Is the Solution for Jamie Dimon's Next Financial Crisis a Larger US Deficit?

Apr 10, 2015Mike Konczal

In JPMorgan’s latest shareholder newsletter (p. 30-34), Jamie Dimon walks through a narrative of the next financial crisis and why we should be worried about it. But instead of worrying, I think it points to interesting details of what we’ve learned from the last crisis, what we evidently haven’t learned, and where we should go next.

Here’s Matt Levine’s summary. Dimon makes two arguments: First, the new capital requirements, especially the liquidity coverage ratio (LCR) that requires banks to fund themselves with enough liquidity to survive a 30-day crisis, will be procyclical. This means they will bind the financial sector more tightly in a crisis and prevent it from being a backstop. This is made even worse by his second argument, which is that there’s a safe asset shortage. Each individual bank is much safer than before the crisis, but using safe assets to meet the LCR means there will be fewer out there to provide stabilization when a crisis hits.

To use Dimon’s language, “there is a greatly reduced supply of Treasuries to go around – in effect, there may be a shortage of all forms of good collateral” in a crisis. Meanwhile, new capital requirements, especially the LCR, mean that in a crisis banks won’t want to lend, roll over credit, or purchase risky assets, because they would be violating the new capital rules. As such, “it will be harder for banks either as lenders or market-makers to ‘stand against the tide’” and to serve as “the ‘lender of last resort’ to their clients.”

What should we make of the fact that Dimon’s target is the LCR, an important new requirement under constant assault by the banks? Four points jump out.

The first is that the idea that we should weaken capital requirements so banks can be the lender of last resort in a financial crisis is precisely what was disproven during the 2008 panic. One reason people use the term “shadow banking” to describe this system is that it has no actual means of providing liquidity and the backstops necessary to prevent self-fulfilling panics, and that was demonstrated during the recent crisis.

Rather than financial firms heroically standing against the tide of a financial panic, they all immediately ran for shelter, forcing the Federal Reserve to stand up instead and create a de facto lender-of-last-resort facility for shadow banks out of thin air.

It’s good to hear that Dimon feels JPMorgan can still fulfill this function in the next crisis, if only we weakened Basel. But we’ve tried before to let financial firms act as the ultimate backstop to the markets while the government got out of the way, and it was a disaster. Firms like AIG wrote systemic risk insurance they could never pay; even interbank lending collapsed in the crisis.

This is precisely why we need to continue regulating the shadow banking sector and reducing reliance and risks in the wholesale short-term funding markets, and why the Federal Reserve should actually write the rules governing emergency liquidity services instead of ignoring what Congress has demanded of it. No doubt there needs to be a balance, but if anything we are counting too much on the shadow banking sector to be able to take care of itself, not too little.

As a quick, frustrating second point, it’s funny that regulators bent over backwards for the financial industry in addressing these issues with LCR, and yet the industry won’t give an inch in trying to dismantle it. That LCR is meant to adjust in a crisis and that the funds would be available for lending was emphasized when regulators weakened the rule under bank pressure, and it is explicitly stated in the final rule (“the Basel III Revised Liquidity Framework indicates that supervisory actions should not discourage or deter a banking organization from using its HQLA when necessary to meet unforeseen liquidity needs arising from financial stress that exceeds normal business fluctuations”).

If risk-weighting is too procyclical, which requires several logical leaps in Dimon’s arguments, the solution is to adjust those rules while raising the leverage ratio, not to pretend that the financial sector would be a sufficient ultimate backstop. Bank comments on tough rules like LCR are less give-and-take and more take-and-take.

But the third point is more interesting. Beyond whether or not the rules are too procyclical and unnecessarily restrictive in a crisis, there’s Dimon’s claim that there aren’t enough Treasuries to go around. If that’s the case, why don’t we simply make more Treasury debt? If the issue is a shortage of Treasuries needed to keep the financial sector well-capitalized and safe, it’s quite easy for us to make more government debt. And right now, with low interest rates and a desperate need for public investment, strikes me as an excellent time to do just that. Dimon is correct in his implicit idea that the financial markets, with enough financial engineering and private-market backstopping, can produce genuinely safe assets is a complete sham. This is a role for the government.

And for fun, a fourth point from Ben Walsh: Dimon says one of the biggest threats to the financial markets is that there isn’t enough U.S. debt. From January 2011: “Dimon Says Government Deficits, Spending Are New Global Risk.” We are risking a major rise in interest rates in the years following 2011 if we have trillion-dollar deficits, Dimon warned. How did that turn out?

Imagine how much worse shape we’d be in if we’d listened to Dimon.

So just as a friendly reminder: not only would more federal debt issued at incredibly low rates do cool things like rebuild schools, fix bridges, and give money to poor people, it would also serve as an important element of reducing the risks of the next financial crisis. This federal debt seems like a pretty useful thing to have around.

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In JPMorgan’s latest shareholder newsletter (p. 30-34), Jamie Dimon walks through a narrative of the next financial crisis and why we should be worried about it. But instead of worrying, I think it points to interesting details of what we’ve learned from the last crisis, what we evidently haven’t learned, and where we should go next.

Here’s Matt Levine’s summary. Dimon makes two arguments: First, the new capital requirements, especially the liquidity coverage ratio (LCR) that requires banks to fund themselves with enough liquidity to survive a 30-day crisis, will be procyclical. This means they will bind the financial sector more tightly in a crisis and prevent it from being a backstop. This is made even worse by his second argument, which is that there’s a safe asset shortage. Each individual bank is much safer than before the crisis, but using safe assets to meet the LCR means there will be fewer out there to provide stabilization when a crisis hits.

To use Dimon’s language, “there is a greatly reduced supply of Treasuries to go around – in effect, there may be a shortage of all forms of good collateral” in a crisis. Meanwhile, new capital requirements, especially the LCR, mean that in a crisis banks won’t want to lend, roll over credit, or purchase risky assets, because they would be violating the new capital rules. As such, “it will be harder for banks either as lenders or market-makers to ‘stand against the tide’” and to serve as “the ‘lender of last resort’ to their clients.”

What should we make of the fact that Dimon’s target is the LCR, an important new requirement under constant assault by the banks? Four points jump out.

The first is that the idea that we should weaken capital requirements so banks can be the lender of last resort in a financial crisis is precisely what was disproven during the 2008 panic. One reason people use the term “shadow banking” to describe this system is that it has no actual means of providing liquidity and the backstops necessary to prevent self-fulfilling panics, and that was demonstrated during the recent crisis.

Rather than financial firms heroically standing against the tide of a financial panic, they all immediately ran for shelter, forcing the Federal Reserve to stand up instead and create a de facto lender-of-last-resort facility for shadow banks out of thin air.

It’s good to hear that Dimon feels JPMorgan can still fulfill this function in the next crisis, if only we weakened Basel. But we’ve tried before to let financial firms act as the ultimate backstop to the markets while the government got out of the way, and it was a disaster. Firms like AIG wrote systemic risk insurance they could never pay; even interbank lending collapsed in the crisis.

This is precisely why we need to continue regulating the shadow banking sector and reducing reliance and risks in the wholesale short-term funding markets, and why the Federal Reserve should actually write the rules governing emergency liquidity services instead of ignoring what Congress has demanded of it. No doubt there needs to be a balance, but if anything we are counting too much on the shadow banking sector to be able to take care of itself, not too little.

As a quick, frustrating second point, it’s funny that regulators bent over backwards for the financial industry in addressing these issues with LCR, and yet the industry won’t give an inch in trying to dismantle it. That LCR is meant to adjust in a crisis and that the funds would be available for lending was emphasized when regulators weakened the rule under bank pressure, and it is explicitly stated in the final rule (“the Basel III Revised Liquidity Framework indicates that supervisory actions should not discourage or deter a banking organization from using its HQLA when necessary to meet unforeseen liquidity needs arising from financial stress that exceeds normal business fluctuations”).

If risk-weighting is too procyclical, which requires several logical leaps in Dimon’s arguments, the solution is to adjust those rules while raising the leverage ratio, not to pretend that the financial sector would be a sufficient ultimate backstop. Bank comments on tough rules like LCR are less give-and-take and more take-and-take.

But the third point is more interesting. Beyond whether or not the rules are too procyclical and unnecessarily restrictive in a crisis, there’s Dimon’s claim that there aren’t enough Treasuries to go around. If that’s the case, why don’t we simply make more Treasury debt? If the issue is a shortage of Treasuries needed to keep the financial sector well-capitalized and safe, it’s quite easy for us to make more government debt. And right now, with low interest rates and a desperate need for public investment, strikes me as an excellent time to do just that. Dimon is correct in his implicit idea that the financial markets, with enough financial engineering and private-market backstopping, can produce genuinely safe assets is a complete sham. This is a role for the government.

And for fun, a fourth point from Ben Walsh: Dimon says one of the biggest threats to the financial markets is that there isn’t enough U.S. debt. From January 2011: “Dimon Says Government Deficits, Spending Are New Global Risk.” We are risking a major rise in interest rates in the years following 2011 if we have trillion-dollar deficits, Dimon warned. How did that turn out?

Imagine how much worse shape we’d be in if we’d listened to Dimon.

So just as a friendly reminder: not only would more federal debt issued at incredibly low rates do cool things like rebuild schools, fix bridges, and give money to poor people, it would also serve as an important element of reducing the risks of the next financial crisis. This federal debt seems like a pretty useful thing to have around.

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What John Oliver Can Tell Us about Foreclosure Fraud, Sweat Boxes and the Profit Motive

Mar 26, 2015Mike Konczal

John Oliver dedicated his main segment on last Sunday’s episode to the epidemic of municipal fees. He walks through several stories about tickets and citations that are overpriced and end up being more expensive for poor people because of a series of burdensome fees. This was one of the conclusions of the Justice Department’s report on Ferguson, which argued that “law enforcement practices are shaped by the City’s focus on revenue rather than by public safety needs.”

Oliver had a memorable phrase to describe how this system catches people and won’t let them go: he called it a “f*** barrel,” and started a NSFW hashtag on Twitter to draw attention to it.

But I had actually heard a similar (and safe-for-work) phrase for this years ago: the “sweat box.” Law professor Ronald Mann coined it in 2006 to describe how the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) would affect consumer debt, and it applies to the criminal justice system now. The problems with this system also sound like the problems in mortgage debt servicing, which has been a focus here. It turns out that these issues are generalizable, and they illustrate some of the real dilemmas with privatization and introducing the profit-motive into the public realm.

The Sweat Box

First, the barrel/box. Credit card companies and other creditors really wanted BAPCPA to become law. But why? Mann argued that the act wouldn’t reduce risky borrowing, reduce the number of bankruptcies, or increase the recoveries these companies got in bankruptcy.

But what it would do is make it harder to start a bankruptcy, thanks to a wide variety of delaying tactics. The act did this “by raising filing fees, but also by lengthening the period between permitted filings and by imposing administrative hurdles related to credit counseling, debt relief agencies, and attorney certifications.” This kept distressed debtors in a period where they faced high fees and high interest payments, which would allow the credit card companies to collect additional revenue. Instead of trying to alter bankruptcy on the front or back ends, what it really did was give consumers fewer options and more confusion in the middle. It trapped them in a box (or over a barrel, if you will).

Mortgage Servicing

But this also sounds familiar to those watching the scandals taking place in servicer fraud as the foreclosure crisis unfolded over the past seven years. Servicers are the delegated, third-party managers of debts, particularly mortgage securitizations but also student debt. They sound disturbingly similar to the companies Oliver describes as managing municipal fees.

As Adam Levitin and Tara Twomey have argued, third-party servicing introduces three major agency problems. The first is that servicers are incentivized to pad costs, as costs are their revenues, even at the expense of everyone else. The second is that they will often pursue their own goals and objectives as the expense of other options, especially when they don’t ultimately care about the overall goals of those who hire them. And a third problem is that when problems do occur, they are often incentivized to drag them out rather than resolve them the best way possible.

Among other heart-breaking stories, Oliver walks through the story of Harriet Cleveland, who had unpaid parking tickets with Montgomery, Alabama. Montgomery, however, outsourced the management of this debt to Judicial Correction Services (JCS). JCS followed this script perfectly.

JCS had every reason to increase its fees and keep them at a burdensome rate, as it was to be paid first. It was completely indifferent to public notions of the county that hired it, such as proportional justice or the cost-benefit ratio of incarceration, such that they threw Cleveland in jail once she couldn’t handle the box anymore. And it economically benefited from keeping Cleveland in the sweat box as long as possible, rather than trying to find some way to actually resolve the tickets.

For those watching the mortgage servicing industry during the foreclosure crisis, this is a very similar story. Mortgage servicers can pyramid nuisance fees knowing that, even if the loan goes into foreclosure when the debtor can’t handle the box, they will be paid first. They are ultimately indifferent to the private notion of maximizing the value of the loan for investors, so much so that, compared to traditional banks that hold loans directly, servicers are less likely to do modifications and do them in a way that will work out. And servicers will often refuse to make good modifications that would get the mortgage current, because doing so can reduce the principal that forms the basis of their fees.

The Perils of the Profit Motive

There are three elements to draw out here. The first is that these problems are significantly worse for vulnerable populations, particularly those whose exit options are limited by background economic institutions like backruptcy or legal defense. The second is that many of our favorite buzzword policy goals, be they privatization of public services or the market-mediation of credit, involve piling on more and more of these third-party agents whose interests and powers aren’t necessarily aligned with what those who originally hired them expected. Assuming good faith for a second, privatization of these carceral services by municipalities requires a level of control of third-party agents that even the geniuses on Wall Street haven’t been able to pull off.

But we see the sweat box when it comes to purely public mechanisms too, as we see in Ferguson. So the third takeaway is that this is what happens when the profit motive is introduced in places where it normally doesn’t exist. Introducing the profit motive requires delegation and coordination, and it can often cause far more chaos than whatever efficiencies it is meant to produce. Traditional banking serviced mortgage debts as part of the everyday functions within the firm. Putting that function outside the firm, where the profit-motive was meant to increase efficiency, also created profit-driven incentives to find ways to abuse that gap in accountability.

The same dynamics come into play with the profit motive is reintroduced into the municipal level. Our government ran under the profit motive through the 1800s, and it was a major political struggle to change that. Municipal fees are very much part of the reintroduction of the profit motive into city services. As libertarian scholar and Reason Foundation co-founder Robert Poole wrote in 1980 regarding municipal court costs, “Make the users (i.e., the criminals) pay the costs, wherever possible.” As Sarah Stillman found, this is what an “offender-funded” justice system, one that aims “to shift the financial burden of probation directly onto probationers,” looks like now as for-profit carceral service providers shift their businesses to probation and parole. Catherine Rampell reports this as a total shift away from taxes and towards fees for public revenues, and the data shows it.

This is the model of the state as a business providing services, one in which those who use or abuse its functions should fund it directly. And it’s a system that can’t shake the conflicts inherent whenever the profit motive appear.

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John Oliver dedicated his main segment on last Sunday’s episode to the epidemic of municipal fees. He walks through several stories about tickets and citations that are overpriced and end up being more expensive for poor people because of a series of burdensome fees. This was one of the conclusions of the Justice Department’s report on Ferguson, which argued that “law enforcement practices are shaped by the City’s focus on revenue rather than by public safety needs.”

Oliver had a memorable phrase to describe how this system catches people and won’t let them go: he called it a “f*** barrel,” and started a NSFW hashtag on Twitter to draw attention to it.

But I had actually heard a similar (and safe-for-work) phrase for this years ago: the “sweat box.” Law professor Ronald Mann coined it in 2006 to describe how the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) would affect consumer debt, and it applies to the criminal justice system now. The problems with this system also sound like the problems in mortgage debt servicing, which has been a focus here. It turns out that these issues are generalizable, and they illustrate some of the real dilemmas with privatization and introducing the profit-motive into the public realm.

The Sweat Box

First, the barrel/box. Credit card companies and other creditors really wanted BAPCPA to become law. But why? Mann argued that the act wouldn’t reduce risky borrowing, reduce the number of bankruptcies, or increase the recoveries these companies got in bankruptcy.

But what it would do is make it harder to start a bankruptcy, thanks to a wide variety of delaying tactics. The act did this “by raising filing fees, but also by lengthening the period between permitted filings and by imposing administrative hurdles related to credit counseling, debt relief agencies, and attorney certifications.” This kept distressed debtors in a period where they faced high fees and high interest payments, which would allow the credit card companies to collect additional revenue. Instead of trying to alter bankruptcy on the front or back ends, what it really did was give consumers fewer options and more confusion in the middle. It trapped them in a box (or over a barrel, if you will).

Mortgage Servicing

But this also sounds familiar to those watching the scandals taking place in servicer fraud as the foreclosure crisis unfolded over the past seven years. Servicers are the delegated, third-party managers of debts, particularly mortgage securitizations but also student debt. They sound disturbingly similar to the companies Oliver describes as managing municipal fees.

As Adam Levitin and Tara Twomey have argued, third-party servicing introduces three major agency problems. The first is that servicers are incentivized to pad costs, as costs are their revenues, even at the expense of everyone else. The second is that they will often pursue their own goals and objectives as the expense of other options, especially when they don’t ultimately care about the overall goals of those who hire them. And a third problem is that when problems do occur, they are often incentivized to drag them out rather than resolve them the best way possible.

Among other heart-breaking stories, Oliver walks through the story of Harriet Cleveland, who had unpaid parking tickets with Montgomery, Alabama. Montgomery, however, outsourced the management of this debt to Judicial Correction Services (JCS). JCS followed this script perfectly.

JCS had every reason to increase its fees and keep them at a burdensome rate, as it was to be paid first. It was completely indifferent to public notions of the county that hired it, such as proportional justice or the cost-benefit ratio of incarceration, such that they threw Cleveland in jail once she couldn’t handle the box anymore. And it economically benefited from keeping Cleveland in the sweat box as long as possible, rather than trying to find some way to actually resolve the tickets.

For those watching the mortgage servicing industry during the foreclosure crisis, this is a very similar story. Mortgage servicers can pyramid nuisance fees knowing that, even if the loan goes into foreclosure when the debtor can’t handle the box, they will be paid first. They are ultimately indifferent to the private notion of maximizing the value of the loan for investors, so much so that, compared to traditional banks that hold loans directly, servicers are less likely to do modifications and do them in a way that will work out. And servicers will often refuse to make good modifications that would get the mortgage current, because doing so can reduce the principal that forms the basis of their fees.

The Perils of the Profit Motive

There are three elements to draw out here. The first is that these problems are significantly worse for vulnerable populations, particularly those whose exit options are limited by background economic institutions like backruptcy or legal defense. The second is that many of our favorite buzzword policy goals, be they privatization of public services or the market-mediation of credit, involve piling on more and more of these third-party agents whose interests and powers aren’t necessarily aligned with what those who originally hired them expected. Assuming good faith for a second, privatization of these carceral services by municipalities requires a level of control of third-party agents that even the geniuses on Wall Street haven’t been able to pull off.

But we see the sweat box when it comes to purely public mechanisms too, as we see in Ferguson. So the third takeaway is that this is what happens when the profit motive is introduced in places where it normally doesn’t exist. Introducing the profit motive requires delegation and coordination, and it can often cause far more chaos than whatever efficiencies it is meant to produce. Traditional banking serviced mortgage debts as part of the everyday functions within the firm. Putting that function outside the firm, where the profit-motive was meant to increase efficiency, also created profit-driven incentives to find ways to abuse that gap in accountability.

The same dynamics come into play with the profit motive is reintroduced into the municipal level. Our government ran under the profit motive through the 1800s, and it was a major political struggle to change that. Municipal fees are very much part of the reintroduction of the profit motive into city services. As libertarian scholar and Reason Foundation co-founder Robert Poole wrote in 1980 regarding municipal court costs, “Make the users (i.e., the criminals) pay the costs, wherever possible.” As Sarah Stillman found, this is what an “offender-funded” justice system, one that aims “to shift the financial burden of probation directly onto probationers,” looks like now as for-profit carceral service providers shift their businesses to probation and parole. Catherine Rampell reports this as a total shift away from taxes and towards fees for public revenues, and the data shows it.

This is the model of the state as a business providing services, one in which those who use or abuse its functions should fund it directly. And it’s a system that can’t shake the conflicts inherent whenever the profit motive appear.

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New The Nation: TPP and Bureaucrats

Mar 26, 2015Mike Konczal

Live at The Nation: Free Trade Isn’t about Trade. It’s About Bureaucrats—and Guns. Free trade agreements like the TPP have provisions that are designed less for trade, and more about replacing public bureaucrats with private, corporate ones. I think there's a lot out there about the corporate welfare elements about TPP, which are definitely true, but I think this element of who has the final say over how our economies are regulating is equally important. Check it out!

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Live at The Nation: Free Trade Isn’t about Trade. It’s About Bureaucrats—and Guns. Free trade agreements like the TPP have provisions that are designed less for trade, and more about replacing public bureaucrats with private, corporate ones. I think there's a lot out there about the corporate welfare elements about TPP, which are definitely true, but I think this element of who has the final say over how our economies are regulating is equally important. Check it out!

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Interview with Eric Foner and his Reconstruction MOOC

Mar 11, 2015Mike Konczal

About a month ago, I interviewed the great historian Eric Foner about his Civil War and Reconstruction MOOC, the experience of teaching those time periods to students, and his work's relationship to the left now for The Nation. I forgot to post it here; I'm doing so now because the third and final part of the MOOC, The Unfinished Revolution: Reconstruction and After, 1865-1890, has just started and you can still sign up. (All the lectures will eventually end up on youtube. Here are links to the first class on the buildup to the Civil War and the second class on the Civil War itself.)

Foner is a great lecturer, and the lectures are his class, the final time he teaches it at Columbia, recorded and broken up into segments. It's especially awesome to get to sit in on Foner lecturing about Reconstruction, given that he wrote the book that still defines the period. I highly recommend checking it out.

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About a month ago, I interviewed the great historian Eric Foner about his Civil War and Reconstruction MOOC, the experience of teaching those time periods to students, and his work's relationship to the left now for The Nation. I forgot to post it here; I'm doing so now because the third and final part of the MOOC, The Unfinished Revolution: Reconstruction and After, 1865-1890, has just started and you can still sign up. (All the lectures will eventually end up on youtube. Here are links to the first class on the buildup to the Civil War and the second class on the Civil War itself.)

Foner is a great lecturer, and the lectures are his class, the final time he teaches it at Columbia, recorded and broken up into segments. It's especially awesome to get to sit in on Foner lecturing about Reconstruction, given that he wrote the book that still defines the period. I highly recommend checking it out.

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Is Expanding Medicaid an Essential Part of Reducing Mass Incarceration? An Interview with Harold Pollack

Mar 11, 2015Mike Konczal

Every policy lever available was pulled in order to create our system of mass incarceration over the past 40 years. Reformers will have to be equally clever and nimble in trying to challenge and dismantle this system. And one important lever that I hadn't thought much about in this context is the Affordable Care Act's (ACA, or Obamacare) expansion of Medicaid. This expansion is being blocked in 22 states, which is preventing 5.1 million Americans from getting health-care.

This came up in an excellent interview between Connor Kilpatrick and the political scientist and incarceration scholar Marie Gottschalk over at Jacobin. Commenting on the limits of the current wave of bipartisan support against incarceration, Gottschalk notes that "If you care about reentry and about keeping people out of prison in the first place, there’s no public policy that you should support more strongly now than Medicaid expansion. Medicaid expansion gives states huge infusions of federal money to expand mental health services, substance abuse treatment, and medical care for many of the people who are most likely to end up in prison. It also allows states and localities to shift a significant portion of their correctional health care costs to the federal tab." Similar concerns were raised by Elizabeth Stoker Bruenig at The New Republic.

I immediately got Gottschalk's new book Caught, the subject of the Jacobin interview, and though I just started the book I highly recommended it as a guide to where the prison state stands in 2015. But I wanted to know more about the relationship between Medicaid and deincarceration.

So I reached out to friend-of-the-blog Harold Pollack. Pollack is the Helen Ross Professor at the School of Social Service Administration at the University of Chicago. He is also Co-Director of The University of Chicago Crime Lab at the University of Chicago. He has published widely at the interface between poverty policy and public health, and he also writes for a wide variety of online and print publications. He is also a thoughtful scholar on health care and crime policy and how they interact in communities.

Mike Konczal: How important is the Medicaid expansion for deincarceration?

Harold Pollack: I’m convinced that Medicaid expansion is essential for this problem. It’s essential for two different purposes. First, individuals in this population need health services, and there needs to be a clear way that individuals can get access to services from qualified providers. The Medicaid expansion does that.

Secondly, the entire ecosystem of care requires proper financing. And for historical reasons, mental health and substance abuse services have been put into their own silos. They are not properly financed, except through a patchwork of safety net funding streams that don’t particularly work well. They have also been poorly-integrated with standard medical care.

Let’s talk about individuals first. In what ways could Medicaid benefit people who are or are likely to get caught up in the criminal justice system?

Think about who is not eligible for Medicaid before health reform. A low-income male who is not a veteran or a custodial parent, or who doesn’t qualify for Ryan-White HIV/AIDS benefits. They may have a serious substance abuse problem, but that wouldn’t qualify them for federal disability benefits. They, with the expansion, can get access to Medicaid simply because they are poor.

The criminal justice population is quite varied, but there are a couple of key areas in which Medicaid expansion would be especially beneficial for them. With the expansion, Medicaid can now cover basic outpatient substance abuse treatment. This is true for both Medicaid and private insurance after health reform. And ACA provides these services in a way that is much more integrated with people’s regular medical care.

One basic challenge with drug and alcohol treatment is that these services are in a separate system that people don’t want to use, and don’t use. With the Medicaid expansion, you can go to a neighborhood clinic and they can help you get Methadone or Suboxone. They can also get you the psychiatric care you need within the same umbrella of your regular care. So it is much more likely that people will use it.

There’s very good evidence that alcohol and illicit drug treatment reduces criminal offending. [Editor note: Both this study and this study, obtained via follow-up email, show treament reduces violent and property crime enough to far pass a cost-benefit test.] Both It partly reduces criminal offending by reducing the need to commit property crimes to get the substances. It also reduces offending by allowing people to be more functional, and thus more likely to stay employed. Especially in the case of alcohol, people getting their substance abuse under control makes it less likely that they’ll be intoxicated, and thus less likely to commit crimes or be victims of crime.

What about those with mental illness?

When it comes to those with serious mental illness, we end up using local jails to try and manage them. It’s important that they can get access to help and mental health treatment outside of the criminal justice itself. It’s ironic that when someone with psychiatric disorders is inside the jail, they do have access to some of these services. But those services are often unavailable or totally disconnected when they leave the jail.

We don’t really know whether, or by how much, these services can be expected to reduce offending among this group. This remains a hypothesis that depends on how well we actually implement programs. Much will depend on how effectively we can implement Medicaid expansion.

How does this element of Medicaid deal with the traditional criticisms of the program?

Medicaid has many shortcomings. It doesn’t pay a market rate for important services. But for all of its faults, Medicaid recipients are grateful to have it. The satisfaction they have is quite high compared to traditional health insurance. Medicaid gives people access to the basic health care that they need to stay healthy and improve their lives. It is also genuinely designed for people who have no money, which is really important for these indigent populations. Medicaid is inferior to private insurance in terms of reimbursement to providers, but it’s better for really poor people than any private insurance I’ve seen, because it’s been road tested for a long time in meeting the needs of indigent people.

And as I mentioned, ACA is especially important, because the ACA includes very specific components in the area of mental health and substance use.

One thing I’ve noticed is that for all the talk about ending mandatory minimums, most of the real energy is about giving judges flexibility to ignore mandatory minimums. But that put a lot of pressure on keeping recidivism down, because judges, especially elected ones, won’t ignore long records.

Deincarceration requires the puzzle pieces to fit together to be sustainable and politically tenable. That requires that we deal with the real-life problems people face when they are released. It requires monitoring and people have access to services, both to improve their quality of life and to reduce the probabilities that they will reoffend.

If we just release people without support services, my fear is that it will not go well. Then it will ultimately generate political backlash. I’m very heartened that we are reducing the mandatory minimums, in particular for older offenders who tend to be less violent. It’s essential that we address the excessive sentencing. But we also have to do what we need to do to make this effective.

Even if judges can reduce sentencing, they are ultimately dependent on the available resources to help and monitor the people that come before them. And if judges don’t see those services, then they aren’t going to use their discretion to release many of these people as early as they might.

And if property crimes are being committed by people under criminal justice supervision, and they have a history of violent offending, then they are much more likely to be sent back with a pretty serious sanctions.

Tell me more about the second issue, how the ACA rationalizes the funding stream for these services.

We’ve had a messy system in the past, and we’ll ultimately rationalize it under Medicaid. Safety net providers for substance abuse and mental illness have always been paid for by a patchwork of public funding through obscure agencies and local governments. It has always been a huge challenge where access has been inadequate, with long waiting lines, and the services provided were often quite forbidding. Given this separate funding, it’s very difficult to integrate this in with people’s overall health care. When you have these silos of places to go, with one for mental health, another silo for substance abuse, and another for safety net health care, that person isn’t going to get the integrated care they really need. The ACA is trying to bring those things together.

Many of these issues will still be in play going forward, but it will be in the context of a coherent system that at-least addresses these issues within the context of broader health care.

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Every policy lever available was pulled in order to create our system of mass incarceration over the past 40 years. Reformers will have to be equally clever and nimble in trying to challenge and dismantle this system. And one important lever that I hadn't thought much about in this context is the Affordable Care Act's (ACA, or Obamacare) expansion of Medicaid. This expansion is being blocked in 22 states, which is preventing 5.1 million Americans from getting health-care.

This came up in an excellent interview between Connor Kilpatrick and the political scientist and incarceration scholar Marie Gottschalk over at Jacobin. Commenting on the limits of the current wave of bipartisan support against incarceration, Gottschalk notes that "If you care about reentry and about keeping people out of prison in the first place, there’s no public policy that you should support more strongly now than Medicaid expansion. Medicaid expansion gives states huge infusions of federal money to expand mental health services, substance abuse treatment, and medical care for many of the people who are most likely to end up in prison. It also allows states and localities to shift a significant portion of their correctional health care costs to the federal tab." Similar concerns were raised by Elizabeth Stoker Bruenig at The New Republic.

I immediately got Gottschalk's new book Caught, the subject of the Jacobin interview, and though I just started the book I highly recommended it as a guide to where the prison state stands in 2015. But I wanted to know more about the relationship between Medicaid and deincarceration.

So I reached out to friend-of-the-blog Harold Pollack. Pollack is the Helen Ross Professor at the School of Social Service Administration at the University of Chicago. He is also Co-Director of The University of Chicago Crime Lab at the University of Chicago. He has published widely at the interface between poverty policy and public health, and he also writes for a wide variety of online and print publications. He is also a thoughtful scholar on health care and crime policy and how they interact in communities.

Mike Konczal: How important is the Medicaid expansion for deincarceration?

Harold Pollack: I’m convinced that Medicaid expansion is essential for this problem. It’s essential for two different purposes. First, individuals in this population need health services, and there needs to be a clear way that individuals can get access to services from qualified providers. The Medicaid expansion does that.

Secondly, the entire ecosystem of care requires proper financing. And for historical reasons, mental health and substance abuse services have been put into their own silos. They are not properly financed, except through a patchwork of safety net funding streams that don’t particularly work well. They have also been poorly-integrated with standard medical care.

Let’s talk about individuals first. In what ways could Medicaid benefit people who are or are likely to get caught up in the criminal justice system?

Think about who is not eligible for Medicaid before health reform. A low-income male who is not a veteran or a custodial parent, or who doesn’t qualify for Ryan-White HIV/AIDS benefits. They may have a serious substance abuse problem, but that wouldn’t qualify them for federal disability benefits. They, with the expansion, can get access to Medicaid simply because they are poor.

The criminal justice population is quite varied, but there are a couple of key areas in which Medicaid expansion would be especially beneficial for them. With the expansion, Medicaid can now cover basic outpatient substance abuse treatment. This is true for both Medicaid and private insurance after health reform. And ACA provides these services in a way that is much more integrated with people’s regular medical care.

One basic challenge with drug and alcohol treatment is that these services are in a separate system that people don’t want to use, and don’t use. With the Medicaid expansion, you can go to a neighborhood clinic and they can help you get Methadone or Suboxone. They can also get you the psychiatric care you need within the same umbrella of your regular care. So it is much more likely that people will use it.

There’s very good evidence that alcohol and illicit drug treatment reduces criminal offending. [Editor note: Both this study and this study, obtained via follow-up email, show treament reduces violent and property crime enough to far pass a cost-benefit test.] Both It partly reduces criminal offending by reducing the need to commit property crimes to get the substances. It also reduces offending by allowing people to be more functional, and thus more likely to stay employed. Especially in the case of alcohol, people getting their substance abuse under control makes it less likely that they’ll be intoxicated, and thus less likely to commit crimes or be victims of crime.

What about those with mental illness?

When it comes to those with serious mental illness, we end up using local jails to try and manage them. It’s important that they can get access to help and mental health treatment outside of the criminal justice itself. It’s ironic that when someone with psychiatric disorders is inside the jail, they do have access to some of these services. But those services are often unavailable or totally disconnected when they leave the jail.

We don’t really know whether, or by how much, these services can be expected to reduce offending among this group. This remains a hypothesis that depends on how well we actually implement programs. Much will depend on how effectively we can implement Medicaid expansion.

How does this element of Medicaid deal with the traditional criticisms of the program?

Medicaid has many shortcomings. It doesn’t pay a market rate for important services. But for all of its faults, Medicaid recipients are grateful to have it. The satisfaction they have is quite high compared to traditional health insurance. Medicaid gives people access to the basic health care that they need to stay healthy and improve their lives. It is also genuinely designed for people who have no money, which is really important for these indigent populations. Medicaid is inferior to private insurance in terms of reimbursement to providers, but it’s better for really poor people than any private insurance I’ve seen, because it’s been road tested for a long time in meeting the needs of indigent people.

And as I mentioned, ACA is especially important, because the ACA includes very specific components in the area of mental health and substance use.

One thing I’ve noticed is that for all the talk about ending mandatory minimums, most of the real energy is about giving judges flexibility to ignore mandatory minimums. But that put a lot of pressure on keeping recidivism down, because judges, especially elected ones, won’t ignore long records.

Deincarceration requires the puzzle pieces to fit together to be sustainable and politically tenable. That requires that we deal with the real-life problems people face when they are released. It requires monitoring and people have access to services, both to improve their quality of life and to reduce the probabilities that they will reoffend.

If we just release people without support services, my fear is that it will not go well. Then it will ultimately generate political backlash. I’m very heartened that we are reducing the mandatory minimums, in particular for older offenders who tend to be less violent. It’s essential that we address the excessive sentencing. But we also have to do what we need to do to make this effective.

Even if judges can reduce sentencing, they are ultimately dependent on the available resources to help and monitor the people that come before them. And if judges don’t see those services, then they aren’t going to use their discretion to release many of these people as early as they might.

And if property crimes are being committed by people under criminal justice supervision, and they have a history of violent offending, then they are much more likely to be sent back with a pretty serious sanctions.

Tell me more about the second issue, how the ACA rationalizes the funding stream for these services.

We’ve had a messy system in the past, and we’ll ultimately rationalize it under Medicaid. Safety net providers for substance abuse and mental illness have always been paid for by a patchwork of public funding through obscure agencies and local governments. It has always been a huge challenge where access has been inadequate, with long waiting lines, and the services provided were often quite forbidding. Given this separate funding, it’s very difficult to integrate this in with people’s overall health care. When you have these silos of places to go, with one for mental health, another silo for substance abuse, and another for safety net health care, that person isn’t going to get the integrated care they really need. The ACA is trying to bring those things together.

Many of these issues will still be in play going forward, but it will be in the context of a coherent system that at-least addresses these issues within the context of broader health care.

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New Score: Liberal Nihilism over Wages

Mar 6, 2015Mike Konczal

I have a new Score column up: Why Are Liberals Resigned to Low Wages? It deals with the three key political institutions that are responsible for wages remaining low, both over the past generation and in the Great Recession. It also tries to understand "liberal nihilism", or the weird glee that results when wages aren't seen as also having an institutional component to them, and thus are no longer a political challenge.

I hope you check it out!

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I have a new Score column up: Why Are Liberals Resigned to Low Wages? It deals with the three key political institutions that are responsible for wages remaining low, both over the past generation and in the Great Recession. It also tries to understand "liberal nihilism", or the weird glee that results when wages aren't seen as also having an institutional component to them, and thus are no longer a political challenge.

I hope you check it out!

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What are the Robots Doing? Rebalancing our Inequality Intellectual Portfolio

Mar 4, 2015Mike Konczal

A blog post responding to a blog post responding to a blog post. Who says the blogosphere is dead?

Recently I wrote about Larry Summers demolishing an argument about robots and our weak recovery on a panel. Jim Tankersley called up Summers to further discuss the topic, and put his interview online as a response meant to correct and expand on my post. But I don’t think we disagree here, and if anything Summers’ interview shows how much the consensus has changed.

Before we continue, I should clarify what we are talking about. When people talk about “the robots,” they are really telling one of three stories:

1. Technology has played an important role in the economic malaise of the past 35 years, broadly defined as a mix of stagnating median wages, increased inequality, and weakening labor-force participation.

2. The Great Recession has led to such a weak and lackluster recovery in large part because of technology. In one version of this story, technology is simply taking all the jobs that would normally be found in a recovery. As the AP put it, “Five years after the start of the Great Recession, the toll is terrifyingly clear: Millions of middle-class jobs have been lost... They're being obliterated by technology.” (President Obama himself often mentioned this story throughout the dark period when unemployment was much higher.)

Another, more popular, version is that workers simply don’t have the skills required for a high-technology labor force. A representative quote from the Atlanta Fed President Dennis Lockhart in 2010: “the skills people have don't match the jobs available. Coming out of this recession there may be a more or less permanent change in the composition of jobs.”

3. We are moving to a post-work economy, one where robots substitute for human labor in massive numbers and fundamentally change society. Here’s an example. We may or may not be seeing the first hints of such a change now, depending on the story.

The story I said Summers (as well as David Autor) demolished is the second. There’s no evidence that we are having a technology renaissance right now, or that technology has contributed in a major way to the weak recovery, or that a skills gap or other educational factor is holding back employment, or that highly skilled workers are having a great time in the labor market. The arguments against this story from the original post are pretty damning, and Summers either reiterates them or doesn’t walk them back in the Washington Post column. (Let’s leave the third story to science fiction speculation for now, noting that the second story getting demolished means it isn't happening now, and that it's hard to imagine robot innovation when labor is so cheap and abundant.)

However, Summers does argue for the first story as well, the one in which technology has played a role in the malaise of the past 30 years. As he tells the Post, “In the 1960s, about 1 in 20 men between the age of 25 and 54 was not working. Today, the number is more like 1 in 6 or 1 in 7. So we have seen some troubling long-term trends, and they appear to be continuing trends.” Summers also notes, “to say that technology is important is not to say that technology is the only important factor, or even that it is the dominant factor.” He mentioned this as the conference as well; Brad DeLong and Marshall Steinbaum noted it in their posts.

Intellectual Portfolio Rebalancing

When we think of the economic malaise of the past 30 years, we should probably think of it as a combination of technology, globalization, sociology, and public policy. Tankersley wants to emphasize technology as a piece of this story, and I agree it should be there.

But here’s what I find interesting. Whenever we have a portfolio of ideas, some ideas get more weight than others. And what strikes me about this conversation is how much technology and skills have been deemphasized relative to other stories since the Great Recession, especially those of public policy.

This is a pretty quick and important change. Almost ten years ago, Greg Mankiw could write, "Policy choices [...] have not been the main causes of increasing inequality. At least that is the consensus, as I understand it, of the professional labor economists who study the issue.” Brad Delong also said in 2006 that he “can't see the mechanism by which changes in government policies bring about such huge swings in pre-tax income distribution.” Skill-biased technical change (SBTC) and technology were assumed to cover the entire inequality story.

That consensus is weaker now than it was then. Certainly the argument for SBTC, while always shaky, has taken a hit. You can see it with Summers himself in the Washington Post, where he notes that “changing patterns of education is unlikely to have much to do with a rising share of the top 1 percent, which is probably the most important inequality phenomenon.”

Meanwhile, more and more inequality research is focused on institutional factors, ranging from marginal tax rates to the minimum wage to the inefficiency and growth of the financial sector to deunionization.  And as the Mankiw quote hints, 10 years ago you’d be less likely to hear, as Summers says at the Washington Post, that a “combination of softer labor markets and the growing importance of economic rents” are an essential part of inequality spoken with the same confidence as you see here. I read that as a major change of the consensus.

This is a major rebalancing of our intellectual portfolio of inequality stories, a change that I think is opening up a much more rich and accurate description of what has happened. I hope the research and conversation continues this way.

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A blog post responding to a blog post responding to a blog post. Who says the blogosphere is dead?

Recently I wrote about Larry Summers demolishing an argument about robots and our weak recovery on a panel. Jim Tankersley called up Summers to further discuss the topic, and put his interview online as a response meant to correct and expand on my post. But I don’t think we disagree here, and if anything Summers’ interview shows how much the consensus has changed.

Before we continue, I should clarify what we are talking about. When people talk about “the robots,” they are really telling one of three stories:

1. Technology has played an important role in the economic malaise of the past 35 years, broadly defined as a mix of stagnating median wages, increased inequality, and weakening labor-force participation.

2. The Great Recession has led to such a weak and lackluster recovery in large part because of technology. In one version of this story, technology is simply taking all the jobs that would normally be found in a recovery. As the AP put it, “Five years after the start of the Great Recession, the toll is terrifyingly clear: Millions of middle-class jobs have been lost... They're being obliterated by technology.” (President Obama himself often mentioned this story throughout the dark period when unemployment was much higher.)

Another, more popular, version is that workers simply don’t have the skills required for a high-technology labor force. A representative quote from the Atlanta Fed President Dennis Lockhart in 2010: “the skills people have don't match the jobs available. Coming out of this recession there may be a more or less permanent change in the composition of jobs.”

3. We are moving to a post-work economy, one where robots substitute for human labor in massive numbers and fundamentally change society. Here’s an example. We may or may not be seeing the first hints of such a change now, depending on the story.

The story I said Summers (as well as David Autor) demolished is the second. There’s no evidence that we are having a technology renaissance right now, or that technology has contributed in a major way to the weak recovery, or that a skills gap or other educational factor is holding back employment, or that highly skilled workers are having a great time in the labor market. The arguments against this story from the original post are pretty damning, and Summers either reiterates them or doesn’t walk them back in the Washington Post column. (Let’s leave the third story to science fiction speculation for now, noting that the second story getting demolished means it isn't happening now, and that it's hard to imagine robot innovation when labor is so cheap and abundant.)

However, Summers does argue for the first story as well, the one in which technology has played a role in the malaise of the past 30 years. As he tells the Post, “In the 1960s, about 1 in 20 men between the age of 25 and 54 was not working. Today, the number is more like 1 in 6 or 1 in 7. So we have seen some troubling long-term trends, and they appear to be continuing trends.” Summers also notes, “to say that technology is important is not to say that technology is the only important factor, or even that it is the dominant factor.” He mentioned this as the conference as well; Brad DeLong and Marshall Steinbaum noted it in their posts.

Intellectual Portfolio Rebalancing

When we think of the economic malaise of the past 30 years, we should probably think of it as a combination of technology, globalization, sociology, and public policy. Tankersley wants to emphasize technology as a piece of this story, and I agree it should be there.

But here’s what I find interesting. Whenever we have a portfolio of ideas, some ideas get more weight than others. And what strikes me about this conversation is how much technology and skills have been deemphasized relative to other stories since the Great Recession, especially those of public policy.

This is a pretty quick and important change. Almost ten years ago, Greg Mankiw could write, "Policy choices [...] have not been the main causes of increasing inequality. At least that is the consensus, as I understand it, of the professional labor economists who study the issue.” Brad Delong also said in 2006 that he “can't see the mechanism by which changes in government policies bring about such huge swings in pre-tax income distribution.” Skill-biased technical change (SBTC) and technology were assumed to cover the entire inequality story.

That consensus is weaker now than it was then. Certainly the argument for SBTC, while always shaky, has taken a hit. You can see it with Summers himself in the Washington Post, where he notes that “changing patterns of education is unlikely to have much to do with a rising share of the top 1 percent, which is probably the most important inequality phenomenon.”

Meanwhile, more and more inequality research is focused on institutional factors, ranging from marginal tax rates to the minimum wage to the inefficiency and growth of the financial sector to deunionization.  And as the Mankiw quote hints, 10 years ago you’d be less likely to hear, as Summers says at the Washington Post, that a “combination of softer labor markets and the growing importance of economic rents” are an essential part of inequality spoken with the same confidence as you see here. I read that as a major change of the consensus.

This is a major rebalancing of our intellectual portfolio of inequality stories, a change that I think is opening up a much more rich and accurate description of what has happened. I hope the research and conversation continues this way.

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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.
 
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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.
 
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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.

 
Follow or contact the Rortybomb blog:
 
  

 

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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