Launching Our Financialization Project with "Disgorge the Cash"

Feb 25, 2015Mike Konczal

So excited to be launching our new Financialization Project. Check out the website here. Part of the goal of the project is to define financialization, and we've focused on the changes to savings, power, wealth, and society that have occured over the past 35 years. We'll have more there soon, but for now check out the general idea here.

We're also releasing our first paper, "Disgorge the Cash: The Disconnect Between Corporate Borrowing and Investment," by Roosevelt fellow J.W. Mason. There's a great writeup of the paper by Lydia DePillis – "Why companies are rewarding shareholders instead of investing in the real economy" – at the Washington Post.

There's a ton in there, from the key intellectual, ideological, legal, and institutional changes that brought about the shareholder revolution, to reasons to doubt a credit crunch has played any kind of role in the Great Recession. But the core of it is told in these two graphs, dug out from detailed Compustat data:

The first figure shows that a firm borrowing $1 would correlate with an additional 40 cents of investment before the 1980s. Since the 1980s that has collapsed. Today, there is a strong correlation between shareholder payouts and borrowing that did not exist before the mid-1980s. Since the 1980s, shareholder payouts have nearly doubled; in the second half of 2007, aggregate payouts actually exceeded aggregate investment.

This next figure, a little harder to follow, uses flow-of-funds data to make the same point more dramatically.

These graphs plot corporate investment and shareholder payouts against cash flow from operations and net borrowing, respectively. Here the series are broken into three periods: 1952–1984; 1985 to the business-cycle trough in 2001; and 2002–2013. As the paper notes, the upper two panels show a strong relationship between corporate sources of funds and investment in the 1950s through the early 1980s: the points of the scatterplots fall clearly along an upward-sloping diagonal, indicating that periods of high corporate earnings and high corporate borrowing were consistently also periods of high corporate investment. The relationship between investment and the two sources of funds is still present, though weaker, in the 1985–2001 period.
 
But in the most recent business cycle and recovery, the correlations appear to have vanished entirely. The rise, fall, and recovery of corporate cash flow over the past dozen years is not associated with any similar shifts in corporate investment, which seems stuck at a low level of 1–2 percent of total assets. Similarly, the very large swings in credit flows to the corporate sector do not correspond to any similar shifts in aggregate investment. Turning to the lower two panels of Figure 6, which show shareholder payouts, we see at most a weak relationship with the two sources of funds in the earlier period. In the earlier period, it is payments to shareholders that are stable at 1–2 percent of corporate assets. In the most recent period, by contrast, payouts to shareholders vary much more, and appear more strongly associated with variation in cash flow and borrowing. The transitional period of 1985–2001 is intermediate between the two.
 
I hope you check out the full paper. Here's the executive summary:
 
This paper provides evidence that the strong empirical relationship of corporate cash flow and borrowing to productive corporate investment has disappeared in the last 30 years and has been replaced with corporate funds and shareholder payouts. Whereas firms once borrowed to invest and improve their long-term performance, they now borrow to enrich their investors in the short-run. This is the result of legal, managerial, and structural changes that resulted from the shareholder revolution of the 1980s. Under the older, managerial, model, more money coming into a firm – from sales or from borrowing – typically meant more money spent on fixed investment. In the new rentier-dominated model, more money coming in means more money flowing out to shareholders in the form of dividends and stock buybacks.
 
These results have important implications for macroeconomic policy. The shareholder revolution – and its implications for corporate financing decisions – may help explain why higher corporate profits in recent business cycles have generally failed to lead to high levels of investment. And under this new system, cheaper money from lower interest rates will fail to stimulate investment, growth, and wages because, as we show here, additional funds are funneled to shareholders through buybacks and dividends.
 
Follow or contact the Rortybomb blog:
 
  

 

So excited to be launching our new Financialization Project. Check out the website here. Part of the goal of the project is to define financialization, and we've focused on the changes to savings, power, wealth, and society that have occured over the past 35 years. We'll have more there soon, but for now check out the general idea here.

We're also releasing our first paper, "Disgorge the Cash: The Disconnect Between Corporate Borrowing and Investment," by Roosevelt fellow J.W. Mason. There's a great writeup of the paper by Lydia DePillis – "Why companies are rewarding shareholders instead of investing in the real economy" – at the Washington Post.

There's a ton in there, from the key intellectual, ideological, legal, and institutional changes that brought about the shareholder revolution, to reasons to doubt a credit crunch has played any kind of role in the Great Recession. But the core of it is told in these two graphs, dug out from detailed Compustat data:

The first figure shows that a firm borrowing $1 would correlate with an additional 40 cents of investment before the 1980s. Since the 1980s that has collapsed. Today, there is a strong correlation between shareholder payouts and borrowing that did not exist before the mid-1980s. Since the 1980s, shareholder payouts have nearly doubled; in the second half of 2007, aggregate payouts actually exceeded aggregate investment.

This next figure, a little harder to follow, uses flow-of-funds data to make the same point more dramatically.

These graphs plot corporate investment and shareholder payouts against cash flow from operations and net borrowing, respectively. Here the series are broken into three periods: 1952–1984; 1985 to the business-cycle trough in 2001; and 2002–2013. As the paper notes, the upper two panels show a strong relationship between corporate sources of funds and investment in the 1950s through the early 1980s: the points of the scatterplots fall clearly along an upward-sloping diagonal, indicating that periods of high corporate earnings and high corporate borrowing were consistently also periods of high corporate investment. The relationship between investment and the two sources of funds is still present, though weaker, in the 1985–2001 period.
 
But in the most recent business cycle and recovery, the correlations appear to have vanished entirely. The rise, fall, and recovery of corporate cash flow over the past dozen years is not associated with any similar shifts in corporate investment, which seems stuck at a low level of 1–2 percent of total assets. Similarly, the very large swings in credit flows to the corporate sector do not correspond to any similar shifts in aggregate investment. Turning to the lower two panels of Figure 6, which show shareholder payouts, we see at most a weak relationship with the two sources of funds in the earlier period. In the earlier period, it is payments to shareholders that are stable at 1–2 percent of corporate assets. In the most recent period, by contrast, payouts to shareholders vary much more, and appear more strongly associated with variation in cash flow and borrowing. The transitional period of 1985–2001 is intermediate between the two.
 
I hope you check out the full paper. Here's the executive summary:
 
This paper provides evidence that the strong empirical relationship of corporate cash flow and borrowing to productive corporate investment has disappeared in the last 30 years and has been replaced with corporate funds and shareholder payouts. Whereas firms once borrowed to invest and improve their long-term performance, they now borrow to enrich their investors in the short-run. This is the result of legal, managerial, and structural changes that resulted from the shareholder revolution of the 1980s. Under the older, managerial, model, more money coming into a firm – from sales or from borrowing – typically meant more money spent on fixed investment. In the new rentier-dominated model, more money coming in means more money flowing out to shareholders in the form of dividends and stock buybacks.
 
These results have important implications for macroeconomic policy. The shareholder revolution – and its implications for corporate financing decisions – may help explain why higher corporate profits in recent business cycles have generally failed to lead to high levels of investment. And under this new system, cheaper money from lower interest rates will fail to stimulate investment, growth, and wages because, as we show here, additional funds are funneled to shareholders through buybacks and dividends.
 
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The One Where Larry Summers Demolished the Robots and Skills Arguments

Feb 20, 2015Mike Konczal
Everyone should take it easy on the robot stuff for a while.
 
There's been a small, but influential, hysteria surrounding the idea is that a huge wave of automation, technology and skills have lead to a massive structural change in the economy since 2010. The implicit argument here is that robots and machines have both made traditional demand-side policies irrelevant or naïve, and been a major driver of wage stagnation and inequality. Though not the most pernicious story that gained prominence as the recovery remained sluggish in 2010 to 2011, it gained an important foothold among elite discussion.
 
That is over. They say Washington DC has had a huge crime decline, but I just saw one of the most vicious muggings I’m likely to see, one where David Autor and Larry Summers just tore this idea that a Machine Age is responsible for our economic plight apart on a panel yesterday at the Hamilton Project for the launch of a new Machine Age report. Summers, in particular, took an aggressive tone that is likely to be where liberal and Democratic Party mainstream economic thinking is in advance of 2016. It is a very, very good place.
 
As Larry Mishel noted in an American Prospect piece on the eve of the event, the robots and skills story has many problems. But I was genuinely surprised at how poorly those pushing the argument - Erik Brynjolfsson and Andrew McAfee, authors of the influential The Second Machine Age, were there - could address the pretty obvious counterarguments that were brought up. You can see the event at CSPAN here. This piece will mostly be blockquotes, because the quotes are too good to try and summarize. (Any transcribing errors are my own.)
 
First up, economist David Autor of MIT demolished the core claims in about a minute of speaking. For those with ears to hear it, this is him also moderating and walking back portions of his “job polarization” arguments from 2010. Autor:

I think there's reason for some skepticism about how fast things are actually moving. There’s a lot of aggregate data that don't support the idea the labor market is changing or the economy is changing as rapidly as this very dramatic story. The premium to higher education has plateaued over the last 10 years. We see evidence highly skilled workers have less rapid career trajectories and are moving into less skill occupation if anything. Productivity is not growing very rapidly, and a lot of the employment growth we’ve seen in the past 15 years has been in relatively low education, in-person service occupations.

The second point I want to make, when we think about how technology interacts with labor market we think of substitution of labor with machinery. [...] What is neglected is that it complements us as well. Many activities require a mixture of things. it requires a mixture of information process and creativity, motor power and dexterity. if those things need to be done together if you make one cheaper and more productive, you increase the value of the other.

It got worse for the robots. Here's Larry Summers:
On the one hand we have enormous anecdotal evidence and visual evidence that points to technology having huge and pervasive effects. Whether it is complementing workers and making them much more productive in a happy way, or whether it is substituting for them and leaving them unemployed can be debated. In either of those scenarios you would expect it to be producing a renaissance of higher productivity.
 
So, on the one hand are convinced of the far greater pervasiveness of technology in the last few years, and, on the other hand, the productivity statistics on the last dozen years are dismal. Any fully satisfactory view has to reconcile those two observations and I have not heard it satisfactorily reconciled.
Summers also pointed out something that's fairly obvious once you think about it: if this robot argument is true, doesn't it mean a short-term job boom? (JW Mason once pointed out this is how Schumpeter thought of these types of “recalculation” business cycles.) Summers:
If you believe technology happens with a big lag and it's only going to happen in the future, that's fine. But then you can't believe it's already caused a large amount of inequality and disruption of employment today. [...] Let's take retailing. You can imagine you can have all kinds of spiffy technology so you no longer have to have people behind cash registers. The problem is you wouldn't expect the people behind the cash registers would get fired before the people working the systems got the new systems working. […] I understand why it might take years for it all to have an effect. What I have a harder time understanding is how there can be substantial disemployment ahead of the effect of the productivity.
 
That is, if you thought that it just was impossible to put in these systems and so forth, then you might think that in the short run it would be a big employment boom. You have to keep your old legacy system going and you have to have a million guys running around figuring out how to put the new computer system in. 
The panel goes into a thing about how education will save us. Moar education! This is where Summers went harder than I had expected:
I think the [education] policies that Aneesh is talking about are largely whistling past the graveyard. The core problem is that there aren't enough jobs. If you help some people, you could help them get the jobs, but then someone else won't get the jobs. Unless you're doing things that have things that are effecting the demand for jobs, you're helping people win a race to get a finite number of jobs. […]
 
Folks, wage inflation in the united states is 2%. It has not gone up in five years. There are not 3% of the economy where there's any evidence of hyper wage inflation of a kind that would go with worker shortages. The idea that you can just have better training and then there are all these jobs, all these places where there are shortages and we just need the train people is fundamentally an evasion. [...]
 
I am concerned that if we allow the idea to take hold, that all we need to do is there are all these jobs with skills and if we can just train people a bit, then they'll be able to get into them and the whole problem will go away. I think that is fundamentally an evasion of a profound social challenge.
But, but, but, if we don’t just educate people more, what can we even do? Summers:
What we need is more demand and that goes to short run cyclical policy, more generally to how we operate macroeconomic policy, and the enormous importance of having tighter labor markets, so that firms have an incentive to reach for worker, rather than workers having to reach for firms. [...]
 
I think that the broad empowerment of labor in a world where an increasing part of the economy is generating income that has a kind of rent aspect to it, the question of who's going to share in it becomes very large. One of the puzzles of our economy today is that on the one hand, we have record low real interest rates, that are expected to be record low for 30 years if you look at the index bond market. And on the other hand, we have record high profits. And you tend to think record high profits would mean record high returns to capital, would also mean really high interest rates. And what we actually have is really low real interest rates. The way to think about that is there's a lot of rents in what we're calling profits that don't really represent a return to investment, but represent a rent.
 
The question then is who's going to get those rents? Which goes to the minimum wage, goes to the power of union, goes through the presence of profit sharing, goes to the length of patents and a variety of other government policies that confer rents and then when those are received, goes to the question of how progressive the tax and transfer system is. That has got to be a very, very large part of the picture.
Two bonus quotes. First, someone immediately followed up that instead of the minimum wage, why don’t we just expand the earned income tax credit? Summers:
If we had the income distribution in the United States that we did in 1979, the top 1% would have $1 trillion less today, and the bottom 80% would have $1 trillion more. That works out to about $700,000 a family for the top 1%, and about $11,000 a year for a family in the bottom 80%.
 
That's a trillion dollars. I don't know what the number is, but my guess is that the total cost of the Earned Income Tax Credit is $50 billion. Nobody's got on the policy agenda doubling the Earned Income Tax Credit. The big, aggressive agendas are probably to increase it by a third or a half. So, I'm all for it, but we are talking about 2.5% of the redistribution that has taken place. So, you have to be looking for things and there's no one thing that is going to do it. My reading of the evidence, it's a fairly general evidence, is that while there may be some elasticity, the elasticity around the current level of the minimum wage is very low.
Nice. And from his introductory remarks, Robert Rubin casually mentions collective bargaining might be a solution to inequality, but also probably redistribution and a cultural and policy shift towards more free time and more leisure. Ya know, no biggie. Rubin:
We may need an increase in the income tax credit, not only for those who receive it at the present time but perhaps much further up the income scale. Measures that facilitate collective bargaining can result in a broader participation in the benefits of productivity and growth [...] If we have ever rapid technological development and it is labor displacing, at some point in the future -- as I say, that may be some distant point in the future -- should that lead to some basic change in our lifestyles with less work, more lecture and a richer, more robust use of that leisure? [...] In addition to everything that needs to be done to enhance growth, tighten labor markets and to improve the position of middle and lower income workers, should there be increased redistribution to accomplish the broad objectives of our society?
(I looked at the left-liberals I knew active in policy circles in the 1990s who were in the room, wondering how they kept their heads from exploding at that moment.)
 
Perhaps this turn is just reflecting this very specific historical moment, and it could change again just as quickly. But the problems are real, and terrifying stories about robots taking all the jobs can no longer have the double function as a form of relief that we have no responsibility to try and address these problems. And it's great to see prominent liberal economists doing that, especially in advance of the 2016 election.
 
Follow or contact the Rortybomb blog:
 
  

 

Everyone should take it easy on the robot stuff for a while.
 
There's been a small, but influential, hysteria surrounding the idea is that a huge wave of automation, technology and skills have lead to a massive structural change in the economy since 2010. The implicit argument here is that robots and machines have both made traditional demand-side policies irrelevant or naïve, and been a major driver of wage stagnation and inequality. Though not the most pernicious story that gained prominence as the recovery remained sluggish in 2010 to 2011, it gained an important foothold among elite discussion.
 
That is over. They say Washington DC has had a huge crime decline, but I just saw one of the most vicious muggings I’m likely to see, one where David Autor and Larry Summers just tore this idea that a Machine Age is responsible for our economic plight apart on a panel yesterday at the Hamilton Project for the launch of a new Machine Age report. Summers, in particular, took an aggressive tone that is likely to be where liberal and Democratic Party mainstream economic thinking is in advance of 2016. It is a very, very good place.
 
As Larry Mishel noted in an American Prospect piece on the eve of the event, the robots and skills story has many problems. But I was genuinely surprised at how poorly those pushing the argument - Erik Brynjolfsson and Andrew McAfee, authors of the influential The Second Machine Age, were there - could address the pretty obvious counterarguments that were brought up. You can see the event at CSPAN here. This piece will mostly be blockquotes, because the quotes are too good to try and summarize. (Any transcribing errors are my own.)
 
First up, economist David Autor of MIT demolished the core claims in about a minute of speaking. For those with ears to hear it, this is him also moderating and walking back portions of his “job polarization” arguments from 2010. Autor:

I think there's reason for some skepticism about how fast things are actually moving. There’s a lot of aggregate data that don't support the idea the labor market is changing or the economy is changing as rapidly as this very dramatic story. The premium to higher education has plateaued over the last 10 years. We see evidence highly skilled workers have less rapid career trajectories and are moving into less skill occupation if anything. Productivity is not growing very rapidly, and a lot of the employment growth we’ve seen in the past 15 years has been in relatively low education, in-person service occupations.

The second point I want to make, when we think about how technology interacts with labor market we think of substitution of labor with machinery. [...] What is neglected is that it complements us as well. Many activities require a mixture of things. it requires a mixture of information process and creativity, motor power and dexterity. if those things need to be done together if you make one cheaper and more productive, you increase the value of the other.

It got worse for the robots. Here's Larry Summers:
On the one hand we have enormous anecdotal evidence and visual evidence that points to technology having huge and pervasive effects. Whether it is complementing workers and making them much more productive in a happy way, or whether it is substituting for them and leaving them unemployed can be debated. In either of those scenarios you would expect it to be producing a renaissance of higher productivity.
 
So, on the one hand are convinced of the far greater pervasiveness of technology in the last few years, and, on the other hand, the productivity statistics on the last dozen years are dismal. Any fully satisfactory view has to reconcile those two observations and I have not heard it satisfactorily reconciled.
Summers also pointed out something that's fairly obvious once you think about it: if this robot argument is true, doesn't it mean a short-term job boom? (JW Mason once pointed out this is how Schumpeter thought of these types of “recalculation” business cycles.) Summers:
If you believe technology happens with a big lag and it's only going to happen in the future, that's fine. But then you can't believe it's already caused a large amount of inequality and disruption of employment today. [...] Let's take retailing. You can imagine you can have all kinds of spiffy technology so you no longer have to have people behind cash registers. The problem is you wouldn't expect the people behind the cash registers would get fired before the people working the systems got the new systems working. […] I understand why it might take years for it all to have an effect. What I have a harder time understanding is how there can be substantial disemployment ahead of the effect of the productivity.
 
That is, if you thought that it just was impossible to put in these systems and so forth, then you might think that in the short run it would be a big employment boom. You have to keep your old legacy system going and you have to have a million guys running around figuring out how to put the new computer system in. 
The panel goes into a thing about how education will save us. Moar education! This is where Summers went harder than I had expected:
I think the [education] policies that Aneesh is talking about are largely whistling past the graveyard. The core problem is that there aren't enough jobs. If you help some people, you could help them get the jobs, but then someone else won't get the jobs. Unless you're doing things that have things that are effecting the demand for jobs, you're helping people win a race to get a finite number of jobs. […]
 
Folks, wage inflation in the united states is 2%. It has not gone up in five years. There are not 3% of the economy where there's any evidence of hyper wage inflation of a kind that would go with worker shortages. The idea that you can just have better training and then there are all these jobs, all these places where there are shortages and we just need the train people is fundamentally an evasion. [...]
 
I am concerned that if we allow the idea to take hold, that all we need to do is there are all these jobs with skills and if we can just train people a bit, then they'll be able to get into them and the whole problem will go away. I think that is fundamentally an evasion of a profound social challenge.
But, but, but, if we don’t just educate people more, what can we even do? Summers:
What we need is more demand and that goes to short run cyclical policy, more generally to how we operate macroeconomic policy, and the enormous importance of having tighter labor markets, so that firms have an incentive to reach for worker, rather than workers having to reach for firms. [...]
 
I think that the broad empowerment of labor in a world where an increasing part of the economy is generating income that has a kind of rent aspect to it, the question of who's going to share in it becomes very large. One of the puzzles of our economy today is that on the one hand, we have record low real interest rates, that are expected to be record low for 30 years if you look at the index bond market. And on the other hand, we have record high profits. And you tend to think record high profits would mean record high returns to capital, would also mean really high interest rates. And what we actually have is really low real interest rates. The way to think about that is there's a lot of rents in what we're calling profits that don't really represent a return to investment, but represent a rent.
 
The question then is who's going to get those rents? Which goes to the minimum wage, goes to the power of union, goes through the presence of profit sharing, goes to the length of patents and a variety of other government policies that confer rents and then when those are received, goes to the question of how progressive the tax and transfer system is. That has got to be a very, very large part of the picture.
Two bonus quotes. First, someone immediately followed up that instead of the minimum wage, why don’t we just expand the earned income tax credit? Summers:
If we had the income distribution in the United States that we did in 1979, the top 1% would have $1 trillion less today, and the bottom 80% would have $1 trillion more. That works out to about $700,000 a family for the top 1%, and about $11,000 a year for a family in the bottom 80%.
 
That's a trillion dollars. I don't know what the number is, but my guess is that the total cost of the Earned Income Tax Credit is $50 billion. Nobody's got on the policy agenda doubling the Earned Income Tax Credit. The big, aggressive agendas are probably to increase it by a third or a half. So, I'm all for it, but we are talking about 2.5% of the redistribution that has taken place. So, you have to be looking for things and there's no one thing that is going to do it. My reading of the evidence, it's a fairly general evidence, is that while there may be some elasticity, the elasticity around the current level of the minimum wage is very low.
Nice. And from his introductory remarks, Robert Rubin casually mentions collective bargaining might be a solution to inequality, but also probably redistribution and a cultural and policy shift towards more free time and more leisure. Ya know, no biggie. Rubin:
We may need an increase in the income tax credit, not only for those who receive it at the present time but perhaps much further up the income scale. Measures that facilitate collective bargaining can result in a broader participation in the benefits of productivity and growth [...] If we have ever rapid technological development and it is labor displacing, at some point in the future -- as I say, that may be some distant point in the future -- should that lead to some basic change in our lifestyles with less work, more lecture and a richer, more robust use of that leisure? [...] In addition to everything that needs to be done to enhance growth, tighten labor markets and to improve the position of middle and lower income workers, should there be increased redistribution to accomplish the broad objectives of our society?
(I looked at the left-liberals I knew active in policy circles in the 1990s who were in the room, wondering how they kept their heads from exploding at that moment.)
 
Perhaps this turn is just reflecting this very specific historical moment, and it could change again just as quickly. But the problems are real, and terrifying stories about robots taking all the jobs can no longer have the double function as a form of relief that we have no responsibility to try and address these problems. And it's great to see prominent liberal economists doing that, especially in advance of the 2016 election.
 
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Did Ending Unemployment Insurance Extensions Really Create 1.8 Million Jobs?

Jan 27, 2015Mike Konczal

According to a new study by Marcus Hagedorn, Iourii Manovskii and Kurt Mitman (HMM), Congress failing to reauthorized the extension of unemployment insurance (UI) resulted in 1.8 million additional people getting jobs. But wait, how does that happen when only 1.3 million people had their benefits expire?

The answer is by going off the normal path of these arguments in models, techniques and data. The paper has a nice write-up by Patrick Brennan here, but it’s one that doesn’t convey how different this paper is compared to the vast majority of the research. The authors made a well-criticized splash in 2013 by arguing that most of the rise in unemployment in the Great Recession was UI-driven; this new paper is a continuation of that approach.

Gold Standard Model. Before we go further, let’s understand what the general standard in UI research looks like. The model here is that UI makes it easier for workers to pass up job offers. As a result they’ll take a longer time to find a job, which creates a larger pool of unemployed people, raising unemployment. In order to test this, researchers use longitudinal data for individuals to compare the length of job searches for individuals who receive UI with those who do not.

This is the standard in the two biggest UI studies from the Great Recession. Both essentially use individuals not receiving UI as a control group to see what getting UI does for people’s job searches over time. Jesse Rothstein (2011) found that UI raised unemployment “by only about 0.1 to 0.5 percentage point.” Using a similar approach, Farber and Valletta (2013) later found “UI increased the overall unemployment rate by only about 0.4 percentage points.” These are generally accepted estimated.

And though small, they are real numbers. The question then becomes an analysis of the trade-offs between this higher unemployment and the positive effects of unemployment insurance, including income support, increased aggregate demand and the increased efficiency of people taking enough time to get the best job for them.

This is not what HMM do in their research. Either in terms of their data, which doesn’t look at any individuals, or their model, which tells a much different story than what we traditionally understand, or their techniques, which add additional problems. Let’s start with the model.

Model Problems. The results HMM get are radically higher than these other studies. They argue that this is because they look at the “macro” effects of unemployment insurance. Instead of just people searching for a job, they argue that labor-search models show that employers must boost the wages of workers and create fewer job openings as a result of unemployment insurance tightening the labor market.

But in their study HMM only look at aggregate employment. If these labor search dynamics were the mechanism, there should be something in the paper about actual wage data or job openings moving in response to this change. There is not. Indeed, their argument hinges entirely on the idea that the labor market was too tight, with workers having too much bargaining power, in 2010-2013. The end of UI finally relaxed this. If that’s the case, then where are the wage declines and corporate profit gains in 2014?

This isn’t an esoteric discussion. They are, in effect, taking a residual and calling it the “macro” effect of UI. But we shouldn’t take it for granted that search models can confirm these predictions without a lot of different types of evidence; as Marshall Steinbaum wrote in his appreciation of these models, when it comes to business cycles and wages predictions they are “an empirical disaster.”

Technique Problems. The model’s vagueness is amplified by the control issue. One of the nice things about the standard model is that people without UI make a nice control group for contrast. Here, HMM simply compare high-UI and low-UI duration states and then counties, without looking at individuals. They argue that since the expiration was done by Congress, it is essentially a random change.

But a quick glance shows their high benefits states group had an unemployment rate of 8.4 percent in 2012, while their low benefits states had an unemployment rate of 6.5 percent. Not random. As the economy recovers, we’d naturally expect to see the states with a higher initial unemployment rate recover faster. But that would just be “recovery”, not an argument about UI, much less workers' bargaining power.

Data Problems. Their county-by-county analysis is meant to cover for this, but this data is problematic here. As Dean Baker notes in an excellent post, the local area data they use is noisy, confusing based on whether the state is where one works versus lives, and is largely model driven. The fact that much of it is model-driven is problematic for their cross-state county comparisons.

Baker replaces their employment data with the more reliable CES employment data (the headline job creation number you hear every month) and finds the opposite headline result:

It's not encouraging that you can get the opposite result by changing from one data source to another. Baker isn’t the first to question the robustness of these results to even minor changes in the data. The Cleveland Fed, on an earlier version of their argument, found their results collapsed with a longer timeframe and excluding outliers. The fact that the paper doesn’t have robustness tests to a variety of data sources and measures also isn’t encouraging.

So data problems, control problems, and the vague sense that this is just them finding a residual and attribute all of it to their “macro” element without enough supporting evidence. Rather than turning over the vast research already done, I think it’s best to conclude as Robert Hall of Stanford and the Hoover Institute did for their earlier paper with a similar argument: “This paper has attracted a huge amount of attention, much of it skeptical. I think it is an imaginative and potentially important contribution, but needs a lot of work to convince a fair-minded skeptic (like me).” This newest version is no different.

 
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According to a new study by Marcus Hagedorn, Iourii Manovskii and Kurt Mitman (HMM), Congress failing to reauthorized the extension of unemployment insurance (UI) resulted in 1.8 million additional people getting jobs. But wait, how does that happen when only 1.3 million people had their benefits expire?

The answer is by going off the normal path of these arguments in models, techniques and data. The paper has a nice write-up by Patrick Brennan here, but it’s one that doesn’t convey how different this paper is compared to the vast majority of the research. The authors made a well-criticized splash in 2013 by arguing that most of the rise in unemployment in the Great Recession was UI-driven; this new paper is a continuation of that approach.

Gold Standard Model. Before we go further, let’s understand what the general standard in UI research looks like. The model here is that UI makes it easier for workers to pass up job offers. As a result they’ll take a longer time to find a job, which creates a larger pool of unemployed people, raising unemployment. In order to test this, researchers use longitudinal data for individuals to compare the length of job searches for individuals who receive UI with those who do not.

This is the standard in the two biggest UI studies from the Great Recession. Both essentially use individuals not receiving UI as a control group to see what getting UI does for people’s job searches over time. Jesse Rothstein (2011) found that UI raised unemployment “by only about 0.1 to 0.5 percentage point.” Using a similar approach, Farber and Valletta (2013) later found “UI increased the overall unemployment rate by only about 0.4 percentage points.” These are generally accepted estimated.

And though small, they are real numbers. The question then becomes an analysis of the trade-offs between this higher unemployment and the positive effects of unemployment insurance, including income support, increased aggregate demand and the increased efficiency of people taking enough time to get the best job for them.

This is not what HMM do in their research. Either in terms of their data, which doesn’t look at any individuals, or their model, which tells a much different story than what we traditionally understand, or their techniques, which add additional problems. Let’s start with the model.

Model Problems. The results HMM get are radically higher than these other studies. They argue that this is because they look at the “macro” effects of unemployment insurance. Instead of just people searching for a job, they argue that labor-search models show that employers must boost the wages of workers and create fewer job openings as a result of unemployment insurance tightening the labor market.

But in their study HMM only look at aggregate employment. If these labor search dynamics were the mechanism, there should be something in the paper about actual wage data or job openings moving in response to this change. There is not. Indeed, their argument hinges entirely on the idea that the labor market was too tight, with workers having too much bargaining power, in 2010-2013. The end of UI finally relaxed this. If that’s the case, then where are the wage declines and corporate profit gains in 2014?

This isn’t an esoteric discussion. They are, in effect, taking a residual and calling it the “macro” effect of UI. But we shouldn’t take it for granted that search models can confirm these predictions without a lot of different types of evidence; as Marshall Steinbaum wrote in his appreciation of these models, when it comes to business cycles and wages predictions they are “an empirical disaster.”

Technique Problems. The model’s vagueness is amplified by the control issue. One of the nice things about the standard model is that people without UI make a nice control group for contrast. Here, HMM simply compare high-UI and low-UI duration states and then counties, without looking at individuals. They argue that since the expiration was done by Congress, it is essentially a random change.

But a quick glance shows their high benefits states group had an unemployment rate of 8.4 percent in 2012, while their low benefits states had an unemployment rate of 6.5 percent. Not random. As the economy recovers, we’d naturally expect to see the states with a higher initial unemployment rate recover faster. But that would just be “recovery”, not an argument about UI, much less workers' bargaining power.

Data Problems. Their county-by-county analysis is meant to cover for this, but this data is problematic here. As Dean Baker notes in an excellent post, the local area data they use is noisy, confusing based on whether the state is where one works versus lives, and is largely model driven. The fact that much of it is model-driven is problematic for their cross-state county comparisons.

Baker replaces their employment data with the more reliable CES employment data (the headline job creation number you hear every month) and finds the opposite headline result:

It's not encouraging that you can get the opposite result by changing from one data source to another. Baker isn’t the first to question the robustness of these results to even minor changes in the data. The Cleveland Fed, on an earlier version of their argument, found their results collapsed with a longer timeframe and excluding outliers. The fact that the paper doesn’t have robustness tests to a variety of data sources and measures also isn’t encouraging.

So data problems, control problems, and the vague sense that this is just them finding a residual and attribute all of it to their “macro” element without enough supporting evidence. Rather than turning over the vast research already done, I think it’s best to conclude as Robert Hall of Stanford and the Hoover Institute did for their earlier paper with a similar argument: “This paper has attracted a huge amount of attention, much of it skeptical. I think it is an imaginative and potentially important contribution, but needs a lot of work to convince a fair-minded skeptic (like me).” This newest version is no different.

 
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The 2003 Dividend Tax Cut Did Nothing to Help the Real Economy

Jan 20, 2015Mike Konczal

President Obama is going big on capital taxation in the State of the Union tonight, including a proposal to raise dividend taxes on the rich to 28 percent. The President is probably not going to frame this as a move away from the George W. Bush economy, but Bush’s radical cuts to capital taxes are part of his legacy that we are still living with. And it’s a part that the latest evidence tells us did a lot to help the rich without helping the overall economy at all.

In the response to Obama’s proposal, you are going to hear a lot about how lower dividend rates increase investment and help the real economy. Indeed, lowering capital tax rates has been a consistent goal of conservatives. As a result, one of the biggest capital taxation changes in history happened in 2003, when George W. Bush reduced the dividend tax rate from 38.6 percent to 15 percent as part of his rapid and expansive tax cut agenda.

There’s been a lot of research about the effect of this massive dividend tax cut on payouts to shareholders (kicked off by an important 2005 Chetty-Saez paper), but very little on its effect on the real economy. Did slashing the dividend tax rate boost corporate investments, perhaps because it made funding projects easier? We don’t know, and it’s not because economists aren’t interested; it’s because it’s very difficult to construct a control group with which to compare the results. Investments increased after 2003, but they likely would have to some degree independent of the dividend tax cut, as we were coming out of a recession. So did the tax cut make a difference?

This is where UC Berkeley economist Danny Yagan’s fantastic new paper, “Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut,” (pdf, slides) comes in. He uses a large amount of IRS data on corporate tax returns to compare S-corporations with C-corporations. Without getting deep into tax law, C-corporations are publicly-traded firms, while S-corporations are closely held ones without institutional investors. But they are largely comparable in the range Yagan looks at (between $1 million and $1 billion dollars in size), as they are competing in the same industries and locations.

Crucially, though, S-corporations don’t pay a dividend tax and thus didn’t benefit from the big 2003 dividend tax cut, while C-corporations do pay them and did benefit. So that allows Yagan to set up S-corporations as a control group and see what the effect of the massive dividend tax cut on C-corporations has been. Here’s what he finds:

The blue line is the C-corporations, which should diverge from the red-line if the dividend tax cut caused a real change. But there’s no statistical difference between the two paths at all. (Note how their paths are the same before the cut, so it’s a real trend in the business cycle.) There’s no difference in either investment or adjusted net investment. There’s also no difference when it comes to employee compensation. The firms that got a massive capital tax cut did not make any different choices about things that boost the real economy. This is true across a crazy-robust number of controls, measures, and coding of outliers.

The one thing that does increase for C-corporations, of course, is the disgorgement of cash to shareholders. Cutting dividend taxes leads to an increase in dividends and share buybacks. This shows that these corporations are in fact making decisions in response to the tax cut; they just happen to be decisions that benefit, well, probably not you. If right now you are worried that too much cash is leaving firms to benefit a handful of investors while the real economy stagnates, suddenly Clinton-era levels of dividend taxation don’t look so bad.

This is interesting for people interested more specifically in corporate finance theory. Because this is evidence against the theory that firms use the stock market to raise funding, and toward a “pecking order” theory that internal funds and riskless debt are far above equity in a hierarchy of corporate funding choices. In models like the latter, taxation of dividends does very little to impact the cost of capital for firms, because equity isn’t the binding constraint on marginal investment options.

President Obama will likely focus his pitch for the dividend tax increase on the future, when, in his argument, globalization and technology will cause compensation to stagnate while investor payouts skyrocket and the economy becomes more focused on the top 1 percent. But it’s worth noting that while capital taxes are a solution to that problem, the radical slashing conservatives have brought to them are also partly responsible for our current malaise.

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President Obama is going big on capital taxation in the State of the Union tonight, including a proposal to raise dividend taxes on the rich to 28 percent. The President is probably not going to frame this as a move away from the George W. Bush economy, but Bush’s radical cuts to capital taxes are part of his legacy that we are still living with. And it’s a part that the latest evidence tells us did a lot to help the rich without helping the overall economy at all.

In the response to Obama’s proposal, you are going to hear a lot about how lower dividend rates increase investment and help the real economy. Indeed, lowering capital tax rates has been a consistent goal of conservatives. As a result, one of the biggest capital taxation changes in history happened in 2003, when George W. Bush reduced the dividend tax rate from 38.6 percent to 15 percent as part of his rapid and expansive tax cut agenda.

There’s been a lot of research about the effect of this massive dividend tax cut on payouts to shareholders (kicked off by an important 2005 Chetty-Saez paper), but very little on its effect on the real economy. Did slashing the dividend tax rate boost corporate investments, perhaps because it made funding projects easier? We don’t know, and it’s not because economists aren’t interested; it’s because it’s very difficult to construct a control group with which to compare the results. Investments increased after 2003, but they likely would have to some degree independent of the dividend tax cut, as we were coming out of a recession. So did the tax cut make a difference?

This is where UC Berkeley economist Danny Yagan’s fantastic new paper, “Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut,” (pdf, slides) comes in. He uses a large amount of IRS data on corporate tax returns to compare S-corporations with C-corporations. Without getting deep into tax law, C-corporations are publicly-traded firms, while S-corporations are closely held ones without institutional investors. But they are largely comparable in the range Yagan looks at (between $1 million and $1 billion dollars in size), as they are competing in the same industries and locations.

Crucially, though, S-corporations don’t pay a dividend tax and thus didn’t benefit from the big 2003 dividend tax cut, while C-corporations do pay them and did benefit. So that allows Yagan to set up S-corporations as a control group and see what the effect of the massive dividend tax cut on C-corporations has been. Here’s what he finds:

The blue line is the C-corporations, which should diverge from the red-line if the dividend tax cut caused a real change. But there’s no statistical difference between the two paths at all. (Note how their paths are the same before the cut, so it’s a real trend in the business cycle.) There’s no difference in either investment or adjusted net investment. There’s also no difference when it comes to employee compensation. The firms that got a massive capital tax cut did not make any different choices about things that boost the real economy. This is true across a crazy-robust number of controls, measures, and coding of outliers.

The one thing that does increase for C-corporations, of course, is the disgorgement of cash to shareholders. Cutting dividend taxes leads to an increase in dividends and share buybacks. This shows that these corporations are in fact making decisions in response to the tax cut; they just happen to be decisions that benefit, well, probably not you. If right now you are worried that too much cash is leaving firms to benefit a handful of investors while the real economy stagnates, suddenly Clinton-era levels of dividend taxation don’t look so bad.

This is interesting for people interested more specifically in corporate finance theory. Because this is evidence against the theory that firms use the stock market to raise funding, and toward a “pecking order” theory that internal funds and riskless debt are far above equity in a hierarchy of corporate funding choices. In models like the latter, taxation of dividends does very little to impact the cost of capital for firms, because equity isn’t the binding constraint on marginal investment options.

President Obama will likely focus his pitch for the dividend tax increase on the future, when, in his argument, globalization and technology will cause compensation to stagnate while investor payouts skyrocket and the economy becomes more focused on the top 1 percent. But it’s worth noting that while capital taxes are a solution to that problem, the radical slashing conservatives have brought to them are also partly responsible for our current malaise.

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What Happened in 2013? Two Clarifications Among Current Debates

Jan 16, 2015Mike Konczal

Is it useful to clarify data and claims in the economics blogosphere? Probably not, but I’ll give it a shot, as there’s two sets of arguments that could use more light rather than heat.

What Happened in 2013? Sumner and Wren-Lewis

Scott Sumner wrote this about Simon Wren-Lewis:

“Simon Wren-Lewis also gets the GDP growth data wrong, in a way that makes austerity look worse. He claims that RGDP growth was 2.3% in 2012 and 2.2% in 2013 (the year of austerity in the US.) But that’s annual y-o-y data, and since the austerity began on January 1st 2013, you need Q4 over Q4 data. In fact, RGDP growth in 2012, Q4 over Q4, was only 1.67%, whereas growth in the austerity year of 2013 nearly doubled to 3.13%.”

There’s no getting it wrong here: there’s simply two methods. Is it better to take the average annual rates and compare them (as Wren-Lewis does) or is it better to look at strict endpoints (as Sumner does)? An important thing about looking at Q4 vs Q4 data, as Sumner does, is to make sure that you haven’t accidentally set up your endpoints to amplify a trend that isn’t there. That technique is very sensitive to where you put the endpoints.

And sure enough, the quarters before and after that range featured negative or near zero growth. What if you redo this moving the quarters back and forth one period? Well, Q1 over Q1 2014 data drops to 1.9%, while Q3 over Q3 2012 rises to 2.7% (Q1 over Q1 2012 was 2.1%). It’s not encouraging if your argument falls apart because you move the data one step. We can graph out the Q over Q data for every quarter in fact; note Sumner is points to a single quarter that obviously sticks out. There’s a reason people might want to average the data in these situations, as Lewis does.

Simon-Wren Lewis, whose blog I really enjoy, already pointed out austerity didn’t start on January 1st, 2013, of course. And it didn’t; note the more consistent growth in the graphic in late 2010. But even better, the fourth quarter of 2012 featured a massive decline in military spending. According to Alan Krueger for the White House, “A likely explanation for the sharp decline in Federal defense spending is uncertainty concerning the automatic spending cuts that were scheduled to take effect in January.” That’s an additional problem for setting up this issue this way.

What Did People Say Would Happen? Jeffrey Sachs

Jeffrey Sachs argues that people worried about additional austerity in 2013 were saying that it would cause another recession. Sachs: “Indeed, deficit cuts [especially in 2013] would court a reprise of 1937, when Franklin D. Roosevelt prematurely reduced the New Deal stimulus and thereby threw the United States back into recession.”

I paid a lot of attention to these debates, and saw three estimates of the impact of 2013 austerity on the recovery: Mark Zandi at Moody’s Economy, EPI, and the CBO. All three were close to each other in their estimates. None predicted that we'd go back into recession or have no growth.

What were they predicting? Zandi put it clearly: “Altogether, lower federal government spending and higher taxes are expected to reduce 2013 real GDP growth...With such a heavy fiscal weight on the economy, it is hard to see how growth could accelerate, at least in the first half of 2013.”

That’s consistent with what we’ve seen. A drag, preventing accelerate growth and delaying a takeoff in 2013 and into 2014. I don’t see how Sachs can obviously claim that these numbers aren’t consistent with the idea that the government has been a net drag since 2011, or point to a pickup in late 2014 as obviously disproving anything. Maybe on closer, empirical grounds you could (though the empirical literature is finding multiplers), but not at this high level.

In my original question about the Federal Reserve versus austerity in 2013, which seems to animate a lot of these debates, the issue I put forward was whether the Federal Reserve could hit the inflation target it announced with the Evans Rule shifting expectations and open-ended purchases to back that up, while government spending was a drag. It did not.

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Is it useful to clarify data and claims in the economics blogosphere? Probably not, but I’ll give it a shot, as there’s two sets of arguments that could use more light rather than heat.

What Happened in 2013? Sumner and Wren-Lewis

Scott Sumner wrote this about Simon Wren-Lewis:

“Simon Wren-Lewis also gets the GDP growth data wrong, in a way that makes austerity look worse. He claims that RGDP growth was 2.3% in 2012 and 2.2% in 2013 (the year of austerity in the US.) But that’s annual y-o-y data, and since the austerity began on January 1st 2013, you need Q4 over Q4 data. In fact, RGDP growth in 2012, Q4 over Q4, was only 1.67%, whereas growth in the austerity year of 2013 nearly doubled to 3.13%.”

There’s no getting it wrong here: there’s simply two methods. Is it better to take the average annual rates and compare them (as Wren-Lewis does) or is it better to look at strict endpoints (as Sumner does)? An important thing about looking at Q4 vs Q4 data, as Sumner does, is to make sure that you haven’t accidentally set up your endpoints to amplify a trend that isn’t there. That technique is very sensitive to where you put the endpoints.

And sure enough, the quarters before and after that range featured negative or near zero growth. What if you redo this moving the quarters back and forth one period? Well, Q1 over Q1 2014 data drops to 1.9%, while Q3 over Q3 2012 rises to 2.7% (Q1 over Q1 2012 was 2.1%). It’s not encouraging if your argument falls apart because you move the data one step. We can graph out the Q over Q data for every quarter in fact; note Sumner is points to a single quarter that obviously sticks out. There’s a reason people might want to average the data in these situations, as Lewis does.

Simon-Wren Lewis, whose blog I really enjoy, already pointed out austerity didn’t start on January 1st, 2013, of course. And it didn’t; note the more consistent growth in the graphic in late 2010. But even better, the fourth quarter of 2012 featured a massive decline in military spending. According to Alan Krueger for the White House, “A likely explanation for the sharp decline in Federal defense spending is uncertainty concerning the automatic spending cuts that were scheduled to take effect in January.” That’s an additional problem for setting up this issue this way.

What Did People Say Would Happen? Jeffrey Sachs

Jeffrey Sachs argues that people worried about additional austerity in 2013 were saying that it would cause another recession. Sachs: “Indeed, deficit cuts [especially in 2013] would court a reprise of 1937, when Franklin D. Roosevelt prematurely reduced the New Deal stimulus and thereby threw the United States back into recession.”

I paid a lot of attention to these debates, and saw three estimates of the impact of 2013 austerity on the recovery: Mark Zandi at Moody’s Economy, EPI, and the CBO. All three were close to each other in their estimates. None predicted that we'd go back into recession or have no growth.

What were they predicting? Zandi put it clearly: “Altogether, lower federal government spending and higher taxes are expected to reduce 2013 real GDP growth...With such a heavy fiscal weight on the economy, it is hard to see how growth could accelerate, at least in the first half of 2013.”

That’s consistent with what we’ve seen. A drag, preventing accelerate growth and delaying a takeoff in 2013 and into 2014. I don’t see how Sachs can obviously claim that these numbers aren’t consistent with the idea that the government has been a net drag since 2011, or point to a pickup in late 2014 as obviously disproving anything. Maybe on closer, empirical grounds you could (though the empirical literature is finding multiplers), but not at this high level.

In my original question about the Federal Reserve versus austerity in 2013, which seems to animate a lot of these debates, the issue I put forward was whether the Federal Reserve could hit the inflation target it announced with the Evans Rule shifting expectations and open-ended purchases to back that up, while government spending was a drag. It did not.

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A Battle Map for the Republican War Against Dodd-Frank

Jan 15, 2015Mike Konczal

The Republicans have declared war against Dodd-Frank. But what kind of war is it, and on what fronts are they waging this war? I think there are at least three campaigns, each with its own strategic goals and tactics. Distinguishing these campaigns from each other will help us understand what Republicans are trying to do and how to keep them in check.

First, to understand the Republican campaigns, it’s useful go over what Dodd-Frank does. Dodd-Frank can be analogized to the way we regulate driving. First, there are simple rules of the road, like speed limits and stop signs, designed as outright prevention against accidents. Then there are efforts to help with stabilization if the driver gets in trouble, such as anti-lock brakes or road design. And then there are regulations for the resolution of accidents that do occur, like seat belts and airbags, designed to avoids worst-case scenarios.

These three goals map onto Dodd-Frank pretty well. Dodd-Frank also puts rules upfront to prevent certain actions, requires additional regulations to create stability within large financial firms, and lays out plans to allow for a successful resolution of a firm once it fails. Let’s graph that out:

Prevention: Dodd-Frank created a Consumer Financial Protection Bureau (CFPB), reforming consumer protection from being an “orphan mission” spread across 11 agencies by establishing one dedicated agency for it. The act also requires that derivatives trade with clearinghouses and through exchanges or else face additional capital requirements, which brought price transparency and additional capital to the market that brought down AIG. Another piece is the Volcker Rule, which separates the proprietary trading that can cause rapid losses from our commercial banking and payment systems.

Stabilization: Dodd-Frank also provides for the expansion of capital requirements across the financial sector, including higher requirements for the biggest firms relative to smaller ones, as well as higher requirements for those who use short-term funding in the “shadow” banking sector relative to traditional banks. These firms are designed by the Financial Stability Oversight Council (FSOC).

Resolution:  The firms FSOC designates as systemically risky have to prepare themselves for a rapid resolution for when they do fail. They have to prove that they can survive bankruptcy without bringing down the entire system (an effort currently being fought). The FDIC has prepared a second line of defense, a special “resolution authority” (OLA) to use if bankruptcy isn’t a viable option in a crisis.

These elements of the law all flow naturally from the financial crisis of 2008. It would have been very helpful in the crisis for there to be more clarity in the derivatives market, more capital in shadow banks, and a process to resolve Lehman Brothers. Maybe these are great ways to approach the problem or maybe they aren’t, but to suggest they have no basis in the crisis, as the American Enterprise Institute comically does, is pure ideology.

But ignore the more ridiculous arguments. The actual war against Dodd-Frank is much more sophisticated, and it’s being waged on numerous fronts. Let’s make a map of the battlefield:

There are three distinct campaigns being waged:

Guerrilla Deregulation. The goal here is to undermine as much of the efforts of derivatives regulation, the Volcker Rule, and the CFPB as possible through quick, surprise attacks. This, in turn, has a chilling effect across regulators and throws the regulatory process into chaos.

The main tactic, as in any good guerrilla campaign, is to do hit-and-run ambushes of key, important targets vulnerable to raids. David Dayen had a helpful list of some key bills that must pass in 2015, bills likely to be perfect targets for a good guerrilla raid. The guerrilla campaign had a major victory in weakening the Section 716 “push-out” rule in the Cromnibus bill. And that will probably be a model going forward for these tactics, replicated in the recent attacks we’ve seen, down to counting the small handful of Democrats signing on as some sort of concession of bipartisanship.

Another guerrilla element will be the focus on victory through attrition. It’s not like the House Republicans have their own theory of how to regulate the derivatives market, or that they are making the full case against the Volcker Rule or the CFPB, or even proposing their own anything. They are winning simply through weakening both the rules and the resolve of reformers.

Administrative Siege: Aside from the guerrilla war of deregulation, the GOP is also waging war on another front, through a long-term siege of the regulatory agencies. This includes blockading them from resources like funding and personnel, consistent harassment, discrediting them in the eyes of the broader public, and weakening their power to act. This is a long-term battle, going back to the beginning of Dodd-Frank, and their terms are unconditional surrender.

The seriousness of this campaign became clear when the GOP first refused to appoint any director of the CFPB unless there was a complete overhaul to weaken it. This campaign has continued against the CFTC, and now extends to the FSOC trying to designate firms as systemically risky. The recent House bill to extend cost-benefit analysis to financial regulations, where it has little history, unclear analytical benefit, and could easily lead to worse rules, is also part of this siege.

One key argument the GOP is pushing is that the regulators are historically too powerful and out of control. As House Financial Services Committee chairman Jeb Hensarling said to the Wall Street Journal, the CFPB is “the single most unaccountable agency in the history of America.” This is just silly agitprop. The structure -- independent budgets and a single director -- looks exactly like their counterparts in the OCC. It’s not only subject to the same rule-making process as other regulators, but other regulators can in fact veto the CFPB, making it significantly more accountable compared to any other agency.

The same is being said about FSOC. Note that there’s always room for improvement; Americans for Financial Reform (AFR) have some ways to improve the transparency of FSOC here. But as AFR’s Marcus Stanley notes, the House’s recent FSOC bill “appears better calculated to hinder FSOC operations than to improve its transparency.” Indeed, as Better Markets notes, this FSOC battle is in large part over the regulation of money market funds, a crucial reform in fixing shadow banking. But making government work better isn’t the goal of the siege; this campaign’s goal is to break these agencies and their ability to regulate the financial system.

Reactionary Rhetoric: The goal of this ideological programming campaign is to push the argument that Dodd-Frank simply reinforces the worst part of the bailouts and does nothing productive toward reform. Instead of a series of methods to check and reduce Too Big To Fail, this campaign argues that Dodd-Frank does worse than fail. Following the rhetoric of reaction, reform simply makes the problem far worse. The point here is to remove the FDIC’s ability to put systemically risky firms into a receivership while also preparing the ground for a full repeal.

Advancing the argument that Dodd-Frank has made the bailouts of 2008-2009 permanent and serves only to benefit the biggest financial firms has become a marching order for the movement right. It was basically the entire GOP argument against Dodd-Frank in 2012 (Mitt Romney calling the act "the biggest kiss" to Wall Street), and it still dominates their talking points. If this were the case, the largest banks would receive a large Too Big To Fail subsidy, and we’d subsequently see a reduction in their borrowing costs.

Major studies tells us that the opposite is the case; since 2010 Too Big To Fail subsidies have fallen instead of stabilized or increased. This doesn’t mean the work is done - we could still see a major failure cause systemic risk, and just “avoiding catastrophic collapses” isn’t really a headline goal for a functioning financial system. There’s also little evidence that Dodd-Frank enriches the biggest banks; firms go out of their way to avoid a SIFI designation, which they wouldn’t if there were a benefit to them, and Wall Street analysts take it for granted that capital requirements and other regulations are more binding for the largest firms.

There could be a productive discussion here about finding a way to reform the bankruptcy code to help combat Too Big To Fail while keeping resolution authority as a backup option. That backup option is key though. Unlike OLA, bankruptcy is slow and deliberate, isn't designed to preserve ongoing firm business, doesn't have guaranteed funding available, can’t prevent runs from short-term creditors, and has trouble internationally. But again, the point for Republicans isn’t to try to come up with the best regime; it’s to discredit the effort at reform entirely so the other campaigns, and the overall campaign for repeal, can be that much easier.

Why do Republicans want all this? The answer you will normally hear is that they are in the pocket of Wall Street or in the thrall of free-market fundamentalism. And there’s truth to that. But they’ve also created a whole institutionally enforced counter-narrative where there was no real crisis and Wall Street committed no bad behavior except for when ACORN made them. This narrative is, bluntly, dumb. But it is the narrative their movement has chosen, and movements have a way of forcing well-meaning people who’d otherwise want to find good solutions to fall in line.

2015 will require reformers to wage their own campaigns to push additional reform (here’s a start), push for stronger action from regulators, and make the public understand the progress that has been made. But first we need to understand that while conservatives may look like they are running a smash-and-grab operation when it comes to Dodd-Frank, it’s actually a quite sophisticated series of campaigns, and they are already winning battles.

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The Republicans have declared war against Dodd-Frank. But what kind of war is it, and on what fronts are they waging this war? I think there are at least three campaigns, each with its own strategic goals and tactics. Distinguishing these campaigns from each other will help us understand what Republicans are trying to do and how to keep them in check.

First, to understand the Republican campaigns, it’s useful go over what Dodd-Frank does. Dodd-Frank can be analogized to the way we regulate driving. First, there are simple rules of the road, like speed limits and stop signs, designed as outright prevention against accidents. Then there are efforts to help with stabilization if the driver gets in trouble, such as anti-lock brakes or road design. And then there are regulations for the resolution of accidents that do occur, like seat belts and airbags, designed to avoids worst-case scenarios.

These three goals map onto Dodd-Frank pretty well. Dodd-Frank also puts rules upfront to prevent certain actions, requires additional regulations to create stability within large financial firms, and lays out plans to allow for a successful resolution of a firm once it fails. Let’s graph that out:

Prevention: Dodd-Frank created a Consumer Financial Protection Bureau (CFPB), reforming consumer protection from being an “orphan mission” spread across 11 agencies by establishing one dedicated agency for it. The act also requires that derivatives trade with clearinghouses and through exchanges or else face additional capital requirements, which brought price transparency and additional capital to the market that brought down AIG. Another piece is the Volcker Rule, which separates the proprietary trading that can cause rapid losses from our commercial banking and payment systems.

Stabilization: Dodd-Frank also provides for the expansion of capital requirements across the financial sector, including higher requirements for the biggest firms relative to smaller ones, as well as higher requirements for those who use short-term funding in the “shadow” banking sector relative to traditional banks. These firms are designed by the Financial Stability Oversight Council (FSOC).

Resolution:  The firms FSOC designates as systemically risky have to prepare themselves for a rapid resolution for when they do fail. They have to prove that they can survive bankruptcy without bringing down the entire system (an effort currently being fought). The FDIC has prepared a second line of defense, a special “resolution authority” (OLA) to use if bankruptcy isn’t a viable option in a crisis.

These elements of the law all flow naturally from the financial crisis of 2008. It would have been very helpful in the crisis for there to be more clarity in the derivatives market, more capital in shadow banks, and a process to resolve Lehman Brothers. Maybe these are great ways to approach the problem or maybe they aren’t, but to suggest they have no basis in the crisis, as the American Enterprise Institute comically does, is pure ideology.

But ignore the more ridiculous arguments. The actual war against Dodd-Frank is much more sophisticated, and it’s being waged on numerous fronts. Let’s make a map of the battlefield:

There are three distinct campaigns being waged:

Guerrilla Deregulation. The goal here is to undermine as much of the efforts of derivatives regulation, the Volcker Rule, and the CFPB as possible through quick, surprise attacks. This, in turn, has a chilling effect across regulators and throws the regulatory process into chaos.

The main tactic, as in any good guerrilla campaign, is to do hit-and-run ambushes of key, important targets vulnerable to raids. David Dayen had a helpful list of some key bills that must pass in 2015, bills likely to be perfect targets for a good guerrilla raid. The guerrilla campaign had a major victory in weakening the Section 716 “push-out” rule in the Cromnibus bill. And that will probably be a model going forward for these tactics, replicated in the recent attacks we’ve seen, down to counting the small handful of Democrats signing on as some sort of concession of bipartisanship.

Another guerrilla element will be the focus on victory through attrition. It’s not like the House Republicans have their own theory of how to regulate the derivatives market, or that they are making the full case against the Volcker Rule or the CFPB, or even proposing their own anything. They are winning simply through weakening both the rules and the resolve of reformers.

Administrative Siege: Aside from the guerrilla war of deregulation, the GOP is also waging war on another front, through a long-term siege of the regulatory agencies. This includes blockading them from resources like funding and personnel, consistent harassment, discrediting them in the eyes of the broader public, and weakening their power to act. This is a long-term battle, going back to the beginning of Dodd-Frank, and their terms are unconditional surrender.

The seriousness of this campaign became clear when the GOP first refused to appoint any director of the CFPB unless there was a complete overhaul to weaken it. This campaign has continued against the CFTC, and now extends to the FSOC trying to designate firms as systemically risky. The recent House bill to extend cost-benefit analysis to financial regulations, where it has little history, unclear analytical benefit, and could easily lead to worse rules, is also part of this siege.

One key argument the GOP is pushing is that the regulators are historically too powerful and out of control. As House Financial Services Committee chairman Jeb Hensarling said to the Wall Street Journal, the CFPB is “the single most unaccountable agency in the history of America.” This is just silly agitprop. The structure -- independent budgets and a single director -- looks exactly like their counterparts in the OCC. It’s not only subject to the same rule-making process as other regulators, but other regulators can in fact veto the CFPB, making it significantly more accountable compared to any other agency.

The same is being said about FSOC. Note that there’s always room for improvement; Americans for Financial Reform (AFR) have some ways to improve the transparency of FSOC here. But as AFR’s Marcus Stanley notes, the House’s recent FSOC bill “appears better calculated to hinder FSOC operations than to improve its transparency.” Indeed, as Better Markets notes, this FSOC battle is in large part over the regulation of money market funds, a crucial reform in fixing shadow banking. But making government work better isn’t the goal of the siege; this campaign’s goal is to break these agencies and their ability to regulate the financial system.

Reactionary Rhetoric: The goal of this ideological programming campaign is to push the argument that Dodd-Frank simply reinforces the worst part of the bailouts and does nothing productive toward reform. Instead of a series of methods to check and reduce Too Big To Fail, this campaign argues that Dodd-Frank does worse than fail. Following the rhetoric of reaction, reform simply makes the problem far worse. The point here is to remove the FDIC’s ability to put systemically risky firms into a receivership while also preparing the ground for a full repeal.

Advancing the argument that Dodd-Frank has made the bailouts of 2008-2009 permanent and serves only to benefit the biggest financial firms has become a marching order for the movement right. It was basically the entire GOP argument against Dodd-Frank in 2012 (Mitt Romney calling the act "the biggest kiss" to Wall Street), and it still dominates their talking points. If this were the case, the largest banks would receive a large Too Big To Fail subsidy, and we’d subsequently see a reduction in their borrowing costs.

Major studies tells us that the opposite is the case; since 2010 Too Big To Fail subsidies have fallen instead of stabilized or increased. This doesn’t mean the work is done - we could still see a major failure cause systemic risk, and just “avoiding catastrophic collapses” isn’t really a headline goal for a functioning financial system. There’s also little evidence that Dodd-Frank enriches the biggest banks; firms go out of their way to avoid a SIFI designation, which they wouldn’t if there were a benefit to them, and Wall Street analysts take it for granted that capital requirements and other regulations are more binding for the largest firms.

There could be a productive discussion here about finding a way to reform the bankruptcy code to help combat Too Big To Fail while keeping resolution authority as a backup option. That backup option is key though. Unlike OLA, bankruptcy is slow and deliberate, isn't designed to preserve ongoing firm business, doesn't have guaranteed funding available, can’t prevent runs from short-term creditors, and has trouble internationally. But again, the point for Republicans isn’t to try to come up with the best regime; it’s to discredit the effort at reform entirely so the other campaigns, and the overall campaign for repeal, can be that much easier.

Why do Republicans want all this? The answer you will normally hear is that they are in the pocket of Wall Street or in the thrall of free-market fundamentalism. And there’s truth to that. But they’ve also created a whole institutionally enforced counter-narrative where there was no real crisis and Wall Street committed no bad behavior except for when ACORN made them. This narrative is, bluntly, dumb. But it is the narrative their movement has chosen, and movements have a way of forcing well-meaning people who’d otherwise want to find good solutions to fall in line.

2015 will require reformers to wage their own campaigns to push additional reform (here’s a start), push for stronger action from regulators, and make the public understand the progress that has been made. But first we need to understand that while conservatives may look like they are running a smash-and-grab operation when it comes to Dodd-Frank, it’s actually a quite sophisticated series of campaigns, and they are already winning battles.

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On President Obama's Community College Plan and Public Options

Jan 9, 2015Mike Konczal

Looks like a smart plan he announced yesterday. I wrote about it, and public options more generally, here at The Nation. I hope you check it out!

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Looks like a smart plan he announced yesterday. I wrote about it, and public options more generally, here at The Nation. I hope you check it out!

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Guest Post: Will Wall Street Win Again with Antonio Weiss Nomination?

Jan 7, 2015Brad Miller

Mike here. This post is from my colleague Brad Miller over the important debate on the Antonio Weiss nomination. Brad is a former U.S. Representative who recently joined the Roosevelt Institute as a Senior Fellow, so he has firsthand knowledge of the internal negotiations around financial reform. Check it out below.

The opposition to the nomination of another investment banker, Antonio Weiss, to a top position in the U.S. Treasury is not just a demagogic appeal to anti-Wall Street prejudices, as his supporters argue.

Weiss’s actual experience appears to be a poor match for the specific duties of the position in question, and may be less laudable than his supporters claim. Weiss’s principal credential appears to be that he is a product of the same culture that produced our other recent economic policymakers.

And that is the real problem for opponents, who believe that economic policies should be subject to democratic debate and require the consent of the governed.

The response to the financial crisis was the most consequential economic policy in generations. Wall Street and Washington insiders alike argue that those policies, endlessly indulgent of banks and pitiless to homeowners, were technocratic decisions that required the recondite knowledge of Wall Street professionals.

To Weiss’s supporters, disregard for public opinion is a virtue. “Making economic policy isn’t a popularity contest,” David Ignatius wrote in The Washington Post, “especially when financial markets are in a panic.” “Our job was to fix it,“ former Treasury Secretary Timothy Geithner said, “not make people like us.”

Criticism did not just come from politicians pandering to the great unwashed, however.

Most economists argued that the lesson of past financial crises was to take economic pain quickly, recognize losses on distressed debt, and take insolvent banks through an orderly receivership. The standard playbook” for financial crises since the 1870s was to “shut down insolvent institutions so executives and shareholders in the future do not think they will escape the consequences of the moral hazard they created.” “Zombie” banks, economists argued, only delay recovery.

The Bush and Obama Administrations instead helped too-big-to-fail banks pretend to be solvent and provided subsidies and other dispensations until the banks became profitable, an effort that continues.

Unfortunately, any effective effort to reduce foreclosures required banks to recognize losses on mortgages. Insiders regarded foreclosures as a lesser concern. Geithner said that even if the government used federal funds “to wipe out every dollar of negative equity in the U.S. housing market…it would have increased annual consumption by just 0.1 to 0.2 percent.”

According to Atif Mian and Amir Sufi, two prominent economists, “that is dead wrong.” Household wealth fell by $9 trillion after the housing bubble burst in 2006, which greatly reduced consumer demand. “The evidence,” Amir and Sufi said, “is pretty clear: an aggressive bold attack on household debt would have significantly reduced the horrible impact of the Great Recession on Americans.”

Wall Street’s critics did not lose that debate. There was no debate.

Senator Obama endorsed legislation in his presidential campaign to allow the judicial modification of mortgages in bankruptcy. President Obama never publicly wavered from that position, but Treasury officials privately lobbied against the legislation in the Senate, where the legislation died. The determination by economic policymakers to protect their immaculate policies from tawdry politics may extend to attempts by the President to intrude.

Meddling by Members of Congress was certainly unwelcome. In a private meeting between Administration officials and disgruntled House Democrats, I said that foreclosure relief efforts appeared designed to help banks absorb losses gradually, not to help homeowners. Geithner was offended—indignant—at the suggestion. Neil Barofsky, then the Special Inspector General for the Troubled Asset Recovery Program, later confirmed that was exactly the purpose of the programs—in Geithner’s words, to “foam the runway” for the banks.

The success of policies that are unacknowledged or even denied is difficult to measure. Since the financial crisis, however, the financial sector, from whence our unguarded platonic guardians came and soon will return, has prospered. Others fared less well. Wealth and income inequality widened dramatically.

Weiss has not served in government, so opposition to his nomination may punish him for the sins of others, perhaps unfairly. There is nothing to indicate, however, that Weiss questions the assumption that the North Star of economic policy should be the prosperity of the financial sector, or that policies should be freely debated unless there’s money involved.

The presidential campaign in 2016 will undoubtedly largely be about economic policy. Voters may assume that the election of one candidate or another will result in implementation of that candidate’s economic policies.

If the culture of economic policymakers remains unchanged, the public positions of candidates and the votes of citizens may not matter much.

Brad Miller is a Senior Fellow at the Roosevelt Institute. Previously, he served for a decade in the U.S. House of Representatives.

Mike here. This post is from my colleague Brad Miller over the important debate on the Antonio Weiss nomination. Brad is a former U.S. Representative who recently joined the Roosevelt Institute as a Senior Fellow, so he has firsthand knowledge of the internal negotiations around financial reform. Check it out below.

The opposition to the nomination of another investment banker, Antonio Weiss, to a top position in the U.S. Treasury is not just a demagogic appeal to anti-Wall Street prejudices, as his supporters argue.

Weiss’s actual experience appears to be a poor match for the specific duties of the position in question, and may be less laudable than his supporters claim. Weiss’s principal credential appears to be that he is a product of the same culture that produced our other recent economic policymakers.

And that is the real problem for opponents, who believe that economic policies should be subject to democratic debate and require the consent of the governed.

The response to the financial crisis was the most consequential economic policy in generations. Wall Street and Washington insiders alike argue that those policies, endlessly indulgent of banks and pitiless to homeowners, were technocratic decisions that required the recondite knowledge of Wall Street professionals.

To Weiss’s supporters, disregard for public opinion is a virtue. “Making economic policy isn’t a popularity contest,” David Ignatius wrote in The Washington Post, “especially when financial markets are in a panic.” “Our job was to fix it,“ former Treasury Secretary Timothy Geithner said, “not make people like us.”

Criticism did not just come from politicians pandering to the great unwashed, however.

Most economists argued that the lesson of past financial crises was to take economic pain quickly, recognize losses on distressed debt, and take insolvent banks through an orderly receivership. The standard playbook” for financial crises since the 1870s was to “shut down insolvent institutions so executives and shareholders in the future do not think they will escape the consequences of the moral hazard they created.” “Zombie” banks, economists argued, only delay recovery.

The Bush and Obama Administrations instead helped too-big-to-fail banks pretend to be solvent and provided subsidies and other dispensations until the banks became profitable, an effort that continues.

Unfortunately, any effective effort to reduce foreclosures required banks to recognize losses on mortgages. Insiders regarded foreclosures as a lesser concern. Geithner said that even if the government used federal funds “to wipe out every dollar of negative equity in the U.S. housing market…it would have increased annual consumption by just 0.1 to 0.2 percent.”

According to Atif Mian and Amir Sufi, two prominent economists, “that is dead wrong.” Household wealth fell by $9 trillion after the housing bubble burst in 2006, which greatly reduced consumer demand. “The evidence,” Amir and Sufi said, “is pretty clear: an aggressive bold attack on household debt would have significantly reduced the horrible impact of the Great Recession on Americans.”

Wall Street’s critics did not lose that debate. There was no debate.

Senator Obama endorsed legislation in his presidential campaign to allow the judicial modification of mortgages in bankruptcy. President Obama never publicly wavered from that position, but Treasury officials privately lobbied against the legislation in the Senate, where the legislation died. The determination by economic policymakers to protect their immaculate policies from tawdry politics may extend to attempts by the President to intrude.

Meddling by Members of Congress was certainly unwelcome. In a private meeting between Administration officials and disgruntled House Democrats, I said that foreclosure relief efforts appeared designed to help banks absorb losses gradually, not to help homeowners. Geithner was offended—indignant—at the suggestion. Neil Barofsky, then the Special Inspector General for the Troubled Asset Recovery Program, later confirmed that was exactly the purpose of the programs—in Geithner’s words, to “foam the runway” for the banks.

The success of policies that are unacknowledged or even denied is difficult to measure. Since the financial crisis, however, the financial sector, from whence our unguarded platonic guardians came and soon will return, has prospered. Others fared less well. Wealth and income inequality widened dramatically.

Weiss has not served in government, so opposition to his nomination may punish him for the sins of others, perhaps unfairly. There is nothing to indicate, however, that Weiss questions the assumption that the North Star of economic policy should be the prosperity of the financial sector, or that policies should be freely debated unless there’s money involved.

The presidential campaign in 2016 will undoubtedly largely be about economic policy. Voters may assume that the election of one candidate or another will result in implementation of that candidate’s economic policies.

If the culture of economic policymakers remains unchanged, the public positions of candidates and the votes of citizens may not matter much.

Brad Miller is a Senior Fellow at the Roosevelt Institute. Previously, he served for a decade in the U.S. House of Representatives.

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2014's Case Study in the Vertically Integrated Conservative Movement

Dec 30, 2014Mike Konczal

The mass resignation at the New Republic had several people joking about how the magazine wanted to become “vertically integrated.” What does that even mean here? But if anything was vertically integrated in 2014, it was the conservative movement. And you could see this clearly from the reaction to the Halbig decision in July.

I’m occasionally asked what conservative sites people should read. My answer is usually that people should read the blogs of the major think tanks, like AEIdeas, Daily Signal (Heritage), and Cato-at-Liberty. There are many writers who are conservative, or who cover conservatives, who are interesting to read, of course. But if you want to understand the conservative movement as the actual movement it is, you want to look upstream to where the ideas and arguments are first formulated.

From there, you can then watch them move downstream, first to the set of gatekeepers on the right who can give these arguments credibility or otherwise charge them. From there they move down to the front line right-wing writers who incorporate them into their various Hot Takes, as well as the TV and radio stations with their massive audiences.

And we have a real-time example this year. Since 2011, think tanks have been building their Halbig argument, which is that the ACA doesn’t allow state-exchanges created by the federal government to access subsidies. They learned how to discuss it. Most of all they learned how they couldn’t call it a “glitch” but instead, given administrative law, had to argue it was a conscious decision. But the argument wasn’t part of the mainstream discussion.

But then the court case had a success July 22nd, where the Federal Circuit Court for the District of Columbia agreed with Halbig. And you could then watch it move down the river and become mainstream conservative logic almost immediately.

This is where gatekeepers were important. The editors of National Review immediately jumped on it (“States were expected to go along and establish their own exchanges. When it became clear that many states wouldn’t do so because the law was so unpopular, the IRS just rewrote the law”). One of the more important conservative gatekeepers, Ramesh Ponnuru, did the same at Bloomberg (“It's wrong, then, to say that Congress obviously didn't intend to include this restriction”).

With that, the low-level writers could write their takes and mass media personalities could speak as if this was always obviously always the case. Rush Limbaugh (“The Obamacare law specifically says [...] the only people qualified for subsidies are those who acquire their insurance through state exchanges, exchanges established by the state”) is one of many example. Those far away from the think tanks who are good at digging up embarrassing examples soon found numerous examples of Jonathan Gruber embarrassing himself once they knew what to dig for, which in turn boosted the upstream arguments. Vertical integration.

You can go back and see liberal writers trying to figure out in real time how Halbig became conservative common wisdom, when none of the conservative reporters covering the bill while this was all debated ever noted it, or that it wasn't part of the extensive rollout strategy by ACA supporters. Brian Beutler’s Why Are Conservative Health Journalists Covering for Halbig Truthers? and Jonathan Chait’s The New Secret History of the Obamacare Deniers are good examples. It shows a genuine surprise at how vertically integrated the conservative movement can be, and how quickly a new logic became their reality once an opportunity presented itself.

An important thing I noticed from the outside is how there was no strong opposition at the gatekeeper level, only mild skepticism. Reihan Salam wrote “I’m not a Halbig guy [...] I am (at best) agnostic on whether Halbig is correct.” Ross Douthat tweeted that point while describing his own “conflictedness.” But this was the extent of it. Neither they or any other gatekeepers I could find leveled a strong charge, much less a sustained case, against Halbig from within the movement. In a movement, people know when to be quiet.

I noticed this dynamic quickly when I first started reading conservatives writing about the financial crisis. Virtually all the front-line writers were mimicking an odd argument about the GSEs that I didn’t recognize from my time in the industry. I quickly looked upriver to see it all comes from AEI’s Peter Wallison. Again, some crucial gatekeepers air quiet skepticism, like his GOP colleagues on the FCIC whose email trail shows how they tried to minimize his bad arguments. But that doesn’t stop the movement writers from pushing just that narrative at all times.

Next time you read a random article from a conservative site, see if you can see how it’s just a rewritten form of some talking points created far upstream. And always remember that when a movement acts, it creates its own reality.

Follow or contact the Rortybomb blog:
 
  

 

The mass resignation at the New Republic had several people joking about how the magazine wanted to become “vertically integrated.” What does that even mean here? But if anything was vertically integrated in 2014, it was the conservative movement. And you could see this clearly from the reaction to the Halbig decision in July.

I’m occasionally asked what conservative sites people should read. My answer is usually that people should read the blogs of the major think tanks, like AEIdeas, Daily Signal (Heritage), and Cato-at-Liberty. There are many writers who are conservative, or who cover conservatives, who are interesting to read, of course. But if you want to understand the conservative movement as the actual movement it is, you want to look upstream to where the ideas and arguments are first formulated.

From there, you can then watch them move downstream, first to the set of gatekeepers on the right who can give these arguments credibility or otherwise charge them. From there they move down to the front line right-wing writers who incorporate them into their various Hot Takes, as well as the TV and radio stations with their massive audiences.

And we have a real-time example this year. Since 2011, think tanks have been building their Halbig argument, which is that the ACA doesn’t allow state-exchanges created by the federal government to access subsidies. They learned how to discuss it. Most of all they learned how they couldn’t call it a “glitch” but instead, given administrative law, had to argue it was a conscious decision. But the argument wasn’t part of the mainstream discussion.

But then the court case had a success July 22nd, where the Federal Circuit Court for the District of Columbia agreed with Halbig. And you could then watch it move down the river and become mainstream conservative logic almost immediately.

This is where gatekeepers were important. The editors of National Review immediately jumped on it (“States were expected to go along and establish their own exchanges. When it became clear that many states wouldn’t do so because the law was so unpopular, the IRS just rewrote the law”). One of the more important conservative gatekeepers, Ramesh Ponnuru, did the same at Bloomberg (“It's wrong, then, to say that Congress obviously didn't intend to include this restriction”).

With that, the low-level writers could write their takes and mass media personalities could speak as if this was always obviously always the case. Rush Limbaugh (“The Obamacare law specifically says [...] the only people qualified for subsidies are those who acquire their insurance through state exchanges, exchanges established by the state”) is one of many example. Those far away from the think tanks who are good at digging up embarrassing examples soon found numerous examples of Jonathan Gruber embarrassing himself once they knew what to dig for, which in turn boosted the upstream arguments. Vertical integration.

You can go back and see liberal writers trying to figure out in real time how Halbig became conservative common wisdom, when none of the conservative reporters covering the bill while this was all debated ever noted it, or that it wasn't part of the extensive rollout strategy by ACA supporters. Brian Beutler’s Why Are Conservative Health Journalists Covering for Halbig Truthers? and Jonathan Chait’s The New Secret History of the Obamacare Deniers are good examples. It shows a genuine surprise at how vertically integrated the conservative movement can be, and how quickly a new logic became their reality once an opportunity presented itself.

An important thing I noticed from the outside is how there was no strong opposition at the gatekeeper level, only mild skepticism. Reihan Salam wrote “I’m not a Halbig guy [...] I am (at best) agnostic on whether Halbig is correct.” Ross Douthat tweeted that point while describing his own “conflictedness.” But this was the extent of it. Neither they or any other gatekeepers I could find leveled a strong charge, much less a sustained case, against Halbig from within the movement. In a movement, people know when to be quiet.

I noticed this dynamic quickly when I first started reading conservatives writing about the financial crisis. Virtually all the front-line writers were mimicking an odd argument about the GSEs that I didn’t recognize from my time in the industry. I quickly looked upriver to see it all comes from AEI’s Peter Wallison. Again, some crucial gatekeepers air quiet skepticism, like his GOP colleagues on the FCIC whose email trail shows how they tried to minimize his bad arguments. But that doesn’t stop the movement writers from pushing just that narrative at all times.

Next time you read a random article from a conservative site, see if you can see how it’s just a rewritten form of some talking points created far upstream. And always remember that when a movement acts, it creates its own reality.

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Rortybomb's 2014 Yearly Roundup

Dec 30, 2014Mike Konczal

2014 is over, and good riddance. This year I wanted to start some formal projects, as well as write longer pieces, and I managed to do just that. Here’s the high-level stuff I did this past year.

Financialization. I started a project on financialization with the Roosevelt Institute, and I’m helping with a big inequality project helmed by Joe Stiglitz. All this will bear fruit next year, but I did a piece on financialization for Washington Monthly, Frenzied Financialization, that gives you some sense of what we’ll be doing.

(Seeing one's name on a magazine stand is still the coolest.)

Voluntarism. I wrote a big article on The Voluntarism Fantasy (pdf) for Democracy Journal, that had a lot of responses (collected here). One of my favorite pieces I’ve done; Philanthropy Daily, of all places, red-baited me, which was a neat enemy to make in 2014.



(Remember this cover?)

Piketty-Mania. There were races to see how quickly reviews of Piketty’s Capital in the 21st Century could get written. My review, Studying the Rich for Boston Review, was scheduled for late summer and had to be turned around in a week after the demand for readable summaries of the book exploded. I think my review holds up in describing the way the fault lines around the work would unfold.

The two points I wished I had included were Russell Jacoby’s fantastic comparison to the actual Marx’s Capital, on how economic critique has moved from Marx’s factories of production to Piketty’s spreadsheets of distribution, and that what constitutes a “wealth equality” agenda isn’t clear, which I later covered for The Nation. Speaking of...

The Score. I started as a columnist for The Nation with a new economics column, The Score, where I alternate with my former colleague Bryce Covert. It’s still starting up but I’m already happy with columns on socializing Uber and the growth of incarceration. It’s great to work with Bryce again and get to work with the talented editor Sarah Leonard, who is boosting the economic content of The Nation (she also helped launched The Curve with Kathy Grier since joining).

Issue Editing. I also got to help curate and edit an issue of The New Inquiry, The Money Issue. Rob Horning and I had wanted to do something with the weirdness and newness of the finance blogs circa 2007-2009, and hopefully part of that got through here with pieces by Izzy Kaminska and Steve Waldman. I’m very happy to have helped edit the excellent Disgorge the Cash by JW Mason, which will soon relate to the financialization project mentioned above.

Other Writing. I wrote less for the blog this year, but some notable pieces that caught people’s interest included how the “pragmatic” libertarian case for a basic income makes basic errors about the welfare state, explaining the end-of-year fight over financial reform, pieces on how neoconservatism and libertarians have helped get us to the policing situation in Ferguson and elsewhere, and on the limits of liberalism after the 2014 election.

Big pieces for other sites included a review of Playing the Whore for Wonkblog, explaining how we already have a public option for banking and we could expand it for Al-Jazeera America, and a group book review on the role of profit in the state for Boston Review.

What else? In other news I turned 35. My wife got me a Nick Cage in The Rock birthday cake, which is really the best present ever. I moved to Washington DC after a crazy final summer in New York. I’ve been reading a lot of history lately and want to keep incorporating that into my stuff, and I’m enjoying the Eric Foner MOOC of the Civil War era.

Anything you’d like to see different next year? Thanks for reading everyone, see you in 2015.

(Previous editions:  2013, 2012, 2011.)

Follow or contact the Rortybomb blog:
 
  

 

2014 is over, and good riddance. This year I wanted to start some formal projects, as well as write longer pieces, and I managed to do just that. Here’s the high-level stuff I did this past year.

Financialization. I started a project on financialization with the Roosevelt Institute, and I’m helping with a big inequality project helmed by Joe Stiglitz. All this will bear fruit next year, but I did a piece on financialization for Washington Monthly, Frenzied Financialization, that gives you some sense of what we’ll be doing.

(Seeing one's name on a magazine stand is still the coolest.)

Voluntarism. I wrote a big article on The Voluntarism Fantasy (pdf) for Democracy Journal, that had a lot of responses (collected here). One of my favorite pieces I’ve done; Philanthropy Daily, of all places, red-baited me, which was a neat enemy to make in 2014.



(Remember this cover?)

Piketty-Mania. There were races to see how quickly reviews of Piketty’s Capital in the 21st Century could get written. My review, Studying the Rich for Boston Review, was scheduled for late summer and had to be turned around in a week after the demand for readable summaries of the book exploded. I think my review holds up in describing the way the fault lines around the work would unfold.

The two points I wished I had included were Russell Jacoby’s fantastic comparison to the actual Marx’s Capital, on how economic critique has moved from Marx’s factories of production to Piketty’s spreadsheets of distribution, and that what constitutes a “wealth equality” agenda isn’t clear, which I later covered for The Nation. Speaking of...

The Score. I started as a columnist for The Nation with a new economics column, The Score, where I alternate with my former colleague Bryce Covert. It’s still starting up but I’m already happy with columns on socializing Uber and the growth of incarceration. It’s great to work with Bryce again and get to work with the talented editor Sarah Leonard, who is boosting the economic content of The Nation (she also helped launched The Curve with Kathy Grier since joining).

Issue Editing. I also got to help curate and edit an issue of The New Inquiry, The Money Issue. Rob Horning and I had wanted to do something with the weirdness and newness of the finance blogs circa 2007-2009, and hopefully part of that got through here with pieces by Izzy Kaminska and Steve Waldman. I’m very happy to have helped edit the excellent Disgorge the Cash by JW Mason, which will soon relate to the financialization project mentioned above.

Other Writing. I wrote less for the blog this year, but some notable pieces that caught people’s interest included how the “pragmatic” libertarian case for a basic income makes basic errors about the welfare state, explaining the end-of-year fight over financial reform, pieces on how neoconservatism and libertarians have helped get us to the policing situation in Ferguson and elsewhere, and on the limits of liberalism after the 2014 election.

Big pieces for other sites included a review of Playing the Whore for Wonkblog, explaining how we already have a public option for banking and we could expand it for Al-Jazeera America, and a group book review on the role of profit in the state for Boston Review.

What else? In other news I turned 35. My wife got me a Nick Cage in The Rock birthday cake, which is really the best present ever. I moved to Washington DC after a crazy final summer in New York. I’ve been reading a lot of history lately and want to keep incorporating that into my stuff, and I’m enjoying the Eric Foner MOOC of the Civil War era.

Anything you’d like to see different next year? Thanks for reading everyone, see you in 2015.

(Previous editions:  2013, 2012, 2011.)

Follow or contact the Rortybomb blog:
 
  

 

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