The Diversity of Arguments for a Higher Minimum Wage

Mar 3, 2014Mike Konczal

I have a piece in the new Boston Review on seven ways of looking at a higher minimum wage increase. I wanted to step back from the denser statistical arguments (though those are included) and get a sense of why the minimum wage is popular and an important feature of our economy. The diversity of reasons is remarkable. The seven ways I focus on are inequality, poverty, policy, feminism, conservatism, republicanism, and Catholicism's living wage. I hope you check it out.

I have a piece in the new Boston Review on seven ways of looking at a higher minimum wage increase. I wanted to step back from the denser statistical arguments (though those are included) and get a sense of why the minimum wage is popular and an important feature of our economy. The diversity of reasons is remarkable. The seven ways I focus on are inequality, poverty, policy, feminism, conservatism, republicanism, and Catholicism's living wage. I hope you check it out.

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Recent Writings, February 2014 Edition

Feb 19, 2014Mike Konczal

Recent Rortybomb enterprise updates:

- My last weekly column at Wonkblog went up a week ago. It's a review of Melissa Gira Grant's book Playing the Whore.

- I wrote about the minimum wage twice at the New Republic. The first time was on the Silicon Valley wage fixing scandal, and what it says about how labor markets work. (it's a nontechnical introduction to "dynamic monopsony" theory, if you are familiar with that.)

If you haven't read about the Silicon Valley scandal I highly recommend it. (I had assumed, falsely, that more people knew about it when I wrote my piece.) Mark Ames had the most comprehensive version when it broke; Josh Harkinson just did another piece on it. It's worth it just for the quotes you'll see from the digital Masters of the Universe.

- I also wrote about the CBO report that just came out on the minimum wage at the New Republic too.

- I also wrote a piece at Al-Jazeera America about what is at stake when liberals, including President Obama, replace a focus on inequality with a focus on opportunity.

Follow or contact the Rortybomb blog:

  

Recent Rortybomb enterprise updates:

- My last weekly column at Wonkblog went up a week ago. It's a review of Melissa Gira Grant's book Playing the Whore.

- I wrote about the minimum wage twice at the New Republic. The first time was on the Silicon Valley wage fixing scandal, and what it says about how labor markets work. (it's a nontechnical introduction to "dynamic monopsony" theory, if you are familiar with that.)

If you haven't read about the Silicon Valley scandal I highly recommend it. (I had assumed, falsely, that more people knew about it when I wrote my piece.) Mark Ames had the most comprehensive version when it broke; Josh Harkinson just did another piece on it. It's worth it just for the quotes you'll see from the digital Masters of the Universe.

- I also wrote about the CBO report that just came out on the minimum wage at the New Republic too.

- I also wrote a piece at Al-Jazeera America about what is at stake when liberals, including President Obama, replace a focus on inequality with a focus on opportunity.

Follow or contact the Rortybomb blog:

  

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The Politics of Children

Feb 19, 2014Mike Konczal

Not the politics of having children, but the politics of actual children. Long-winded, but three things.

One. Katie Baker has written some of the best things I’ve read this month, but one thing stands out: Here to Make Friends. It’s about the difficulty reality show television producers have in making children compete against each other for prizes, as the kids naturally want to cooperate.

“In the beginning, older Kid Nation contestants helped younger, weaker kids out and the dusty air was rife with auspicious anti-grownup sentiment … host Jonathan Karsh, a fully grown man, showed up halfway through the first episode and announced that the kids would be separated into a socioeconomic hierarchy … From then on, the kids were more interested in climbing the ranks of the pseudo-feudal class structure than subverting it.

[Although the] MasterChef Junior … structure was ultimately every-kid-for-themselves, the contestants still found ways to support one another by giving each other hugs and high-fives, tearing up when their new friends lost, and celebrating their competitor’s victories.”

It then goes into the Hunger Games. Definitely worth a read.

Two. From New York Daily News, 4 and 5-year-olds are taking standardized math tests. “Teachers said kindergartners are bewildered. ‘Sharing is not caring anymore; developmentally, it’s not the right thing to do,’ said one Queens teacher, whose pupils kept trying to help one another on the math test she gave for the first time this fall.”

Sarah Jaffe likes using this story as a good example of what people mean by neoliberalism subjectivity creation. There’s something awful in a teacher having to break up 5 year olds trying to help each other learn and overcome obstacles, saying that they can’t help other, but instead should be looking to compete and win.

Three. In early 2006, I decided I was going to visit a variety of churches across Chicago, both to see the ceremonies and as an architecture tour. I grew up attending a Catholic Church with an aggressively modern design that shocked the Poles in Chicago’s Gage Park when it arrived, so I always had a fascination with church architecture.

One stop I wanted to make was at First Unitarian Church of Chicago, in a gothic Hyde Park building. I checked their schedule and Melissa Harris-Lacewell was giving a talk on “The Ethics of Getting Away With It.” ("How can our diverse religious and humanist traditions help us to understnad why bad acts so often seem to bring prosperity and reward?") I had seen her give an interesting talk on public access when my DVR box recorded that instead of the normally scheduled Chic-a-go-go, and I was intrigued. (Harris-Lacewell is now Melissa Harris-Perry, of the weekend show on MSNBC. I debated trying to bring this story up during commercial when I was on that show, but thought better of it.)

Before the ceremony, the children in the audience were given a bunch of pieces of wrapped candy and told that they could pass them out or do whatever they want with them. And the kids handed them so that each person in the church got some. They didn’t stockpile them, or only pass them out to their friends, but ensured that there was something for everyone. A basic distributional concern that society would eventually try to remove from them.

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Not the politics of having children, but the politics of actual children. Long-winded, but three things.

One. Katie Baker has written some of the best things I’ve read this month, but one thing stands out: Here to Make Friends. It’s about the difficulty reality show television producers have in making children compete against each other for prizes, as the kids naturally want to cooperate.

“In the beginning, older Kid Nation contestants helped younger, weaker kids out and the dusty air was rife with auspicious anti-grownup sentiment … host Jonathan Karsh, a fully grown man, showed up halfway through the first episode and announced that the kids would be separated into a socioeconomic hierarchy … From then on, the kids were more interested in climbing the ranks of the pseudo-feudal class structure than subverting it.

[Although the] MasterChef Junior … structure was ultimately every-kid-for-themselves, the contestants still found ways to support one another by giving each other hugs and high-fives, tearing up when their new friends lost, and celebrating their competitor’s victories.”

It then goes into the Hunger Games. Definitely worth a read.

Two. From New York Daily News, 4 and 5-year-olds are taking standardized math tests. “Teachers said kindergartners are bewildered. ‘Sharing is not caring anymore; developmentally, it’s not the right thing to do,’ said one Queens teacher, whose pupils kept trying to help one another on the math test she gave for the first time this fall.”

Sarah Jaffe likes using this story as a good example of what people mean by neoliberalism subjectivity creation. There’s something awful in a teacher having to break up 5 year olds trying to help each other learn and overcome obstacles, saying that they can’t help other, but instead should be looking to compete and win.

Three. In early 2006, I decided I was going to visit a variety of churches across Chicago, both to see the ceremonies and as an architecture tour. I grew up attending a Catholic Church with an aggressively modern design that shocked the Poles in Chicago’s Gage Park when it arrived, so I always had a fascination with church architecture.

One stop I wanted to make was at First Unitarian Church of Chicago, in a gothic Hyde Park building. I checked their schedule and Melissa Harris-Lacewell was giving a talk on “The Ethics of Getting Away With It.” ("How can our diverse religious and humanist traditions help us to understnad why bad acts so often seem to bring prosperity and reward?") I had seen her give an interesting talk on public access when my DVR box recorded that instead of the normally scheduled Chic-a-go-go, and I was intrigued. (Harris-Lacewell is now Melissa Harris-Perry, of the weekend show on MSNBC. I debated trying to bring this story up during commercial when I was on that show, but thought better of it.)

Before the ceremony, the children in the audience were given a bunch of pieces of wrapped candy and told that they could pass them out or do whatever they want with them. And the kids handed them so that each person in the church got some. They didn’t stockpile them, or only pass them out to their friends, but ensured that there was something for everyone. A basic distributional concern that society would eventually try to remove from them.

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Conservatives Concerned About the CBO and the Dignity of Work Should Consider a Higher Minimum Wage

Feb 13, 2014Mike Konczal

It’s a shame that Ron Unz’s conservative case for a higher minimum wage gets caught up in the debate over immigration politics, because the arguments are broader and more fascinating, and incredibly important to have as part of the debate. This is especially true in light of last week’s CBO report, which has sent conservatives running to the barricades over the impact of Obamacare on waged work in this country. The conservative case for a minimum wage would address the two main concerns the right has displayed on this topic.

Broadly speaking, as summarized by Josh Barro here, there are two separate elements of the conservative take on Obamacare and the CBO’s findings. The first is that it allows people to break “job lock” and leave the labor market. This means there are fewer people working, which concerns conservatives because, as Ross Douthat put it, paid wage labor is “essential to dignity, mobility and social equality,” and they “see its decline as something to be fiercely resisted.” [1]

The second is that, because of the subsidies that are given to low-wage workers, these workers face a higher marginal tax rate. If there are subsidies for low-wage workers, as those workers make more money those subsidies are phased out. The fact that they are losing money while earning more money, or that a higher income means a smaller subsidy, functions like a tax. And this means that workers will work a bit less. Liberals in general don’t like this (though they do like that both effects will increase wages, as well they should), but understand it is going to be part of any type of means-tested income support.

Where does the minimum wage come in?

To address the first complaint, it’s important to keep in mind that the “dignity of work” isn’t a static concept, but tied directly to the conditions of work itself. If you ask the people striking against their low-wage job right now, you’ll find that things like working unpaid hours or erratic scheduling are also part of their complaints. As a result of these conditions, the work is socially tagged as undignified, degrading, erratic, and unpredictable. [2]

So driving the wages straight up can help counteract this. As Ron Unz writes, “consider the impact of a sharp rise in the minimum wage, sufficient to remove the taint of poverty overhanging so many of our lower-tier jobs.” This would, in turn, make lower-tier service jobs more attractive from a social perspective, increasing the level of dignity for those who hold them. This would in turn make people much more likely to seek out and hold said jobs. As I’ve argued elsewhere, by reducing vacancies, encouraging job searches and tightening the low-wage labor market, a higher minimum wage would also de facto give low-wage workers more power in the workplace, which would help reduce the petty tyrannies that come with low-wage work.

The second issue comes from effective marginal tax rates, or the burden low-wage workers face as income support is phased out. And the common bipartisan alternative to the minimum wage, increasing the earned-income tax credit (EITC), doubles down on this. There are ways to manage it and make the effective tax rate have less of a bite. But it’s essential to the DNA of means-tested income support that it’ll eventually phase out, and as a result impose some higher marginal tax rate. Conservatives who support a higher earned-income tax credit play into this as well.

The minimum wage, however, poses no such higher effective tax rate. If you work more hours at the minimum wage, there’s no effective tax because the minimum wage doesn't phase out. So if the slight effect of higher effective tax rates of Obamacare is driving you up the wall, perhaps now is a good time to consider this positive side of the minimum wage.

Additional:

I’ve seen many people point out that there’s an administrative simplicity and cost-effectiveness to the minimum wage over the EITC, amplifying the case for them to act as complements to each other instead of substitutes. But I had no idea that, according to the IRS and Treasury, the EITC’s improper payment rate is between 21 and 25 percent. This includes overpayments as well as underpayments.

That simply doesn’t happen with the minimum wage. And if you are a conservative who wants to “simplify” government, or if bringing the impact of government as close as possible to those who need help - say directly in the workplace rather than in the complicated and confusing tax code administered by a faraway IRS - is important to your subsidiarity view of policy, a bigger role for the minimum wage is essential.

[1] This will sound snarky, but I genuinely mean it: I want to see a conservative take on Nickel and Dimed, where maids cleaning bathrooms experience “social equality” with the people paying them.

[2] Remember that Dave Chappelle comedy skit about the person who gets a fast food job to impress his community, and finds that it isn’t quite as dignified as he thought?

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It’s a shame that Ron Unz’s conservative case for a higher minimum wage gets caught up in the debate over immigration politics, because the arguments are broader and more fascinating, and incredibly important to have as part of the debate. This is especially true in light of last week’s CBO report, which has sent conservatives running to the barricades over the impact of Obamacare on waged work in this country. The conservative case for a minimum wage would address the two main concerns the right has displayed on this topic.

Broadly speaking, as summarized by Josh Barro here, there are two separate elements of the conservative take on Obamacare and the CBO’s findings. The first is that it allows people to break “job lock” and leave the labor market. This means there are fewer people working, which concerns conservatives because, as Ross Douthat put it, paid wage labor is “essential to dignity, mobility and social equality,” and they “see its decline as something to be fiercely resisted.” [1]

The second is that, because of the subsidies that are given to low-wage workers, these workers face a higher marginal tax rate. If there are subsidies for low-wage workers, as those workers make more money those subsidies are phased out. The fact that they are losing money while earning more money, or that a higher income means a smaller subsidy, functions like a tax. And this means that workers will work a bit less. Liberals in general don’t like this (though they do like that both effects will increase wages, as well they should), but understand it is going to be part of any type of means-tested income support.

Where does the minimum wage come in?

To address the first complaint, it’s important to keep in mind that the “dignity of work” isn’t a static concept, but tied directly to the conditions of work itself. If you ask the people striking against their low-wage job right now, you’ll find that things like working unpaid hours or erratic scheduling are also part of their complaints. As a result of these conditions, the work is socially tagged as undignified, degrading, erratic, and unpredictable. [2]

So driving the wages straight up can help counteract this. As Ron Unz writes, “consider the impact of a sharp rise in the minimum wage, sufficient to remove the taint of poverty overhanging so many of our lower-tier jobs.” This would, in turn, make lower-tier service jobs more attractive from a social perspective, increasing the level of dignity for those who hold them. This would in turn make people much more likely to seek out and hold said jobs. As I’ve argued elsewhere, by reducing vacancies, encouraging job searches and tightening the low-wage labor market, a higher minimum wage would also de facto give low-wage workers more power in the workplace, which would help reduce the petty tyrannies that come with low-wage work.

The second issue comes from effective marginal tax rates, or the burden low-wage workers face as income support is phased out. And the common bipartisan alternative to the minimum wage, increasing the earned-income tax credit (EITC), doubles down on this. There are ways to manage it and make the effective tax rate have less of a bite. But it’s essential to the DNA of means-tested income support that it’ll eventually phase out, and as a result impose some higher marginal tax rate. Conservatives who support a higher earned-income tax credit play into this as well.

The minimum wage, however, poses no such higher effective tax rate. If you work more hours at the minimum wage, there’s no effective tax because the minimum wage doesn't phase out. So if the slight effect of higher effective tax rates of Obamacare is driving you up the wall, perhaps now is a good time to consider this positive side of the minimum wage.

Additional:

I’ve seen many people point out that there’s an administrative simplicity and cost-effectiveness to the minimum wage over the EITC, amplifying the case for them to act as complements to each other instead of substitutes. But I had no idea that, according to the IRS and Treasury, the EITC’s improper payment rate is between 21 and 25 percent. This includes overpayments as well as underpayments.

That simply doesn’t happen with the minimum wage. And if you are a conservative who wants to “simplify” government, or if bringing the impact of government as close as possible to those who need help - say directly in the workplace rather than in the complicated and confusing tax code administered by a faraway IRS - is important to your subsidiarity view of policy, a bigger role for the minimum wage is essential.

[1] This will sound snarky, but I genuinely mean it: I want to see a conservative take on Nickel and Dimed, where maids cleaning bathrooms experience “social equality” with the people paying them.

[2] Remember that Dave Chappelle comedy skit about the person who gets a fast food job to impress his community, and finds that it isn’t quite as dignified as he thought?

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The Three Big Questions Janet Yellen Should Answer in Today's Testimony

Feb 11, 2014Mike Konczal

Janet Yellen has her first Humphrey-Hawkins testimony today, where she’ll give a prepared speech, already released online, and testify before the Republican-controlled House Financial Services committee. What are the points that she’ll need to cover?

The first element is how and when she’ll manage the so-called “taper” of monetary policy. At the end of 2012, the Federal Reserve started an extensive program of monetary stimulus designed to boost the economy. They declared that this would stay in full effect until unemployment dropped to 6.5 percent.

We are close to hitting that threshold. The unemployment rate is at 6.6 percent, and will fall below 6.5 percent very soon. Yellen, in her testimony, emphasizes a broader picture of unemployment than just the headline rate, including the amount of people working part-time against their choice and the amount of long-term unemployed.

What’s even more interesting, and a bit new, is her statement that “it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the 2 percent goal.”

Hopefully Congress will ask her to consider these choices in light of the last two weak job reports. Isn’t it more appropriate to step on the gas rather than test the brakes? However, she’ll likely encounter a skeptical Congress, and as such it will be essential for Yellen to make the case that the weak job numbers, combined with the vagueness of what the headline unemployment rate is telling us, requires continued monetary action.

The second point is how she'll handle financial reform. Given that Yellen is considered a monetary dove, it’s been interesting to see the amount of questions she’s taken from Congress about where Dodd-Frank and other reforms stand. This will no doubt continue into this testimony.

Financial reform has hit an interesting point where much of the rule-writing from the Dodd-Frank Act is finished, and now there’s a transition to both enforcement and clean-up action. Yellen notes in her testimony that rules related to derivatives as well as capital requirements still remain in the works. It would be useful for Congress to ask her where she thinks capital requirements for the largest firms should ultimately end up. Does she think that this number is too high, or too low?

It would also be fascinating for someone to ask Yellen about the recent wave of “postal banking” coverage, and the role the government can play in providing essential banking services to unbanked and underbanked Americans.

The third and most important is how the Federal Reserve will transition to prevent periods of mass unemployment like we are currently experiencing. Is a 2 percent inflation target either high enough, or the right target, for the job?

Sadly, this will be the topic least covered of them all. However, it’s the one that is most essential for preventing the economy from falling back into the situation it now finds itself in.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Image via Federal Reserve

Janet Yellen has her first Humphrey-Hawkins testimony today, where she’ll give a prepared speech, already released online, and testify before the Republican-controlled House Financial Services committee. What are the points that she’ll need to cover?

The first element is how and when she’ll manage the so-called “taper” of monetary policy. At the end of 2012, the Federal Reserve started an extensive program of monetary stimulus designed to boost the economy. They declared that this would stay in full effect until unemployment dropped to 6.5 percent.

We are close to hitting that threshold. The unemployment rate is at 6.6 percent, and will fall below 6.5 percent very soon. Yellen, in her testimony, emphasizes a broader picture of unemployment than just the headline rate, including the amount of people working part-time against their choice and the amount of long-term unemployed.

What’s even more interesting, and a bit new, is her statement that “it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the 2 percent goal.”

Hopefully Congress will ask her to consider these choices in light of the last two weak job reports. Isn’t it more appropriate to step on the gas rather than test the brakes? However, she’ll likely encounter a skeptical Congress, and as such it will be essential for Yellen to make the case that the weak job numbers, combined with the vagueness of what the headline unemployment rate is telling us, requires continued monetary action.

The second point is how she'll handle financial reform. Given that Yellen is considered a monetary dove, it’s been interesting to see the amount of questions she’s taken from Congress about where Dodd-Frank and other reforms stand. This will no doubt continue into this testimony.

Financial reform has hit an interesting point where much of the rule-writing from the Dodd-Frank Act is finished, and now there’s a transition to both enforcement and clean-up action. Yellen notes in her testimony that rules related to derivatives as well as capital requirements still remain in the works. It would be useful for Congress to ask her where she thinks capital requirements for the largest firms should ultimately end up. Does she think that this number is too high, or too low?

It would also be fascinating for someone to ask Yellen about the recent wave of “postal banking” coverage, and the role the government can play in providing essential banking services to unbanked and underbanked Americans.

The third and most important is how the Federal Reserve will transition to prevent periods of mass unemployment like we are currently experiencing. Is a 2 percent inflation target either high enough, or the right target, for the job?

Sadly, this will be the topic least covered of them all. However, it’s the one that is most essential for preventing the economy from falling back into the situation it now finds itself in.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Image via Federal Reserve

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In 2013, the Fed Showed Why Fiscal Policy is Still Important

Jan 10, 2014Mike Konczal

Last April I had a piece in Wonkblog saying we’d get to see whether or not the expansion of monetary policy in fall 2012 would offset 2013 fiscal austerity. I concluded that it wasn’t looking too good at the start, that QE3 was a smart idea anyway (and should go further), and, most importantly, that a fiscal multiplier would be in effect, and we should run a larger deficit and cancel out things like the payroll tax cut while the economy is still fragile. It received a lot of responses at the time (see the endnotes here for a list).

Recently, there’s been a wave of posts by Scott Sumner and David Beckworth calling me and others out, saying that the votes are in and it's a victory for the market monetarists, the team that said monetary policy would offset austerity in 2013 and fiscal policy wouldn't matter. (There have also been responses from Brad DeLong and Noah Smith.)

I don’t see it. I’m willing to be convinced, but the two clearest tests I saw the market monetarists put forward in early 2013 have resulted in failure. Let’s go through them:

1. “Paul Krugman Will Not Like These Figures,” David Beckworth, December 2, 2012, Macro and Other Market Musings

At the end of 2012, David Beckworth told the Keynesians they were wrong. In a provocative post, he argued “that nominal GDP (NGDP) growth has been remarkably stable since about mid-2010 despite a contraction in federal government expenditures" and that "the Fed has been doing a remarkable job keeping NGDP growth stable.” He posted a graph showing year-over-year NGDP growth at a steady clip.

My Wonkblog column was addressed to Beckworth specifically, and he reiterated the same exact data graphic in his response, arguing, “The U.S. series shows a stable NGDP growth rate.”

Even though the approach of examining year-over-year NGDP growth drew criticism, I like this test because it draws a line in the sand and it also fits with my understanding of how the market monetarists view the situation. The Federal Reserve picks the NGDP path it wants, as if it was off a menu, no matter what is going on with the rest of the economy.

So how did this line in the sand turn out? Here’s the data updated through 2013, with year-over-year (Beckworth’s line) and two quarters showing:

It was stable, until it wasn’t. You can see the year-over-year stable at 4-5 percent from 2011 through part of 2012, but when government spending starts to fall in late 2012 and through 2013, this falls as well. NGDP growth was lower in the first two quarters of 2013 than it was in 2012.

The third quarter did spike, but it was mostly the result of inventories, which, as Yglesias says, is probably bad news. Even more interesting, there wasn’t any additional government austerity in this quarter. Government spending actually increased slightly as state and local spending increased, which more than canceled out declining federal spending. (If continued, this would be an excellent trend, like the opposite of the downturn in which state and local austerity canceled out additional federal spending. I was hoping we'd have more data before we started this conversation.)

I’d note Beckworth didn’t mention this data or his old approach at all in his victory lap. Scott Sumner used this graph and data for his "Most Important Graphic of 2013," but didn’t include any of the 2013 data.

1.a Another related way of judging how the economy evolved in 2013 is to compare it to the Federal Reserve’s projections of it. As some market monetarists believe (e.g. Ryan Avent), these projections are an engine, not a camera -- they aren’t neutral projections of inflation and growth but also a communication of what the Fed thinks about what it can accomplish, which in turn will have an impact and determine what happens in the economy.

How did the Fed's projections for 2013 turn out? Did the economy end up how the Fed said it would when it announced expanded monetary policy?

It fell, both in real GDP and especially core inflation. Which leads me to the second test…

2: “The Federal Reserve's New Yield Curve,” Matt Yglesias, January 21, 2013, Slate

One way to read 2012’s monetary actions was that the Federal Reserve really wanted to hit a 2 percent inflation target. First they announced said target, then they announced open-ended purchases, then they announced that 2 percent wasn’t a ceiling and that they’d tolerate inflation above 2 percent.

Many people considered this an important part of the Fed’s ability to boost the economy (e.g. “the commitment to allow higher inflation in the future is one of the key methods through which the central bank can have a positive effect on an economy stuck at the zero lower bound”). I had written a lot about the Evans Rule, and why it would be a good idea for people to support, so I was watching this closely.

Yglesias, in the linked post, pointed to higher inflation projections in the short- and medium-term as of January as a success story. But, as you can see above, we then went on to have inflation rates collapse, leading to some of the lowest inflation rates in decades.

Regardless of what you think the Fed wanted in late 2012, they certainly weren't trying to generate lower inflation. If the Fed truly is omnipotent, we shouldn't see this. You can say that the bickering over the taper caused these problems, but this is precisely, as Michael Woodford has pointed out, one of advantages of fiscal stimulus in these situations (as I said in last year’s piece, “Using fiscal policy also avoids the expectations problems that plague monetary policy”).

To reiterate, I think the Federal Reserve should be doing more. I’d love to see Yellen enact a genuine regime change at the Fed. But we shouldn’t doubt that fiscal policy, at this moment, is making a difference in the giant slack that still smothers our economy and is collapsing our labor force.

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Last April I had a piece in Wonkblog saying we’d get to see whether or not the expansion of monetary policy in fall 2012 would offset 2013 fiscal austerity. I concluded that it wasn’t looking too good at the start, that QE3 was a smart idea anyway (and should go further), and, most importantly, that a fiscal multiplier would be in effect, and we should run a larger deficit and cancel out things like the payroll tax cut while the economy is still fragile. It received a lot of responses at the time (see the endnotes here for a list).

Recently, there’s been a wave of posts by Scott Sumner and David Beckworth calling me and others out, saying that the votes are in and it's a victory for the market monetarists, the team that said monetary policy would offset austerity in 2013 and fiscal policy wouldn't matter. (There have also been responses from Brad DeLong and Noah Smith.)

I don’t see it. I’m willing to be convinced, but the two clearest tests I saw the market monetarists put forward in early 2013 have resulted in failure. Let’s go through them:

1. “Paul Krugman Will Not Like These Figures,” David Beckworth, December 2, 2012, Macro and Other Market Musings

At the end of 2012, David Beckworth told the Keynesians they were wrong. In a provocative post, he argued “that nominal GDP (NGDP) growth has been remarkably stable since about mid-2010 despite a contraction in federal government expenditures" and that "the Fed has been doing a remarkable job keeping NGDP growth stable.” He posted a graph showing year-over-year NGDP growth at a steady clip.

My Wonkblog column was addressed to Beckworth specifically, and he reiterated the same exact data graphic in his response, arguing, “The U.S. series shows a stable NGDP growth rate.”

Even though the approach of examining year-over-year NGDP growth drew criticism, I like this test because it draws a line in the sand and it also fits with my understanding of how the market monetarists view the situation. The Federal Reserve picks the NGDP path it wants, as if it was off a menu, no matter what is going on with the rest of the economy.

So how did this line in the sand turn out? Here’s the data updated through 2013, with year-over-year (Beckworth’s line) and two quarters showing:

It was stable, until it wasn’t. You can see the year-over-year stable at 4-5 percent from 2011 through part of 2012, but when government spending starts to fall in late 2012 and through 2013, this falls as well. NGDP growth was lower in the first two quarters of 2013 than it was in 2012.

The third quarter did spike, but it was mostly the result of inventories, which, as Yglesias says, is probably bad news. Even more interesting, there wasn’t any additional government austerity in this quarter. Government spending actually increased slightly as state and local spending increased, which more than canceled out declining federal spending. (If continued, this would be an excellent trend, like the opposite of the downturn in which state and local austerity canceled out additional federal spending. I was hoping we'd have more data before we started this conversation.)

I’d note Beckworth didn’t mention this data or his old approach at all in his victory lap. Scott Sumner used this graph and data for his "Most Important Graphic of 2013," but didn’t include any of the 2013 data.

1.a Another related way of judging how the economy evolved in 2013 is to compare it to the Federal Reserve’s projections of it. As some market monetarists believe (e.g. Ryan Avent), these projections are an engine, not a camera -- they aren’t neutral projections of inflation and growth but also a communication of what the Fed thinks about what it can accomplish, which in turn will have an impact and determine what happens in the economy.

How did the Fed's projections for 2013 turn out? Did the economy end up how the Fed said it would when it announced expanded monetary policy?

It fell, both in real GDP and especially core inflation. Which leads me to the second test…

2: “The Federal Reserve's New Yield Curve,” Matt Yglesias, January 21, 2013, Slate

One way to read 2012’s monetary actions was that the Federal Reserve really wanted to hit a 2 percent inflation target. First they announced said target, then they announced open-ended purchases, then they announced that 2 percent wasn’t a ceiling and that they’d tolerate inflation above 2 percent.

Many people considered this an important part of the Fed’s ability to boost the economy (e.g. “the commitment to allow higher inflation in the future is one of the key methods through which the central bank can have a positive effect on an economy stuck at the zero lower bound”). I had written a lot about the Evans Rule, and why it would be a good idea for people to support, so I was watching this closely.

Yglesias, in the linked post, pointed to higher inflation projections in the short- and medium-term as of January as a success story. But, as you can see above, we then went on to have inflation rates collapse, leading to some of the lowest inflation rates in decades.

Regardless of what you think the Fed wanted in late 2012, they certainly weren't trying to generate lower inflation. If the Fed truly is omnipotent, we shouldn't see this. You can say that the bickering over the taper caused these problems, but this is precisely, as Michael Woodford has pointed out, one of advantages of fiscal stimulus in these situations (as I said in last year’s piece, “Using fiscal policy also avoids the expectations problems that plague monetary policy”).

To reiterate, I think the Federal Reserve should be doing more. I’d love to see Yellen enact a genuine regime change at the Fed. But we shouldn’t doubt that fiscal policy, at this moment, is making a difference in the giant slack that still smothers our economy and is collapsing our labor force.

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Rortybomb's Best of 2013

Dec 31, 2013Mike Konczal

2013. The year we won the argument but lost the war. It’s better than losing both the arguments and the war, I suppose.

2013 brought us a fiscal deficit that closed far too fast, NGDP growth and inflation falling compared to previous years, and unemployment completely falling off the political radar at the same moment the argument that the deficit was a worry collapsed. Before there were elaborate arguments about how the unemployed were this or that, or uncertainty was causing the one thing and the other. Now it's just quiet out there, yet the economy remains below potential. The collapse of the counter-Keynesian position didn't revitalize a position of aggressive action; it just left a void.

But rortybomb enterprises still marches forward. Here are the top posts from this blog for 2013:

1-2) My initial writeup of the work of Thomas Herndon, Michael Ash and Robert Pollin's critical dismantling of the Reinhart and Rogoff argument for austerity crashed this website shortly after it went up. That, and the follow-up from Arin Dube arguing that the causation was certainly backwards, are two of the most read things I’ve been involved with, and I’m honored to have played a role in dismantling this argument. A nice reminder that these things matter and blogs matter too; perhaps some people in Europe aren't being pummeled into dust as a result of this place.

3) I wrote a piece taking apart what kind of problem the ACA botched roll-out is for (neo)liberalism, that got people aruging about what kinds of social insurance we want out there.

4) I discussed the minimum wage, which I'll be doing much more of in 2014, throwing down the argument that it forms an important complement to various tax-based income support measures like the EITC.

5) I also wrote about Samuel Freeman’s argument that We Already Tried Libertarianism - It Was Called Feudalism. The term feudalism was chosen to be provocative, but the real concept is that it is anti-liberal in the traditional sense, and feeds on something darker, more pre-modern, than most people give it credit for.

Wonkblog: This year I wanted to write more regular columns at other venues, and was pretty successful at that goal. I contributed a weekly column to the Washington Post's Wonkblog. My favorites, in case you missed them the first time around:

The arguments surrounding the Universal Basic Income. (I received several notes from people happy to see Gøsta Esping-Andersen name-dropped in the Washington Post.) Creating a theory of the state that went into the shutdown. What we get wrong when we describe the financial crisis. Bernanke versus austerity. The idea of public problems. Is a democratic surveillance state possible? Defending the 30 year mortgage and the Volcker Rule. We are teaching economics backwards. And an interview with Shelia Bair that was mentioned in the House by people trying, successfully, to rally House Democrats against dismantling Section 716 of Dodd-Frank.

In Other News: I also started writing some columns for The New Republic and Al-Jazeera America at the end of the year, which I'll continue into 2014. I also wrote a review of Phillip Mirowski's latest book for the New Inquiry, meaning I've completed the hat-trick of writing for TNI, Jacobin and Dissent in the past year and a half. I also co-edited a big report on the future of financial reform which I’m very proud of, and will continue to build out next year. And Thomas Edsall wrote an excellent overview of the arguments we've built here at rortybomb for the New York Times.

Here’s to a good 2014. There's some exciting stuff already in the works.

Previous editions: 2012, 2011

Follow or contact the Rortybomb blog:

  

 

2013. The year we won the argument but lost the war. It’s better than losing both the arguments and the war, I suppose.

2013 brought us a fiscal deficit that closed far too fast, NGDP growth and inflation falling compared to previous years, and unemployment completely falling off the political radar at the same moment the argument that the deficit was a worry collapsed. Before there were elaborate arguments about how the unemployed were this or that, or uncertainty was causing the one thing and the other. Now it's just quiet out there, yet the economy remains below potential. The collapse of the counter-Keynesian position didn't revitalize a position of aggressive action; it just left a void.

But rortybomb enterprises still marches forward. Here are the top posts from this blog for 2013:

1-2) My initial writeup of the work of Thomas Herndon, Michael Ash and Robert Pollin's critical dismantling of the Reinhart and Rogoff argument for austerity crashed this website shortly after it went up. That, and the follow-up from Arin Dube arguing that the causation was certainly backwards, are two of the most read things I’ve been involved with, and I’m honored to have played a role in dismantling this argument. A nice reminder that these things matter and blogs matter too; perhaps some people in Europe aren't being pummeled into dust as a result of this place.

3) I wrote a piece taking apart what kind of problem the ACA botched roll-out is for (neo)liberalism, that got people aruging about what kinds of social insurance we want out there.

4) I discussed the minimum wage, which I'll be doing much more of in 2014, throwing down the argument that it forms an important complement to various tax-based income support measures like the EITC.

5) I also wrote about Samuel Freeman’s argument that We Already Tried Libertarianism - It Was Called Feudalism. The term feudalism was chosen to be provocative, but the real concept is that it is anti-liberal in the traditional sense, and feeds on something darker, more pre-modern, than most people give it credit for.

Wonkblog: This year I wanted to write more regular columns at other venues, and was pretty successful at that goal. I contributed a weekly column to the Washington Post's Wonkblog. My favorites, in case you missed them the first time around:

The arguments surrounding the Universal Basic Income. (I received several notes from people happy to see Gøsta Esping-Andersen name-dropped in the Washington Post.) Creating a theory of the state that went into the shutdown. What we get wrong when we describe the financial crisis. Bernanke versus austerity. The idea of public problems. Is a democratic surveillance state possible? Defending the 30 year mortgage and the Volcker Rule. We are teaching economics backwards. And an interview with Shelia Bair that was mentioned in the House by people trying, successfully, to rally House Democrats against dismantling Section 716 of Dodd-Frank.

In Other News: I also started writing some columns for The New Republic and Al-Jazeera America at the end of the year, which I'll continue into 2014. I also wrote a review of Phillip Mirowski's latest book for the New Inquiry, meaning I've completed the hat-trick of writing for TNI, Jacobin and Dissent in the past year and a half. I also co-edited a big report on the future of financial reform which I’m very proud of, and will continue to build out next year. And Thomas Edsall wrote an excellent overview of the arguments we've built here at rortybomb for the New York Times.

Here’s to a good 2014. There's some exciting stuff already in the works.

Previous editions: 2012, 2011

Follow or contact the Rortybomb blog:

  

 

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Guest Post: Max Sawicky on the Liberal Case Against a Universal Basic Income

Dec 17, 2013Mike Konczal

Earlier this month, I was on a Wonkblog live event panel discussing a Universal Basic Income (some video clips here), a topic I wrote about at Wonkblog earlier in the year. There was two people for and two people against, one from the left and one from the right. The person who represented the liberal side who was against a Universal Basic Income was Max Sawicky, formerly of EPI and the blog Maxspeak. He had prepared remarks for his introduction. I asked him if I could post them here and he agreed, and here it is:

With the coming referendum in Switzerland has come a flurry of commentary about a “Universal Basic Income” (UBI). There are some strange bedfellows from left and right are saying nice things about it. I suggest that it can be a distraction from more important things.

If you don’t have time to read this, just consider that a payment of $10,000 to every U.S. adult, a pretty basic basic income, would cost $2.5 trillion. Game over.

That aside, first off we need to distinguish between the objective of ensuring a minimum standard of consumption for all persons and the specifics of a UBI. You can support the first without the baggage of the second. More plausible ways to pursue the objective include: promote full employment, raise the minimum wage, rationalize and expand our system of refundable tax credits in the Federal individual income tax, federalize the Temporary Assistance for Needy Families program (reversing the welfare reform of 1996), establish the Federal government as an employer of last resort, support trade unions, and establish pay for caregivers. All of these in some combination are worth more of our time than a UBI. They are all more in keeping with our current system and our political culture.

What’s wrong with the UBI? It is not the utopianism. The measures I note, if you scale them up, are pretty ambitious. Nor do I see incentive problems with a UBI or similar measures. I do not believe that the availability of a UBI would spawn an army of slackers and moochers.

Let's start with the rationale for the UBI, which I would summarize as eliminating poverty with a low overhead cost. That still leaves a lot to the imagination. UBI proposals tend not to be fully baked. Presumably you reduce overhead by eliminating existing programs, but which ones? Are you willing to ding people at 105% of the poverty line to help others below it? Note you would still need eligibility determination and verification with a universal program. And how universal would it be? Immigrants? The aged? Children? Prisoners? Ex-convicts?

Like good fiction, the way to read the UBI is not as a real proposal, but as a message about something else: our existing system. But the implicit critique of the existing system underlying UBI advocacy is not well-founded.

Overhead cost is typically exaggerated in conservative discussions. Conservatives present comparisons of spending under a long list of Federal programs, many of which have broader or entirely different objectives than reducing poverty. The costs of programs that try to do things requiring public employees are not the same as ‘overhead,’ nor are these employees necessarily a bureaucracy. Even the programs explicitly aimed at reducing poverty are designed to cover more than just those under the poverty line. Moreover, the overhead costs of the main programs noted below are low, for the most part.

We also see exaggerations of the number of programs that are dedicated to reducing poverty. The fact is that most anti-poverty spending is concentrated in relatively few places: Medicaid, food stamps, the Earned Income Tax Credit, Supplemental Security Income, Temporary Assistance for Needy Families, unemployment compensation, and housing subsidies. Coverage in most of these programs goes well above the official poverty line.

In the current system, there is plenty to criticize. Eligibility could be simplified and broadened. Assistance could be increased. The main gap in coverage where a UBI would have the most impact is on able-bodied adults without children, who currently get the least from the current system as far as cash transfers are concerned. I’ve already mentioned easier ways to remedy that deficiency.

So why are we talking about the UBI? Dissatisfaction with the current system feeds a dream of wiping the slate clean, but motivations for a clean slate vary drastically.

Some on the right would like to replace existing programs because they disapprove of what those programs do, not because they fail to erase poverty. What the programs do is masked with the epithet of “bureaucracy.” Or they imagine a scenario where Federal spending decreases, and the remaining UBI programs can then be further whittled down over time. In effect, conservative supporters of the UBI concede their major, historic critique of anti-poverty benefits – the moocher issue. One naturally wonders how deeply felt this conversion really is.

Some on the left would like more ample, broader, simpler provision of benefits. This critique actually goes back to the 60s, when the principal anti-poverty program – Aid to Families with Dependent Children – was viewed as intrusive and demeaning.

If you like the transfer of cold cash, your chief target ought to be Temporary Assistance for Needy Families, the fruits of the Clinton/Gingrich welfare reform of 1996. The Feds provide a grant to state governments, who busy themselves with helping people to help themselves. In the actual event, states helped a lot of people off the welfare rolls and into poverty. The national poverty rate, notwithstanding this reform, steadily went up after 2000. So if you want to strike a blow for reduced overhead, simplicity, and adequacy – if you’re serious – go ahead and make my day: Federalize TANF and establish it as an individual, adequate cash payment to which every resident has a legal right. To constrain its cost, limit eligibility to families with dependent children and phase it out as other income grows.

We do have a mix of programs – what’s been called a “mish-mosh” -- aimed at poverty reduction, among other objectives. Why this complexity?

1.  No surprise, poor people don’t have much political power. They are obliged to seek alliances with provider interests – most famously with agriculture behind the food stamp program (an alliance that may be ending).

2.  The disorganization of Congress and associated interest groups encourages fragmentation. Every member wants something specific to attach his or her name to. (In recent decades, instead of spending programs, we have tax breaks named after Members of Congress).

3.  Federalism, hard-wired into our constitution.

4.  Public opinion, a Tower of Babel.

In light of these constraints, why dwell on a proposal founded on the mirage of wiping the slate clean to start from scratch that presumes a completely fantastical political environment? The answer is, to avoid devices that have been used successfully in the past, that exist at some level and actually work, that stand better than a ghost of a chance at being enacted, and importantly, surviving.

People need a basic income, so they need us to talk about the best ways to get it.

Max Sawicky is employed with the Federal government. His views here do not represent those of his employer.

Follow or contact the Rortybomb blog:

  

 

Earlier this month, I was on a Wonkblog live event panel discussing a Universal Basic Income (some video clips here), a topic I wrote about at Wonkblog earlier in the year. There was two people for and two people against, one from the left and one from the right. The person who represented the liberal side who was against a Universal Basic Income was Max Sawicky, formerly of EPI and the blog Maxspeak. He had prepared remarks for his introduction. I asked him if I could post them here and he agreed, and here it is:

With the coming referendum in Switzerland has come a flurry of commentary about a “Universal Basic Income” (UBI). There are some strange bedfellows from left and right are saying nice things about it. I suggest that it can be a distraction from more important things.

If you don’t have time to read this, just consider that a payment of $10,000 to every U.S. adult, a pretty basic basic income, would cost $2.5 trillion. Game over.

That aside, first off we need to distinguish between the objective of ensuring a minimum standard of consumption for all persons and the specifics of a UBI. You can support the first without the baggage of the second. More plausible ways to pursue the objective include: promote full employment, raise the minimum wage, rationalize and expand our system of refundable tax credits in the Federal individual income tax, federalize the Temporary Assistance for Needy Families program (reversing the welfare reform of 1996), establish the Federal government as an employer of last resort, support trade unions, and establish pay for caregivers. All of these in some combination are worth more of our time than a UBI. They are all more in keeping with our current system and our political culture.

What’s wrong with the UBI? It is not the utopianism. The measures I note, if you scale them up, are pretty ambitious. Nor do I see incentive problems with a UBI or similar measures. I do not believe that the availability of a UBI would spawn an army of slackers and moochers.

Let's start with the rationale for the UBI, which I would summarize as eliminating poverty with a low overhead cost. That still leaves a lot to the imagination. UBI proposals tend not to be fully baked. Presumably you reduce overhead by eliminating existing programs, but which ones? Are you willing to ding people at 105% of the poverty line to help others below it? Note you would still need eligibility determination and verification with a universal program. And how universal would it be? Immigrants? The aged? Children? Prisoners? Ex-convicts?

Like good fiction, the way to read the UBI is not as a real proposal, but as a message about something else: our existing system. But the implicit critique of the existing system underlying UBI advocacy is not well-founded.

Overhead cost is typically exaggerated in conservative discussions. Conservatives present comparisons of spending under a long list of Federal programs, many of which have broader or entirely different objectives than reducing poverty. The costs of programs that try to do things requiring public employees are not the same as ‘overhead,’ nor are these employees necessarily a bureaucracy. Even the programs explicitly aimed at reducing poverty are designed to cover more than just those under the poverty line. Moreover, the overhead costs of the main programs noted below are low, for the most part.

We also see exaggerations of the number of programs that are dedicated to reducing poverty. The fact is that most anti-poverty spending is concentrated in relatively few places: Medicaid, food stamps, the Earned Income Tax Credit, Supplemental Security Income, Temporary Assistance for Needy Families, unemployment compensation, and housing subsidies. Coverage in most of these programs goes well above the official poverty line.

In the current system, there is plenty to criticize. Eligibility could be simplified and broadened. Assistance could be increased. The main gap in coverage where a UBI would have the most impact is on able-bodied adults without children, who currently get the least from the current system as far as cash transfers are concerned. I’ve already mentioned easier ways to remedy that deficiency.

So why are we talking about the UBI? Dissatisfaction with the current system feeds a dream of wiping the slate clean, but motivations for a clean slate vary drastically.

Some on the right would like to replace existing programs because they disapprove of what those programs do, not because they fail to erase poverty. What the programs do is masked with the epithet of “bureaucracy.” Or they imagine a scenario where Federal spending decreases, and the remaining UBI programs can then be further whittled down over time. In effect, conservative supporters of the UBI concede their major, historic critique of anti-poverty benefits – the moocher issue. One naturally wonders how deeply felt this conversion really is.

Some on the left would like more ample, broader, simpler provision of benefits. This critique actually goes back to the 60s, when the principal anti-poverty program – Aid to Families with Dependent Children – was viewed as intrusive and demeaning.

If you like the transfer of cold cash, your chief target ought to be Temporary Assistance for Needy Families, the fruits of the Clinton/Gingrich welfare reform of 1996. The Feds provide a grant to state governments, who busy themselves with helping people to help themselves. In the actual event, states helped a lot of people off the welfare rolls and into poverty. The national poverty rate, notwithstanding this reform, steadily went up after 2000. So if you want to strike a blow for reduced overhead, simplicity, and adequacy – if you’re serious – go ahead and make my day: Federalize TANF and establish it as an individual, adequate cash payment to which every resident has a legal right. To constrain its cost, limit eligibility to families with dependent children and phase it out as other income grows.

We do have a mix of programs – what’s been called a “mish-mosh” -- aimed at poverty reduction, among other objectives. Why this complexity?

1.  No surprise, poor people don’t have much political power. They are obliged to seek alliances with provider interests – most famously with agriculture behind the food stamp program (an alliance that may be ending).

2.  The disorganization of Congress and associated interest groups encourages fragmentation. Every member wants something specific to attach his or her name to. (In recent decades, instead of spending programs, we have tax breaks named after Members of Congress).

3.  Federalism, hard-wired into our constitution.

4.  Public opinion, a Tower of Babel.

In light of these constraints, why dwell on a proposal founded on the mirage of wiping the slate clean to start from scratch that presumes a completely fantastical political environment? The answer is, to avoid devices that have been used successfully in the past, that exist at some level and actually work, that stand better than a ghost of a chance at being enacted, and importantly, surviving.

People need a basic income, so they need us to talk about the best ways to get it.

Max Sawicky is employed with the Federal government. His views here do not represent those of his employer.

Follow or contact the Rortybomb blog:

  

 

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Two Simple Reasons to Not Fight Bubbles With Higher Interest Rates

Nov 27, 2013Mike Konczal

I had no idea that Sweden has gone all-in on raising interest rates to fight "financial instability." (Alas poor Lars Svensson!) Simon Wren-Lewis has details, Krugman has more, and Peter Orszag had a great column about how New Zealand is instead using regulations to fight worries about the financial system.

I've been long fascinated by this topic. The stakes are very high: should we endure a mini-recession, with lower employment and output, to fight a thing called “financial instability”? I offered a list of reasons why the answer should be a resounding "no", but I recently found two more. These two are much clearer, and I think should provide a major hurdle to clear for those who think we should raise rates.

First: Every Target Needs an Instrument

I hate to spoil what happens when you try to kill two birds with one stone, but you usually end up missing both of them.

In policy we have targets and we have instruments. Targets are states of the world we want to bring about but don't control, and instruments are means of bringing them about that policymakers do control. Targets for the Federal Reserve are things like full employment, price stability, and now financial stability, and its main instrument is the interest rate.

There's an old principle in policy called Tinbergen's Rule (h/t JW Mason). Tinbergen's Rule says that you need at least as many instruments as there are targets. One instrument can't hit two targets consistently or with any regularity.

In modern macroeconomics there's an interest rate consistent with both full employment and price stability, so that's functionally one target. Now what people are saying is that we will take one instrument, the interest rate, and try to hit both financial stability and full employment. That can't be done, or at least not regularly or with any consistency. (And there's no reason to think that a set of regulatory tools could, with any real effect or consistency, create full employment, so there's no way to cross them.)

Doing something that common sense tells us we can't is a really bad way to establish how we want macroeconomic policy to look after the crisis. If we need financial stability, and I really believe we do, we need to develop a separate set of tools through law and regulations.

Second: What Would the Net Effect Even Be?

The short answer here is that we have no idea what the actual effects of raising interest rates would be on financial stability. This was on clear display in the IMF's "The Interaction of Monetary and Macroprudential Policies" from earlier this year. Here's a great chart from that report:

That's a lot to take in, so let's walk through it. Imagine we raise interest rates right now, in the name of financial stability. That in turn reduces employment and decreases incomes, making it harder for people to make payments and worsening their balance-sheet situations. The higher rates themselves will lead to higher payments for those with loans linked to variable payments. Raising rates to fight financial instability will lead to weaker balance sheets and more defaults, thus increasing the problem it was meant to solve.

(That's why in the balance-sheet channel of the chart above, there's a red arrow, representing a decline in financial stability, under an increase of policy rates.)

But there are other channels as well. Under the risk-taking channel, lowering rates can cause "intermediaries to expand their balance sheets, increase leverage, and reduce efforts in screening borrowers." However, for the risk-shifting channel, increasing rates "tends to reduce the margins of intermediaries that are funded short-term at variable rates, but lend long-term at fixed rates." Thus, to maintain a return on equity, there may need to be a shift into riskier assets. These two effects go in opposite directions, and it's not clear which would be greater.

There's also an asset price channel. It's not clear how much low interest rates cause asset price booms in practice. But to the extent that they do, they can increase financial stability by increasing asset value and borrowers' net worth. However, in the exchange rate channel, raising interest rates will lead to more capital inflows (the IMF says "excessive capital inflow," heh) and capital growth, which will decrease financial stability. (JW Mason flagged this as a major problem with the "raise rates" crew in a guest blog post here a while ago.)

It shouldn't be clear to a random person which of these would dominate over the other, thus making me believe that raising interest rates would likely be a wash in terms of financial stability. But it would definitely move us further away from full employment and price stability.
 
Now if I had to put money on it, I know that the risk channels can be tackled through financial regulation, while I believe the idea that running a larger output gap, with weaker incomes and more unemployment than necessary, will somehow fix consumer balance-sheets is borderline insane.
 
So why are so many countries going this way? Does capital just have an inherent right to a certain level of return regardless of mass suffering?
 
Follow or contact the Rortybomb blog:

 

  

 

I had no idea that Sweden has gone all-in on raising interest rates to fight "financial instability." (Alas poor Lars Svensson!) Simon Wren-Lewis has details, Krugman has more, and Peter Orszag had a great column about how New Zealand is instead using regulations to fight worries about the financial system.

I've been long fascinated by this topic. The stakes are very high: should we endure a mini-recession, with lower employment and output, to fight a thing called “financial instability”? I offered a list of reasons why the answer should be a resounding "no", but I recently found two more. These two are much clearer, and I think should provide a major hurdle to clear for those who think we should raise rates.

First: Every Target Needs an Instrument

I hate to spoil what happens when you try to kill two birds with one stone, but you usually end up missing both of them.

In policy we have targets and we have instruments. Targets are states of the world we want to bring about but don't control, and instruments are means of bringing them about that policymakers do control. Targets for the Federal Reserve are things like full employment, price stability, and now financial stability, and its main instrument is the interest rate.

There's an old principle in policy called Tinbergen's Rule (h/t JW Mason). Tinbergen's Rule says that you need at least as many instruments as there are targets. One instrument can't hit two targets consistently or with any regularity.

In modern macroeconomics there's an interest rate consistent with both full employment and price stability, so that's functionally one target. Now what people are saying is that we will take one instrument, the interest rate, and try to hit both financial stability and full employment. That can't be done, or at least not regularly or with any consistency. (And there's no reason to think that a set of regulatory tools could, with any real effect or consistency, create full employment, so there's no way to cross them.)

Doing something that common sense tells us we can't is a really bad way to establish how we want macroeconomic policy to look after the crisis. If we need financial stability, and I really believe we do, we need to develop a separate set of tools through law and regulations.

Second: What Would the Net Effect Even Be?

The short answer here is that we have no idea what the actual effects of raising interest rates would be on financial stability. This was on clear display in the IMF's "The Interaction of Monetary and Macroprudential Policies" from earlier this year. Here's a great chart from that report:

That's a lot to take in, so let's walk through it. Imagine we raise interest rates right now, in the name of financial stability. That in turn reduces employment and decreases incomes, making it harder for people to make payments and worsening their balance-sheet situations. The higher rates themselves will lead to higher payments for those with loans linked to variable payments. Raising rates to fight financial instability will lead to weaker balance sheets and more defaults, thus increasing the problem it was meant to solve.

(That's why in the balance-sheet channel of the chart above, there's a red arrow, representing a decline in financial stability, under an increase of policy rates.)

But there are other channels as well. Under the risk-taking channel, lowering rates can cause "intermediaries to expand their balance sheets, increase leverage, and reduce efforts in screening borrowers." However, for the risk-shifting channel, increasing rates "tends to reduce the margins of intermediaries that are funded short-term at variable rates, but lend long-term at fixed rates." Thus, to maintain a return on equity, there may need to be a shift into riskier assets. These two effects go in opposite directions, and it's not clear which would be greater.

There's also an asset price channel. It's not clear how much low interest rates cause asset price booms in practice. But to the extent that they do, they can increase financial stability by increasing asset value and borrowers' net worth. However, in the exchange rate channel, raising interest rates will lead to more capital inflows (the IMF says "excessive capital inflow," heh) and capital growth, which will decrease financial stability. (JW Mason flagged this as a major problem with the "raise rates" crew in a guest blog post here a while ago.)

It shouldn't be clear to a random person which of these would dominate over the other, thus making me believe that raising interest rates would likely be a wash in terms of financial stability. But it would definitely move us further away from full employment and price stability.
 
Now if I had to put money on it, I know that the risk channels can be tackled through financial regulation, while I believe the idea that running a larger output gap, with weaker incomes and more unemployment than necessary, will somehow fix consumer balance-sheets is borderline insane.
 
So why are so many countries going this way? Does capital just have an inherent right to a certain level of return regardless of mass suffering?
 
Follow or contact the Rortybomb blog:

 

  

 

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Do Negative Rates Call For a Permanent Expansion of the Government?

Nov 19, 2013Mike Konczal

Everyone has been talking about the recent Larry Summers speech on secular stagnation, written up with force by Paul Krugman here. Gavyn Davies, in his own nice coverage, noted that the Q&A had an interesting exchange about fiscal stimulus between Bernanke and Summers, so I decided to write that up.

From the IMF video, starting around 1h 2m 15s:

Bernanke:
 
I remember another course we had at MIT with Mr. Samuelson, who I think is a relative of yours [laughter], where he explains…why the real interest rate couldn't be negative indefinitely. He said there was always the possibility of leveling a hill so that a locomotive could get to a destination [faster]…
 
If the real return is negative, first of all, monetary policy can get negative interest rates with positive inflation. But on the fiscal side, the return to public investment, as long as it's real, as long as it's above zero, would always be an approach. It would always be profitable at negative interest rates.
 
Summers:
 
[…] If you think about it as a private investment, it requires that there are perfect property rights, that you can get the benefit of that through all of time, which is reasonable to suppose you don't. If you think of it as a public investment, it's sort of the point that there may be a case for what, in some ways of thinking, be a permanent fiscal expansion, where you are constantly undertaking projects of that kind. It is precisely how one should think of medium-term and long-term fiscal policy that the kind of argument that I made goes to, to a very substantial extent.
 
[…] if you generate inflation, you can have as negative of a real interest rate as you want. It's often assumed, from that, that monetary policy can necessarily solve the problem alone. But that depends on the ability of pure monetary policy to achieve any desired inflation.
 
There's no question… if you drop enough dollar bills from enough helicopters, you can get as much inflation as you want, but in the classic economic lexicon, that's expansionary fiscal policy, because you are making a transfer. And we've done a lot of quantitative easing, and the inflation rate is not conspicuously higher than what it was before it started.
I would normally edit a transcript a bit more, but I wanted to make sure you saw that Summers has a triple hedge ("it's sort of the point that there may be a case for what, in some ways of thinking") before he says that we may need a permanent, or at least a permanent enough, fiscal expansion. This is a long way away from the "timely, targeted, and temporary" mantra Summer had for fiscal stimulus in 2008. Stimulus should still be very well targeted, but now temporary and perhaps even timely are up for grabs.
 
Of course, if we needed to expand government for our new era, we have a lot of projects, like fighting global warming and rationalizing our safety net with some kind of basic income, with which we could start. So we aren't lacking for genuine investment opportunities. But would a serious and sustained expansion of the size of government be a necessary or sufficient condition for combating the issue of secular stagnation? I'm curious what everyone thinks and why.
 
I can imagine the steam coming out of Ryan Avent's ears at Summers's description of quantitative easing and the inflation rate (see Avent's response to the Summers speech here). I will say that 11 months ago, when the Evans Rule and QE3 were announced, I thought there would be a small but reasonable chance that we'd experience anemic growth but above-trend inflation (say 2.25 percent). The question then was why people should be happy about this, and whether it would translate into wage growth. Instead, we have anemic growth and record-low inflation, and I don't know how to explain that.
 
The old complaint was that Bernanke was targeting volumes instead of prices (I'll buy so many bonds, but not set the 10 year interest rate at 1.75% and the mortgage rate at 3%), in part because he was afraid of failing at hitting a target and, perhaps, was afraid of the optics of it. But the one target he has gone for - 2% inflation - he hasn't hit. I imagine that's a big problem for bigger actions going forward.
 

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Everyone has been talking about the recent Larry Summers speech on secular stagnation, written up with force by Paul Krugman here. Gavyn Davies, in his own nice coverage, noted that the Q&A had an interesting exchange about fiscal stimulus between Bernanke and Summers, so I decided to write that up.

From the IMF video, starting around 1h 2m 15s:

Bernanke:
 
I remember another course we had at MIT with Mr. Samuelson, who I think is a relative of yours [laughter], where he explains…why the real interest rate couldn't be negative indefinitely. He said there was always the possibility of leveling a hill so that a locomotive could get to a destination [faster]…
 
If the real return is negative, first of all, monetary policy can get negative interest rates with positive inflation. But on the fiscal side, the return to public investment, as long as it's real, as long as it's above zero, would always be an approach. It would always be profitable at negative interest rates.
 
Summers:
 
[…] If you think about it as a private investment, it requires that there are perfect property rights, that you can get the benefit of that through all of time, which is reasonable to suppose you don't. If you think of it as a public investment, it's sort of the point that there may be a case for what, in some ways of thinking, be a permanent fiscal expansion, where you are constantly undertaking projects of that kind. It is precisely how one should think of medium-term and long-term fiscal policy that the kind of argument that I made goes to, to a very substantial extent.
 
[…] if you generate inflation, you can have as negative of a real interest rate as you want. It's often assumed, from that, that monetary policy can necessarily solve the problem alone. But that depends on the ability of pure monetary policy to achieve any desired inflation.
 
There's no question… if you drop enough dollar bills from enough helicopters, you can get as much inflation as you want, but in the classic economic lexicon, that's expansionary fiscal policy, because you are making a transfer. And we've done a lot of quantitative easing, and the inflation rate is not conspicuously higher than what it was before it started.
I would normally edit a transcript a bit more, but I wanted to make sure you saw that Summers has a triple hedge ("it's sort of the point that there may be a case for what, in some ways of thinking") before he says that we may need a permanent, or at least a permanent enough, fiscal expansion. This is a long way away from the "timely, targeted, and temporary" mantra Summer had for fiscal stimulus in 2008. Stimulus should still be very well targeted, but now temporary and perhaps even timely are up for grabs.
 
Of course, if we needed to expand government for our new era, we have a lot of projects, like fighting global warming and rationalizing our safety net with some kind of basic income, with which we could start. So we aren't lacking for genuine investment opportunities. But would a serious and sustained expansion of the size of government be a necessary or sufficient condition for combating the issue of secular stagnation? I'm curious what everyone thinks and why.
 
I can imagine the steam coming out of Ryan Avent's ears at Summers's description of quantitative easing and the inflation rate (see Avent's response to the Summers speech here). I will say that 11 months ago, when the Evans Rule and QE3 were announced, I thought there would be a small but reasonable chance that we'd experience anemic growth but above-trend inflation (say 2.25 percent). The question then was why people should be happy about this, and whether it would translate into wage growth. Instead, we have anemic growth and record-low inflation, and I don't know how to explain that.
 
The old complaint was that Bernanke was targeting volumes instead of prices (I'll buy so many bonds, but not set the 10 year interest rate at 1.75 percent and the mortgage rate at 3 percent), in part because he was afraid of failing to hit a target and, perhaps, was afraid of the optics of it. But the one target he has gone for, 2 percent inflation, he hasn't hit. I imagine that's a big problem for bigger actions going forward.
 

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