How Does Education Help in the Great Recession?

Aug 21, 2012Mike Konczal

There's a new report from Anthony Carnevale, Tamara Jayasundera, and Ban Cheah, "Weathering the College Storm," that has attracted some attention in the economic blogs.

There's a new report from Anthony Carnevale, Tamara Jayasundera, and Ban Cheah, "Weathering the College Storm," that has attracted some attention in the economic blogs. Dylan Matthews wrote about it here and again here, with Dean Baker and Larry Mishel adding in critical commentary.

The report looks at who has gained the most jobs since the "recovery" started, a period they benchmark to January 2010. They find that people with bachelor's degrees and some college have gained all the jobs, while people with just a high-school diploma or less haven't gained any jobs over this time period. They also find that about 80 percent of the new jobs created since January 2010 have gone to men.

What should one conclude? Well, one conclusion is that we wouldn't have any unemployment if we had fewer women and more men. Since men are gaining all the jobs, it stands to reason that if we, on net, had more men and fewer women, we'd have a lot more people employed. Public policy should involve job-training programs where unemployed women get boyish haircuts and study movies like the cult 1980s hit Just One of the Guys and other high school movies loosely based on Twelfth Night. They should learn about swagger, sports metaphors, and that thing where dudes treat job requirements as suggestions when they apply for them, while women don't apply unless they have all of the requirements.

You might point out that I must have skipped a step somewhere. When we are so far away from full employment, does this analysis make sense? Instead of actually reflecting the proper allocation of labor this is just reflecting the fact that, for a variety of reasons including discrimination, men are jumping to the front of the queue to take all of the new jobs that are created. But the report seems to go in the other direction and argue that if there were a lot more college-educated workers we'd have more employment; alternatively, the lack of properly educated workers is a check on recovery.

Dean Baker and Larry Mishel focus on the fact that unemployment rates have gone up for college-educated workers and that most of the big net job increases have gone to those with post-bachelor degrees. I'm interested in the issue of line-jumping. How much does growing employment for college-educated workers in this recession have to do with being prepared for a variety of new, cutting-edge jobs that require a high level of education? And how much is education like a zero-sum hedge that puts the person in question at the front of the line for the limited jobs the economy is creating, even if those jobs require less education?

This chart from the report is interesting:

These are numbers since the recovery began in January 2010. Here people with bachelor's degrees have substantial growth in "high education" occupations. But they also have substantial growth in middle-education ones as well. Meanwhile, those with associate degress have significant growth in "low education" occupations. All the while those with high school diplomas are falling out of middle-education occupations. So two big trends are those with a high-school diploma being kicked out of middle-education (and presumably middle-class) jobs, combined with a down-tier move in education -- those with bachelor's degrees taking middle-education jobs and those with associate degrees taking low education jobs.

The 866,000 jobs lost in middle-education for those with a high school diploma or less are largely a function of the job category "office and administrative support occupations" (see Table 9 of the main report). There were 502,000 jobs lost for high-school diploma or less education in this category; if this is excluded it is a significantly different analysis. Bryce Covert and I flagged this category of work as explaining a lot of missing jobs for women and a broader change in the work environment for GOOD Magazine (data supplement here). This is a function of both longer-term trends and a speedup that has taken place in workplaces since the recession, where people are expected to do more with less. Workplaces keep the same amount of work even as they lose their support staff. So these changes aren't just the result of technological change, but reflect the way that recessions are reworking office environments to put more pressure on workers.

There's no denominator in the graphic above. Is the percentage of those with an associate degree working in the low-education occupations increasing, or has it held constant? What do these changes look like? Though not definitive, it would give us a clue as to whether or not this hedge aspect of education, the ability to jump to the front of the line for jobs, even crappy jobs, is in play in this weak recovery. I take education by occupation for all workers over 25, first quarter 2010 and first quarter 2012, from BLS/CPS, using the reports division of education levels, and compare the percentage of each education group in an occupation before and after to see how they are changing:

As we can see, there is a movement downward in education. BAs gain in their share of medium-education jobs, while AAs and some college gain in the low-education jobs.

In a buried part of the report, the authors anticipate this, noting "increased hiring of more educated workers in low- and middle-education occupations raises a valid concern about whether the workers need more education to perform the tasks or whether workers are being 'underemployed' in a slack labor market. This concern is addressed in detail in the Center on Education and the Workforce report, The Undereducated American....The analysis found a Bachelor’s degree wage premium in jobs at all education levels. The simple fact that employers are willing to pay more for educated workers suggests that they see added benefit in such workers."

I'm willing to believe this, though it still wouldn't directly address the underemployment issue. However, the analysis cited (page 28) only looks at 2007 through 2009, and doesn't look at people specifically hired in that period, much less the recovery. That premium has a lot to do with differentiation within occupations that analysis isn't capturing, like rookie cops and veteran detectives falling under the same occupation, but the second more likely to have more education and pay. But to the extent that premium exists, it isn't clear that it is going to people who now require some college to get even the most menial jobs our economy is producing.

When the economy is stalled, the limited number of new jobs will create certain winners and certain losers. But the first priority for us isn't to make sure that we help people fight for the scraps of a weak economy; it's that we grow the economy and demand full employment to provide for all.

Mike Konczal is a Fellow at the Roosevelt Institute. Follow or contact the Rortybomb blog:

  

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Paul Ryan Really Doesn't Like Dodd-Frank

Aug 13, 2012Mike Konczal

Beyond thinking Dodd-Frank generally was a bad bill, he's voted against most of its individual pieces.

The entirety of Romney's plan for financial reform in the wake of the 2008 crisis is contained in the following sentence: "Repeal Dodd-Frank and replace with streamlined, modern regulatory framework." One might argue that this is vague enough to cause some of the dreaded economic policy uncertainty, but either way it is very unclear about what exactly financial regulation should involve.

Beyond thinking Dodd-Frank generally was a bad bill, he's voted against most of its individual pieces.

The entirety of Romney's plan for financial reform in the wake of the 2008 crisis is contained in the following sentence: "Repeal Dodd-Frank and replace with streamlined, modern regulatory framework." One might argue that this is vague enough to cause some of the dreaded economic policy uncertainty, but either way it is very unclear about what exactly financial regulation should involve.

This might change with Paul Ryan. Not only is Ryan well known for his wonky style, but he voted for TARP, the Wall Street bailout. He also went to the floor of the House and asked his fellow Republicans to vote for TARP. One would imagine he would think that the status quo is flawed if he had to vote for TARP to save the economy. Alas, Paul Ryan voted against the Dodd-Frank Wall Street Reform and Consumer Protection Act, the major financial regulatory response to the crisis.

(It might be worth noting that Public Citizen did an analysis that found that House members who voted for TARP and against Dodd-Frank, a club Paul Ryan belongs to and consists mostly of Republicans, received three times as much campaign money from the financial industry as those that voted the opposite in both cases. As Zach Carter pointed out in an analysis back in 2010, of the 60 Republican House members who voted for TARP and against Dodd-Frank, Paul Ryan received the ninth highest donation from the financial industry in 2010, with a haul of at least $531,500 for the year.)

So Paul Ryan is against Dodd-Frank as an overall bill. He also seeks to repeal it in his budget. But what does Ryan think of the individual parts of Dodd-Frank? One could be opposed to Dodd-Frank as a whole while still thinking individual parts are good ideas. In order to isolate that question, we can look at a series of Dodd-Frank amendments Ryan voted on, as well as subsequent actions and statements.

Consumer Protection: While the bill that became Dodd-Frank was going through the House, Ryan voted to scrap the Consumer Financial Protection Agency and replace it with a plan proposed by the Chamber of Commerce. Right before Dodd-Frank came up for a vote in the House, there was an amendment proposed by Rep. Walt Minnick (D-ID) to replace the CFPA with a council of existing regulators. According to reports from the time, this was modeled off suggestions from the Chamber of Commerce. The amendment failed, though Paul Ryan voted for it. Beyond concerns of accountability or funding of the CFPB, Paul Ryan would likely rather see the entire thing go.

Derivatives Regulation: Part of Dodd-Frank requires that derivative contracts trade through a clearinghouse. We don't have a clear vote from Ryan that shows what he thought of derivatives at the time, but he did vote against the Lynch amendment. Stephen Lynch (D-Mass) proposed a simple amendment stating that a financial firm can't own more than 20 percent of a derivatives clearinghouse to prevent conflicts of interest. Later, Ryan also voted to delay the implementation of derivative regulations for one year in June 2011, signaling he doesn't approve of the aggressive derivatives reforms people like Gensler are championing at the CFTC. This contrasts him sharply with someone like John Hunstman, who had very strong derivatives reform as part of his broad, serious financial reform ideas during the Republican primary.

Resolution Authority: Ryan voted for the repeal of resolution authority -- indeed, he sponsored the legsliation to repeal it. Resolution authority, or orderly liquidation authority, is a new set of legal abilities that allow the FDIC to take over and wind down a failing financial firm. When Barney Frank says that his bill actually has a death panel in it, he's referring to this part.

We can get a bit specific with why Ryan likely did this. In his Path to Prosperity, Ryan makes two points in argument against resolution authority. The first is that it "intensifies the problem of too-big-to-fail by giving large, interconnected financial institutions advantages that small firms will not enjoy." As Barney Frank and others point out, there's not evidence that banks are actively seeking to be designated as systemically risky. The general read is that business are going out of their way to avoid that designation, even restructuring away from risky activities. Which is the point.

The second critique is that "Federal Deposit Insurance Corporation (FDIC) now has the authority to access taxpayer dollars in order to bail out the creditors" and will presumably use it, preserving Too Big to Fail. Depending on who is talking, this usually refers to either the FDIC’s ability to provide “an immediate source of liquidity for an orderly liquidation, which allows continuation of essential functions and maintains asset values” or its ability to repay creditors.

Dodd-Frank requires that the FDIC's responsibilities include ensuring "that unsecured creditors bear losses in accordance with the priority of claim,” that shareholders receive nothing "until after all other claims and the Fund are fully paid" and that any losses remaining afterward that could impact Treasury are repaid through assesments on systemically risky financial institutions. In order to avoid situations like AIG, the FDIC is explicitly prohibited from taking "an equity interest in or become a shareholder of any covered financial company or any covered subsidiary" during resolution. Management has to be fired. Taxpayer money is recouped and bailouts avoided.

Title II is built to avoid looking like a bailout, self-consciously so. If the critique is about the powers to differentiate payments, those powers, as Douglas G. Baird and Edward R. Morrison noted about the powers, look like critical vendor orders or other parts of bankruptcy powers. By all accounts the FDIC rules are being written in this manner.

Bankruptcy: Speaking at a town hall, Ryan has seemingly proposed modifying the bankruptcy code, perhaps in line with plans from the Hoover Institute, in order to handle financial firms. (He also seemed to endorse the Volcker Rule in that town hall, but I haven't seen that from him anywhere else.) This would mean the FDIC would lose the special powers it has been given, which are believed to be important for resolution, including advance planning and living wills, debtor-in-possession financing and liquidity, making payments to creditors based on expected recoveries, keeping operations running, having graduated regulations based on size and riskiness, the ability to transfer qualified financial contracts without termination, and the ability to turn up or down regulations going into a potential resolution based on prompt corrective action. If that is the plan, and those powers are unnecessary to tackle TBTF, Ryan should spell it out more clearly.

At the same time, Ryan has proposed policies that were already in or based on Dodd-Frank. He has told CNBC and Ezra Klein that he was interested in using Luigi Zingales' approach to taking down a financial firm as outlined in a National Affairs article. This approach uses credit default swap measures, a financial derivative designed to gauge the risk of collapse, to judge when to take a financial firm into an orderly liquidation.

As I noted at the time, this is a form of resolution authority. It is specifically a form of prompt corrective action, which requires regulators to go ahead and collapse a firm based on market signals instead of regulator judgement. For it to work, you'd need legal powers to carry out a resolution, which Ryan has voted against, as well as sufficient regulation of dervatives to make sure the price signal is clear, which Ryan also voted against. And it seems to stand in contrast to the bankruptcy approach he has talked about elsewhere.

At this point there are some allusions to specifics in what Ryan talks about when it comes to taking down a large financial firm, though it often contradicts itself. But he hasn't offered anything specific on derivatives, consumer financial protection, insurance, securitization, ratings agencies, and the shadow-banking industry more broadly -- all of which would be up for grabs if Dodd-Frank was repealed under the Path to Prosperity.

Mike Konczal is a Fellow at the Roosevelt Institute. Follow or contact the Rortybomb blog:

  

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Romney's Failed Unemployment Strategy and the Bizarro Stimulus of Paul Ryan

Aug 13, 2012Mike Konczal

Mitt Romney aired an ad last summer titled "Bump in the Road." It attacked President Obama's record on mass unemployment by linking it to a comment he made about there being bumps in the road to economic recovery. A group of people stood on a road in a desert, holding signs explaining their years of unemployment, their student debts, and their struggling families (something not dissimilar to the We Are the 99% Tumblr that started later that year).

Mitt Romney aired an ad last summer titled "Bump in the Road." It attacked President Obama's record on mass unemployment by linking it to a comment he made about there being bumps in the road to economic recovery. A group of people stood on a road in a desert, holding signs explaining their years of unemployment, their student debts, and their struggling families (something not dissimilar to the We Are the 99% Tumblr that started later that year). They pointed to the real suffering that goes on beyond numerical aggregates like the unemployment rate.

I remember this ad, because I remember several liberals being worried about this type of Romney campaign. Why? Because the liberals in question basically agreed with it. President Obama was trying to make a Grand Bargain with unemployment above 9 percent. The weak recovery was accepted as a given by the administration instead of the problem that had to be tackled. There was a lot of debate over what could be done and how, but at that point unemployment was off the table. President Obama would pivot back to jobs that fall, but it would remain a quiet priority, especially after so much time had been wasted. And it was a worry that if Mitt Romney ran a campaign that was all about unemployment all the time, President Obama would lose. I thought this was correct at the time.

That has changed with Paul Ryan now announced as Romney's vice presidential running mate. This appears to signal that the Romney campaign will move away from the previous focus on unemployment towards arguing for the conservative transformation of the federal government and the social safety net. This move is being interpreted as a sign of weakness from the campaign, one where they are worried that their previous strategy was failing. But why was the unemployment message failing? The economy isn't much stronger, so it hasn't lost its potency. Mitt Romney's job creation record was being attacked, but that only gets you so far. I think a major reason why is because of an odd contradiction one can see from the recent "Romney Program for Economic Recovery, Growth, and Jobs" released by Romney's economics team. Romney has no actual interest in trying to bring unemployment down faster, which blunts the ability to really say anything about unemployment, but his economics team also wasn't signing off on the far-right's bizarro stimulus plans.

There's already been a lot written on how the paper distorts the research it cites. The paper claims to "speed up the recovery in the short run." How? "By changing course from the policies of the current administration and ending economic uncertainty." What are the bold policies to help those unemployed people President Obama ignored? Tax code reform, block-granting Medicaid, and repealing Dodd-Frank and Obamacare while making "cost-benefit analysis important features of regulation."

Which is to say that Romney wanted to focus on unemployment, but had no real serious plan on how to get unemployed people jobs. I can, quickly, come up with a set of conservative stimulus ideas on how to get the economy going again, but the wide range of these programs are missing from Romney's economics report. They aren't going to hire market monetarists to run the Federal Reserve. Mitt Romney just publicly said the Federal Reserve shouldn't go ahead with another round of quantitive easing [1]. There isn't the argument that the government should just not collect taxes for a year or two with borrowing costs so low, which will also make it that much harder to raise taxes to Clinton-era rates afterwards. There's nothing in the paper about housing, even though one of Romney's advisors is well known for his mass refinancing program to help boost demand. And there's no conditional lending to states to prevent layoffs on the condition that they dismantle public sector unions, or privatize certain government services, or whatever.

Ideas have consequences, and the fact that Romney has no actual ideas for how to get the unemployed jobs means that making unemployment a big issue is only going to have so much traction with the electorate. "The long-term unemployed should vote for me so I can go after financial regulations," or "Vote for me, because I'll just ignore mass unemployment outright rather than not do enough and then pivot away" aren't political strategies that capitalize on the big vunerability Obama has on economic weakness.

Given the number of policy entrepreneurs on the right, it's almost shocking how little effort I've seen to get creative with getting unemployment down. The policy for unemployment is just a set of conservative reforms conservatives would want to see anyway regardless of the economy. And the general message seems to be that unemployment is unfortunate, but the downside risks of trying to combat it are far too high. Better to just get through this period and focus on the long-term economy. The unemployed are, in fact, just bumps in the road.

But the Romney Program document is interesting because it avoids embracing something I'll call "bizarro stimulus." These are arguments that doing things traditionally thought of as the opposite of economic stimulus will be the real stimulus and help bring unemployment down. Romney's economics team doesn't seem to want to go in that direction, yet that is the direction of the House Republicans and of Paul Ryan.

Many economists believe that the Federal Reserve should lower rates, but that a "zero lower bound" holds conventional monetary policy in check. The debate is whether and how unconventional monetary policy can help. In bizarro stimulus, the problem is that the rate is at zero. If you were to raise that rate, you would get capital going again. Here's Paul Ryan from Summer 2010, arguing that "I think literally that if we raised the federal funds rate by a point, it would help push money into the economy, as right now, the safest play is to stay with the federal money and federal paper." This is usually thought of as incorrect by most economists, but that's why it is bizarro stimulus. Ryan has also promoted bills to drop the dual mandate of the Federal Reserve, even though the problem is the Federal Reserve not taking its dual mandate seriously enough.

When the economy is weak and we are far away from full employment, we should run a larger deficit in order to boost demand. Austerity and the slashing of government spending will actually make the economy worse in these times. Unless you are in bizarro economics, under which austerity can expand the economy. David Brook wrote back in 2010, in an article called "Prune and Grow," that “Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions.” Though this research has many serious problems, it became part of the core of the new conservatives in the House, a group Paul Ryan is influential with. Republicans' economic policy in 2011 was all about expansionary austerity, with their JEC report making several references to the possibility of austerity being offset by confidence and certainty. Romney actually pointed out the absurdity of expansionary austerity back in May of this year, noting "I don’t want to have us go into a recession in order to balance the budget." Nobody could tell if Romney was going off message with that statement.

It's interesting that Romney's advisors don't touch either of these ideas, yet they are an important part of how the House Republicans approach the economy. Will the Ryan pick also signal that Romney will move much further to the right on economic issues? We've rarely ever had to ask if a presidential candidate agrees with the views of his vice-presidential running mate, rather than the other way around, but that is now a relevant question.

[1] Can you imagine the debate and coverage that would happen if President Obama encouraged Bernanke to move with QE3? Yet Mitt Romney calling out against QE3 doesn't get noticed, and certainly isn't thought of as "politicizing the Federal Reserve," even though it obviously is.

Mike Konczal is a Fellow at the Roosevelt Institute. Follow or contact the Rortybomb blog:

  

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What is the Economic Policy Uncertainty Index Really Telling Us?

Aug 8, 2012Mike Konczal

Conservatives have crafted a measurement that uses their own rhetoric as evidence to support their economic talking points.

Do you want to see a magic trick? It doesn't involves cards, fire, or anyone levitating. Instead I'm going to show you a set of Republican talking points magically turn into an economic index -- an index that Republicans then use to argue for their policies.

Conservatives have crafted a measurement that uses their own rhetoric as evidence to support their economic talking points.

Do you want to see a magic trick? It doesn't involves cards, fire, or anyone levitating. Instead I'm going to show you a set of Republican talking points magically turn into an economic index -- an index that Republicans then use to argue for their policies.

Mitt Romney's economics team of Hubbard, Mankiw, Taylor, and Hassett have rapidly turned around an economic policy sheet titled "The Romney Program for Economic Recovery, Growth, and Jobs." Matt Yglesias has a post on the issue of sluggish growth and Dylan Matthews has one on their review of the stimulus literature. Brad DeLong takes the deep dive through the entire piece here.

I'm interested in something I haven't seen people critically discuss enough, and that is the "policy uncertainty index." The Romney plan argues that "uncertainty over policy - particularly over tax and regulatory policy - limited both the recovery and job creation. One recent study by Scott Baker and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago found that this uncertainty reduced GDP by 1.4 percent in 2011 alone, and that restoring pre-crisis levels of uncertainty would add 2.3 million jobs in 19 months." This appears to be a new talking point for the candidate's team, as the same language was in a Wall Street Journal editorial by Hubbard over the weekend.

Let's take a critical look at this paper, "Measuring Economic Policy Uncertainty," which also has its own website, as it is likely to come up again in the election season. There are two sets of issues, one related to what the index actually shows and another related to the construction of the index itself.

Interpreting the Index

First off, does the paper show what Romney's team claims? Matt O'Brien notes that the big run-up in uncertainty in 2011 is a function of the battle over the debt ceiling. This is very obvious from the graph of their index:

I personally think we can blame that fiasco on House Republicans. But even if you think the Democrats share some of the blame, it has nothing to do with Dodd-Frank or Obamacare. But Romney's team is using this uncertainty issue to call for repealing both.

That said, the rate is elevated starting around 2009. Why is that? The uncertainty index consists of three parts. The first a news search for articles on policy uncertainty, which we'll return to in a minute. The second part has to do with disagreements among economic forecasters. And the last part is "the number of federal tax code provisions set to expire in future years." Tax code provisions set to expire are weighted by the formula 0.5^((T+1)/12), where T is the number of months until the tax code expires. That means these provisions weigh more in the analysis as they get closer to expiring -- those with more time left have weights approaching 0, and those close to expiration approach 1.

And of course, as the paper notes, "An important recent example involves the Bush-era income tax cuts originally set to expire at the end of 2010." The way the weighting works is that it jumps in the two years before expiration, which means the tax cuts scheduled to expire at the end of 2010 really start to matter for the index starting in late 2008, when President Obama is elected.

Watch that again. George W. Bush's economic advisors, like Glenn Hubbard, pass a series of tax cuts in the early 2000s that are set to expire 10 years out. When Obama gets into office the deadline starts to approach, creating "uncertainty" in this index. Then people like Hubbard blame President Obama for all that uncertainty caused by the design of the Bush tax cuts. Brilliant.

A Magic Trick

But now for that magic trick. How do they construct the search of newspaper articles for their index, which generates a lot of the movement?

Their news search index is constructed with four steps. They first isolate their search to a set of articles from 10 major newspapers (USA Today, the Miami Herald, the Chicago Tribune, the Washington Post, the Los Angeles Times, the Boston Globe, the San Francisco Chronicle, the Dallas Morning News, the New York Times, and the Wall Street Journal). They then search articles for the term "uncertainty" or "uncertain." They then filter again for the word "economic" or "economy." With economic uncertainty flagged, they then filter again for one of the following words to identify government policy: "policy," "'tax," "spending," "regulation," "federal reserve," "budget," or "deficit."

See the problem? We don't know what specific stories are in their index; however, we can use their search terms listed above to find which articles would have likely qualified. Let's take a story from their first listed paper, USA Today"Obama taking aim at GOP pledge on campaign trail," from August 28, 2010 (for the rest of this post, I'm going to underline the words in quotes that would trigger inclusion in their policy uncertainty index):

Brendan Buck, a spokesman for the House GOP lawmakers who crafted the pledge, said "it's laughable that the president would try to lecture anyone on spending." [....] Buck said the pledge was developed to address voter worries about high unemployment and record levels of government spending and debt.

"While the president has exploded federal spending and ignored Americans who are asking, 'Where are the jobs?', the pledge offers a plan to end the economic uncertainty and create jobs, as well as a concrete plan to rein in Washington's runaway spending spree," Buck said.
Spokespeople for the conservative movement tell reporters that President Obama's policies are causing economic uncertainty. Reporters write it down and publish it. Economic researchers search newspapers for stories about economic uncertainty and policy, and create a policy uncertainty index out of those talking points. The conservative movement then turns around and points to the policy uncertainty index as scientifically justifying their initial talking points about Obama and uncertainty as well as the need to implement their policies. Taa-daa! Magic.
 
Two Other Issues
 

It's amazing how much of the GOP rhetoric you find when trying to replicate this index. With that in mind, there are two additional issues with the index, one empirical and the other theoretical. Let's start with this story, likely caught in their index, USA Today's "Minority leader accuses Obama, aides of 'job-killing,'" from August 28, 2010: "House Minority Leader John Boehner of Ohio used a speech in Cleveland to blame Obama's spendingtax and regulatory policies for creating uncertainty and stalling economic growth."

Let's pretend, after this story came out, that reporters follow up by asking a lot of experts what they think, and those experts say "There's little evidence to support Boehner's idea that uncertainty over regulation and policy are contributing to economic weakness." What happens? Do they cancel? No, the uncertainty index flags it as more economic uncertainty.

If Boehner, upon reading that story, went out the next day and gave a quote to a reporter that said "I no longer think that uncertainty caused by regulation is contributing to our economic problems," that would be flagged as more uncertainty!

Which is to say that the empirical problems with this measure of policy uncertainty always bias the results upward. Data is never perfect, so it is important to understand which way it is likely to bias. The noise machine of talking points biases this index upwards, but any stories pushing back against this uncertainty meme would also push the index upwards.

There's also the theoretical issue. Their story is one of a weak economy created by government policy uncertainty, of "taxes, government spending and other policy matters." Last fall, the authors wrote an editorial for Bloomberg arguing that their model showed that "harmful rhetorical attacks on business and millionaires," the NLRB's actions against Boeing, and Obamacare were all major factors in the weak recovery. These all point to the supply side of the economy.

But what about uncertainty from lack of demand? Consider a story that begins with "Keynesian economists argue that the economy today is weak because businesses are uncertain about future customers and workers are uncertain about their future jobs, and the textbook response to this situation is expansionary monetary and fiscal policy." This would be flagged in their index as a problem of government policy, though it is a story of weak aggregate demand.

This isn't a hypothetical. Let's look at another story likely captured by their index, USA Today, "Retail sales drop for first time in 5 months," August 13, 2008:

Retail sales fell in July, the weakest performance in five months, as shoppers shunned autos and other big ticket items. [....] Analysts said the poor showing in July, the last month for bulk mailings of stimulus checks, raised concerns about consumer spending going forward.

"Cautious and uncertain consumers are watching their wallets and with the back-to-school shopping season under way, that does not bode well for retailers," said Joel Naroff, chief economist for Naroff Economic Advisors. [....] The disappointing performance of retail sales meant that the consumer sector, which accounts for two-thirds of total economic activity, got off to a weak start at the beginning of the third quarter.

As the economy is going into freefall, as the worst recession since the Great Depression is starting, as the Great Moderation is coming to an end and the violence of the business cycle and a prolonged downturn shows its ugly head again, consumers are reducing consumption because of economic uncertainty. Yet this index reads this as just another example of out-of-control government policy and records it as such. The index will see stories about demand uncertainty as stories about supply, which means it will have trouble telling any accurate story about the Great Recession and our current troubles.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Why Romney's Tax Plan is Mathematically Impossible

Aug 6, 2012Mike Konczal

A quick analysis based on class shows that the math simply doesn't add up, particularly for the poor and middle class.

A quick analysis based on class shows that the math simply doesn't add up, particularly for the poor and middle class.

The big news in campaign trail policy wonkery last week was the Tax Policy Center's white paper by Samuel Brown, William G. Gale, and Adam Looney arguing that it is mathematically impossible for the Romney tax plan to meet its described goals. Ezra Klein has write-ups here and here, and James Pethokoukis has analysis here. Since Romney hasn't released his plan, Brown, Gale, and Looney cleverly put together the best case scenario and crunch the numbers -- and conclude they don't work.

How is that? Romney's plan has three goals. It starts by lowering tax rates by 20 percent. It then seeks to keep raising the same amount of tax revenues as it did before by removing tax expenditures, or the variety of exemptions, deductions, or credits in the tax code that function as government spending. As the wonks would say, it wants to "lower the rates and broaden the base." However, and this will be crucial, it excludes expenditures related to investment income and savings from being available for these cuts. Finally, it wants to maintain the current level of progressivity by making sure that the top one percent pays no less in taxes and everyone else pays no more. The Tax Policy Center analysis shows that it is impossible to do all three: enacting the Romney plan requires cutting taxes on the top one percent and raising them on everyone else.

In order to better understand why this is impossible we need a quick, back-of-the-envelope class and distrbutional analysis of how tax expenditures work in the United States. Tax expenditures are thought to be regressive, benefitting those with more resources. The general argument for why is because tax expenditures are closely linked with employment compensation or spending, so those who have jobs and get paid more or spend more benefit more. Being able to pay less in taxes disproporationately benefits those better off and those with the resources and ability to take advantage of often complicated tax planning. A privatized welfare state administered through these coupon-like mechanisms, compared to public ones, involve less compulsory risk-pooling and more individualized risk-bearing, which tends to benefit those who are better off.

But we can get more granular than that, and we need to in order to understand why Romney's plan fails. Let's take a quick look, using this great New York Times chart based on Tax Policy Center numbers, at who gains from different types of tax expenditures in the United States.

This chart looks at five types of tax expenditures and then at the distributional consequences for each class. Let's grab this stick by the other end and look at what sets of tax expenditures benefit three classes of people.

The first are tax expenditures that go to the working poor. These are focused on refundable credits, where almost 60 percent of them go to the bottom 40 percent of Americans. Low-income workers are, by definition, struggling to find decent wages, and these tax expenditures are meant to help boost wages at the bottom end. The big driver here is the Earned Income Tax Credit, which is a credit for low-income workers. The Tax Policy Center has this "on the table" for being able to be cut under Romney, and it is telling that the GOP hasn't said whether they want to cut it and seem to be dropping hints that they might want to go after these "lucky duckies."

The second are those that go to the middle class and upper-middle class. I don't mean middle class as the median person, but more along the lines of people whose work requires having at least some college education and who often are defined by longer-term attachment to an employer or middle management positions. These are focused on itemized deductions and tax exclusions. As seen in the chart, over 50 percent of these go to those between the 80th and 99th percentile of income. The big drivers here are two goods that are closely associated with middle-class life: health care provided by employers and a home mortgage. Both mortgage interest and employer health care spending are subsidized through tax exemptions.

And the third set are those that go to the top one percent. These are focused on special treatment for capital and dividend income. Dividends and capital income are taxed at a lower rate than wages, and as those incomes are predominately earned by the top one percent, these benefits tend mostly to benefit that group. The top 0.1 percent earn more than half of this expenditure, with the top one percent taking home a total of 75 percent of the benefit. Because of this differential, people working in certain elite financial positions often claim that their wages come from money rather than labor, and thus qualify for this exemption.

Tax policy doesn't create the conditions for each of these groups, but it helps sustain them. Making low-wage work more bearable, keeping the middle class in long-term employment relationships and making sure they are property owning members of their communities, and increasing the financialization of the economy and the explosive wealth of the top one percent all are boosted by the system the government uses to identify and collect taxes.

So with this framework in mind, what's the problem with Romney's plan? What it wants to do is lower taxes on each group and make up that difference by reducing the tax expenditures each group receives. But remember that he doesn't want to touch the tax expenditures in the third set, all the ones for savings, capital gains, and dividends, which go overwhelmingly to the top one percent. So he wants to lower taxes on the one percent, and he has to make the lost revenue up by cutting a set of tax expenditures for them that largely go to either the working poor or the middle class.

Now it is true that the top one percent benefit from exclusions as well, but this is largely a function of tax preferences for retirement savings, which the Tax Policy Center excludes from Romney's plan. The rest of the major exclusions and credits don't do very much and can't make up the shortfall given runaway inequality. Qualified retirement plans have caps on them, and health care premiums do not scale with inequality at the top end. Child tax credits are a fixed amount and don't scale at all with income. There's simply very little in this space that could be done.

So, and I'm not seeing this emphasized enough, if you are going to "lower the rates and broaden the base" for the rich, you need to actually broaden the base of the tax expenditures that the rich receive. This will be true for all of these plans going forward, and especially for Romney's. Otherwise, as the Tax Policy Center found, the exercise can't actually work.

One question I have, and I'm surprised the paper doesn't touch on, is whether the Romney plan is mathematically impossible, period. Would broadening the base on the third set of savings and investment income actually make the plan work? The 99 to 99.9 percent gain an average percent change in after-tax income of 3.5 percent, and the top 0.1 percent gain 4.4 percent, while everyone loses 1.1 percent under the Romney plan.

According to another Tax Policy Center paper, "Distributional Effects of Individual Income Tax Expenditures: An Update" by Eric Toder and Daniel Baneman (p. 7), eliminating the tax preference for capital gains and dividends would reduce after-tax income by an average of 4.5 percent for the top 1 percent. That would get Romney most of the way there, and perhaps removing exclusions for savings would make the entire plan work. However, if you lower rates while broadening the base, reducing tax expenditures brings in less money. So bringing in the tax expenditures for the top one percent may still not allow the plan to work. It's likely that these exclusions for savings and investments would be expanded, not cut, under the Ryan budget and what Romney eventually ends up doing, but it is worthwhile to see if this plan could work under any set of base broadening.

Mike Konczal is a Fellow at the Roosevelt Institute. Follow or contact the Rortybomb blog:

  
 
Romney image via Shutterstock.com.

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A Year After S&P's Rating Downgrade, US Treasuries Trade 1% Lower

Aug 5, 2012Mike Konczal

On August 5th, 2011, one year ago today, S&P downgraded the United States from AAA to AA+. This was four days after Congress voted to raise the debt ceiling. S&P did this because they didn't like the politics of the debt ceiling, implicitly blaming the Republicans' aggressive threat of a default on the national debt to obtain their political goals.

On August 5th, 2011, one year ago today, S&P downgraded the United States from AAA to AA+. This was four days after Congress voted to raise the debt ceiling. S&P did this because they didn't like the politics of the debt ceiling, implicitly blaming the Republicans' aggressive threat of a default on the national debt to obtain their political goals. "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed." And they did this because they wanted to nudge Congress to make big, Grand Bargain type changes. S&P was worried that, in the aftermath of the debt ceiling agreement, "new revenues have dropped down on the menu of policy options" and "only minor policy changes on Medicare and little change in other entitlements" would potentially be achieved in the near future.

Analysts at Treasury quickly noted, after reviewing the numbers, that S&P made a $2 trillion dollar mistake, which dramatically overstated the medium-term debt levels of the United States that were their economic justification. S&P stood by their downgrade while admitting the error.

The United States losing its AAA rating was a political shock. The verdict was quick from the center and the right - this would be incredibly harmful to the United States' ability to deal with its national debt. When S&P first brought up the possibility of the downgrade in July, the centrist think tank Third Way highlighted that "S&P estimates that a downgrade would increase the interest rates on U.S. treasuries by 50-basis points," and urged "Congress and the Administration [to] come together and pass a 'grand bargain' that will put us on a sustainable path and avoid a credit downgrade."

After the downgrade Mitt Romney noted that “America’s creditworthiness just became the latest casualty in President Obama’s failed record of leadership on the economy. Standard & Poor’s rating downgrade is a deeply troubling indicator of our country’s decline under President Obama."

Those are two empirical predictions. Did the downgrade increase interest rates on U.S. Treasuries 50-basis points? Would you go further and describe our creditworthiness itself as a casualty?

Here's FRED data on Treasury 10 years:

They are down a little over 1 full percentage point, from 2.58 percent to 1.51 percent. If you want to consider the baseline the 3 percent interest rates from right before the downgrade, or the 2 percent interest rates that happened afterwards, then rates are down either 1.5 or 0.5 percentage points. That's a major decline in the borrowing cost of the United States. One can't find the increase in rates in this market. Counterfactuals are difficult - perhaps S&P is correct, and 10-year Treasuries would be closer to 1 percent had there been no downgrade.

But that seems unlikely. Here's a previous link discussing ratings agencies' internal research finding that they consistently overstate the default risk of government debt. The ratings agencies can add value in thin markets with little history, or as a means of a coordinating research and action among market participants. But the United States' debt market is one of the most liquid, traded, researched and transparent markets in the world, and it seemed doubtful the ratings agencies were going to add much information with their downgrade. A year later the downgrade appeared to have been irrelevant to United States' borrowing costs. To the extent that they were relevant they signaled and reinforced a further move away from potential stimulus for the economy, which collapsed demand and drove even more money into government bonds and the interest rate down to 2 percent almost right away. But either way, low interest rates on US debt continues their downward march. Contrary to S&P, the financial markets are calling for a larger deficit, not a smaller one.

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The "Pain Funnel" and the Harkin Report on For-Profit Schools

Aug 1, 2012Mike Konczal

Senator Tom Harkin (D-IA) has finally released his major report on for-profit schools, the result of two years of studies and investigations. It's a telling look into the numbers in the for-profit college industry and the growing future of higher learning amid a collapsing public sector. It gives us a reason to reexamine some of the deregulation that took place around this industry during the George W. Bush years. The report also also clarifies one of my new favorite metaphors, and that is the role of the "pain funnel" in our new system of higher educaiton.

Senator Tom Harkin (D-IA) has finally released his major report on for-profit schools, the result of two years of studies and investigations. It's a telling look into the numbers in the for-profit college industry and the growing future of higher learning amid a collapsing public sector. It gives us a reason to reexamine some of the deregulation that took place around this industry during the George W. Bush years. The report also also clarifies one of my new favorite metaphors, and that is the role of the "pain funnel" in our new system of higher educaiton.

There's some great metaphors for understanding how higher education has been created by the government throughout the years. There's the "democracy's college" of the 1862 Morrill Act, which sought to "promote the liberal and practical education of the industrial classes in the several pursuits and professions in life" by making sure public higher education would spread westward across the nation and be broadly accessible to all, including women, not just the rich or connected. There's the "Master Plan" of California, the culmination of a moderate Whig Republicanism and progressive liberalisms that no longer exist, which guaranteed those who wanted to study would be able to do so in a way that emphasized mobility -- one could move up or down in the three-part hierachy of education institutions. And this Master Plan was government planning, an explicit goal to create a certain amount of supply at a center price. 

Instead of government planning, we now have the for-profit industry. And one of the things it brings to the table is its aggressive recruitment techniques, one of which is called the "pain funnel." The Harkin report uncovered a for-profit recruiter's handbook from ITT that included this sales technique. As the Harkin Report notes, "After a recruiter located a prospective student’s pain point, the 'pain funnel' presented a number of questions that the recruiter can ask that are progressively more hurtful. In 'Level 1' a recruiter asks prospective students, 'tell me more about that' or 'give me an example.' In 'Level 2' the recruiter asks 'What have you tried to do about that?' The highest level asks a hurtful question to elicit pain." There's even a chart of the pain funnel from the recruitment materials:

I bring it up because this pain funnel approach to recruiting higher education students was brought up earlier last year by Harkin, and ITT immediately turned around and denied that it was actual company policy. Harkin's team went and interviewed the recruiter in question, and she said that "at quarterly district meetings I did pain funnel training for nearly every top recruitment representative, financial aid coordinator, dean, instructor, department chairs, all functional managers, all college directors and the district manager for the entire Southern California District, the largest district in the country... In October 2009, I wrote up a BEST OF THE BEST (BOB) submission to HQ that included the same 'Pain Funnel and Pain Puzzle' and how proper usage of this tool can bring a prospect to their inner child, an emotional place intended to have the prospect say yes I will enroll." Yup.

It's amazing how quickly we've gone from using government resources to enact the democratic visions of the Morrill Act, the GI Bill, and the California Master Plan, three of the greatest pieces of legislation our country has passed, to using government resources to enact a vision premised on eliciting pain. Through a funnel.

Because government is creating this vision. Government resources pay for it all. Eighty-seven percent of revenues at for-profits come from federal or state sources, including student loans and pell grants. Dylan Matthews has more on this. Though they teach around 10 percent of students, they take in about 25 percent of total Department of Education student aid program funds. These numbers are on the rise and show little sign of slowing.

Given that government is funding the basis of this system, what's the benefit of this privatization of public services and the introduction of the profit motive? Where's the innovation? The general claim for the privatization of government services is that you can get the same quality for a much cheaper price. The profit motive rewards those who go after inefficiencies, finding ways to make the same thing cheaper. When Mitt Romney praised for-profit colleges as the solution to higher education problems, he explicitly noted that it would “hold down the cost of education.”

But that is a significant failure. For for-profit schools, "Bachelor’s degree programs averaged 20 percent more than the cost of analogous programs at flagship public universities... Associate degree programs averaged four times the cost of degree programs at comparable community colleges... Certificate programs similarly averaged four and a half times the cost of such programs at comparable community colleges."

It's at the low end, i.e. community colleges that are particularly hit by state-level austerity, where this is even worse. The report finds that "for comparable diplomas, tuition at for-profit colleges ranges from 2 to 20 times the tuition at local community colleges." These for-profit schools have worse employment outcomes than community colleges as well. And there's significant dropout rates. Are there any advantages to us spending our valuable resources this way rather than expanding public community colleges? A former Poet Laureate, Kay Ryan, once said of public community colleges, "I can’t think of a more efficient, hopeful or egalitarian machine, with the possible exception of the bicycle.” Compared with the boiler room techiques and massive debts of the "pain funnel," I think the bicycle vision is the better one.

Why are we choosing to pay for higher education this way? How do we make sure that the demand for higher education is met? The government took steps to deregulate the way funding goes to for-profit schools under the George W. Bush administration, and the results are a disaster. Meeting the demand for mass higher education after the Civil War has never been a private phenomenon, either for profit or nonprofit. It has fallen to the public sector to ensure broad, accessible higher education for all.

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Can We Start the Merkley Plan Now Using TARP (And Bypass a Dysfunctional Congress)?

Jul 30, 2012Mike Konczal

Senator Jeff Merkley (D-OR) has just released a new housing plan for dealing with the mortgage crisis by refinancing underwater mortgages titled "The 4% Mortgage: Rebuilding American Homeownership." This plan would create a Rebuilding American Homeownership (RAH) Trust, modeled after the HOLC plan in the Great Depression. It would buy out underwater mortgages for three years, then wind down while managing its mortgage portfolio.

Senator Jeff Merkley (D-OR) has just released a new housing plan for dealing with the mortgage crisis by refinancing underwater mortgages titled "The 4% Mortgage: Rebuilding American Homeownership." This plan would create a Rebuilding American Homeownership (RAH) Trust, modeled after the HOLC plan in the Great Depression. It would buy out underwater mortgages for three years, then wind down while managing its mortgage portfolio. Underwater mortgages would have three payment options, including a 15-year 4 percent interest rate plan to help rebuild equity, a 30-year 5 percent plan like a standard mortgage, and a two-part plan that splits the loan into a first mortgage equal to 95 percent of the home's current value and a "soft second" for the rest. Here are links to the summarythe full plan and a YouTube video introduction.

I think it is a great plan. Felix Salmon is also a "huge fan" of the plan and has a description of several of the positive features. Many will probably react to it like Matt Yglesias, who, after discussing the positive parts of the plan, notes that the "chances of Congress actually doing this are slim to none."

But what if this plan didn't need Congress? What if the Executive Branch could do this right now, on its own?

There is interest is moving forward. Senator Merkley told David Dayen that he was hoping that "pilot programs for RAH operating in several states between now and the end of the year." Treasury Secretary Timothy Geithner said that he'd be willing to try to "find legal authority and resources to -- to test [the RAH] on a pilot basis."

The report notes three potential homes for the plan: (1) FHA, (2) Federal Home Loan Banks system, or (3) the Federal Reserve. Of those, FHA seems like a potential place to launch the plan immediately. As the report mentions, "FHA already implements the FHA Short Refi program as one of the government's foreclosure prevention programs." What if the administration took the FHA Short Refi program and replaced it with what is needed to run the RAH? To launch this right away by replacing FHA Short Refi with the Merkley plan you'd need authority and cash, and FHA Short Refi has both.

Why does FHA Short Refi have the authority to implement this plan? FHA Short Refi plan is a part of TARP designed to deal with the housing crisis by modifying underwater mortgages. When Dodd-Frank passed in July 2010, special language was put in to limit the creation of new programs or initiatives under TARP. However, this project exists as part of that already-existing housing priority, and those programs can be modified. These programs are modified all the time to try to make them work better. HAMP, for instance, was modified earlier this year.

FHA Short Refi was designed to "enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth." So it looks like it has the authority to act and change its mission structure from Short Refi to the Merkley plan, provided that Treasury's lawyers (I believe) approve of the changes.

FHA Short Refi also has moneyAccording to SIGTARP's quarterly report to Congress from July 2012, Treasury had allocated $8.1 billion for FHA Short Refinance.

How many mortgages have been modified under the FHA Short Refi program since it started? "As of June 30, 2012, there have been 1,437 refinancings under the program." Less than 1,500 mortgages in the country have gone through this program. How much money has been spent? "Treasury has pre-funded a reserve account with $50 million to pay future claims and spent $6.6 million on administrative expenses." Less than $57 million dollars. Given $8.1 billion dollars to spend on helping the housing market, less than 0.7 percent of it has been allocated, impacting less than 1,500 people.

That's a bit mind-boggling, but the failure of FHA Short Refi to either impact homeowners, help the economy or use its resources could be the genesis for the success of the RAH. FHA can provide the baseline funding for the part of the mortgage that isn't underwater, while the additional resources necessary to ensure the additional funding for the underwater part of the mortgage can come from this FHA Short Refi. That $8 billion could be used to insure the other part of the mortgages involved, which would then be sold off in a new bond. Amplified in this way, that $8 billion dollars could be used to backstop tens of billions of dollars of new mortgages.

At that point funding would end, but we'd have a sense if it was working or not. And if that $8 billion can insure $100 billion dollars worth of underwater debt, between 10 and 18 percent of underwater debt could be refinanced. If it is successful, there will both be a good empirical argument for continuing with additional funding and a political coalition of other underwater homeowners who would want to participate. If it is a failure, then it is a good opportunity to end it right there.

With that in mind, it might be useful to remind ourselves why this plan is important as an economic matter. Most of the recent research finds that underwater mortgage debt is strongly linked with weak consumption, high unemployment, and sluggish wage growth - our economy is stuck in a "balance-sheet recession." The blockage of prepayment has created a windfall for creditors in a weak economy with low interest rates; as Felix Salmon notes "the CBO is saying that if we paid off current bondholders at 100 cents on the dollar, they would lose as much as $15 billion...They’re basically taking unfair advantage of the fact that homeowners are locked into above-market mortgage rates" and can't prepay or refinance their mortgages.

Beyond creating a hangover effect on aggregate demand and basic unfairness, underwater mortgages also blunt the ability of monetary policy to do its full job. Even Federal Reserve Chairman Ben Bernanke believes this is happening. Here's Bernanke at a press conference from last November:

One area where monetary policy has been blunted, the effects have been blunted, has been the mortgage market where very tight credit standards have prevented many people from purchasing or refinancing their homes and therefore the low mortgage rates that we’ve achieved have not been as effective as we had hoped. So, monetary policy maybe is somewhat less powerful in the current context than it has been in the past but nevertheless it is affecting economic growth and job creation.

That’s Fed speak for underwater mortgage refinancing being a major boom to boosting demand, which helps the economy as a whole, even people who have no mortgage or debt but are stuck in a terrible jobs market. Given how interested the Federal Reserve is in this blocked channel for the efficiency of monetary policy, I hope they are considering how they can play a role in this.

All in all, Merkley has put together an excellent plan and I believe we have the means to do it. It provides new stimulus while amplifying already existing monetary stimulus, plus it contains a measure of fairness between creditors and everyone else. When can we start?

 

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Bubble Standards: Why the Poor Are on the Hook for the Housing Crash

Jul 23, 2012Mike Konczal

When it comes to assigning losses from an economic bubble, we apply one set of standards to elite investors and another to struggling homeowners.

When it comes to assigning losses from an economic bubble, we apply one set of standards to elite investors and another to struggling homeowners.

Many are discussing a potential collapse of a housing bubble in Canada and what could be done about it right now. Here are posts on that subject from Matt Yglesias, Dean Baker, and Worthwhile Canadian Initiative. As I read the literature being written on this crisis, the key issue to watch for is whether the rapid growth in housing prices is matched by a similar growth in household mortgage debt. To see why, it might be useful to contrast the aftermath of the United States' housing bubble with the stock market bubble.

The IMF recently studied a series of 25 OECD countries from 1980 to 2011. These countries experienced a total of 99 housing busts ("turning points (peaks) in nominal house prices"). It divided these housing busts into ones with a high run-up in household debt and ones with a low run-up, and found that "housing busts preceded by larger run-ups in household debt tend to be followed by more severe and longer-lasting declines in household consumption...real GDP typically falls more and unemployment rises more for the high-debt busts." This happens with or without a financial crisis occuring at the same time as the housing bust.

Why is this the case? Let's look at the allocation of losses that occur from the collapse of a bubble.

Within a short time after the internet dot-com bubble popped in 2000-2001, people had a sense of the size of the losses and who would take those losses. The equity holders of collapsing dot-com firms, the ones who held companies' stocks, would be wiped out, and the creditors would take huge hits, as there was very little property to be auctioned off or value to be retained. Trying to reorganize and resurrect the dot-com firms under Chapter 11 bankruptcy wouldn't have helped because they were new firms with no real revenues sources, their high-skill employees would flee, and there was little in terms of assets to use as collateral to secure future funding.

Since the firms were mostly webpages and had small-scale intellectual property, they were auctioned off very quickly under Chapter 7 bankruptcy rules. Even telecom firms that went bankrupt but had a large amount of assets and were eventually relaunched took less than two years. Global Crossing, for example, went bankrupt in January 2002 and relaunched in December 2003. These bankruptcies involved heavy losses for creditors. According to bankruptcy expert Edward Altman, "Default recoveries continued at persistently low average levels, weighed down by the enormous supply of new defaults and communication firms’ 16.6% average recovery." (h/t Greg Ip) But within a two-year span, the losses were understood and allocated.

It has been roughly five or six years since the United States' housing bubble popped. Have we finished assigning the losses yet? Robbie Whelan at the Wall Street Journal reports that we have a range of estimates from 23 percent of homes with a mortgage being underwater, owing a total of $715 billion more than their homes are worth (CoreLogic's estimates), to 31 percent of homes with a mortgage being underwater, owing a total of $1.2 trillion more than their homes are worth (Zillow's estimate). The evidence is clear that where households are most underwater on their mortgages, consumption is weakest, job losses are the worst, and income gains are struggling.

Mortgage debtors aren't shareholders, but it is fascinating to contrast their fates. In the dot-com bust, losses were assigned very quickly. In the housing bust, losses stick with the equivalent "equity" holder years and years out (and hang like an albatross around the neck of the economy as a whole). The losses that are allocated come about in large part through painful foreclosures, which create more losses by fire-selling assets into a weak marketplace. This system is designed to destroy all possible value and drag out the procedures in long, painful ways.

Crucially, in the dot-com bust there weren't the same moral and political arguments that we see in the current one. Economists who demand to know why U.S. mortgages don't stay with people who walk away from their homes didn't demand to know why the equity holders of Pets.com didn't have to dip into their personal savings to pay off the losses creditors took. Very Serious People wonder if debtors' prisons are necessary for homeowners who would walk away from a mortgage or view bankruptcy as an exit strategy, yet no Very Serious People called for the mass imprisonment of Webvan or Flooz shareholders after those firms declared bankruptcy as an exit strategy. Nobody argues that the shareholders of the dot-com era received a gigantic government bailout through the law when they were not personally on the hook for sticking creditors with an 83.4 percent average loss. Meanwhile, efforts to allow for a cleaner way of allocating the housing bubble losses, from retaining value of the household through bankruptcy reform to local municipalities taking action through eminent domain, face a minefield of political and financial industry opposition that gives the impression that the banks "own the place."

When it comes to assigning losses among elite financial institutions, like shareholders and creditors, there is a clean system in place to make sure that it runs efficiently without dragging the entire economy to a halt. When it comes to assigning losses between household mortgage debtors and elite financial creditors, we sit in a perpetual quasi-recession six years out. As the antropologist David Graber finds historically, "[d]ebts between the very wealthy or between governments can always be renegotiated and always have been throughout world history. They’re not anything set in stone... It’s, generally speaking, when you have debts owed by the poor to the rich that suddenly debts become a sacred obligation, more important than anything else. The idea of renegotiating them becomes unthinkable." This time isn't different.

Mike Konczal is a Fellow at the Roosevelt Institute.

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What Policy Agenda Follows From "You Didn't Build That?"

Jul 20, 2012Mike Konczal

(Note: There's a previous post on this subject of "you didn't build that," taking apart the conservative agenda around "job creators," which you can read here.)

(Note: There's a previous post on this subject of "you didn't build that," taking apart the conservative agenda around "job creators," which you can read here.)

The right is freaking out about President Obama's "you didn't build that" comment. Well, let's hope the conservatives in the audience have their fainting couches nearby and pearls sufficiently clutched, because I am going to start by kicking out two jams by my man, Franklin Delano Roosevelt, from back from when he was on the campaign trail:

"Our Republican leaders tell us economic laws--sacred, inviolable, unchangeable--cause panics which no one could prevent. But while they prate of economic laws, men and women are starving. We must lay hold of the fact that economic laws are not made by nature. They are made by human beings." (Nomination Address, July 2nd, 1932, Chicago, IL)

"To insure the first set of rights, a Government must so order its functions as not to interfere with the individual. But even Jefferson realized that the exercise of the property rights might so interfere with the rights of the individual that the Government, without whose assistance the property rights could not exist, must intervene, not to destroy individualism, but to protect it." (Commonwealth Club Address, September 23, 1932, San Francisco, CA)

Now as long as people are guessing as to what the true, deeper, esoteric meaning is of President Obama saying, "Somebody invested in roads and bridges. If you’ve got a business—you didn’t build that," let throw something out there. It may be less a legal argument for how all property is the creation of the state - or as Roosvelt said, "the Government, without whose assistance...property rights could not exist" - and more a genuine call for actually building roads and bridges, something Congress is no longer capable of doing in these times. The current House went to war over whether or not to fund transportation infrastructure. It barely passed in a last-minute bill that left many issues still on the table. Former Republican congressman and now Transportation Secretary Ray LaHood told Politico that the original proposal was “the worst transportation bill I’ve ever seen during 35 years of public service.” Given that capital markets are willing to lose money to loan to us for 20 years and there's lots of unemployed people around, this should be a no-brainer.

There's two responses I've seen on the right to this topic that I'd like to address on the "you didn't build that" point, and both come up in Julian Sanchez's post "What Follows from 'You Didn't Build That'?" One is that President Obama is addressing a strawman, and that unless you are speaking to an anarcho-capitalist nobody would disagree with this. "Even we minarchist libertarians are already on board with" basic public goods, he writes, and President Obama's vision of the role of the state is much more expansive than that. I disagree that there is no disagreement. I think that the current vision animating conservatism broadly and GOP policy narrowly is one of an economy in which value is created top-down by "job creators," which I outlined at length here. Rather than "Social Darwinist," as the president refers to it, I think it is clearer to say that the current GOP policy, centered around the Ryan Budget, is "Randian." Now, that doesn't mean the opposition believes every part of Ayn Rand's theories; it just means that their political compass is orientated towards her vision, and if you step in that direction you are getting closer to your goal.

The other response is that what Obama says is largely true, but there's no actual politics that falls out of it. Sanchez writes, "It’s not that the 'you didn’t build that' argument is wrong as a factual matter—it’s that it’s true about everything, and therefore doesn’t get you much of anything."

That's a good point. What does a "you didn't build that" agenda look like? Here's what I think it should include broadly, and what matters it should be concerned with, at least on all things related to economics. (Noting in advance that I'm pretty sure the mainstream Democratic Party and President Obama aren't going to sign up for most of this.)

The first step is what President Obama was calling for in the speech, which is progressive taxation. This doesn't require the state to do more than what it does now, or less than what it does now, but instead changes how we pay for those things. And here the idea would be that those who have benefitted the most have an obligation to contribute the most. This has historically been a controversial policy - when the French economist and statesman Turgot was presented with a project for progressive taxation he responded "we must execute the author, not the project" - and I think it is useful to consider the Ryan Plan as ending progressive taxation. There's a lot of ways to argue for progressive taxation, including shared sacrifice of marginal utility, and this is another.

Another would be emphasizing that public goods are actually that: publically provided and shared. There's been a move to both privatize large parts of the government and to emphasize putting costs for the use of publically provided infrastructure directly on end users instead of making them paid for broadly. Higher education, for instance, is now less a conscious set of planning the government does to make sure all who need education can receive it, which is paid for broadly through taxes, but instead of a series of coupons -- grants, loans, tax subsidies -- to subsidize individuals purchasing a self-investment by and for themselves, with the assumption that the "for-profit" sector and innovation broadly will expand in size and quality to pick up the slack of decreasing public provisioning. A broader question is what is treated as a commodity, and under what terms. Fighting back against both of these issues would be part of the agenda.

Continuing the inter-generational pact of the welfare state is another part. David Frum recently described the current GOP as "a going-out-of-business sale for the baby-boom generation." Not wrecking the entire social safety net and the mechanisms of the goverment on the way out the door, and instead thinking of the government as a pact through time, is another important point to emphasize.

Now for property. Conn Carroll at the Washington Examiner brings up Robert Hale and the progressive, legal realist attack on laissez faire, and Sanchez brings up the similar arguments of the Nagel/Murphy book “Myth of Ownership.” These arguments are partially inherited from people like Jeremy Bentham, who argued that “property is entirely the creature of the law.”

One of the critiques that comes out of these arguments is that the picture of property rights as a vertical relationship between a person and an object, one where the issue at play is whether the person's right over the object is “deserved all the way down,” is flawed, or at least insufficient. Property is really a horizontal set of relationships between people; it isn't just your control of an object but your control over others with respect to that object. The fundamental right of private property, of course, has always been the power to exclude others. But in the 1910s, a law professor named Wesley Hohfeld formalized property "rights" into a series of four capacities: "right," "privilege," "power," and "immunity." They contrast with four incapacities: "duty," "no-right," "liability," and "disability" (see here or here for more). Each type of property right is predicated on being able to force others to respond a certain way -- you have certain immunities while others have disabilities in response, certain powers while others have liabilities, and so on.

And so "liberty" for one comes at an expense of "liberty" for another. Since there's no neutral way for the government to set these rules, certainly no abstraction like "economic liberty" to guide the path, the question over social control of property, as Leonard Trelawny Hobhouse put it, is "not of increasing or diminishing, but of reorganizing, restraints." The issue here isn't that everything is up for grabs - it's that there is no "neutral," and appealing to higher abstractions as "rights" or "ownership" don't get you anywhere.

Perhaps you find that objectionable or maybe you don't, so let's build out the You Didn't Build That Agenda in regards to property. The first stop is that there needs to be a democratic element and accountability in setting up these rules. If only because trying to back out a system of rules from vague appeals to "liberty" (especially as interpreted by courts) don't actually get us anywhere. The second issue would be acknowledging and confronting the issue that the current set up of the rules of property and economic exchange are important in creating our current economic inequality, from the runaway wealth of the top 1% to the stagnating wages of everyone else.

The way we set up the rules creates a lot of winners. The top 1% consists mostly of corporate CEOs and financial wealth. The former are influenced by the way we structure corporations through law -- read Demos' Anthony Kammer on "Reimagining the Corporate Form: Toward a More Democratic System of Corporate Governance" -- and compensation packages through tax law. The latter has a clear link with financial deregulation and much of the system exists in a way where finance's failure can pose huge externalities on other market actors and the macroeconomy as a whole. Another example is patent law which, as many note, provides large windfalls for owners. Over half of the windfall that comes from the fact that we privledge income from capital over income from labor in taxation goes to the top 0.1%. Dean Baker’s e-book, "The End of Loser Liberalism: Making Markets Progressive," is great on these points.

The way we set up the rules also creates a lot of losers. Bankruptcy law has become tougher on regular people while corporations do fine under it, something Robert Kuttner writes about as an important double standard. It is harder to unionize, and simple measures to allow for card check have failed in Congress. Inequality at the low end can be largely attributed to decreased unionization (for men) and a stagnant minimum wage (for women), both of which reduce bargaining power for their respective parties.

There's also macroeconomic policy, something the government does (or doesn't do) that has significant impact on economic outcomes but that impacts all kinds of claims to property. As Ryan Avent notes, commenting on the You Didn't Build That issue, the "operating monetary principle over the past generation—price and financial stability at all costs, help for the unemployed if we get around to it and only to the extent that the first priorities aren't endangered—has facilitated the creation of an enormous amount of financial wealth," as well as stagnating wages for everyone else. Full employment for all is a great start, though there's no way to appeal to it by referencing abstractions of economic liberty.

What else needs to be part of the agenda?

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