Representative Bachus, FDIC and Voting Down Dodd-Frank's Resolution Authority

Apr 20, 2012Mike Konczal

So the House Republicans on the Financial Services Committee just voted to repeal "resolution authority."  What does this mean, and how can we compare it to previous actions by House Republicans?

So the House Republicans on the Financial Services Committee just voted to repeal "resolution authority."  What does this mean, and how can we compare it to previous actions by House Republicans?

A useful way of understanding both the financial crisis of 2008 and Dodd-Frank's response to it is through the idea of a "shadow banking system."  We have a set of regulatory rules, laws, practices and institutions from the New Deal that does well with the regular banking sector.  Over the past thirty years, a set of institutions started acting like banks without calling themselves banks, and thus did not have the same set of rules, laws and practices in place to regulate them as such.  Dodd-Frank's goal was to extend this regulatory framework to all "systemically risky financial institutions," or shadow banking institutions.

One of the main pillars of this is "resolution authority," which allows FDIC to takeover and wind-down a failing shadow bank.  Since the New Deal the FDIC can wind down a failing commercial bank without the system collapsing.  We found that putting commercial banks through bankruptcy was a disaster, so we created FDIC to allow a firm to fail and allocate losses in a way that mitigated panics and contagion.  Now the FDIC can use those powers on firms acting like banks but that are not hanging a "bank" sign on their window.  These powers include the ability to force big financial firms to write "living wills" to help with taking them down.

The FDIC has been making progress in formulating these powers.  They released a major report, The Orderly Liquidation of Lehman Brothers Holdings under the Dodd-Frank Act, which walks through how they would have handled 2008.  They've also answered conservative think tank critiques of resolution authority in what I think are correct and persuasive.

So when you hear people, especially on the right, criticizing Dodd-Frank's resolution authority your first step should be to analyze what they think of the FDIC more broadly.  Do they view it as a statist boot stamping on a human face forever?  Here's a Cato Handbook for Congress from 1997 arguing for the privatization of FDIC and mandating banks purchase private deposit insurance (perhaps from an exchange?).  Cato's 2001 call for privatizing FDIC is amazing for how disastrous every one of their assumptions and calls turned out to be in light of the financial crisis.  But, as they say, at least it's an ethos.

Representative Spencer Bachus (R - AL) is the current Chairman of the House Financial Services Committee, and just lead the Committee in a vote that, among many other things, repealed this resolution authority powers.  Bachus has argued "This authority is not a death panel for failed institutions...It is taxpayer-funded support for their creditors and counterparties.”

So where does Bachus stand on FDIC more broadly?  Here's the fascinating part: he lead a major 2002 move that expanded deposit insurance.  Bachus was the chief sponsor of the Federal Deposit Insurance Reform Act of 2002 which increased "the standard maximum amount of deposit insurance coverage from $100,000 to $130,000" and also adjusted it for inflation.

It's not clear why he supports FDIC when it comes to commercial banks but not shadow banks.  It's also not clear why, if he is so concerned about even the potential for moral hazard and taxpayer-funding being at risk (remember: FDIC recoups any expenses from fees on shadow banks, so taxpayers are always paid back), he took the bizarre step of expanding the amount of coverage FDIC gives to depositors (or the "creditors and counterparties" he rails about).  Did he feel creditors in the form of depositors weren't protected enough?

I've been reading about this 2002 bill, and if Bachus showed any concern about FDIC as an institution and a preference for putting commercial banks through bankruptcy instead of an orderly winddown I can't find it.  I'm trying to get a comment from the House Financial Services Committee on this but it certainly seems like a complete about face.  So one has to ask - if FDIC is a useful and appropriate way of allowing firms that hang a "bank" sign on the window to fail, why isn't it appropriate when a firm functions exactly like a bank?

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Why Full Employment is the Best Medicine for Inequality

Apr 20, 2012Mike Konczal

We face a lot of policy challenges, but making sure Americans have jobs will make them all easier.

One of the interesting ideas to come out of the recent Occupy Handbook is Paul Krugman and Robin Wells' argument that inequality has contributed to the lack of a serious and sustained response to the unemployment crisis of the Great Recession.

We face a lot of policy challenges, but making sure Americans have jobs will make them all easier.

One of the interesting ideas to come out of the recent Occupy Handbook is Paul Krugman and Robin Wells' argument that inequality has contributed to the lack of a serious and sustained response to the unemployment crisis of the Great Recession.

Daron Acemoglu and James Robinson respond at their Why Nations Fail blog.  Two points to discuss:

First, the distinction between “right” and “left” (or perhaps pro-elite and anti-elite) is not a natural one when it comes to Keynesian economics and policies. Many conservative politicians, and not just Nixon and Reagan, have embraced Keynesian economics. Both Fascist Italy and Nazi Germany were big-time Keynesians...Third, even in the current US context it is not clear why the wealthiest Americans should be opposed to Keynesian policies...

Fourth, even if Krugman and Wells’s emphasis is right, we find it hard to place lack of sufficient Keynesian stimulus as one of the most corrosive effects of soaring political inequality and political polarization in the US. What about the failure of our educational institutions; the huge incarceration rate, particularly for African-Americans; erosion of civil liberties; increasingly inefficient subsidies and tax breaks to select corporations and sectors; distortions created by implicit and explicit subsidies to the financial industry? Lack of sufficient Keynesian zeal seems a little less important.
For the first point, it's useful to distinguish between some stimulus/counter-cyclical spending and the actual policy goal of full employment. It is easy to imagine elites supporting policies that prevent system collapse -- nobody benefits from 25 percent unemployment -- but not being all that concerned with getting to full employment in two years versus 10 years (or even at all). Whether right now is a "sweet spot" of just enough aggregate demand and employment to keep the system running (and creditors paid) but not enough to give workers serious bargaining power is an ongoing topic of debate on the Internet. (Steve Waldman at interfluidity has the latest entry.) The Krugman/Wells essay brings up Kalecki in a way that I think is useful on this question; the issue of coordination and relative priorities among many eilites is also important.
For the second paragraph (their fourth point), it is always difficult to rank bad things. But it is very important to remember that a policy of full employment makes it significantly easier to deal with many other problems. People have much more realistic and managed expectations for what education can do for workers' wage gains in an economy where wages are actually growing. There's good data that unemployment is linked with a lack of interest in global warming, another very important issue. When there's full employment and serious wage growth people are also probably less likely to be concerned about immigration and trade's impact on their jobs. Deincarceration will be easier if there are jobs waiting for people on the other side of the walls rather than sky-high unemployment. And so on.
For all the policy fads of getting wages up -- Charles Murray's recent call for elites to shame the working class into higher wages being the latest, and probably not the worst -- the best way to get wages up is to have full employment. As Jared Bernstein notes, "the working man and woman really have no better friend than full employment."

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A Saez/Piketty Profile and a Syllabus

Apr 19, 2012Mike Konczal

Annie Lowrey has a must-read New York Times profile of the two French economists who have meticulously documented changes in the income share of the 1%, Emmanuel Saez and Thomas Piketty.  We've used their research extensively at this blog.  From the profile:

Annie Lowrey has a must-read New York Times profile of the two French economists who have meticulously documented changes in the income share of the 1%, Emmanuel Saez and Thomas Piketty.  We've used their research extensively at this blog.  From the profile:

Both admire, even adore, the United States, they say, for its entrepreneurial drive, innovative spirit and, not least, its academic excellence: the two met while re-searchers in Cambridge, Mass. But both also express bewilderment over the current conversation about whether the wealthy, who have taken most of America’s income gains over the last 30 years, should be paying higher taxes.
“The United States is getting accustomed to a completely crazy level of inequality,” Mr. Piketty said, with a degree of wonder. “People say that reducing inequality is radical. I think that tolerating the level of inequality the United States tolerates is radical.”
“In a way, the United States is becoming like Old Europe, which is very strange in historical perspective,” Mr. Piketty said. “The United States used to be very egalitarian, not just in spirit but in actuality. Inequality of wealth and income used to be much larger in France. And very high taxes on the very rich — that was invented in the United States,” he said.
Mr. Saez added, “Absent drastic policy changes, I doubt that income inequality will decline on its own.”

I also want to use this moment and link to the syllabus and course materials for Thomas Piketty's Paris School of Economics class on the "Economics of Inequality/Economie des inégalités."  I like reading syllabi to get a sense of where academic debates are, and these materials are going to be at the forefront of the inequality debate for some time to come.  The left-liberal space is re-examining and re-building its case on inequality in wake of the Recession and the 1% narrative, and this syllabus is a brilliant collection of the latest arguments, research and academic debate.  It's what will, in a good world, be common knowledge among all graduate students in 10 years - here you can see it argued in real time.  Check it out!

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What Should You Know About the Quebec Student Strikes and Occupations?

Apr 17, 2012Mike Konczal

One thing to remember about Occupy is that it has much of its current origins, successes, and most intense interactions with authority around the spaces of college campuses. Its activism is particularly innovative when it comes to direct actions, occupations, and student strikes, all to combat college tuition increases, privatization, and the creation of student debt markets.

One thing to remember about Occupy is that it has much of its current origins, successes, and most intense interactions with authority around the spaces of college campuses. Its activism is particularly innovative when it comes to direct actions, occupations, and student strikes, all to combat college tuition increases, privatization, and the creation of student debt markets. Here’s the Wikipedia entry on the Puerto Rico student strikes, where they were protesting massive waves of layoffs of government workers and campus faculty and an estimated 100 percent tuition hike. Here’s the Wikipedia entry on the Chilean student strikes, which date back to 2006, where students fought high application fees they couldn’t afford. And, of course, there's what is going on at University of California, with the pepper spray at Davis and the beatings both in 2009 and 2011 at Berkeley.

But the most interesting resistance happening right now is going on in Quebec, Canada. There are, according to one representative report, over 165,000 students on strike from class out of 495,000 in the student body.

Quebec is looking to increase its tuition 75 percent over the next several years. Students responded by starting what is now the longest strike in the province's history. It's gone on even though the government has offered to make student loans a nicer, kinder form of debt, with income-contingent repayments, while not budging on the tuition hikes.

This image by Tina Mailhot-Roberge shows tens of thousands of people marching through Montreal on March 22nd, 2012:

And here's an amazing video of two and a half hours of the protest time-lapsed down into 50 seconds on YouTube. And with a h/t to The Nation, here's the Real News Network's coverage of the protests.

The strike is heading into a dangerous time. The administration isn't looking to make concessions on tuition and students are approaching the point where they won't complete the semester. This will be worth watching in the weeks ahead.

Why are these sites so potent for activism? The college campus combines several issues into one: the privatization of public services, the dismembering of social insurance and its replacement with a regime of debt and risk-shifting, and the dismantling of the primary means of social mobility with one designed to entrench inequality, which all builds toward a lack of freedom to fully develop one's talents and abilities and be full, productive citizens.

These students are right to fight this battle at the beginning, during the initials cuts. Privatization creates its own justification; the more public universities are defunded and reconceived as a private good, the less civic interest there is in defending them as a public good. And they are also fighting at the beginning of their lives, both for what kind of world they want to live in and against the constraints of indenture that we see when this process of privatization and debt reaches its ultimate conclusion -- a path the United States is much further along.

Mike Konczal is a Fellow at the Roosevelt Institute.

Image courtesy of

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Does Expansionary Monetary Policy Primarily Benefit Finance and Rentiers?

Apr 17, 2012Mike Konczal

Joe Weisenthal calls it the Biggest Myth in Monetary Policy Today, and recently there's been a wave of posts about it.  Would another round of expansionary monetary policy at this point - in either a QE3, a conditional higher inflation target or NGDP targeting - primarily benefit the financial sector, rentiers and the wealthy?

Joe Weisenthal calls it the Biggest Myth in Monetary Policy Today, and recently there's been a wave of posts about it.  Would another round of expansionary monetary policy at this point - in either a QE3, a conditional higher inflation target or NGDP targeting - primarily benefit the financial sector, rentiers and the wealthy?

Here are Daron Acemoglu and Simon Johnson at Economix, making the case in Who Captured the Fed?:

Thus was born the idea of independent central bankers, steering the monetary ship purely on the basis of disinterested, objective and scientific analysis. When inflation is too high, they are supposed to raise interest rates. When unemployment is too high, they should make it cheaper and easier to borrow, all the while working to make sure that inflation expectations remain under control.

Increasingly, however, it seems that technocratic policy-making is just a myth. We have come full circle, and the Wall Street banks are calling the shots again...

Monetary policy has an impact on inflation, output and employment. But it also has a major impact on stock market prices. Any central banker raising interest rates is reducing stock market values and thus eroding the bonuses of top bankers and other chief executives....

Those people will lobby, asserting that higher interest rates will undermine the economy and cause us to plummet into recession, or worse....

We have lost track of the number of research notes from major banks pleading for easier credit, lower capital requirements, delay in implementing financial reforms or all of the above...

As the American economy begins to improve, influential people in the financial sector will continue to talk about the need for a prolonged period of low interest rates. The Fed will listen.

I'm a huge fan of both Daron Acemoglu and Simon Johnson (I'm about to start each of their books, Why Nations Fail and White House Burning), so I want to take this argument carefully.  How to approach it?

First off, it isn't just the financial sector calling for low rates (if they are, in fact, calling for it, as we'll see in a second).  A generic Taylor Rule, as Paul Krugman recently pointed out, calls for low rates until 2015.  Mess with the rule and the data a bit to adjust that date at the margins, but generic macroeconomic stabilization rules still see low rates for quite some time as necessary.

I always find the following to be a useful thought exercise: imagine we wake up and find that interest rates aren't set at zero but instead at one percent.  Whoops!  Should we turn around and have the Federal Reserve lower interest rates?  Those who think that Taylor Rule is correct and that the zero lower bound is blocking monetary policy from being effective would say yes; so would people who think the Federal Reserve isn't out of ammunition at the zero lower bound, people like Christina Romer and Charles Evans.

The post argues the Federal Reserve should, when unemployment is high, "make it cheaper and easier to borrow, all the while working to make sure that inflation expectations remain under control."  The post seems to concede that monetary policy works as normal, and unemployment is high and inflation expectations are, if anything, lower than what we want.

But I feel the entire vibe of the article is wrong. The financial sector is calling for higher interest rates.  This is why Carmen Reinhart told Institutional Investor that “Financial repression is manifesting itself right now” alongside the notion that financial repression is like “the rape and plunder of pension funds.”  Members of the financial community complain to reporters about "low interest rates that have been 'artificially manipulated' by the Federal Reserve."

Or take Brad Delong's six minute debate about QE with Jim Grant from last year.  As Delong summarized it (my bold):

I found it depressing because the major unfairness Grant focused on is that, because of the Federal Reserve, investors in money market funds can get only one basis point of interest. The 9% unemployed: they are not the victims. Those who cannot sell their houses because of the foreclosure overhang: they are not the victims. Those whose businesses crash because of slack aggregate demand call they are not the victims. The real victims are the rentiers who have a right to a nice solid well above inflation safe return, and from whom the Federal Reserve is stealing that right.

And I found what I could gauge of Jim Grant's worldview depressing as well. He seemed to be selling rentier-populist ressentiment. Grant's world is full of "takers"--and the Federal Reserve is helping them. And the biggest takers in Jim Grant's mind are the hedge fund operators of Greenwich, Connecticut. Why are they the biggest takers? Because they can borrow cheap, at low interest rates, and put the overnight money they borrow to work making fortunes. If only the Federal Reserve would shrink the money stock and raise interest rates! Then the hedge funds would have to pay healthy interest rates for their cash! Then the profits would flow to the truly worthy: the rentier coupon-clippers now suffering with their one basis point yields.

Never mind what a policy of monetary restraint to "normalize" interest rates would do to the unemployed...

You can read that in the recent statement by Mohamed A. El-Erian of Pimco, who, as Karl Smith noted, wants the Federal Reserve to focus on microeconomic goals instead of the macroeconomic problem of full employment.  This isn't new.  As Keynes noted, "the most stable, and the least easily shifted, element in our contemporary economy has been hitherto, and may prove to be in future, the minimum rate of interest acceptable to the generality of wealth-owners."

The implicit argument is that the interest rate compatible with full employment is too low for financial investors to accept.  Do we then just accept mass unemployment and the subsequent hysteresis-induced slowing of growth and human potential so Jim Grant and Pimco can make a profit they feel is worthy of their financial talents?  Of course not.

Now if you check out Jim Grant's argument to Brad Delong, there's an argument that we should split finance in two sectors - an established one that is hurt by low interest rates and one that is more focused on intermediation and/or trading for themselves, which could benefits from low rates and bubbles is stock prices and assets.

The stock market is following unemployment claims pretty closely, so it isn't clear to me that the stock market is broken from its function as a prediction of future economic activity (i.e. in a bubble).  I like two MIT economists arguing that we should disconnect stock prices from the real economy, but I think that requires an additional layer of explanation.  For instance, if monetary policy was constant and we passed another round of deficit-funded fiscal stimulus to rebuild infrastructure and employ people, I would expect the stock market to increase because the economy would be stronger.

If that's the case, that there's two financial sectors and one of them benefits from monetary expansion we have to ask - so what?  If monetary policy is working, and bringing us closer to full employment, and some hedge funds and Wall Street traders make some money off of it, why should that impact our commitment to using all levers for full employment?  Monetary policy is not a morality play, and it's not about rewarding the good people and punishing the bad ones.  It’s about stabilizing growth, prices and maximum employment without overheating the system or letting it choke to death from a lack of oxygen.

As Josh Mason's great guest post here mentioned, if we are worried about where the financial sector channels money, that's an argument for regulation instead of mass unemployment and scarce liquidity.  We should commit to better regulations as well as progressive taxes and/or financial taxes.  If those aren't in place (and I don't believe they sufficently are), those shouldn't be attempted with monetary policy, and they absolutely must not distract us from taking our eye off the goal - full employment in the wake of the Great Recession.

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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.

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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?

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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.

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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.

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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.

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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.

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