What Does "Fair Value" Accounting Say About the Government?

Apr 16, 2012Mike Konczal

Charles Lane had an editorial at the Washington Post while I was out about fair value accounting:

Charles Lane had an editorial at the Washington Post while I was out about fair value accounting:

There is general agreement that federal budgets should include a dollar figure for the estimated lifetime cost of each year’s new lending. Congress adds up all the expected cash flow associated with a particular credit program — interest and principal payments, fees, expected defaults — and calculates its “present value,” based on a notional interest rate known as the discount rate.

Under current law, however, Congress bases these estimates on the government’s ultra-cheap cost of borrowing. That means the calculations are done as though everyone were as default-proof as Uncle Sam, which understates the costs and risks to taxpayers.

The Congressional Budget Office believes “fair value” accounting, which adjusts the discount rate to reflect the risk of widespread defaults during downswings in the business cycle, would be more accurate.

Yglesias responded here.  This is entirely a fight over the discount rate to use for estimating government loans and whether we should be "measur[ing] the costs of federal loans and loan guarantees at [private] market prices."  As those of you who follow the global warming economics debates closely know, slight changes in discount rates can have huge policy implications.

Jason Delisie of New America and Economics21 also argued for fair value accounting at The Agenda Blog in light of a post I wrote; he was also kind enough to invite me to a big Economics21 panel he organized on fair value accounting which is online here.

A few points.

1.  I tried to make an example using swaps but it didn't convey the point well, so let's try it a different way.  Imagine two identical firms A and B, who are making identical loans.  They should use the same discount rate, correct?

Now imagine that A has a lower borrowing cost of capital than B for whatever exogenous reasons - ratings, savings, size, etc. It must be the case, provided that cost of capital is a monotonically increasing input into the discount rate (and I know of no model in which that isn't the case), that A has a lower discount rate.  A is the government here under these circumstances.  That doesn't mean that the discount rate should be the cost of borrowing per se, but financial logic dictates we don't take the same market discount rate as B for A.  I haven't seen a sufficient answer to this argument.

2.  It's ironic that Lane pushes the idea of "downswings" so aggressively, because the whole reason the government now stands behind the mortgage market is because the entire private market collapsed during the downswing.  Student loans weren't going to go out and the securitization channel is a swamp of fraud, missing or forged documents and bad incentives on the servicing end.  Meanwhile the government churns along without a crisis.

I'm not sure what to make of the argument that private lending channels couldn't survive the downturn without their costs exploding and therefore the government, which is surviving fine, should use the discount rates of the private market - more prone to collapse! - because of a risk of a downturn.

3.  Most of these arguments, especially in response to #1 above, are predicated that "shareholders" of the government, i.e. citizens, need to be compensated some amount X - equivalent to private market returns.  It's not clear to me why this is the case or how to determine it other than a normative argument about what government is. I brought up that this implies a normative argument as to what the government is supposed to do in the panel and got some really bad looks from the wonks in the audience; Yglesias also came to the same conclusion in his response to Lane.  But fair value accounting assumes that the government is just like any other firm, when in fact it has unique abilities (compulsion, scale, longevity, lack of a profit-motive, currency, etc.) that distinguish it from any private firm.

4.  The two CBPP wonks at the panel, Richard Kogan and Paul N. Van de Water, went medieval on everyone else; it was like watching a kung-fu fight.  That whole crew is awesome.  Read their entire report, but note their points about "phantom costs" and that if we need a higher discount for risk-bearing is it weird that we don't need a lower discount for risk-mitigating programs like Social Security and unemployment insurance.

Follow or contact the Rortybomb blog:


Share This

A Quick Thought on Obamacare's Economic Activity/Inactivity Distinction

Apr 16, 2012Mike Konczal

My vacation started off as the Supreme Court was arguing the constitutionality of the individual mandate.  As friend-of-the-blog Noah Millman explains "the question comes down to the commerce power – whether the activity/inactivity distinction is meaningful at all and, if it is, whether, because everyone is part of the healthcare market, the government can legitimately claim that nobody is actually 'inactive.'”

My vacation started off as the Supreme Court was arguing the constitutionality of the individual mandate.  As friend-of-the-blog Noah Millman explains "the question comes down to the commerce power – whether the activity/inactivity distinction is meaningful at all and, if it is, whether, because everyone is part of the healthcare market, the government can legitimately claim that nobody is actually 'inactive.'”

As the argument goes the commerce power allows the government to regulate economic activity but not inactivity.  To use the example that floats out there, the government can regulate the broccoli people purchase - subsidizing it with vouchers, taxing it, requiring safety inspections of it, etc.  But it can't force people to purchase broccoli by ascribing a penalty to those who don't do it.  The first is economic activity, the second is inactivity.  Even if the two activities net out the same, it doesn't matter. "Just because the government does have the power to do x, doesn’t mean they have the power to do y, even if y has the same effect as x."  As Cato put it, "there is a qualitative difference between regulating or prohibiting existing economic activity and mandating that someone engage in such activity."

The New Republic has a great article up by Harvard law professor Einer Elhauge explaining how many individual mandates were passed by the founders in the first years of the Republic:

In 1790, the very first Congress—which incidentally included 20 framers—passed a law that included a mandate: namely, a requirement that ship owners buy medical insurance for their seamen. This law was then signed by another framer: President George Washington. That’s right, the father of our country had no difficulty imposing a health insurance mandate...In 1792, a Congress with 17 framers passed another statute that required all able-bodied men to buy firearms.

There's a lot more.

Jack Balkin gives three limiting principles that "that justifies the individual mandate but doesn't give Congress unlimited power under the Commerce Clause."  Here's an interview with Akhil Reed Amir Ezra Klein did that explains some of these issues.

I don't know if I understand the actual activity/inactivity distinction. My legal realist/marginalist mind always believes there are five people who are party to an economic transaction - the buyer (B), the seller (S), the next best buyer (B'), the next best seller (S') and the government (G).  If B = B' and S = S' you are starting to see the shadow of that beast economists are always talking about - an efficient market.

But what if they are different?  Picture you are B, and you are drowning in a lake and looking to buy a life-preserver from the shore, and I'm S, who will sell it to you for $50,000. If there isn't a S' who will do it for the dollar of time it takes to do it around (or if S' is even more of a jerk than I am and will charge more), and if a government G will enforce the contract instead of voiding it, then you just bought yourself one hell of an expensive life-preserver.

The existence of the next available buyer and seller, even if they don't buy or sell anything, has a huge impact on how the market functions and the subsequent distributional consequences.  There's no economic inactivity, no outside the market, even if people aren't actually buying and selling.  And that's with generic transactions, not ones with informational dynamics like health care.

But that's me.  What would a conservative judge make of this argument?  Luckily we have one who upheld Obamacare last NovemberLawrence Silberman.  His opinion upholding Obamacare is worth your time.  He argues:

But to tell the truth, those limits are not apparent to us, either because the power to require the entry into commerce is symmetrical with the power to prohibit or condition commercial behavior, or because we have not yet perceived a qualitative limitation. That difficulty is troubling, but not fatal, not least because we are interpreting the scope of a long-established constitutional power, not recognizing a new constitutional right....

It certainly is an encroachment on individual liberty, but it is no more so than a command that restaurants or hotels are obliged to serve all customers regardless of race, that gravely ill individuals cannot use a substance their doctors described as the only effective palliative for excruciating pain, or that a farmer cannot grow enough wheat to support his own family.  The right to be free from federal regulation is not absolute, and yields to the imperative that Congress be free to forge national solutions to national problems, no matter how local–or seemingly passive–their individual origins.

It's worth noting that when Citizens United came back as a 5-4 decision, the court went all out with an expansive ruling against campaign finance regulations, reworking the entirety of the legal framework, instead of a narrow interpretation relevant to the case at hand.  Will we see a similar move if the court comes back 5-4 against Obamacare?

Follow or contact the Rortybomb blog:


Share This

How Can Herbert Spencer's 1892 Revisions to his Social Statics Help Us Understand Conservative Opposition to the Individual Mandate?

Apr 16, 2012Mike Konczal

What should liberal wonks make of the conservative movement's abandonment of center-right policy innovations like the individual mandate and cap-and-trade once President Obama took them up?

What should liberal wonks make of the conservative movement's abandonment of center-right policy innovations like the individual mandate and cap-and-trade once President Obama took them up? To answer this, it might be useful to look at revisions made to the 1892 edition of Herbert Spencer's classic 19th century handbook of laissez-faire, Social Statics or The Conditions essential to Happiness specified, and the First of them Developed.  That's the book Oliver Wendell Holmes alluded to when dissenting in Lochner, famously saying, "The Fourteenth Amendment does not enact Mr. Herbert Spencer's Social Statics."


Herbert Spencer's name bounced around the internet while I was on vacation after President Obama referred to Paul Ryan's budget as “thinly-veiled Social Darwinism.” Damon Root at Reason wrote that that it's unfortunate that Spencer is smeared as a monster when he was a proponent of free markets, a defender of private charity, and had "pioneering support for feminism and women’s equality."

The feminism, women's equality, and women's suffrage points are correct. In his book Social Statics, originally written in 1851 and with the following taken from the 1888 reprint, Spencer had chapter 16 titled "The Rights of Women," which opens, "Equity knows no difference of sex." Spencer thought dominion of man over women in the household was a form of feudalism, something he believed his evolutionary thought was there to bury: "in as far as our laws and customs violate the rights of humanity by giving the richer classes power over the poorer, in so far do they similarly violate those rights by giving the stronger sex power over the weaker."

Spencer embraced the worry of critics that giving women some rights would inevitably lead to demands for suffrage: "The extension of the law of equal freedom to both sexes will doubtless be objected to, on the ground that the political privileges exercised by men must thereby be ceded to women also. Of course they must; and why not?" He concludes, "it has been shown that the rights of women must stand or fall with those of men; derived as they are from the same authority; involved in the same axiom; demonstrated by the same argument."

He was a serious defender of women's rights... until it looked like women might actually start getting rights. He then suddenly became very concerned about equality between the genders. The revolutionary language and political equality above was removed from the 1892 edition of Social Statics.

And Spencer had changed his position much earlier. In August 1867, when John Stuart Mill asked Spencer to join the Women's Suffrage Society, he declined, saying that there had been a "modification" of his views. The same year, Spencer also declined Mill's request, on behalf of his step-daughter Helen Taylor, that "The Rights of Women" from Social Statics (the essay that Root linked to in his post) be included in a collection of essays she was putting together. When Mill sent him a copy of The Subjection of Women, Spencer replied that someone should write an essay called The Supremacy of Women, about how women nag men and that gives them a lot of hidden power. (Mill responded, "two contradictory tyrannies do not make liberty.")

People change their minds all the time. But the reasons Spencer gave weren't impressive. One argument was that women don't share in military service, thus they shouldn't share political rights. Given how important it was to Spencer that his arguments be rigorous and hang together logically from his system of authority, axioms, and arguments, this reversal is so underdeveloped many argue it resulted from his lack of luck with romance and women.

But I think it's clear what his real objection was: universal suffrage has the potential to advance socialistic causes, interfering with his laissez-faire project. From his autobiography: "Another extension of the franchise since made...will inevitably be followed by a still more rapid growth of socialistic legislation." When he realized women's equality could potentially interfere with laissez-faire economics, it was time for women's equality to get cut from his overall theory of a better world. He would rather mutilate his intellectual project instead of allowing his enemies to continue to build their governance project.


Because Spencer was an ardent defender of laissez-faire. He thought evolution would bring about less government, he attacked the idea that government regulations "will work as it is intended to work, which it never does," he believed in a Right To Ignore The State, and, of course, he believed that private property in land was a joke and that all land should be nationalized and run like "a joint-stock company" by the State. His belief that the injustice of private property in land fell so naturally out of his rigorous theory of laissez-faire that he titled Chapter 9 of Social Statics "The Right To Uses of the Earth," which argued that "to deprive others of their rights to the use of the earth, is to commit a crime inferior only in wickedness to the crime of taking away their lives or personal liberties."

What's that you say? How could a laissez-faire person like Spencer be against private property in land? Spencer:

For if each of them “has freedom to do all that he wills provided he infringes not the equal freedom of any other,” then each of them is free to use the earth for the satisfaction of his wants, provided he allows all others the same liberty... Equity, therefore, does not permit property in land...

For if one portion of the earth’s surface may justly become the possession of an individual...eventually the whole of the earth’s surface may be so held...the rest of its inhabitants can then exercise their faculties—can then exist even—only by consent of the landowners; it is manifest, that an exclusive possession of the soil necessitates an infringement of the law of equal freedom. For, men who cannot “live and move and have their being” without the leave of others, cannot be equally free with those others.

Separate ownerships would merge into the joint-stock ownership of the public. Instead of being in the possession of individuals, the country would be he held by the great corporate body—Society. Instead of leasing his acres from an isolated proprietor, the farmer would lease them from the nation... A state of things so ordered would be in perfect harmony with the moral law.

This was a crucial part of Spencer's thinking... until it wasn't. In the 1892 edition of Social Statics, the entire chapter on land reform is gone. Spencer suddenly thought that his policy had some serious problems right around the time land reformers were making progress.

The equivalent of the late 19th century wonk blogosphere sprang into action to figure this out. Alfred Wallace, who you may know as the person who discovered evolution by natural selection separately from Darwin, was the president and founder of the Land Nationalization Society. He dedicated his 1892 presidential address to Spencer, noting that reading Social Statics in 1853 made him found the Society, and tried to clarify why Spencer's new policy was incorrect, both as they related to his overall theory and the practical reality of the policy itself. Clearly he just made a mistake.

Henry George wrote A Perplexed Philosopher, a large critique of Spencer's new opinion. George noted that Spencer took the brave and daring step of siding with the wealthy, landed aristocracy in his new policy. In the conclusion, George refers to the about-face as an act of "intellectual prostitution." Clearly he was bought off.

Spencer had always been under attack for that chapter of his book. The Economist magazine, god bless 'em, praised the laissez-faire parts of the original Social Statics but went after the land reform parts at length in its 1851 review. The conservative press, and well as laissez-faire organizational groups like the "Liberty and Property Defence League," were constantly attacking Spencer on the land question because they saw reformers do the "even Herbert Spencer agrees...." thing. Clearly he realized what the correct argument was all along.

But what if it is the same situation as women's suffrage? What if he saw, correctly, that this piece of his theory was emboldening his enemies in the progressive, socialist, and reform movements? Even though he agreed with them in principle, to see democratic challenges from below succeed would both show that the other side can deliver on its projects and would threaten the laissez-faire economy he wanted to build.

What's both fascinating and sad about the process is that, in order to defeat even the potential of his enemies gaining a policy priority he believed in, he was willing to butcher his elaborate theory of the world so that it could protect the thing - the regressive, anti-evolutionary, feudal, unproductive, landed British aristocracy - he was hoping it would bury.

Two quick endnotes:

1. Here's a thought:  All property in land exists through the might of a barrel of a gun and the subsequent property documents are dripping with the blood from a sword. To try and cynically create a calculus that x years wipes y amount of the blood off the documents makes you as cupable as the person who pulled the trigger. The thought of a radical, Kenyan, anti-colonialist thinker? Nope, just Herbert Spencer in Social Statics, Chapter 9, Part 3:

It can never be pretended that the existing titles to such property are legitimate. Should any one think so, let him look in the chronicles. Violence, fraud, the prerogative of force, the claims of superior cunning—these are the sources to which those titles may be traced. The original deeds were written with the sword, rather than with the pen: not lawyers, but soldiers, were the conveyancers: blows were the current coin given in payment; and for seals, blood was used in preference to wax...

“But Time,” say some, “is a great legaliser. Immemorial possession must be taken to constitute a legitimate claim"...To do this, however, they must find satisfactory answers to such questions as—How long does it take for what was originally a wrong to grow into a right? At what rate per annum do invalid claims become valid?

2.  I'm currently reading Free Market Fairness by John Tomasi; here they are debating the theory at Cato Unbound. In order to explain the difference between classical liberals and high liberals like Rawls, Tomasi uses the thought experiment of how each would set the rules for a game of Monopoly. He does it in the book and he does it in this blog post. Classical liberals want equal rules for everyone in Monopoly and are okay with unequal starting money; High Liberals are concerned about inequalities in wealth, even after the game begins. And so on.

How would Herbert Spencer approach Monopoly, a game entirely about private property in land? The crucial part of the game isn't the issue of fairness between players on turn one, it's how fair the game is to people who start on turn 30. At that point, the productive capital (all the land cards) have been purchased. The turn 30 players would run around the board hoping not to be bankrupted. Maybe they'd pass go enough times to build enough wealth to buy some land, but most likely all their income would be siphoned off in rents by the turn one players. To use Spencer's phrase, the turn 30 players cannot “'live and move and have their being' without the leave of others" and thus "cannot be equally free with those others."

Spencer answered Tomasi's rules question when he anticipated the incrementalist types in the land reform movement who thought redistributing the land once and setting up some side rules would suffice (i.e. restart the Monopoly game) by noting "what becomes of all who are to be born next year? And what will be the fate of those whose fathers sell their estates and squander the proceeds? These portionless ones must constitute a class already described as having no right to a resting-place on earth—as living by the sufferance of their fellow men—as being practically serfs. And the existence of such a class is wholly at variance with the law of equal freedom."

So if you asked the young Herbert Spencer how to fairly set up the rules of Monopoly, he'd probably say "there are no fair rules to this game," flip the board over and walk away. Like a boss.

Follow or contact the Rortybomb blog:


Share This

Is a She-covery Really in Sight?

Mar 12, 2012Mike Konczal

One key data adjustment makes women's supposed job gains in recent months all but disappear.

One key data adjustment makes women's supposed job gains in recent months all but disappear.

New Deal 2.0 editor Bryce Covert had an excellent summary of gender and the recovery over at The Nation, "One Mancession Later, Are Women Really Victors in the New Economy?" Trying to figure out why women's job growth have been lagging in 2010-2011 has been a bit of an industry in the econoblogosphere, and Covert brings together the debate.

But is this changing? David Leonhardt has a post up at Economix, "Has the He-covery Become a She-covery?," which features the following argument and graph:

For nearly all of 2010 and 2011, job growth was stronger for men than for women, causing Catherine Rampell and others to refer to the recovery as a “he-covery.” But in the last few months, the trend has turned around: since December, job growth has been significantly stronger for women than men...

But there's a slight problem with how that data is shown in the graph above. That graph is from the household survey. In the release of the December jobs numbers, there was a big change in the employment numbers as a result of the annual benchmarking process and the updating of seasonal adjustment factors:

Effective with data for January 2012, updated population estimates which reflect the results of Census 2010 have been used in the household survey. Population estimates for the household survey are developed by the U.S. Census Bureau. Each year, the Census Bureau updates the estimates to reflect new information and assumptions about the growth of the population during the decade... In accordance with usual practice, BLS will not revise the official household survey estimates for December 2011 and earlier months... The adjustment increased the estimated size of the civilian noninstitutional population in December by 1,510,000, the civilian labor force by 258,000, employment by 216,000, unemployment by 42,000, and persons not in the labor force by 1,252,000.

Vote for Roosevelt Institute | Pipeline to win a free both at Netroots Nation!

Employment went up 216,000 as a result of these changes, and those extra employed people were all put in the month the changes occurred instead of smoothed across the year ("in accordance with usual practices" above). What it doesn't say is that while employment was adjusted up 216,000, men were adjusted down 368,000 jobs and women were adjusted up 584,000. So December showed women gaining 584,000 jobs as a result of statistical population adjustments that, in reality, should have been smoothed across a longer time frame.

I was happy to see this, as I had spent some time last fall trying to figure out why the household numbers were so different from the business survey when divided out by gender, and this helped bring them back in sync. But this is what is pushing up the six-month average in the graph above, not a sudden rush of actual job growth for women.

Instead of looking at the household survey, a look at the business survey shows that men are always gaining more jobs since the recovery took off:

Mike Konczal is a Fellow at the Roosevelt Institute.

Share This

Deficit Hawks Should Curb Their Enthusiasm About Jobs

Mar 6, 2012Mike Konczal

With our best job reports looking like Clinton's worst, now isn't the time to pivot to deficit reduction.

With our best job reports looking like Clinton's worst, now isn't the time to pivot to deficit reduction.

Steven Pearlstein is concerned there’s too much emphasis on getting unemployment down and not enough on pivoting to deficit reduction in the states. Krugman has a good response; I want to focus on two specific parts of Pearlstein’s post. The first:

There are some on the left who also cling to the view that the economy is stuck in a depression — lest it undermine their critique about the woeful inadequacy of fiscal stimulus and the desperate need for more.

Let’s start with some basic facts: Monthly job growth was over 250,000 in just over half of the months during Bill Clinton’s presidency. In the other half, the slow months, the average job growth was around 154,000 per month.

Knowing that is what healthy job growth looks like, the meek jobs numbers we are seeing -- last month’s was 243,000, and the high end estimate for this month is 250,000-300,000 -- looks like it may be approaching a period of solid growth. But with so much potential downside (Iran, Europe, etc.), why would we want to stop expansionary monetary and fiscal stimulus?

Steven Pearlstein notes, “The data points for this optimism are to be found in recent reports on private payrolls (averaging just under 200,000 jobs per month for the past year).”

Notice the “private” payrolls -- total job growth is actually 160,000 averaged when you take into account the shedding of government jobs through 2011. Which is to say our economy at its strongest looks close to the Clinton economy at its weakest.

Using this handy Atlanta Fed Jobs and Unemployment Calculator, at 160,000 average jobs per month it will take until 2017 to get to 5 percent unemployment. At 300,000 average jobs per month it will take two more years.

Check out “The 99 Percent Plan,” a new Roosevelt Institute/Salon essay series on the progressive vision for the economy.

The second:

There is no denying that an official unemployment rate of 8.3 percent is too high and understates the weakness in the job market. But too much of their gloomy analysis is based on a misguided assumption that it’s possible to put the nation on a sustainable growth path without making the painful but necessary structural adjustments required to an economy left badly out of balance by the Bubble Economy…

It is the restructuring and right-sizing of the public sector that, as a practical political matter, only happens when the fiscal pressure is on. It can easily be phased in without throwing the economy into recession.

This “structural adjustments” part is frustrating because it isn’t clear what he is talking about (until you get to the second paragraph). Is the issue the idea that the capital markets think the debt is out of control? Workers can’t be retrained? Hysteresis? There are ways of quantifying each of these arguments and they have their strengths and weaknesses. An incredibly generous argument about structural unemployment would say that we might hit problems closer to 6 percent than 4 percent, and even then we are still far away.

The second paragraph is similar to Richard Fischer’s argument against QE (and Naomi Klein’s Shock Doctrine too) -- if growth takes off, we can’t make the hard decisions necessary for the economy. At 6 percent unemployment, crafting state budgets won’t be any easier -- better to do whatever is necessary now, while in a crisis.

I don’t agree with the idea that state budgets will be significantly easier to deal with at full employment in theory, but I also don’t see this working in practice. Is there any evidence that state governors who attack workers to fix the budgets aren’t turning around and cutting corporate taxes by a larger amount over the long run? That’s what is happening is Wisconsin. Shock times aren’t about responsibility -- they are about power shifts.

Mike Konczal is a Fellow at the Roosevelt Institute.

Share This

Welcome to the 1% Recovery

Mar 5, 2012Mike Konczal

As the 1% reap 93 percent of the income gains from the recovery, we're rapidly returning to pre-New Deal levels of inequality.

As the 1% reap 93 percent of the income gains from the recovery, we're rapidly returning to pre-New Deal levels of inequality.

There was a brief debate focused on the following question: would the gains of the economy continue to accrue to the top 1% once the recovery started, or would they have a weak post-recession showing in terms of raw income growth as well as income share of the economy? The top 1% had a rough Great Recession. They absorbed 50 percent of the income losses, and their share of income dropped from 23.5 percent to 18.1 percent. Was this a new state of affairs, or would the 1% bounce back in 2010?

We finally have the estimated data for 2010 by income percentile, and it turns out that the top 1% had a fantastic year. The data is in the World Top Income Database, as well as Emmanuel Saez’s updated "Striking it Richer: The Evolution of Top Incomes in the United States" (as well as the excel spreadsheet on his webpage). Timothy Noah has a first set of responses here. The takeaway quote from Saez is, "the top 1% captured 93% of the income gains in the first year of recovery.”

First off, let’s get some absolute numbers here. Here is income by important percentiles, as well as the change from 2009-2010. I include the change with and without capital gains to make it clear that this is a phenomenon both in and independent of a strong stock market (click through for larger image):

The bottom 90 percent of Americans lost $127, the bottom 99 percent of Americans gained $80, and the top 1% gained $105,637. The bottom 99 percent is net positive for the year due to around $125 in average capital gains. They can take comfort in efforts by the right to set the capital gains tax to 0 percent, which would have netted them an additional couple dozen bucks.

(Also, just to show "the top 1% captured 93% of the income gains in the first year of recovery” isn’t some sort of stats juke, you can take $105,637 and divide it by the the number you get when you add $80 times 99 to $105,637 times 1. That number is 93 percent, which is the share of income gains the 1% took home.)

Check out “The 99 Percent Plan,” a new Roosevelt Institute/Salon essay series on the progressive vision for the economy.

And if this wasn’t obvious, you can see the gains become quite high the farther you walk up the inequality ladder. When we discuss things like the Buffett Rule or taxing capital gains as ordinary income, it is important to see how top-heavy that capital gains distribution actually is.

This should also be put in the historical frame of looking at 2002 onward. I’m going to normalize some percentiles by their average income in 2002 and show how they have moved going into and out of the recession. This takes the income distribution in 2002 as granted -- and any movements from there on out reflect changes from that income. I’m going to exclude capital gains for this chart to show it’s a deeper phenomenon than the stock market, though the effects are the same in either case (click through for larger image):

The Great Recession dropped income for the bottom 99 percent by 11.6 percent, completely wiping out the meager gains of the Bush years. And crucially, while 2010 was a year of continued stagnation for the economy as a whole, the 1% began to show strong gains even when capital gains are excluded.

As you can imagine, this has increased the percentage of the economic pie that the top 1% takes home. As Saez notes, “excluding realized capital gains, the top decile share in 2010 is equal to 46.3%, higher than in 2007.”

There are two things worth mentioning. There’s an interesting debate within left-liberal circles about whether or not elite economic interests benefit from a weak recovery, benefit more from a strong recovery, are vaguely indifferent to the United States economy, are impotent during the recession, or are more interested in pursuing other agendas during the instability caused by mass unemployment. These numbers are certainly a point for the argument that the rich are doing just fine, and to whatever extent they’d be doing better with more robust growth and employment, it isn’t putting a damper on their earnings.

It’s also worth mentioning that, pre-recession, inequality hadn’t been that high since the Great Depression, and we are quickly returning to that state. It’s important to remember that a series of choices were made during the New Deal to react to runaway inequality, including changes to progressive taxation, financial regulation, monetary policy, labor unionization, and the provisioning of public goods and guaranteed social insurance. A battle will be fought over the next decade -- it’s already been fought for the past three years -- on all these fronts. The subsequent resolution will determine how broadly shared prosperity is going forward and whether our economy will continue to be as unstable as it has been.

Mike Konczal is a Fellow at the Roosevelt Institute.

Share This

Has the White House Changed Its Tune on the Nature of the Recession?

Feb 24, 2012Mike Konczal

It may be coming around to what's really driving weak demand three years too late, but better late than never.

It may be coming around to what's really driving weak demand three years too late, but better late than never.

There's a mini-debate going on over the relationship between the housing crash and weak demand. As Cardiff Garcia of FT Alphaville recently summarized it: "This reminded us of the debate last year about whether the sluggishness in consumer spending was the result of households wanting to deleverage or was caused by the big negative wealth effect caused by the huge crash in home prices." See this from James Surowiecki on the wealth effect and the Q&A I did with Amir Sufi on deleveraging. Which is the main driver, deleveraging balance sheets or a wealth effect?

I'm more on team balance sheet. It must seem like an esoteric debate, but it has some consequences. If it's about deleveraging balance sheets, the problem is an income/debt issue. It can be solved by reducing debt through forgiveness, lower interest rates and refinancing, equity swaps, a jubilee, and many other options. The models used in these stories indicate that any kind of transfer from creditors to debtors will make the economy better off. If it's a wealth effect, forgiving debt is likely to be less important -- it's not the root of the problem. Redistribution between creditors and debtors is unlikely to have a major impact outside of marginal propensities to consume. You'd need to get housing prices back up for there to be a significant adjustment.

(When Jim Bullard made two meta-conservative cases against additional monetary and fiscal stimulus recently, he switched between these narratives. The first case was about how the collapse of the housing bubble represents a technology loss. Though he didn't specify it, people could refer to the collapse of the securitization model, the inability to use housing as collateral, and the now idle Wall Street machine --results from weak balance sheets -- as a type of technology that has been destroyed. I don't think that's a particularly useful way to look at it. The second argument was pure wealth effect: we feel poorer, and the only solution is to beg policymakers to "please reinflate the bubble."  That's a pretty significant change in the underlying theory.)

Garcia noted that the Federal Reserve looks like it is considering joining team balance sheet. It discussed three studies at its most recent meeting, all credit and balance sheet related. One of the studies "used data on borrowing, debt repayments, and other credit factors for individual borrowers; this study found that movements in leverage -- resulting from voluntary loan repayments and from loan charge-offs -- have had a substantial effect on the cash flow of many households over time, and thus presumably on their spending." I'd really like to see that study!

Check out “The 99 Percent Plan,” a new Roosevelt Institute/Salon essay series on the progressive vision for the economy.

The White House also looks to be on team balance sheet. See the latest Economic Report of the President (pages 110 to 114).

The standard approach in economics has been to assume that households consume about the same fraction of the increase in their wealth each year, regardless of its source... The severity of losses experienced during the recession that began in December of 2007 in both national output and in labor markets makes these estimates appear too small...

A growing economics literature highlights the importance of household debt balances in influencing the severity of economic slumps... A series of empirical papers attempts to quantify the effect of such deleveraging on consumption (Mian and Sufi 2010; Mian, Rao, and Sufi 2011). These papers broadly suggest that the levered nature of household housing assets amplified the effect of pure wealth losses from the crash in housing prices.

The report even includes this iconic chart of team balance-sheet:

When Noam Scheiber wrote about how the administration viewed the economy in late 2010, he explicitly contrasted its wonks' opinions with that of the balance sheet recession theorist Richard Koo. So is this a revolution within the administration? Is this why it is now pushing for writedowns and refinancing, after having left housing on the side for the past three years? Let's hope so, since I consider being three years late to the party better than never showing up.

Mike Konczal is a Fellow at the Roosevelt Institute.

Share This

An Interview with Occupy the SEC About Their Volcker Rule Comment Letter

Feb 16, 2012Mike Konczal

February 13 was an important deadline for comment letters relating to the implementation of the Volcker Rule. One group that submitted a comment letter was Occupy the SEC, an Occupy Wall Street-affiliated working group that has an excellent web presence outlining their objectives.  The site also includes their comment letter (available as a pdf here) -- all 325 pages of it.

February 13 was an important deadline for comment letters relating to the implementation of the Volcker Rule. One group that submitted a comment letter was Occupy the SEC, an Occupy Wall Street-affiliated working group that has an excellent web presence outlining their objectives.  The site also includes their comment letter (available as a pdf here) -- all 325 pages of it.

Felix SalmonMatt YglesiasSwamplandThe NationJosh Harkinson, and Dave Dayen, among many others, have all said great things about it. I was most impressed with the point-by-point, aggressive answering of the regulators' questions -- the stuff that can make a difference. Felix suggests reading the introduction if nothing else, particularly pages 3-6, and I agree.

Since this blog is a fan of all things financial reform, Volcker Rule, and the Occupy movement, I was very fascinated with the backstory on this letter. I was able to speak with two members of Occupy the SEC, Alexis Goldstein (@alexisgoldstein), a former Wall Street technology VP, and Caitlin Kline, a former credit derivatives trader.

Mike Konczal: What is Occupy the SEC? And what is the Volcker Rule?

Alexis Goldstein: Occupy the SEC is a working group inside Occupy Wall Street, which has been focused on writing a comment letter on the Volcker Rule.

The high-level overview is that the Volcker Rule is meant to keep federally-backed banking entities from proprietary trading and from owning more than 3 percent of any given hedge fund or private equity fund.

MK: How did you end up getting involved in Occupy the SEC?

AG: I was going down to Occupy Wall Street every day and one day Naomi Klein came and gave an open forum talk. And I asked a question, over the people's mic, on whether we should bring back Glass-Steagall, and she said yes.

Afterwards, all these people came up afterwards and asked me "What's Glass-Steagall?" And I thought I could help out and do a teach-in. After announcing an upcoming teach-in at a General Assembly, Akshat emailed me and asked if I was interested in forming a group to write a comment letter.

Caitlin Kline: A friend of mine who was involved in the movement called me up one day and told me that he had just seen a teach-in, and that the woman “spoke about derivatives the way you do!” So he put me in touch with Alexis, and I started attending the book club meetings.

MK: How much of the group are people currently or formerly in the financial industry?

AG: Probably a slight majority. Not everyone -- we had people who were leaders or people who wanted to learn and get up to speed. But it definitely had a strong industry contingent.

MK: How did you start focusing the letter?

CK: It took a long time to get our minds around all the different elements of the Volcker Rule and what kind of comment letter we wanted to write. We decided early that we wanted to write about the nitty-gritty of the rule and focus on the specifics, so it required a really deep dive into the material to leverage everyone’s expertise. Right off the bat, we decided that this rule was a good idea, and it has to actually be meaningful. That's how we attacked it -- we wanted to strengthen it as much as possible.

MK: Some people (usually not in the movement) complain about the General Assembly and consensus-driven procedures as not workable for a complex task, like writing hundred of pages responding to regulatory rules. What was your procedure and how well did it work?

AG: There were two tasks. The first task was much like a book club. We treated the Volcker Rule as our book, and we'd assign readings and times for discussion. At first we were meeting once a week, then later twice a week for marathon sessions. During those marathon sessions we'd go through all the questions the agencies asked about the rule.

MK: How many questions were there?

AG: 395. But each of those questions had around three or four questions in it. But 395 numbered questions.

CK: So a total of around 1,200 to 1,400 individual questions.

AG: It's easiest to visualize this. So we are all there in the atrium with our laptops. We are going through this question by question, discussing them, debating what we think the answer should be. Once we all agree on something we put it in a bullet or several bullets. And sometimes we'd go off on these huge tangents and have debates on the best way to address the topic. We'd often have to say "let's move on to the next topic," but we always tried to work from consensus.

Check out “The 99 Percent Plan,” a new Roosevelt Institute/Salon essay series on the progressive vision for the economy.

When we went to try and write the initial draft of the letter we'd work collaboratively on these online documents that everyone could see at all times. That way if there was something someone didn't agree with they could leave a comment or send an email to the group and we could talk it out. For the most part we tended to agree -- though there were many instances where we clashed horns.

After that initial pass we broke it up section by section so everyone had their focus area. From there we could embellish those central consensus bullet points we had come up with.

MK: How many people are involved?

AG: There was a core group of seven people, with a variety of people coming in and out. There were many experts in an area who couldn't commit to all the meetings but wanted to work on very narrow areas. They'd drop in and drop out.

There was one person who was very interested with the metrics section. So she attended one meeting where we were going to talk about that and she gave us some great ideas. There was a gentleman who used to work at a special purpose vehicle and was really involved with securitizations. He did a really great job writing and giving insights on those topics via e-mail, even though he couldn't make the groups.

CK: In a lot of cases we pooled our resources to find people with certain expertise on issues we wanted to address in the letter.

MK: What are you worried about with the implementation of the Volcker Rule?

CK: The one that comes up often is that liquidity is going to evaporate overnight, crippling markets. This is the base of the lobbyists' efforts. We spent a while debunking that argument.

MK: How do you respond to that?

CK: Well the whole theory is predicated on the idea that these federally-backstopped banks are the only institutions that can provide liquidity. It is a profitable business, especially the market-making end of it, and any number of firms will step in in order to take this.

MK: Were the members of Occupy the SEC involved broadly with the movement?

AG: It depends on the person. For me I was highly active in the woman's caucus. I would go to the General Assembly often, I'd go to the Spokes Council meetings. I was very involved in the day-to-day. When this letter got started I had to take a step back and focus on that instead.

We had some people that weren't involved with the letter but they'd help us by coming to the meetings, organizing and planning direct actions. Others were involved in the Politics and Electoral Reform group, the Direct Action working group, and the Think Tank, which conducts open air discussions on various topics.

CK: This was the first time that I thought that I could jump in and get involved. Particularly as an ex-trader, I could do this, and be involved with the movement in a meaningful way. Since we started, I've met so many smart people and encountered so many issues that I'm going to continue to be involved with, and I think most of the group has had a similar experience.

MK: There's a saying that goes "Occupy Everything, Demand Nothing." You've written a document giving very technical advice to regulators. Part of Occupy is about creating alternatives instead of making demands, yet your group set out to reform a system very resistant to reform. How do you handle that tension?

AG: There's two points. The first is that all working groups at Occupy are autonomous. Since no one can speak for Occupy Wall Street, each group can choose their own goals that they want to work for as long as you don't say you speak for Occupy Wall Street (without going to the New York City General Assembly). So there's a lot of freedom to work on Occupy Wall Street on whatever projects you want.

The second thing is that though the system is broken and difficult to repair, you don't have to choose between abandoning it or reforming it. I think you can do both -- try to reform it from within while building a new system. This particular effort is about reforming the current system, but that doesn't mean, at all, that we aren't interested in alternative systems. There's another group called Occupy Bank thinking through a completely new banking system from scratch.

CK: From those of us who saw how big and screwed up the financial system is, it's very difficult to know, or even understand, what it would take to fix it. Some people would say to us "why are you even bothering with this? Why not go back to Glass-Steagall?" Well, that's not on the table right now, but this is. And the Volcker Rule is something very real and concrete. It's good intellectual work to think through alternative systems and I want to be a part of it and see where it goes, but in an immediate way there's ways to clean up things right in front of us. A lot of people I know get stuck on this -- "it's really screwed up and there has to be another way" -- and you end up thinking about that other way forever.

MK: Quick question: did your group do the twinkles during meetings?

AG: Yes. In fact when Caitlin was just talking with you I was twinkling.

MK: Over the phone?

AG: Yes, it is such a habit I can't break it.

MK: What are you excited about for Occupy in 2012?

AG: As an activist you are often isolated to your particular cause. Let's say you are an environmental activist and your cause is sustainability. You fight the same fights with the same people, you go against the same industries, and it is easy to burn out. You are stuck in this little bubble. My favorite thing about Occupy Wall Street is that there is this cacophony of causes. You come together for the things that matter the most to you, but you are surrounded by all these other people fighting for all these other causes, with their own expertise, and all those passions amplify each other. If you need a break from your topic, you can jump into another one. And there's so many new people, fresh faces all the time, it gives you courage and the strength of purpose to continue. Because it's so tough to fight a fight and think you are the only one who cares.

Also, I really hope we can retake more public spaces.

Share This

The Economy Sucks for Those Who Have Jobs, Too

Feb 7, 2012Mike Konczal

New JOLTS data show that people are quitting their jobs less and less and getting hired at a similarly slow rate.

Last week's job numbers were generally positive. Now if those numbers pick up steam, if the housing market begins to recover, if Europe doesn't sink the U.S. economy, if the situation in the Middle East and especially Iran doesn't cause oil prices to spike, and if we don't immediately disrupt government spending through premature austerity, we could see some major job growth in 2012.

New JOLTS data show that people are quitting their jobs less and less and getting hired at a similarly slow rate.

Last week's job numbers were generally positive. Now if those numbers pick up steam, if the housing market begins to recover, if Europe doesn't sink the U.S. economy, if the situation in the Middle East and especially Iran doesn't cause oil prices to spike, and if we don't immediately disrupt government spending through premature austerity, we could see some major job growth in 2012.

What about those who still have a job? We focus on the unemployed for many good reasons. Economists do this because of it is so miserable to be unemployed in this country and because they function as a good barometer for the health of the economy. We "see" changes in unemployed in the data much quicker than movements in GDP and other aggregates.

But the economy also has major problems for those with jobs. Be honest: how many of you spent the past two months thinking, "I'm going to quit this job I have now"? Personally, many friends of mine have discussed how they want to move on and quit their current jobs and were putting in the energy to find new ones. They've mostly failed and are taking it as a personal failure.

Except it's less a personal failure than a macroeconomic one.

Click here to buy Senior Fellow Richard Kirsch’s new book on the epic health care reform battle, Fighting for Our Health.

This morning the Bureau of Labor Statistics put out their Job Openings and Labor Turnover Survey (JOLTS) data for December 2010. The "quit rate" -- how many people are walking out of their jobs -- was flat for the month at the very low 1.5 percent rate, and still significantly lower than it's been over the past decade. The quit rate for those with jobs plummeted during the the recession and it's never recovered. And it's remained stagnant even as there's been some encouraging signs for the unemployed. Here is how the rate looks historically:

I also have a few friends -- both employed and unemployed -- who have been strung along by potential new jobs, and I imagine this is happening to many people. They hear a lot of "we'll let you know soon" over the course of several months with no actual offer or hiring on the horizon. Again, think macroeconomics -- the job hire rate also plummeted and has stayed flat recently.

The problem isn't just that there are so many people who have been unemployed for over 99 weeks -- the problems exist for everyone, even those with jobs.

Mike Konczal is a Fellow at the Roosevelt Institute.

Share This

How Government Decides Which Workers Deserve Rights

Feb 1, 2012Mike Konczal

It used to be that white men had steady employment and all the government protection that came with it while minorities and women were stuck with precarious jobs. Now we're all vulnerable.

It used to be that white men had steady employment and all the government protection that came with it while minorities and women were stuck with precarious jobs. Now we're all vulnerable.

Malcolm Harris has a New Inquiry essay on the movie Sleeping Beauty (2011) and the feminization of precarious labor. A lot has been written on precarious labor recently, including both John Schmitt's book review in Dissent and Bhaskar Sunkara's critical response. I want to elaborate on this, since looking at gender and precarious work leads to an examination of a favorite topic -- the relationship between pity-charity liberalism and unconditional, universal programs related to economic security. A perfect example is how labor in the New Deal was treated differently by gender. The wedge between the two groups illuminates the difficulty in bringing economic justice to the 21st century. Precarious, vulnerable work was once relegated solely to women, but in this day and age more and more of us will fall into that category.

For Harris, the precarious worker is "indebted, insecure, vulnerable." If the classic notion of a worker "relies on having a bargaining place at the table with the boss," then precarious workers aren't workers (even though all they do is work or try to cobble work together).

How is the work gendered? Harris focuses on gendered affect: "passivity and her eagerness to please, her vulnerability and blank demeanor would look incredibly strange on a young man. Her willingness to keep treading water without the promise of anything better to come, her ability to communicate nonthreateningly and stay quiet at the right times are parts of what Nina Power describes in the chapter 'The Feminization of Labor.'"

But there's an institutional way to think about how the precarious nature of gender and work is both reflected in and amplified by governmental regulatory regimes, and how the future looks bleak in terms of bending those regimes toward just ends. Suzanne Mettler's Dividing Citizens: Gender and Federalism in New Deal Public Policy (1998) is useful for this conversation. (Mettler, a political scientist and recent author of The Submerged State, is a favorite around here -- III, -- and recently joined our think-tank neighbors at the Century Foundation as a fellow.)

To set up the problem, Seth Ackerman has recently discussed universal programs in the context of the Tea Party's war against the state:

...[I]t’s indisputable that Tea Partiers make some kind of conceptual distinction between universal programs like Social Security and Medicare and other government programs. But this says less about the Tea Party than it does about universal social programs. It is easy for liberals to point to the Tea Partiers and call them bigots because they make a distinction between 'people on welfare' and 'normal people.' But in fact it’s the state that made the distinction first. When the state operates a means-tested or other conditional program, it inspects each citizen and stamps him or her as belonging to one category or the other... Political scientists have long known that something almost alchemical happens to public opinion when a universal, as opposed to a mean-tested, welfare program is established.

Mettler argues that this distinction comes out of the dual administrative nature of the New Deal. Part of the New Deal was to be administered by newly created federal government programs, while another part was to be administered by local and state authorities. It just so happened that the federal government's role regulated the work and lives of white men, while the state and local role retained authority over women and minorites. Keeping part of the New Deal's welfare state and floor of economic security administered at the state and local level was predicated intellectually on Brandeis' notion of the states as laboratories of democracy and politically on getting Southern white supremacists to endorse the New Deal. This meant that how people realize economic freedom could be maintained and expanded through illiberal means.

Remember that just three years after the Lochner case, with a Supreme Court hostile to all economic regulations, it made an exception to maximum hours regulations for women. Why? In 1908, the Court ruled in Muller v. Oregon, "That woman's physical structure and the performance of maternal functions place her at a disadvantage in the struggle for subsistence is obvious...as healthy mothers are essential to vigorous offspring, the physical well-being of woman becomes an object of public interest and care in order to preserve the strength and vigor of the race." These are the terms on which economic regulation could exist -- protecting essentialist visions of a women's place.

Mettler argues that "programs geared toward men became nationally administered programs and those aimed toward women retained state-level authority." This welfare state led to citizens becoming "divided by gender between two different sovereignties that govern in very different ways." As she says:

Click here to buy Senior Fellow Richard Kirsch’s new book on the epic health care reform battle, Fighting for Our Health.

What it meant to be an "American citizen" meant very different things to the retired male breadwinner, who came to expect his monthly social security check from the national government, and to the poor mother who hoped that the social worker assigned to evaluate her eligibility for a meager welfare check would find her child-rearing and housekeeping efforts worthy. The first was treated with dignity and respect, as an entitled person; the latter, with suspicion and scrutiny.

Mettler maps out a 2X2 grid, dividing out New Deal programs:

The crucial point is that liberal inclusion was based on long-term, full-time work for a single employer. If you had a job along those lines --and these jobs were held by white men at that time -- then you were included in a regime of universal economic security. Short-term, part-time work for multiple employers -- work done by women and minorities -- falls through the cracks into a patchwork of state and local governance. That governance bases inclusion on hierarchical ideals invoking republican notions of where a person stood in his or her community. The notion of the "deserving poor" comes out of this relationship. Aid to Dependent Children (ADC), for instance, was predicated on single mothers being able to retain their "natural" work as housewives and child-raisers. ADC's spot inspections of single mothers for "male callers" gives you a sense of how this played out -- as Mettler notes, "officials monitored and regulated women's moral character."

Progress was made on these New Deal programs up through the 1970s. But there's been significant rollback over the past 30 years. The call to "means-test" social insurance programs, Ending Welfare as We Know It by block-granting welfare's administrative role back to the states, the battles over block-granting Medicaid and privatizing Social Security and Medicare -- all have shifted the momentum in the opposite direction. But where does this leave us now, especially in regard to precarious labor?

I asked Dorian Warren, Columbia political scientist, Roosevelt Institute Fellow, and union expert, about where this stands. As he puts it:

Add up the Mettler argument with Hacker's notion of "policy drift," and most New Deal social policies (especially the FLSA and the NLRA) are outdated and obsolete. They were crafted with assumptions about work and the nature of the economy in mind: an agricultural and industrial economy, where workers had long-term attachments to one employer. That's no longer the case, and labor and employment laws haven't caught up to the new employment relationship. Long story short, we don't have the adequate legal structures to deal with this new employment environment.

The battle to move the welfare state to the federal level, where it could be administered inclusively and universally, was an intellectual and political battle waged within the New Deal. How is this playing out in the Obama administration? I'll eventually build a full case against the "nudge" theory of the administrative state, but for now a theory of using subtle and unconscious government techniques to help people work better within "choice architectures" isn't up to the challenge of recreating a regulatory environment for a new age.

For insight into how the current administration's approach is playing out in this model, take a look at the administration of health care reform. I asked Richard Kirsch, recent author of Fighting for Our Health and Roosevelt Institute Senior Fellow, about the federal/local administration of health care reform. He responded:

The House bill set up a strong federal exchange and let the states do their own only if their exchanges had stronger consumer protections. However with the Senate bill -- the law we have now -- states can set up very weak exchanges. And the insurance industry has lots of clout at the state level. The best hope is that there will be a strong federal exchange for states that don’t set up their own. But that will only be true if HHS creates one.

So we have an outdated regulatory regime, an intellectual climate geared towards local, illiberal control, and the application of economic freedoms designed to keep women yoked to essentialist and moralistic discoures. A "polarizing" workforce means that the labor market, without significant reform, will take on an exaggerated version of the split we saw in the New Deal, with the precarious work falling into a patchwork administration system of moralizing and without opportunities to organize.

Mike Konczal is a Fellow at the Roosevelt Institute.

Share This