Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • Why Is Spending Through the Tax Code Popular on the Right?

    Apr 20, 2012Mike Konczal

    Why is spending through the tax code popular on the Right?  Justin Wolfers and Betsy Stevenson have a Bloomberg editorial on tax expenditures that, beyond being a smart column on the topic, notes the distributional impact of these expenditures:

    Why is spending through the tax code popular on the Right?  Justin Wolfers and Betsy Stevenson have a Bloomberg editorial on tax expenditures that, beyond being a smart column on the topic, notes the distributional impact of these expenditures:

    The rich get such big subsidies for three reasons. First, they spend more on the things the tax system favors, such as homes and health care. Second, they are subject to higher tax rates, so they get more benefit from each dollar of deductions. Finally, they’re rich enough to take full advantage of their deductions. The poor typically have too little income to itemize, while many families in the upper middle class find themselves siphoned off into a separate tax system known as the alternative minimum tax, which allows fewer deductions.

    They note that Grover Norquist and other conservatives tend to support tax expenditures.  Why is this?  One reason they give are various psychological biases - "It’s a tribute to our psychological biases that getting a subsidy through the tax system is treated so differently from receiving a government check or copping a fine."

    Will Wilkinson at Democracy in America adds some additional reasons.  He argues that many on the right might think the following: "Tax deductions and credits are best understood as selective restraint, as selective acknowledgement of what is ours, on the part of a generally kleptomaniacal government."  He also notes that a lot of how people view this issue is tied up with how they view "giving and not taking" as equivalent actions.

    I'd like to throw in another point to compliment these.  It's important to understand tax expenditures as a political project. This goes back quite some time on the Right with health care spending through the tax code - but let's focus on the Reagan era.  Conservatives think that tax expenditures help with privatization and their larger political projects.  Let's look at Heritage's Stuart Butler's 1985 article, released by Cato, titled: Privatization: A Strategy to Cut the Budget.  (Butler was writing this in a lot of venues, but the Cato one is online; we discussed this article recently here.) Butler is worried that President Reagan can't destroy the Welfare State.  He's shocked and appalled by the way that middle-class people rush to the defense of Social Security.  The outright assault isn't working.  What can conservatives do next?

    They can use the tax code to create a private-sector welfare state to compete and ultimately win out against the government, removing the government from people's daily lives. Butler is concerned about "public sector coalitions" which are difficult to dislodge; why not create private sector ones?  Butler (my bold):

    Complaining about public-spending coalitions achieves little more than high blood pressure. But developing methods to entice the public to choose a private rather than a public way of promoting their self-interest may achieve a great deal….But a distinction is drawn between government as a provider (implying that government should levy taxes and deliver services itself), and government as a facilitator (implying that it should encourage or require those services to he provided by the private sector). Privatization, in other words, means seeking to transfer programs into the private sector using the carrot of incentives, not the stick of aggregate cutbacks…
     
    These privatization coalitions are the mirror image, so to speak, of the public-sector coalitions. And they are at the heart of the strategy to create a “privatization ratchet” to counter the federal ratchet. By providing a targeted benefit (such as a tax incentive or some regulatory relief) to those who demand or provide a private alternative to government, considerable rewards can be guaranteed to individuals within the coalition.  Members of that coalition can be expected to press for deeper incentives and to oppose any move to eliminate existing incentives…

    Privatization thus turns conventional political dynamics on its head. Lobbying pressure develops for less taxation (if a tax incentive is given), and for private, not public, programs. Moreover, each legislative victory won by the coalition, however small, serves to strengthen it, thereby adding to its capacity to achieve furthen legislative concessions and a corresponding growth in the private program…tax incentives concentrate benefits on a small number of people and they act as the nucleus for the growth of privatization coalitions….Because tax incentives are so essential to a privatization campaign, supporters of the approach should be cautious in their support of tax simplification.

    The battle here is between "government as a provider" and "government as facilitator."  Wolfers and Stevenson argue that the two are economically "identical."  Butler sees, I think correctly, that the two provide people with a very different experience of governance.  Since these actions are subsidized, the market is able to provide goods on better terms than they normally would; since they were ‘private’, they removed the linkage between people and the government.
     
    And here the political gridlock that results from trying to deal with tax expenditures is a feature not a bug; they use Public Choice theory to note that this privatized welfare state has such concentrated gains and diffused losses that it would be very difficult for the government to try and make these benefits truly public again.  As a tax cut, they are stickier since those whose gains are so concentrated have so much to lose and will lobby accordingly (check out the home builders and the mortgage interest deduction, for starters).  Take one concrete example of a tax expenditure Butler walks through, the subsidization of IRAs being tax-free as a way of fighting Social Security, to see this hidden welfare state ratchet in action (my bold):
    Social Security is a classic example of the federal ratchet in operation…Yet a minor provision in the 1981 tax act may eventually break up that coalition…By allowing all working Americans to open tax-deductible IRAs, Congress planted the seeds of a private alternative to Social Security…
     
    It was not long after the passage of the 1981 act that banks and other financial institutions…began a massive campaign to encourage Americans to open retirement accounts. Soon after that, nonworking married women began to complain that limiting their deduction to just $250 was unfair and discriminatory (near beneficiaries). And politicians were quick to propose accommodating the near beneficiaries and increasing the standard IRA deduction. A privatization coalition was born.
     
    The “tax loss” (as the Treasury puts it) of IRAs has vastly exceeded the original Reagan Administration projections. Yet repealing on reducing the deduction is already politically unthinkable—the coalition is too powerful and the privatization ratchet is in place….In short, the incentive has begun to divert the pressure of demand for a secure retirement income away from the publicly provided system (Social Security) and to the private alternative (IRAs)….From the budget-cutter’s point of view, the growing power of this IRA coalition offers the only real hope for spending reductions in Social Security, since the more Americans prefer IRAs as their primary pension vehicle, the weaker will become support for retaining Social Security in its present form.

    For these conservative intellectuals, in order to slay the monsters of the New Deal and the Great Society they had to unleash an even more vicious beast - the political mess of our tax expenditure system.

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  • Representative Bachus, FDIC and Voting Down Dodd-Frank's Resolution Authority

    Apr 20, 2012Mike Konczal

    So the House Republicans on the Financial Services Committee just voted to repeal "resolution authority."  What does this mean, and how can we compare it to previous actions by House Republicans?

    So the House Republicans on the Financial Services Committee just voted to repeal "resolution authority."  What does this mean, and how can we compare it to previous actions by House Republicans?

    A useful way of understanding both the financial crisis of 2008 and Dodd-Frank's response to it is through the idea of a "shadow banking system."  We have a set of regulatory rules, laws, practices and institutions from the New Deal that does well with the regular banking sector.  Over the past thirty years, a set of institutions started acting like banks without calling themselves banks, and thus did not have the same set of rules, laws and practices in place to regulate them as such.  Dodd-Frank's goal was to extend this regulatory framework to all "systemically risky financial institutions," or shadow banking institutions.

    One of the main pillars of this is "resolution authority," which allows FDIC to takeover and wind-down a failing shadow bank.  Since the New Deal the FDIC can wind down a failing commercial bank without the system collapsing.  We found that putting commercial banks through bankruptcy was a disaster, so we created FDIC to allow a firm to fail and allocate losses in a way that mitigated panics and contagion.  Now the FDIC can use those powers on firms acting like banks but that are not hanging a "bank" sign on their window.  These powers include the ability to force big financial firms to write "living wills" to help with taking them down.

    The FDIC has been making progress in formulating these powers.  They released a major report, The Orderly Liquidation of Lehman Brothers Holdings under the Dodd-Frank Act, which walks through how they would have handled 2008.  They've also answered conservative think tank critiques of resolution authority in what I think are correct and persuasive.

    So when you hear people, especially on the right, criticizing Dodd-Frank's resolution authority your first step should be to analyze what they think of the FDIC more broadly.  Do they view it as a statist boot stamping on a human face forever?  Here's a Cato Handbook for Congress from 1997 arguing for the privatization of FDIC and mandating banks purchase private deposit insurance (perhaps from an exchange?).  Cato's 2001 call for privatizing FDIC is amazing for how disastrous every one of their assumptions and calls turned out to be in light of the financial crisis.  But, as they say, at least it's an ethos.

    Representative Spencer Bachus (R - AL) is the current Chairman of the House Financial Services Committee, and just lead the Committee in a vote that, among many other things, repealed this resolution authority powers.  Bachus has argued "This authority is not a death panel for failed institutions...It is taxpayer-funded support for their creditors and counterparties.”

    So where does Bachus stand on FDIC more broadly?  Here's the fascinating part: he lead a major 2002 move that expanded deposit insurance.  Bachus was the chief sponsor of the Federal Deposit Insurance Reform Act of 2002 which increased "the standard maximum amount of deposit insurance coverage from $100,000 to $130,000" and also adjusted it for inflation.

    It's not clear why he supports FDIC when it comes to commercial banks but not shadow banks.  It's also not clear why, if he is so concerned about even the potential for moral hazard and taxpayer-funding being at risk (remember: FDIC recoups any expenses from fees on shadow banks, so taxpayers are always paid back), he took the bizarre step of expanding the amount of coverage FDIC gives to depositors (or the "creditors and counterparties" he rails about).  Did he feel creditors in the form of depositors weren't protected enough?

    I've been reading about this 2002 bill, and if Bachus showed any concern about FDIC as an institution and a preference for putting commercial banks through bankruptcy instead of an orderly winddown I can't find it.  I'm trying to get a comment from the House Financial Services Committee on this but it certainly seems like a complete about face.  So one has to ask - if FDIC is a useful and appropriate way of allowing firms that hang a "bank" sign on the window to fail, why isn't it appropriate when a firm functions exactly like a bank?

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  • Why Full Employment is the Best Medicine for Inequality

    Apr 20, 2012Mike Konczal

    We face a lot of policy challenges, but making sure Americans have jobs will make them all easier.

    One of the interesting ideas to come out of the recent Occupy Handbook is Paul Krugman and Robin Wells' argument that inequality has contributed to the lack of a serious and sustained response to the unemployment crisis of the Great Recession.

    We face a lot of policy challenges, but making sure Americans have jobs will make them all easier.

    One of the interesting ideas to come out of the recent Occupy Handbook is Paul Krugman and Robin Wells' argument that inequality has contributed to the lack of a serious and sustained response to the unemployment crisis of the Great Recession.

    Daron Acemoglu and James Robinson respond at their Why Nations Fail blog.  Two points to discuss:

    First, the distinction between “right” and “left” (or perhaps pro-elite and anti-elite) is not a natural one when it comes to Keynesian economics and policies. Many conservative politicians, and not just Nixon and Reagan, have embraced Keynesian economics. Both Fascist Italy and Nazi Germany were big-time Keynesians...Third, even in the current US context it is not clear why the wealthiest Americans should be opposed to Keynesian policies...

    Fourth, even if Krugman and Wells’s emphasis is right, we find it hard to place lack of sufficient Keynesian stimulus as one of the most corrosive effects of soaring political inequality and political polarization in the US. What about the failure of our educational institutions; the huge incarceration rate, particularly for African-Americans; erosion of civil liberties; increasingly inefficient subsidies and tax breaks to select corporations and sectors; distortions created by implicit and explicit subsidies to the financial industry? Lack of sufficient Keynesian zeal seems a little less important.
    For the first point, it's useful to distinguish between some stimulus/counter-cyclical spending and the actual policy goal of full employment. It is easy to imagine elites supporting policies that prevent system collapse -- nobody benefits from 25 percent unemployment -- but not being all that concerned with getting to full employment in two years versus 10 years (or even at all). Whether right now is a "sweet spot" of just enough aggregate demand and employment to keep the system running (and creditors paid) but not enough to give workers serious bargaining power is an ongoing topic of debate on the Internet. (Steve Waldman at interfluidity has the latest entry.) The Krugman/Wells essay brings up Kalecki in a way that I think is useful on this question; the issue of coordination and relative priorities among many eilites is also important.
     
    For the second paragraph (their fourth point), it is always difficult to rank bad things. But it is very important to remember that a policy of full employment makes it significantly easier to deal with many other problems. People have much more realistic and managed expectations for what education can do for workers' wage gains in an economy where wages are actually growing. There's good data that unemployment is linked with a lack of interest in global warming, another very important issue. When there's full employment and serious wage growth people are also probably less likely to be concerned about immigration and trade's impact on their jobs. Deincarceration will be easier if there are jobs waiting for people on the other side of the walls rather than sky-high unemployment. And so on.
     
    For all the policy fads of getting wages up -- Charles Murray's recent call for elites to shame the working class into higher wages being the latest, and probably not the worst -- the best way to get wages up is to have full employment. As Jared Bernstein notes, "the working man and woman really have no better friend than full employment."

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  • A Saez/Piketty Profile and a Syllabus

    Apr 19, 2012Mike Konczal

    Annie Lowrey has a must-read New York Times profile of the two French economists who have meticulously documented changes in the income share of the 1%, Emmanuel Saez and Thomas Piketty.  We've used their research extensively at this blog.  From the profile:

    Annie Lowrey has a must-read New York Times profile of the two French economists who have meticulously documented changes in the income share of the 1%, Emmanuel Saez and Thomas Piketty.  We've used their research extensively at this blog.  From the profile:

    Both admire, even adore, the United States, they say, for its entrepreneurial drive, innovative spirit and, not least, its academic excellence: the two met while re-searchers in Cambridge, Mass. But both also express bewilderment over the current conversation about whether the wealthy, who have taken most of America’s income gains over the last 30 years, should be paying higher taxes.
     
    “The United States is getting accustomed to a completely crazy level of inequality,” Mr. Piketty said, with a degree of wonder. “People say that reducing inequality is radical. I think that tolerating the level of inequality the United States tolerates is radical.”
     
    [...]
     
    “In a way, the United States is becoming like Old Europe, which is very strange in historical perspective,” Mr. Piketty said. “The United States used to be very egalitarian, not just in spirit but in actuality. Inequality of wealth and income used to be much larger in France. And very high taxes on the very rich — that was invented in the United States,” he said.
     
    Mr. Saez added, “Absent drastic policy changes, I doubt that income inequality will decline on its own.”

    I also want to use this moment and link to the syllabus and course materials for Thomas Piketty's Paris School of Economics class on the "Economics of Inequality/Economie des inégalités."  I like reading syllabi to get a sense of where academic debates are, and these materials are going to be at the forefront of the inequality debate for some time to come.  The left-liberal space is re-examining and re-building its case on inequality in wake of the Recession and the 1% narrative, and this syllabus is a brilliant collection of the latest arguments, research and academic debate.  It's what will, in a good world, be common knowledge among all graduate students in 10 years - here you can see it argued in real time.  Check it out!

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  • What Should You Know About the Quebec Student Strikes and Occupations?

    Apr 17, 2012Mike Konczal

    One thing to remember about Occupy is that it has much of its current origins, successes, and most intense interactions with authority around the spaces of college campuses. Its activism is particularly innovative when it comes to direct actions, occupations, and student strikes, all to combat college tuition increases, privatization, and the creation of student debt markets.

    One thing to remember about Occupy is that it has much of its current origins, successes, and most intense interactions with authority around the spaces of college campuses. Its activism is particularly innovative when it comes to direct actions, occupations, and student strikes, all to combat college tuition increases, privatization, and the creation of student debt markets. Here’s the Wikipedia entry on the Puerto Rico student strikes, where they were protesting massive waves of layoffs of government workers and campus faculty and an estimated 100 percent tuition hike. Here’s the Wikipedia entry on the Chilean student strikes, which date back to 2006, where students fought high application fees they couldn’t afford. And, of course, there's what is going on at University of California, with the pepper spray at Davis and the beatings both in 2009 and 2011 at Berkeley.

    But the most interesting resistance happening right now is going on in Quebec, Canada. There are, according to one representative report, over 165,000 students on strike from class out of 495,000 in the student body.

    Quebec is looking to increase its tuition 75 percent over the next several years. Students responded by starting what is now the longest strike in the province's history. It's gone on even though the government has offered to make student loans a nicer, kinder form of debt, with income-contingent repayments, while not budging on the tuition hikes.

    This image by Tina Mailhot-Roberge shows tens of thousands of people marching through Montreal on March 22nd, 2012:

    And here's an amazing video of two and a half hours of the protest time-lapsed down into 50 seconds on YouTube. And with a h/t to The Nation, here's the Real News Network's coverage of the protests.

    The strike is heading into a dangerous time. The administration isn't looking to make concessions on tuition and students are approaching the point where they won't complete the semester. This will be worth watching in the weeks ahead.

    Why are these sites so potent for activism? The college campus combines several issues into one: the privatization of public services, the dismembering of social insurance and its replacement with a regime of debt and risk-shifting, and the dismantling of the primary means of social mobility with one designed to entrench inequality, which all builds toward a lack of freedom to fully develop one's talents and abilities and be full, productive citizens.

    These students are right to fight this battle at the beginning, during the initials cuts. Privatization creates its own justification; the more public universities are defunded and reconceived as a private good, the less civic interest there is in defending them as a public good. And they are also fighting at the beginning of their lives, both for what kind of world they want to live in and against the constraints of indenture that we see when this process of privatization and debt reaches its ultimate conclusion -- a path the United States is much further along.

    Mike Konczal is a Fellow at the Roosevelt Institute.

    Image courtesy of Shutterstock.com

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