, according to the "Congressional Budget Office, $37 billion will flow IN to Treasury from student loans made this fiscal year at the 3.4% rate (on a net present value basis and net of about $1.5 billion to administer them.) " If anything, we should make rates lower than 3.4 percent.

    Lavishing Cheap Credit

    Cato continues by arguing, "the reality is that policymakers have been lavishing cheap money on students for decades...all the cheap aid has enabled colleges to raise their prices at breakneck speeds, rendering the aid largely self-defeating and college pricing insane."

    For aid to be "self-defeating," you'd have to imagine a completely inelastic, fixed supply of higher education, which I hope isn't Cato's argument against keeping current rates. But maybe the author's on to something. If you look at, say, the maximum amount of Pell Grants, do they rise in proportion with increases in tuition? Ummm, no:

    As Demos notes in its 10 points on how student debt is blocking mobility, "In 1980, 39 percent of federal financial aid to undergraduates was in the form of loans, and 55 percent was awarded in grants. By 2008, this had shifted to 64 percent of the funds awarded as loans and only 26 percent as grants. Moreover, today’s maximum Pell Grant covers just over a third of the costs of attending a public 4-year university, down from over two-thirds in 1980."

    Meanwhile, during the same time period, numerous legal restrictions have been put on student debt and protections have been stripped away, which means that the major government changes to student debt involve the it making it a harder, not easier, form of debt to manage. Nondischargeability went from five years to seven years in 1990, until it was revoked permanently in 1998 (when the statute of limitations was also removed). That was extended to for-profit student loans in 2005. Social Security became eligible for student loan collections in 1996. The argument that student debt became "lavish" during the past 20 years requires some additional work.

    And though some of the lower rates are captured by increased tuition because of inelastic supply -- an argument that is equivalent to saying that free, "public option" public universities would thus contain runaway costs -- current tuition movements look like they are being driven more by states cutting support for public universities during the Great Recession. As the CBPP notes, at least 43 states cut services to public higher education. That's what is going to drive serious tuition increases in the next few years.

    (Digging into some of this research, the lack of decent empirical work linking increased aid to tuition increases is startling given how much movement conservatives rely on such an argument.)

    There Are Better Subsidies

    Friend-of-the-blog Josh Barro at Forbes has the another set of arguments against blocking rate increases. First Josh argues that we need to think of a low rate as a subsidy: "A below-market interest rate for Stafford Loans is just another subsidy mechanism—essentially, you can think of the present value of the interest savings as a partial subsidy of a student’s tuition payments." Josh also notes that "Instead of extending the policy of holding Stafford Loan interest rates very low, why not let rates go back up and redirect the cost of the subsidy into an expansion of Pell Grants and refundable tuition tax credits?"

    Sure, but right now these loans are profitable. As noted above, we spent the last 20 years stripping out protections from these loans to guarantee a high recovery rate. There's no decent market rate to compare this to, given how thin and incomplete the private lending market is in this space. So why not fund it closer to where the government can borrow, adding in a small spread for administration and to cover losses?
     
    Pell grants should be considered in their own right. But this is a specific conversation about what the government should charge when it is acting as a lender to young people, collecting the spread between the rate it can borrow and what students will pay. If that spread is very high because capital markets want the government to borrow, that doesn't strike me as an excuse for the government to squeeze borrowers more and use the extra profit it makes at 6.8 percent to do something different. Even if it is a good idea to raise Pell Grants, that doesn't change the nature of how low interest rates are right now, and how the government should approach the rates it sets for students in a way that is fair.
     
    So what's left as far as arguments go?

     

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