What Kind of Problem is the ACA Rollout for Liberalism?

Oct 23, 2013Mike Konczal

“This massive IT launch sure came in on time, under budget, and without headaches” is a statement that nobody has ever said. But even controlling for that, Healthcare.gov looks to be having a disastrous launch.

People are naturally asking about the practical and political implications of this disaster. Is it a problem for the Affordable Care Act as a whole, with its mixture of individual mandates and risk-pooling? Is it a political disaster for President Obama and the Democrats? Does this show us major problems in the way that government procures its contractors?

These are important questions, but some are asking a bigger one: is this a problem for liberalism as a political governance project? Does this rollout failure discredit the core goals of a liberal project, including that of a mixed economy, a regulatory state, and social insurance?

Conservatives in particular think this website has broad implications for liberalism as a philosophical and political project. I think it does, but for the exact opposite reasons: it highlights the problems inherent in the move to a neoliberal form of governance and social insurance, while demonstrating the superiorities in the older, New Deal form of liberalism. This point is floating out there, and it turns out to be a major problem for conservatives as well, so let's make it clear and explicit here.

So what has gone wrong? People are still trying to figure this out. There are the general problems of doing too much with too little time and resources and rolling out a big final product rather than smaller incremental pieces. These are things that, while problematic, don’t particularly have a political story to tell.

However, four bigger problems jump out.

The first has to do with means-testing the program. The biggest front-end problem is that users, before they can register, must “cross a busy digital junction in which data are swapped among separate computer systems built or run by contractors.”

Why is that? It is because the government needs to determine how much of a coupon it’ll write each person to go and buy private insurance. Beyond the philosophical components of means-testing (what the philosopher Jonathan Wolff calls “shameful revelations), the actual process requires substantial coordination between multiple government agencies with very different infrastructures.

As the GAO notes, “the data hub is to verify an applicant’s Social Security number with the Social Security Administration (SSA), and to access the data from the Internal Revenue Service (IRS) and the Department of Homeland Security (DHS) that are needed to assess the applicant’s income, citizenship, and immigration status. The data hub is also expected to access information from the Veterans Health Administration (VHA), Department of Defense (DOD), Office of Personnel Management (OPM), and Peace Corps to enable exchanges to determine if an applicant is eligible for insurance coverage from other federal programs that would make them ineligible for income-based financial subsidies.”

Rather than just being an example of bureaucratic infighting, each of these pieces of information is necessary to determine how aggressively the government should subsidize the private insurance individuals will buy, and the entire process will stall and fall apart if one of these checks isn’t completed quickly.

This by itself might not be a problem; however, the second issue is that the means-testing is necessary to link individuals up with individual private insurers. As the Washington Post notes, the back-end problems are in part the result of the site being “designed to draw from the offerings of private insurers, each with their own computer systems, rates and offerings.” And though this may be getting better, a serious concern has been inaccurate data being transmitted to the insurance companies. Which is to say that the emphasis on creating a digital marketplace where individuals get means-tested and can then pick and choose among insurers requires syncing on both ends, which is a difficult process.

So what? A third issue, and a major reason this is freaking people out, is that the first two problems could introduce adverse selection, as only the most needy will wait, and wait, to take advantage of the programs. As Yuval Levin has emphasized, the “danger of a rapid adverse selection spiral is much more serious than they believed possible this summer.”

And the fourth and final issue is that the federal government has had to pick up so much slack from rebelling states that didn’t want to implement health care. The state-level exchanges that were actually implemented appear to be doing okay, or at least significantly better. But the general problem is that “More than 30 states refused to set up their own exchanges, requiring the federal government to vastly expand its project in unexpected ways.”

So this tells a story. Let’s refer to these features of social insurance, which are also playing a major role in the rollout problems, as “Category A.” Now, what would the opposite of this look like? Let’s define the opposite of this as “Category B” social insurance. And let's take these two categories and chart them out:

What we often refer to as Category A can be viewed as a “neoliberal” approach to social insurance, heavy on private provisioning and means-testing. This term often obscures more than it helps, but think of it as a plan for reworking the entire logic of government to simply act as an enabler to market activities, with perhaps some coordinated charity to individuals most in need.

This contrasts with the Category B grouping, which we associate with the New Deal and the Great Society. This approach creates a universal floor so that individuals don’t experience basic welfare goods as commodities to buy and sell themselves. This is a continuum rather than a hard line, of course, but readers will note that Social Security and Medicare are more in Category B category rather than Category A. My man Franklin Delano Roosevelt may not have known about JavaScript and agile programming, but he knew a few things about the public provisioning of social insurance, and he realized the second category, while conceptually more work for the government, can eliminate a lot of unnecessary administrative problems.

Some of the more cartoony conservatives argue that this is a failure of liberalism because it is a failure of government planning, evidently confusing the concept of economic “central planning” with “the government makes a plan to do something.”

However, the smarter conservatives who are thinking several moves ahead (e.g. Ross Douthat) understand that this failed rollout is a significant problem for conservatives. Because if all the problems are driven by means-testing, state-level decisions and privatization of social insurance, the fact that the core conservative plan for social insurance is focused like a laser beam on means-testing, block-granting and privatization is a rather large problem. As Ezra Klein notes, “Paul Ryan's health-care plan -- and his Medicare plan -- would also require the government to run online insurance marketplaces.” Additionally, the Medicaid expansion is working well where it is being implemented, and the ACA is perhaps even bending the cost curve of Medicare, the two paths forward that conservatives don’t want to take.

I’ll be discussing this more, but the choice between Category A and B above will characterize much of the political debate in the next decade. It’s important we get more sophisticated analysis of what has gone wrong with the ACA rollout to better appreciate how utilizing “the market” can be far more cumbersome and inefficient than the government just doing things itself.

Follow or contact the Rortybomb blog:

  

 

“This massive IT launch sure came in on time, under budget, and without headaches” is a statement that nobody has ever said. But even controlling for that, Healthcare.gov looks to be having a disastrous launch.

People are naturally asking about the practical and political implications of this disaster. Is it a problem for the Affordable Care Act as a whole, with its mixture of individual mandates and risk-pooling? Is it a political disaster for President Obama and the Democrats? Does this show us major problems in the way that government procures its contractors?

These are important questions, but some are asking a bigger one: is this a problem for liberalism as a political governance project? Does this rollout failure discredit the core goals of a liberal project, including that of a mixed economy, a regulatory state, and social insurance?

Conservatives in particular think this website has broad implications for liberalism as a philosophical and political project. I think it does, but for the exact opposite reasons: it highlights the problems inherent in the move to a neoliberal form of governance and social insurance, while demonstrating the superiorities in the older, New Deal form of liberalism. This point is floating out there, and it turns out to be a major problem for conservatives as well, so let's make it clear and explicit here.

So what has gone wrong? People are still trying to figure this out. There are the general problems of doing too much with too little time and resources and rolling out a big final product rather than smaller incremental pieces. These are things that, while problematic, don’t particularly have a political story to tell.

However, four bigger problems jump out.

The first has to do with means-testing the program. The biggest front-end problem is that users, before they can register, must “cross a busy digital junction in which data are swapped among separate computer systems built or run by contractors.”

Why is that? It is because the government needs to determine how much of a coupon it’ll write each person to go and buy private insurance. Beyond the philosophical components of means-testing (what the philosopher Jonathan Wolff calls “shameful revelations), the actual process requires substantial coordination between multiple government agencies with very different infrastructures.

As the GAO notes, “the data hub is to verify an applicant’s Social Security number with the Social Security Administration (SSA), and to access the data from the Internal Revenue Service (IRS) and the Department of Homeland Security (DHS) that are needed to assess the applicant’s income, citizenship, and immigration status. The data hub is also expected to access information from the Veterans Health Administration (VHA), Department of Defense (DOD), Office of Personnel Management (OPM), and Peace Corps to enable exchanges to determine if an applicant is eligible for insurance coverage from other federal programs that would make them ineligible for income-based financial subsidies.”

Rather than just being an example of bureaucratic infighting, each of these pieces of information is necessary to determine how aggressively the government should subsidize the private insurance individuals will buy, and the entire process will stall and fall apart if one of these checks isn’t completed quickly.

This by itself might not be a problem; however, the second issue is that the means-testing is necessary to link individuals up with individual private insurers. As the Washington Post notes, the back-end problems are in part the result of the site being “designed to draw from the offerings of private insurers, each with their own computer systems, rates and offerings.” And though this may be getting better, a serious concern has been inaccurate data being transmitted to the insurance companies. Which is to say that the emphasis on creating a digital marketplace where individuals get means-tested and can then pick and choose among insurers requires syncing on both ends, which is a difficult process.

So what? A third issue, and a major reason this is freaking people out, is that the first two problems could introduce adverse selection, as only the most needy will wait, and wait, to take advantage of the programs. As Yuval Levin has emphasized, the “danger of a rapid adverse selection spiral is much more serious than they believed possible this summer.”

And the fourth and final issue is that the federal government has had to pick up so much slack from rebelling states that didn’t want to implement health care. The state-level exchanges that were actually implemented appear to be doing okay, or at least significantly better. But the general problem is that “More than 30 states refused to set up their own exchanges, requiring the federal government to vastly expand its project in unexpected ways.”

So this tells a story. Let’s refer to these features of social insurance, which are also playing a major role in the rollout problems, as “Category A.” Now, what would the opposite of this look like? Let’s define the opposite of this as “Category B” social insurance. And let's take these two categories and chart them out:

What we often refer to as Category A can be viewed as a “neoliberal” approach to social insurance, heavy on private provisioning and means-testing. This term often obscures more than it helps, but think of it as a plan for reworking the entire logic of government to simply act as an enabler to market activities, with perhaps some coordinated charity to individuals most in need.

This contrasts with the Category B grouping, which we associate with the New Deal and the Great Society. This approach creates a universal floor so that individuals don’t experience basic welfare goods as commodities to buy and sell themselves. This is a continuum rather than a hard line, of course, but readers will note that Social Security and Medicare are more in Category B category rather than Category A. My man Franklin Delano Roosevelt may not have known about JavaScript and agile programming, but he knew a few things about the public provisioning of social insurance, and he realized the second category, while conceptually more work for the government, can eliminate a lot of unnecessary administrative problems.

Some of the more cartoony conservatives argue that this is a failure of liberalism because it is a failure of government planning, evidently confusing the concept of economic “central planning” with “the government makes a plan to do something.”

However, the smarter conservatives who are thinking several moves ahead (e.g. Ross Douthat) understand that this failed rollout is a significant problem for conservatives. Because if all the problems are driven by means-testing, state-level decisions and privatization of social insurance, the fact that the core conservative plan for social insurance is focused like a laser beam on means-testing, block-granting and privatization is a rather large problem. As Ezra Klein notes, “Paul Ryan's health-care plan -- and his Medicare plan -- would also require the government to run online insurance marketplaces.” Additionally, the Medicaid expansion is working well where it is being implemented, and the ACA is perhaps even bending the cost curve of Medicare, the two paths forward that conservatives don’t want to take.

I’ll be discussing this more, but the choice between Category A and B above will characterize much of the political debate in the next decade. It’s important we get more sophisticated analysis of what has gone wrong with the ACA rollout to better appreciate how utilizing “the market” can be far more cumbersome and inefficient than the government just doing things itself.

Follow or contact the Rortybomb blog:

  

Website error message image via Shutterstock.com

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Live Around the Web: Gensler and Low-Wage Workers

Oct 23, 2013Mike Konczal

Two posts from around the internet this week:

1. Perhaps you’ve heard this story before: In early October 2013 regulators launched an electronic trading platform. An important part of the Obama administration’s plan to build a more just economy, and a crucial part of the landmark legislation passed by the 111th United States Congress, this platform is designed to fix a market that many believed was broken. By structuring the market through a combination of incentives, mandates and regulations, the government could bring efficiency, transparency and competition to a market that was sorely lacking it, benefitting both individuals themselves and the economy as a whole. If it succeeds it will make the case for government’s role in the economy; if it ultimately fails, it could discredit the project of liberalism for decades.
 
Many will recognize this story as the launch of the health-care exchanges under the Affordable Care Act. But it’s the same exact story for Dodd-Frank and financial reform. On October 2nd the Commodity Futures Trading Commission (CFTC) launched something called a “swap execution facility” (SEF).
 
My interview with CFTC chairman Gary Gensler about the SEFs and derivative reform more generally is up at Wonkblog here.
 
2. Given the range of strikes and actions by low-wage workers, particularly at big-box retailers and fast-food locations, it's important to document how wages  are just one among many things they are fighting for. Live at Al Jazeera America: America are fighting for more than just money: Strikers at fast-food chains and big-box stores demand respect and freedom from abusive labor practices.
 

Follow or contact the Rortybomb blog:

  

 

Two posts from around the internet this week:

1. Perhaps you’ve heard this story before: In early October 2013 regulators launched an electronic trading platform. An important part of the Obama administration’s plan to build a more just economy, and a crucial part of the landmark legislation passed by the 111th United States Congress, this platform is designed to fix a market that many believed was broken. By structuring the market through a combination of incentives, mandates and regulations, the government could bring efficiency, transparency and competition to a market that was sorely lacking it, benefitting both individuals themselves and the economy as a whole. If it succeeds it will make the case for government’s role in the economy; if it ultimately fails, it could discredit the project of liberalism for decades.
 
Many will recognize this story as the launch of the health-care exchanges under the Affordable Care Act. But it’s the same exact story for Dodd-Frank and financial reform. On October 2nd the Commodity Futures Trading Commission (CFTC) launched something called a “swap execution facility” (SEF).
 
My interview with CFTC chairman Gary Gensler about the SEFs and derivative reform more generally is up at Wonkblog here.
 
2. Given the range of strikes and actions by low-wage workers, particularly at big-box retailers and fast-food locations, it's important to document how wages  are just one among many things they are fighting for. Live at Al Jazeera America: America are fighting for more than just money: Strikers at fast-food chains and big-box stores demand respect and freedom from abusive labor practices.
 

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Live at Wonkblog: What is Actually Shutdown?

Oct 7, 2013Mike Konczal

My weekly post at Wonkblog is: The ‘non-essential’ parts of government that shut down are actually quite essential. Given the way parks and zoo cameras have dominated the coverage of the shutdown, I wanted to step back and summarize what exactly the federal government doesn't do in a shutdown, and how important it is. I also highlight some great journalism being done on the shutdown itself. Hope you check it out.

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My weekly post at Wonkblog is: The ‘non-essential’ parts of government that shut down are actually quite essential. Given the way parks and zoo cameras have dominated the coverage of the shutdown, I wanted to step back and summarize what exactly the federal government doesn't do in a shutdown, and how important it is. I also highlight some great journalism being done on the shutdown itself. Hope you check it out.

Follow or contact the Rortybomb blog:

  

 

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What are Conservative Experts Saying About Breaking Through the Debt Ceiling?

Oct 7, 2013Mike Konczal

There was a fantastic piece in The Atlantic back in 2000 about psychiatrists dealing with people who wanted to have their limbs cut off because it would make them feel more like themselves to be amputees. The doctors’ big dilemma was whether or not to treat “apotemnophilia” as a diagnosable mental illness. If they engaged with it as a mental illness that existed and was recognized by the medical community, they ran the risk of encouraging more patients to identify with it.

I have the same feelings about engaging in a debate over whether or not breaching the debt ceiling matters. I don’t want it to become a debate that people have, because it will get coded as yet another partisan thing pundits fight about, and thus reduce the seriousness with which we should regard the situation. That, in turn, could make a default even more likely. This is a problem we face because of the he-said/she-said coverage of political topics in most U.S. media.

Right now, many House Tea Party members believe that a default is impossible because we can prioritize interest payments to go first. There have been really great pieces written lately about going through the debt ceiling and what it would mean for the economy; Kevin Roose, Greg Ip, and Matthew O’Brien have pieces that are particularly worth your time.

At a baseline, what they tell us is that even if that kind of prioritizing is possible, the legality is in doubt, we could still miss a payment, the economy would go into a recession from the sudden collapse of spending, and even flirting with this possibility has a bad effect on the economy. We also simply don’t know if prioritizing would work.

But I wanted to get a sense of what the right wing is hearing on this topic. In order to do that, I contacted three major conservative think tanks to ask for a comment from their experts “about the economic consequences of the government defaulting on its debt if it goes through the debt ceiling.” Here’s what I got.

Heritage

The Heritage Foundation immediately responded with a quote from this post, stating, “Congress still has some time and options. Even if the debt limit is not raised by mid-October, Boccia writes, ‘the Treasury would not necessarily default on debt obligations,’ as it can ‘reasonably be expected to prioritize principal and interest payments on the national debt, protecting the full faith and credit of the United States above all other spending.’”

They added, “In other words, risk of a default is practically nil—unless the President and Treasury choose to default, an unprecedented and almost inconceivable course of action.”

In short, Heritage’s position is that if there’s a default, it will be because the president chooses to default.

Cato Institute

The Cato Institute put me in touch with their senior fellow Dan Mitchell, who said, “I think the likelihood of an actual default is zero, or as close to zero as you can possibly get, for the simple reason that the Treasury Department has plenty of competent people who would somehow figure out how to prioritize payments.”

But wait, does the Obama administration have the legal authority to do something like that? “From what I understand. I’m an economist, not a lawyer. It’s a gray area.”

But isn’t it complicated to prioritize debt payments? “Interest on the debt is paid out of a different account than other government spending. So the argument that there’d be a lot of difficulty and challenges to prioritizing most payments is true, because it’s automatic.” However, “interest payments on the debt are apparently out of a different account, which presumably means that that it would be relatively simple to make sure that happens.”

But certainly it would cause some financial panic, right? “Will there be some economic repercussions? Financial markets I’m sure would be worried as we’d be in uncharted territory… Yes, I’m sure there’d be some anxiety. Especially if Bernanke or Lew or somebody like that is saying something that triggers concern, and spooks the markets.”

American Enterprise Institute

Bucking the trend, the American Enterprise Institute put me in touch with Michael Strain. What happens if we go through the debt ceiling? “First thing I’d say is that nobody really knows, and that’s the scary thing,” he told me. He referenced and drew on an LA Times editorial he had just written.

“I think you’d see a spike in interest rates. Though others think interest rates might fall because people would be spooked. Either way, we should consider it a catastrophe. If there’s a default it could cause a credit crunch. If the repo markets don’t consider Treasuries good collateral anymore there could be a panic. There really could be something similar to 2008.”

Could we prioritize payments? “What I would caution is that it is not clear we could do that. So, for example, back in the 1970s Congress waited until the 11th hour to raise the debt ceiling, and we were put into default by errors in execution. I’d caution that if we try and do something cute things can go wrong. And we don’t want to invite error. We saw what happened in 2011 - even with a deal and no default, even doing that really hurts the economy in a measurable way.”

So why is there so much fascination on the right with going through the debt ceiling? “When I do interviews with right-wing media there does seem to be a story that goes like this: they said the sequester would be horrible and the sky didn’t fall, they said that the government shutdown would be horrible, and the sky didn’t fall, and now they are saying going through the debt ceiling date would be horrible and why would we believe them this time? I’ve been trying to push back against this.”

Add to that last part the idea that conservatives are “winning” the shutdown, so why not push their luck and go through the debt ceiling, too? Especially when the majority of people doing the intellectual, “expert” work on the right are describing it as either consequence-free or an opportunity to blame President Obama for something.

Follow or contact the Rortybomb blog:

  

 

There was a fantastic piece in The Atlantic back in 2000 about psychiatrists dealing with people who wanted to have their limbs cut off because it would make them feel more like themselves to be amputees. The doctors’ big dilemma was whether or not to treat “apotemnophilia” as a diagnosable mental illness. If they engaged with it as a mental illness that existed and was recognized by the medical community, they ran the risk of encouraging more patients to identify with it.

I have the same feelings about engaging in a debate over whether or not breaching the debt ceiling matters. I don’t want it to become a debate that people have, because it will get coded as yet another partisan thing pundits fight about, and thus reduce the seriousness with which we should regard the situation. That, in turn, could make a default even more likely. This is a problem we face because of the he-said/she-said coverage of political topics in most U.S. media.

Right now, many House Tea Party members believe that a default is impossible because we can prioritize interest payments to go first. There have been really great pieces written lately about going through the debt ceiling and what it would mean for the economy; Kevin Roose, Greg Ip, and Matthew O’Brien have pieces that are particularly worth your time.

At a baseline, what they tell us is that even if that kind of prioritizing is possible, the legality is in doubt, we could still miss a payment, the economy would go into a recession from the sudden collapse of spending, and even flirting with this possibility has a bad effect on the economy. We also simply don’t know if prioritizing would work.

But I wanted to get a sense of what the right wing is hearing on this topic. In order to do that, I contacted three major conservative think tanks to ask for a comment from their experts “about the economic consequences of the government defaulting on its debt if it goes through the debt ceiling.” Here’s what I got.

Heritage

The Heritage Foundation immediately responded with a quote from this post, stating, “Congress still has some time and options. Even if the debt limit is not raised by mid-October, Boccia writes, ‘the Treasury would not necessarily default on debt obligations,’ as it can ‘reasonably be expected to prioritize principal and interest payments on the national debt, protecting the full faith and credit of the United States above all other spending.’”

They added, “In other words, risk of a default is practically nil—unless the President and Treasury choose to default, an unprecedented and almost inconceivable course of action.”

In short, Heritage’s position is that if there’s a default, it will be because the president chooses to default.

Cato Institute

The Cato Institute put me in touch with their senior fellow Dan Mitchell, who said, “I think the likelihood of an actual default is zero, or as close to zero as you can possibly get, for the simple reason that the Treasury Department has plenty of competent people who would somehow figure out how to prioritize payments.”

But wait, does the Obama administration have the legal authority to do something like that? “From what I understand. I’m an economist, not a lawyer. It’s a gray area.”

But isn’t it complicated to prioritize debt payments? “Interest on the debt is paid out of a different account than other government spending. So the argument that there’d be a lot of difficulty and challenges to prioritizing most payments is true, because it’s automatic.” However, “interest payments on the debt are apparently out of a different account, which presumably means that that it would be relatively simple to make sure that happens.”

But certainly it would cause some financial panic, right? “Will there be some economic repercussions? Financial markets I’m sure would be worried as we’d be in uncharted territory… Yes, I’m sure there’d be some anxiety. Especially if Bernanke or Lew or somebody like that is saying something that triggers concern, and spooks the markets.”

American Enterprise Institute

Bucking the trend, the American Enterprise Institute put me in touch with Michael Strain. What happens if we go through the debt ceiling? “First thing I’d say is that nobody really knows, and that’s the scary thing,” he told me. He referenced and drew on an LA Times editorial he had just written.

“I think you’d see a spike in interest rates. Though others think interest rates might fall because people would be spooked. Either way, we should consider it a catastrophe. If there’s a default it could cause a credit crunch. If the repo markets don’t consider Treasuries good collateral anymore there could be a panic. There really could be something similar to 2008.”

Could we prioritize payments? “What I would caution is that it is not clear we could do that. So, for example, back in the 1970s Congress waited until the 11th hour to raise the debt ceiling, and we were put into default by errors in execution. I’d caution that if we try and do something cute things can go wrong. And we don’t want to invite error. We saw what happened in 2011 - even with a deal and no default, even doing that really hurts the economy in a measurable way.”

So why is there so much fascination on the right with going through the debt ceiling? “When I do interviews with right-wing media there does seem to be a story that goes like this: they said the sequester would be horrible and the sky didn’t fall, they said that the government shutdown would be horrible, and the sky didn’t fall, and now they are saying going through the debt ceiling date would be horrible and why would we believe them this time? I’ve been trying to push back against this.”

Add to that last part the idea that conservatives are “winning” the shutdown, so why not push their luck and go through the debt ceiling, too? Especially when the majority of people doing the intellectual, “expert” work on the right are describing it as either consequence-free or an opportunity to blame President Obama for something.

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Debt ceiling banner image via Shutterstock.com

 

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The 1 Percent Took Home the Largest Share of Income Since 1928 Last Year

Sep 12, 2013Mike Konczal

Are our rich content? It's a question that bounces back and forth in the blogosphere. Are elites, economic and otherwise, happy with the pace of the weak recovery? Are they indifferent? Or are they actively worse off than they would be if unemployment were lower?

This question comes up when Emmanuel Saez updates his data on the incomes of the top 1 percent. Most of the coverage has focused on the rate of change for incomes of the top 1 percent, particularly the fact that the top 1 percent have enjoyed 95 percent of all income growth from 2009 to 2012. But I want to focus on levels. I'm going to modify one of Saez's charts to show something I don't think has been pointed out:

This is the percentage of all income, excluding capital gains, that goes to the top 1 percent. And as you can see, it's not just back where it was before the recession; it's far exceeded that benchmark. And it's exceeded all the years on record, with the one exception of 1928.

Over the past 20 years, this percentage dropped after each recession. If you look, you can see it drop in the early 1990s and 2000s. However, it then recovered and exceeded the old rates.

We saw this rate fall in the Great Recession. The obvious question was whether this would be a permanent break or whether it would recover and exceed the old rate. That question is now answered. As noted, the only year on record in which the top 1 percent took home a larger piece of the economic pie was in 1928, and then only barely.

This excludes volatile capital income, in part to see a cleaner trend and in part because tax changes from the fiscal cliff and Obamacare probably influenced the 2012 results. But the trend is nearly the same with capital gains, where this year's 22.4 percent share for the top 1 percent is closing in on 2007's 23.5 percent share (and 1928's record high 23.9 percent). This pattern is also true when using average incomes.

But this one chart is something I've particularly watched during the Great Recession. Because you could, at one point, say that the rich had taken a huge fall in the Great Recession, and therefore it was in everyone's interest to get the economy back on track. That is harder to say today, and it will be harder to say next year as these trends continue in the absence of policy action.

Follow or contact the Rortybomb blog:

  

 

Are our rich content? It's a question that bounces back and forth in the blogosphere. Are elites, economic and otherwise, happy with the pace of the weak recovery? Are they indifferent? Or are they actively worse off than they would be if unemployment were lower?

This question comes up when Emmanuel Saez updates his data on the incomes of the top 1 percent. Most of the coverage has focused on the rate of change for incomes of the top 1 percent, particularly the fact that the top 1 percent have enjoyed 95 percent of all income growth from 2009 to 2012. But I want to focus on levels. I'm going to modify one of Saez's charts to show something I don't think has been pointed out:

This is the percentage of all income, excluding capital gains, that goes to the top 1 percent. And as you can see, it's not just back where it was before the recession; it's far exceeded that benchmark. And it's exceeded all the years on record, with the one exception of 1928.

Over the past 20 years, this percentage dropped after each recession. If you look, you can see it drop in the early 1990s and 2000s. However, it then recovered and exceeded the old rates.

We saw this rate fall in the Great Recession. The obvious question was whether this would be a permanent break or whether it would recover and exceed the old rate. That question is now answered. As noted, the only year on record in which the top 1 percent took home a larger piece of the economic pie was in 1928, and then only barely.

This excludes volatile capital income, in part to see a cleaner trend and in part because tax changes from the fiscal cliff and Obamacare probably influenced the 2012 results. But the trend is nearly the same with capital gains, where this year's 22.4 percent share for the top 1 percent is closing in on 2007's 23.5 percent share (and 1928's record high 23.9 percent). This pattern is also true when using average incomes.

But this one chart is something I've particularly watched during the Great Recession. Because you could, at one point, say that the rich had taken a huge fall in the Great Recession, and therefore it was in everyone's interest to get the economy back on track. That is harder to say today, and it will be harder to say next year as these trends continue in the absence of policy action.

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What Policy Do We Want Out of the Next Fed Chair?

Sep 5, 2013Mike Konczal

What a difference a year makes. Last year, the Jackson Hole conference was focused on how monetary policy and central banks were still effective at the zero lower bound if they were willing to take chances. It provided the intellectual basis for several "asks," including targeting states, allowing for conditional higher inflation under the Evans Rule, alongside a commitment to open-ended purchases in QE3. These asks were executed that winter.

This year it isn’t clear what “asks” there are for the Federal Reserve. Stop the taper? A higher inflation target? Targeting something else? More purchases? The Evans Rule and state-targeting established a specific goal that allowed us to measure whether or not the Federal Reserve was taking its responsibility seriously. There isn’t the same ask for this year.

Which is a problem, because there’s going to be a new Federal Reserve chair nominated in a few weeks. Last year, asking if the candidates supported the Evans Rule and QE3 would have helped us figure out if they took their role seriously. This year, the questions are more vague.

This hasn’t been helped by the lack of concrete writing on monetary policy during the crisis by the presumed frontrunner for the position, Larry Summers. As such, it’s hard to connect commentary on Summers with specific demands from monetary policy in the Great Recession. And much of Summers’ writings on financial reform are from before Dodd-Frank, so it is tough to link them to the specifics of what is happening right now.

Zachary Goldfarb at Wonkblog has a post, ”Here’s what Larry Summers would do at the Fed, that tries to determine what Summers would emphasize. It’s “based on interviews with some of the people who know him best, primarily sources who have worked closely with him, along with parsing his public comments,“ which Goldfarb found while researching a longer piece on the politics of Obama nominating Summers.

You should read it, as I want to comment on four things that stand out from it. I hate formatting a post this way, but I want to use Goldfarb’s bullet points to emphasize what questions people should have of Summers if his name goes forward. Bold is Goldfarb:

“Summers wouldn’t be any more dovish or hawkish than Ben Bernanke… While he’s likely to focus on employment while inflation remains low, he’ll be a hawk if inflation starts to rise much beyond the 2 percent target.”

If Summers would get aggressive if inflation started to rise above 2 percent, that would be significantly more hawkish than current policy, which has the Federal Reserve willing to tolerate inflation until 2.5 percent if it’s seen as controlled. If it became an important part of his policy, the Fed could reinstate a de facto 2 percent ceiling on inflation.

Bernanke spent 2011-2012 moving the FOMC to endorse the Evans Rule. On the first read, it’s not clear that Summers would have done that if he had been appointed back in 2010, especially if he was skeptical of QE in general. If this is the case, it’s a major abandonment of what was hard fought for by doves like Bernanke and Janet Yellen.

More generally, many economists are calling for a move to a higher inflation target, both as a means to deal with our current recession and to prevent future episodes at the zero lower bound. If Summers is excluding this possibility out of hand, that’s a problem.

“He thinks capital is king.”

The biggest question in town is whether or not U.S. regulators should raise capital requirements over what is required in Basel III. Daniel Tarullo thinks so. So does the FDIC. The administration is currently seen as being opposed to this. As Undersecretary for Domestic Finance Mary Miller said in a recent speech pouring cold water on the idea, “It is important to consider the totality of what the Dodd-Frank Act and Basel reforms do and give existing reforms time to take both shape and effect.”

If Summers agrees with Treasury, then expect him to make life difficult for Daniel Tarullo. If he agrees with Tarullo, that’s great for Tarullo. But if that’s the case, why hasn’t Summers done anything to publicly support him while Tarullo has stuck his neck out?

“He would use the Fed to pressure global banks to be more transparent and accurate.”

Summers is concerned about foreign financial institutions and their regulatory status. If you are concerned about foreign regulators and foreign standards for the financial sector, the biggest issue, by far, is cross-border derivatives. Should foreign subsidiaries of U.S. financial firms follow United States rules or weaker European rules?

As Gary Gensler, the chair of the CFTC, has argued, “All of these common-sense reforms Congress mandated [in Dodd-Frank], however, could be undone if the overseas guaranteed affiliates and branches of U.S. persons are allowed to operate outside of these important requirements.”

The administration did not agree. According to a blockbuster story by Silla Brush and Robert Schmidt at Bloomberg, Treasury Secretary Jack Lew put pressure on Gensler to back off this part of Dodd-Frank. According to the story, Gensler had “been hearing the same request from lobbyists seeking to slow the process, and he told the Treasury chief it felt like his adversary bankers were in the room.”

As a potential member of FSOC, Summers would have a lot of influence in supporting or stopping the CFTC. As with capital requirements, does Summers support the administration and the Treasury Department seeking to cool Dodd-Frank rule-writing, or does he support people like Tarullo and Gensler seeking to write more aggressive rules?

As a reminder, Summers does not have a great track record of respectfully dealing with regulatory heads who want more aggressive reforms than he wants while in public office. And, oddly, his connections to the administration could cause him to fight, rather than support (or just ignore), these regulatory heads pushing more aggressively.

“If a crisis did occur, he’d be no-holds-barred.”

Minor aside point, but I haven’t seen whether or not Summers supports the limits to the 13(3) powers the Federal Reserve invoked in 2008. Section 13(3) of the Federal Reserve Act was amended under Dodd-Frank so that "any emergency lending program or facility is for the purpose of providing liquidity to the financial system, and not to aid a failing financial company," and any such lending program has to have "broad-based eligibility.” The Federal Reserve will also need permission from the Treasury Secretary before proceeding in some cases.

This is designed to prevent the Federal Reserve from being no-holds-barred in rescuing an individual firm (like AIG) instead of an entire market (like commercial paper). This may be a big wake-up call come the next financial crisis, and I'm curious if the Fed would simply push in ways that try to circumvent the rule.

This is just a baseline, but it shows how much is still open when it comes to the future of monetary policy and financial reform. Or the two biggest things the next Fed Chairman will have to deal with.

Follow or contact the Rortybomb blog:

  

 

What a difference a year makes. Last year, the Jackson Hole conference was focused on how monetary policy and central banks were still effective at the zero lower bound if they were willing to take chances. It provided the intellectual basis for several "asks," including targeting states, allowing for conditional higher inflation under the Evans Rule, alongside a commitment to open-ended purchases in QE3. These asks were executed that winter.

This year it isn’t clear what “asks” there are for the Federal Reserve. Stop the taper? A higher inflation target? Targeting something else? More purchases? The Evans Rule and state-targeting established a specific goal that allowed us to measure whether or not the Federal Reserve was taking its responsibility seriously. There isn’t the same ask for this year.

Which is a problem, because there’s going to be a new Federal Reserve chair nominated in a few weeks. Last year, asking if the candidates supported the Evans Rule and QE3 would have helped us figure out if they took their role seriously. This year, the questions are more vague.

This hasn’t been helped by the lack of concrete writing on monetary policy during the crisis by the presumed frontrunner for the position, Larry Summers. As such, it’s hard to connect commentary on Summers with specific demands from monetary policy in the Great Recession. And much of Summers’ writings on financial reform are from before Dodd-Frank, so it is tough to link them to the specifics of what is happening right now.

Zachary Goldfarb at Wonkblog has a post, ”Here’s what Larry Summers would do at the Fed, that tries to determine what Summers would emphasize. It’s “based on interviews with some of the people who know him best, primarily sources who have worked closely with him, along with parsing his public comments,“ which Goldfarb found while researching a longer piece on the politics of Obama nominating Summers.

You should read it, as I want to comment on four things that stand out from it. I hate formatting a post this way, but I want to use Goldfarb’s bullet points to emphasize what questions people should have of Summers if his name goes forward. Bold is Goldfarb:

“Summers wouldn’t be any more dovish or hawkish than Ben Bernanke… While he’s likely to focus on employment while inflation remains low, he’ll be a hawk if inflation starts to rise much beyond the 2 percent target.”

If Summers would get aggressive if inflation started to rise above 2 percent, that would be significantly more hawkish than current policy, which has the Federal Reserve willing to tolerate inflation until 2.5 percent if it’s seen as controlled. If it became an important part of his policy, the Fed could reinstate a de facto 2 percent ceiling on inflation.

Bernanke spent 2011-2012 moving the FOMC to endorse the Evans Rule. On the first read, it’s not clear that Summers would have done that if he had been appointed back in 2010, especially if he was skeptical of QE in general. If this is the case, it’s a major abandonment of what was hard fought for by doves like Bernanke and Janet Yellen.

More generally, many economists are calling for a move to a higher inflation target, both as a means to deal with our current recession and to prevent future episodes at the zero lower bound. If Summers is excluding this possibility out of hand, that’s a problem.

“He thinks capital is king.”

The biggest question in town is whether or not U.S. regulators should raise capital requirements over what is required in Basel III. Daniel Tarullo thinks so. So does the FDIC. The administration is currently seen as being opposed to this. As Undersecretary for Domestic Finance Mary Miller said in a recent speech pouring cold water on the idea, “It is important to consider the totality of what the Dodd-Frank Act and Basel reforms do and give existing reforms time to take both shape and effect.”

If Summers agrees with Treasury, then expect him to make life difficult for Daniel Tarullo. If he agrees with Tarullo, that’s great for Tarullo. But if that’s the case, why hasn’t Summers done anything to publicly support him while Tarullo has stuck his neck out?

“He would use the Fed to pressure global banks to be more transparent and accurate.”

Summers is concerned about foreign financial institutions and their regulatory status. If you are concerned about foreign regulators and foreign standards for the financial sector, the biggest issue, by far, is cross-border derivatives. Should foreign subsidiaries of U.S. financial firms follow United States rules or weaker European rules?

As Gary Gensler, the chair of the CFTC, has argued, “All of these common-sense reforms Congress mandated [in Dodd-Frank], however, could be undone if the overseas guaranteed affiliates and branches of U.S. persons are allowed to operate outside of these important requirements.”

The administration did not agree. According to a blockbuster story by Silla Brush and Robert Schmidt at Bloomberg, Treasury Secretary Jack Lew put pressure on Gensler to back off this part of Dodd-Frank. According to the story, Gensler had “been hearing the same request from lobbyists seeking to slow the process, and he told the Treasury chief it felt like his adversary bankers were in the room.”

As a potential member of FSOC, Summers would have a lot of influence in supporting or stopping the CFTC. As with capital requirements, does Summers support the administration and the Treasury Department seeking to cool Dodd-Frank rule-writing, or does he support people like Tarullo and Gensler seeking to write more aggressive rules?

As a reminder, Summers does not have a great track record of respectfully dealing with regulatory heads who want more aggressive reforms than he wants while in public office. And, oddly, his connections to the administration could cause him to fight, rather than support (or just ignore), these regulatory heads pushing more aggressively.

“If a crisis did occur, he’d be no-holds-barred.”

Minor aside point, but I haven’t seen whether or not Summers supports the limits to the 13(3) powers the Federal Reserve invoked in 2008. Section 13(3) of the Federal Reserve Act was amended under Dodd-Frank so that "any emergency lending program or facility is for the purpose of providing liquidity to the financial system, and not to aid a failing financial company," and any such lending program has to have "broad-based eligibility.” The Federal Reserve will also need permission from the Treasury Secretary before proceeding in some cases.

This is designed to prevent the Federal Reserve from being no-holds-barred in rescuing an individual firm (like AIG) instead of an entire market (like commercial paper). This may be a big wake-up call come the next financial crisis, and I'm curious if the Fed would simply push in ways that try to circumvent the rule.

This is just a baseline, but it shows how much is still open when it comes to the future of monetary policy and financial reform. Or the two biggest things the next Fed Chairman will have to deal with.

Follow or contact the Rortybomb blog:

  

 

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How Ronald Coase Demolished Current Libertarian Ideas About Property

Sep 3, 2013Mike Konczal

Property isn’t a vertical relationship between a person and an object, but instead is a horizontal, reciprocal relationship of exclusions between people. Since the benefit of one person in regard to property comes at the expense of someone else, there’s no logical or coherent way to invoke liberty or classical liberal principles of “do no harm” when it comes to how the law determines the shape of property. All we can do is pick among competing systems that try to achieve shared social goals.

That’s not an idea normally associated with the economist Ronald Coase, who died yesterday at 102. But it’s a very important part of his landmark paper, ”The Problem of Social Cost (1960), that goes missing when the right-wing celebrates his legacy. Let’s unpack it.

The paper is meant to address the issue of externalities, or when a third party pays a price (or get a benefit) as a result of market transactions he or she isn’t engaged with. Pollution is the classic example.

The normal Coase Theorem argues that in the ethereal world of perfect markets, clear property rights, and no transaction costs, legal regulations would only impact the distribution but not the outcomes of externalities.

Obligatory example, this one from Coase: someone purchases land next to a train to farm. The train throws off sparks, which damage the crops. The railroad company could remodel the train to stop the sparks. What difference would liability law and regulations make?

Let’s say it cost $100 to put on spark guards that would stop $120 worth of crop damage. In this case, the spark guards would get installed. If liability fell on the train company, they’d pay the $100. If it didn’t, the farmer would pay the train company $100 to install the spark guards. If those numbers were reversed, the spark guard wouldn’t get installed. The train company would just pay $100 for the crop damages to prevent the lawsuit if they faced liability. If they didn’t, the farmer would eat the $100 loss. In both cases, the law didn’t change what decision would be made if they just bargained together. The only thing that would change would be the cash payments. (This does not pan out well in the real world [1].)

What does this have to do with libertarianism? As Barbara Fried notes, Coase is defining the social costs as being “the joint costs of conflicting desires in a world of scarce resources.” This move brings the progressive legal realism of the early 20th century law into the economics field.

What Coase is overturning is the idea that the scenario above is simply the railroad damaging the crops, and thus the issue is how to stop or punish the railroad company. Instead, there are multiple, valid claims, claims that necessarily put restrictions on others, and the issue is how to balance them.

As Coase says early on about externalities, “The question is commonly thought of as one in which A inflicts harm on B and what has to be decided is: how should we restrain A? But this is wrong. We are dealing with a problem of a reciprocal nature. To avoid the harm to B would inflict harm on A. The real question that has to be decided is: should A be allowed to harm B or should B be allowed to harm A?”

Indeed, the very first thing Coase does in the paper is to argue the “reciprocal” nature of social cost. The cost of the crop damage isn’t a question. The problem comes out of two people’s desire to utilize their property rights: for the train to run as is, and for the farmer to grow crops near the tracks. The question is, whose property rights do we privilege: the railroad’s or the farmer’s? People in law and economics usually dodge this by arguing that bargaining will take care of the (non-distributional) issues, but in the regular world, which is full of transaction costs, these decisions will need to be made.

And this is where Coase is a major problem for current libertarian thinking. Today’s libertarians draw almost their entire philosophy from the idea of “self-ownership” and think that the only role of government is to enforce a minimal, classical liberal version of “do no harm.”

But notice how ideas like non-aggression makes no sense in the Coase world. The ideal of self-ownership and minimal government can’t get us out of this problem, because it is precisely what ownership entails that is under question. And to realize one person’s ownership would necessarily entail limiting the ownership claims of someone else. (You can read the hostility that anarcho-capitalist Murray Rothbard had for the Coase Theorem’s “social engineering” here.)

Or as Coase concludes, “We may speak of a person owning land and using it as a factor of production but what the land-owner in fact possesses is the right to carry out a circumscribed list of actions…in choosing between social arrangements within the context of which individual decisions are made, we have to bear in mind that a change in the existing system which will lead to an improvement in some decisions may well lead to a worsening of others.”

The question of which social arrangements are best is the problem we face. Some, however, can’t even see the question.

[1] Three quick examples of the Coase Theorem not panning out in the real world:

Where Do We Send Unemployment Checks? John Donohue looked at a natural experiment from a pilot program in Illinois that would send out a bonus unemployment check of $500 for people who successfully found a job. But some people in the pilot program had the checks sent to them, while others, randomly, had the checks sent to their employers. This was a great test for the Coase Theorem, as the people in question had to bargain a contract to get employed in the first place, so there were no transaction costs.

It turned out there was a significant effect. People were much less likely to participate if their employers received the check. So policy design does matter.

Actual Cattle, Actual Society. In 1989, Robert Ellickson of Yale Law School investigated how rural landowners in California handled livestock trespassing under different liability regimes. What did he find? “The field evidence I gathered suggests that a change in animal trespass law indeed fails to affect resource allocation, not because transaction costs are low, but because transaction costs are high. Legal rules are costly to learn and enforce. Trespass incidents are minor irritations between parties who typically have complex continuing relationships that enable them readily to enforce informal norms.”

Norms and social accounts of obligations are important basic sources of entitlements, as opposed to just abstract bargaining models.

Institutions Matter Too. Much of the more interesting work in cross-country growth has been focused on relative strengths and weaknesses of public institutions like courts, something that shouldn’t matter from the Coase world. For one example from someone in that field, Simon Johnson had a great summary about financial regulation and economic conditions. They key point is that securities law has a strong correlation with economic outcomes, which shouldn’t happen. But it does.

Follow or contact the Rortybomb blog:

  

 

Property isn’t a vertical relationship between a person and an object, but instead is a horizontal, reciprocal relationship of exclusions between people. Since the benefit of one person in regard to property comes at the expense of someone else, there’s no logical or coherent way to invoke liberty or classical liberal principles of “do no harm” when it comes to how the law determines the shape of property. All we can do is pick among competing systems that try to achieve shared social goals.

That’s not an idea normally associated with the economist Ronald Coase, who died yesterday at 102. But it’s a very important part of his landmark paper, ”The Problem of Social Cost (1960), that goes missing when the right-wing celebrates his legacy. Let’s unpack it.

The paper is meant to address the issue of externalities, or when a third party pays a price (or get a benefit) as a result of market transactions he or she isn’t engaged with. Pollution is the classic example.

The normal Coase Theorem argues that in the ethereal world of perfect markets, clear property rights, and no transaction costs, legal regulations would only impact the distribution but not the outcomes of externalities.

Obligatory example, this one from Coase: someone purchases land next to a train to farm. The train throws off sparks, which damage the crops. The railroad company could remodel the train to stop the sparks. What difference would liability law and regulations make?

Let’s say it cost $100 to put on spark guards that would stop $120 worth of crop damage. In this case, the spark guards would get installed. If liability fell on the train company, they’d pay the $100. If it didn’t, the farmer would pay the train company $100 to install the spark guards. If those numbers were reversed, the spark guard wouldn’t get installed. The train company would just pay $100 for the crop damages to prevent the lawsuit if they faced liability. If they didn’t, the farmer would eat the $100 loss. In both cases, the law didn’t change what decision would be made if they just bargained together. The only thing that would change would be the cash payments. (This does not pan out well in the real world [1].)

What does this have to do with libertarianism? As Barbara Fried notes, Coase is defining the social costs as being “the joint costs of conflicting desires in a world of scarce resources.” This move brings the progressive legal realism of the early 20th century law into the economics field.

What Coase is overturning is the idea that the scenario above is simply the railroad damaging the crops, and thus the issue is how to stop or punish the railroad company. Instead, there are multiple, valid claims, claims that necessarily put restrictions on others, and the issue is how to balance them.

As Coase says early on about externalities, “The question is commonly thought of as one in which A inflicts harm on B and what has to be decided is: how should we restrain A? But this is wrong. We are dealing with a problem of a reciprocal nature. To avoid the harm to B would inflict harm on A. The real question that has to be decided is: should A be allowed to harm B or should B be allowed to harm A?”

Indeed, the very first thing Coase does in the paper is to argue the “reciprocal” nature of social cost. The cost of the crop damage isn’t a question. The problem comes out of two people’s desire to utilize their property rights: for the train to run as is, and for the farmer to grow crops near the tracks. The question is, whose property rights do we privilege: the railroad’s or the farmer’s? People in law and economics usually dodge this by arguing that bargaining will take care of the (non-distributional) issues, but in the regular world, which is full of transaction costs, these decisions will need to be made.

And this is where Coase is a major problem for current libertarian thinking. Today’s libertarians draw almost their entire philosophy from the idea of “self-ownership” and think that the only role of government is to enforce a minimal, classical liberal version of “do no harm.”

But notice how ideas like non-aggression makes no sense in the Coase world. The ideal of self-ownership and minimal government can’t get us out of this problem, because it is precisely what ownership entails that is under question. And to realize one person’s ownership would necessarily entail limiting the ownership claims of someone else. (You can read the hostility that anarcho-capitalist Murray Rothbard had for the Coase Theorem’s “social engineering” here.)

Or as Coase concludes, “We may speak of a person owning land and using it as a factor of production but what the land-owner in fact possesses is the right to carry out a circumscribed list of actions…in choosing between social arrangements within the context of which individual decisions are made, we have to bear in mind that a change in the existing system which will lead to an improvement in some decisions may well lead to a worsening of others.”

The question of which social arrangements are best is the problem we face. Some, however, can’t even see the question.

[1] Three quick examples of the Coase Theorem not panning out in the real world:

Where Do We Send Unemployment Checks? John Donohue looked at a natural experiment from a pilot program in Illinois that would send out a bonus unemployment check of $500 for people who successfully found a job. But some people in the pilot program had the checks sent to them, while others, randomly, had the checks sent to their employers. This was a great test for the Coase Theorem, as the people in question had to bargain a contract to get employed in the first place, so there were no transaction costs.

It turned out there was a significant effect. People were much less likely to participate if their employers received the check. So policy design does matter.

Actual Cattle, Actual Society. In 1989, Robert Ellickson of Yale Law School investigated how rural landowners in California handled livestock trespassing under different liability regimes. What did he find? “The field evidence I gathered suggests that a change in animal trespass law indeed fails to affect resource allocation, not because transaction costs are low, but because transaction costs are high. Legal rules are costly to learn and enforce. Trespass incidents are minor irritations between parties who typically have complex continuing relationships that enable them readily to enforce informal norms.”

Norms and social accounts of obligations are important basic sources of entitlements, as opposed to just abstract bargaining models.

Institutions Matter Too. Much of the more interesting work in cross-country growth has been focused on relative strengths and weaknesses of public institutions like courts, something that shouldn’t matter from the Coase world. For one example from someone in that field, Simon Johnson had a great summary about financial regulation and economic conditions. They key point is that securities law has a strong correlation with economic outcomes, which shouldn’t happen. But it does.

Follow or contact the Rortybomb blog:

  

 

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Can President Obama's New Metrics Curb College Costs?

Aug 23, 2013Mike Konczal

(Photo Source: White House)

President Obama just announced a major initiative on higher education. Will it contain or reverse rising costs?

I want to discuss the part of it that seems most tailored to containing costs, which is creating new higher education metrics to compare schools. These metrics will be created by 2015, which will be used to determine access to federal dollars such as student loans and Pell grants by 2018.

From the fact sheet, the to-be-determined rankings will be based on three things: access, affordability, and outcomes. Access includes “percentage of students receiving Pell grants,” affordability includes “average tuition, scholarships, and loan debt,” and outcomes includes graduation rates and earnings.

Here are my initial thoughts as I try to understand this. The tl;dr version is that it is important that these metrics are used to drive down private costs relative to public, expose administrative bloat, put pressure on the states, and bring accountability to the for-profits. If they don’t do that, they’re a waste on the cost-containment front. Now, here are six more detailed points to consider about how the metrics will be implemented and what effects they will have:

1. The Goals Will Run Counter to Each Other. The efforts to increase graduation rates and have better post-graduation outcomes may require more spending by colleges. Some colleges in each of the meta-categories are likely to be booted for bad performance, or the metrics will make attending the worst-performing colleges so expensive as to drag them into a death spiral. Good as that may be for education, it will collapse the supply of higher education in the short term, putting more price pressure on existing institutions.

Which is to say that we should distinguish efforts to increase quality through access and outcomes from efforts to contain costs. Students graduating on time will make colleges de facto more affordable, and perhaps that is mainly what the president is looking for.  But that is not entirely cost containment.

2. The Student-Consumer or the Government? What’s different here? As Sara Goldrick-Rab and others argue, one reason cost containment has failed in the past “may stem from the financial aid system’s strong focus on the behaviors of ‘student-consumers’ rather than education providers.”

It’s not clear to me why empowering these “student-consumers,” who go about rationally analyzing disclosed data in the marketplace for education, would give them the ability to make the demands necessary to contain costs at universities as a whole. One could see them driving out obviously underperforming institutions from the landscape, but it’s much harder to imagine them forcing institutions to contain costs, at least without political struggle.

Students themselves are quite aware of the increasing costs in the past few years, with endless “click here to know what you are borrowing” measures that likely don’t do much. There’s really little evidence that an additional range of disclosures would make the institutions here more accountable or force them to contain their costs.

Which is to say that we should focus less on disclosure and the consumer regime for cost containment, and more on how the government will force changes itself by making aid less available unless an affordability metric is met.

3 The Obvious Information to Disclose. Talking about “the problem of higher education costs” is a major category error, as they vary by institution. The factors that cause community colleges to raise tuition (decreasing public support) are different than those facing for-profits (maximizing aid extraction) or private not-for-profits (maximizing prestige and consumer experience).

Consistent across all of these is the idea that increasing administrative costs are a major driver of costs. This strikes me as the obvious, and perhaps only, metric where the consumer-student could force containment and best practices.

So a very obvious thing to inform consumers of is “how much of my tuition goes to instruction?” If consumer-students want to force down football coach salaries and investment in extravagant non-instructional benefits, this is the most obvious way to do it and can be plastered across every disclosure form.

(Another question I think is important, which would be great to deal with for-profits, is to disclose “how much of my tuition will be paid out to shareholders?” Consumers may or may not be happy with paying extra to build a more gigantic football stadium; they are probably not happy paying money that leaves the educational institution entirely.)

4. Taking on Private Universities. It’s worth noting here that these metrics will be applied to private schools as well, using all of the government’s Title IV money (grants and student loans and everything else) as the leverage. And this is probably the major challenge, as private schools will not like this, and they have a lot of political coverage. Who among the elite hasn’t gone to a prominent private university?

In a recent editorial on these new metrics, Sara Goldrick-Rab notes the danger that President Obama will “cave to the private higher-education lobby.” For if private higher education’s “expenses are so merited, we should see bigger gains at private elites than at we do at less-expensive institutions, not just higher graduation rates. None of that is happening now.”

I’m curious how the metrics will “compare colleges with similar missions.” Will they compare public schools and private schools on the issue of cost containment at a given a level of quality? They should, as directly funded public options can drive down the costs of privately allocated goods, but if they do, that will necessarily put a lot of pressure on private schools.

Interestingly, this could lead to a situation where private universities just leave the federal support system. Harvard, for instance, could just say “forget you” to the federal government and fund whatever aid it wants out of its own endowment. This move might split reformers, even though it would likely be for the best.

5. Taking on the States. This is the most incoherent part of Obama’s pitch about the metrics. In the fact sheet, President Obama noted that “[d]eclining state funding has forced students to shoulder a bigger proportion of college costs; tuition has almost doubled as a share of public college revenues over the past 25 years from 25 percent to 47 percent.” Yet at the same time he talks about bloat and waste as drivers. Both could be true, but if the first is a main driver then individual rankings of schools will have a problem.

One way to balance this would be to rank states themselves alongside schools. Demos proposes “an additional ratings system: why don’t we rate state legislatures on their per-student investment in higher education?” This could be useful in giving people in different states a much better sense of what their public higher education looks like. Crucially, it would also adjust for the fact that state education systems function as a continuum with multiple levels and transfers up and down the educational ladder.

6. Political Battles. A lot of commentators are arguing this is a battle between President Obama and liberal professors, so it is unlikely to trigger GOP opposition. I’m not sure about that. The real people who will disproportionately end up in the crosshairs if this is done well, as listed above, are (a) administrators taking inflated salaries, (b) private and flagship schools that provided little value at very high costs, and c) for-profits.

I think Josh Barro misses that for-profit schools are a major GOP constituency. George W. Bush’s Assistant Secretary for Postsecondary Education, Sally Stroup, was a former University of Phoenix lobbyist, and led a successful effort to remove restrictions on for-profit schools. On the campaign trail, Mitt Romney name-dropped a for-profit school that happened to donate to him. Insofar as the Obama administration will try to use these metrics to get a second bite at curbing the for-profit industry as it failed to do in its first term, that will set off alarm bells.

Meanwhile, as noted above, basically every elite within 100 yards of D.C. politics, particularly in elite media and Democratic politics (e.g. “He was my professor actually at Harvard”), functions like a member of a private higher education lobby. How will they react if the hammer comes down there?

There’s a lot of emphasis on getting poor students on Pell grants into high-end schools. That is a good goal. However, the issues with costs and higher education go far beyond this and affect families who are not rich but don’t qualify for means-tested aid. They are the ones who will increasingly demand cost containment.

Something will eventually give. The question remains as to whether or not these metrics will be used to drive down private costs relative to public, expose administrative bloat, put pressure on the states, and bring accountability to the for-profits. If they do, it’s a positive sign; if not, a waste or worse when it comes to cost containment.

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(Photo Source: White House)

President Obama just announced a major initiative on higher education. Will it contain or reverse rising costs?

I want to discuss the part of it that seems most tailored to containing costs, which is creating new higher education metrics to compare schools. These metrics will be created by 2015, which will be used to determine access to federal dollars such as student loans and Pell grants by 2018.

From the fact sheet, the to-be-determined rankings will be based on three things: access, affordability, and outcomes. Access includes “percentage of students receiving Pell grants,” affordability includes “average tuition, scholarships, and loan debt,” and outcomes includes graduation rates and earnings.

Here are my initial thoughts as I try to understand this. The tl;dr version is that it is important that these metrics are used to drive down private costs relative to public, expose administrative bloat, put pressure on the states, and bring accountability to the for-profits. If they don’t do that, they’re a waste on the cost-containment front. Now, here are six more detailed points to consider about how the metrics will be implemented and what effects they will have:

1. The Goals Will Run Counter to Each Other. The efforts to increase graduation rates and have better post-graduation outcomes may require more spending by colleges. Some colleges in each of the meta-categories are likely to be booted for bad performance, or the metrics will make attending the worst-performing colleges so expensive as to drag them into a death spiral. Good as that may be for education, it will collapse the supply of higher education in the short term, putting more price pressure on existing institutions.

Which is to say that we should distinguish efforts to increase quality through access and outcomes from efforts to contain costs. Students graduating on time will make colleges de facto more affordable, and perhaps that is mainly what the president is looking for.  But that is not entirely cost containment.

2. The Student-Consumer or the Government? What’s different here? As Sara Goldrick-Rab and others argue, one reason cost containment has failed in the past “may stem from the financial aid system’s strong focus on the behaviors of ‘student-consumers’ rather than education providers.”

It’s not clear to me why empowering these “student-consumers,” who go about rationally analyzing disclosed data in the marketplace for education, would give them the ability to make the demands necessary to contain costs at universities as a whole. One could see them driving out obviously underperforming institutions from the landscape, but it’s much harder to imagine them forcing institutions to contain costs, at least without political struggle.

Students themselves are quite aware of the increasing costs in the past few years, with endless “click here to know what you are borrowing” measures that likely don’t do much. There’s really little evidence that an additional range of disclosures would make the institutions here more accountable or force them to contain their costs.

Which is to say that we should focus less on disclosure and the consumer regime for cost containment, and more on how the government will force changes itself by making aid less available unless an affordability metric is met.

3 The Obvious Information to Disclose. Talking about “the problem of higher education costs” is a major category error, as they vary by institution. The factors that cause community colleges to raise tuition (decreasing public support) are different than those facing for-profits (maximizing aid extraction) or private not-for-profits (maximizing prestige and consumer experience).

Consistent across all of these is the idea that increasing administrative costs are a major driver of costs. This strikes me as the obvious, and perhaps only, metric where the consumer-student could force containment and best practices.

So a very obvious thing to inform consumers of is “how much of my tuition goes to instruction?” If consumer-students want to force down football coach salaries and investment in extravagant non-instructional benefits, this is the most obvious way to do it and can be plastered across every disclosure form.

(Another question I think is important, which would be great to deal with for-profits, is to disclose “how much of my tuition will be paid out to shareholders?” Consumers may or may not be happy with paying extra to build a more gigantic football stadium; they are probably not happy paying money that leaves the educational institution entirely.)

4. Taking on Private Universities. It’s worth noting here that these metrics will be applied to private schools as well, using all of the government’s Title IV money (grants and student loans and everything else) as the leverage. And this is probably the major challenge, as private schools will not like this, and they have a lot of political coverage. Who among the elite hasn’t gone to a prominent private university?

In a recent editorial on these new metrics, Sara Goldrick-Rab notes the danger that President Obama will “cave to the private higher-education lobby.” For if private higher education’s “expenses are so merited, we should see bigger gains at private elites than at we do at less-expensive institutions, not just higher graduation rates. None of that is happening now.”

I’m curious how the metrics will “compare colleges with similar missions.” Will they compare public schools and private schools on the issue of cost containment at a given a level of quality? They should, as directly funded public options can drive down the costs of privately allocated goods, but if they do, that will necessarily put a lot of pressure on private schools.

Interestingly, this could lead to a situation where private universities just leave the federal support system. Harvard, for instance, could just say “forget you” to the federal government and fund whatever aid it wants out of its own endowment. This move might split reformers, even though it would likely be for the best.

5. Taking on the States. This is the most incoherent part of Obama’s pitch about the metrics. In the fact sheet, President Obama noted that “[d]eclining state funding has forced students to shoulder a bigger proportion of college costs; tuition has almost doubled as a share of public college revenues over the past 25 years from 25 percent to 47 percent.” Yet at the same time he talks about bloat and waste as drivers. Both could be true, but if the first is a main driver then individual rankings of schools will have a problem.

One way to balance this would be to rank states themselves alongside schools. Demos proposes “an additional ratings system: why don’t we rate state legislatures on their per-student investment in higher education?” This could be useful in giving people in different states a much better sense of what their public higher education looks like. Crucially, it would also adjust for the fact that state education systems function as a continuum with multiple levels and transfers up and down the educational ladder.

6. Political Battles. A lot of commentators are arguing this is a battle between President Obama and liberal professors, so it is unlikely to trigger GOP opposition. I’m not sure about that. The real people who will disproportionately end up in the crosshairs if this is done well, as listed above, are (a) administrators taking inflated salaries, (b) private and flagship schools that provided little value at very high costs, and c) for-profits.

I think Josh Barro misses that for-profit schools are a major GOP constituency. George W. Bush’s Assistant Secretary for Postsecondary Education, Sally Stroup, was a former University of Phoenix lobbyist, and led a successful effort to remove restrictions on for-profit schools. On the campaign trail, Mitt Romney name-dropped a for-profit school that happened to donate to him. Insofar as the Obama administration will try to use these metrics to get a second bite at curbing the for-profit industry as it failed to do in its first term, that will set off alarm bells.

Meanwhile, as noted above, basically every elite within 100 yards of D.C. politics, particularly in elite media and Democratic politics (e.g. “He was my professor actually at Harvard”), functions like a member of a private higher education lobby. How will they react if the hammer comes down there?

There’s a lot of emphasis on getting poor students on Pell grants into high-end schools. That is a good goal. However, the issues with costs and higher education go far beyond this and affect families who are not rich but don’t qualify for means-tested aid. They are the ones who will increasingly demand cost containment.

Something will eventually give. The question remains as to whether or not these metrics will be used to drive down private costs relative to public, expose administrative bloat, put pressure on the states, and bring accountability to the for-profits. If they do, it’s a positive sign; if not, a waste or worse when it comes to cost containment.

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Guest Post: O Canada and Its Housing Market

Aug 14, 2013David Min

Mike here. Over the weekend I wrote a post at Wonkblog, "In Defense of the 30 Year Mortgage." Many people have responded to this idea by bringing up the housing market of our neighbors in Canada. In order to keep this conversation running, I have a guest post by David Min, friend of the blog and a University of California, Irvine law professor. Take it away, David:

Does Canada prove the 30-year fixed-rate mortgage is of limited value? Here’s Matt Yglesias from last week:

If you cross the border into Canada it's not like people are living in yurts. It works fine. But since homebuyers have to carry a bit more interest rate risk, they seem to purchase slightly smaller houses. Alternatively if you imagine a jumbo loan scenario where the 30-year fixed rate mortgage lives but with systematically higher interest rates, you'd find that people would have to respond by purchasing slightly smaller houses. And it's not a coincidence that Americans live in the biggest houses in the world.

As I’ve outlined in the past, the dominant mortgage product in Canada is a five-year fixed-rate mortgage, amortized over 25 years, that essentially requires refinancing every five years. This product leaves borrowers open to two important types of mortgage-related risk.

First, there is the risk that interest rates will rise significantly between the time the loan is first originated and the time that it must be refinanced, causing a payment shock that the borrower may not be able to afford. Second, there is the risk that when the loan comes due, there may not be refinancing options available to the borrower, either because the property has declined in value so much that the loan does not meet loan-to-value requirements, or perhaps because banks have reduced their lending due to a credit contraction.

For what it’s worth, Canada has historically had a greater government involvement in its housing finance system, through a combination of government-backed mortgage securitization and mortgage insurance offered by the Canada Mortgage and Housing Corporation (an entity similar in many ways to Fannie and Freddie), as well as governmental reinsurance for all mortgage insurance, which in total accounts for some 70-80 percent of all Canadian home loans. So if you’re looking to Canada as a model of getting the government out of housing finance, look again (and don’t look to Europe, which also has very high levels of government guarantees for housing finance, as I explained recently in congressional testimony).

As to Matt’s broader point about Canadian mortgage finance, there is no question that we can have a housing finance system without the 30-year FRM that drives sufficient capital into housing to meet our needs (both for owner-occupied and rental housing), but that’s not the point of the debate over the 30-year FRM. The key difference between Canada’s five-year FRM and the American 30-year FRM is that the former leaves interest rate risk (and refinancing risk) with consumers, whereas the latter leaves rate risk (and prepayment risk) with financial institutions such as banks, pension funds, and insurance companies.

The key question is whether interest rate risk is better placed with households or with banks and investors. Those of us who favor the 30-year FRM argue that this risk should be placed with the latter, who are better equipped to handle this risk. The available evidence suggests that average mortgage borrowers do not attempt to predict what mortgage rates will be five years down the line. And even if they could do this, they lack access to the financial instruments that might allow them to hedge against this risk. Conversely, banks and MBS investors already spend quite a lot of resources trying to protect against interest rate volatility.  

Moreover, when households are unable to deal with interest rate risk, they are unable to make their mortgage payments. This creates a double whammy insofar as higher rate risk for borrowers means higher credit risk for banks and investors. Thus, from a systemic stability standpoint, it seems to make more sense to place rate risk with financial institutions rather than with consumers.

Neither the U.S. nor Canada has experienced significant interest rate increases since the early 1980s, so the difference between the five- and 30-year FRMs has largely been a theoretical debate since that time. But as Karl Case (the economist who helped create the eponymous Case-Shiller home price index) has noted, we have at least one important data point from that last episode of interest rate volatility that suggests the 30-year FRM is preferable from a financial stability standpoint.

Both Vancouver and California had housing booms in the late 1970s, and both of course went through the double-digit interest rate increases of the early 1980s, which led to U.S. mortgage rates settling at about 17-18 percent. Then, as now, the dominant mortgage in the U.S. was the 30-year FRM and the dominant mortgage in Canada was the five-year FRM. Vancouver and California experienced starkly different housing markets in response to this interest rate volatility. Because Canadian mortgages were designed to be refinanced every few years, Canadian borrowers faced enormous payment shocks (with mortgage payments doubling or tripling), which resulted in a huge housing bust, with Vancouver experiencing a 60 percent (!) home price decline in the early 1980s. Conversely, California experienced a few years of a stagnant housing market in which potential sellers simply held onto their existing mortgages, and prices never fell in nominal terms.

This limited historical data suggests that the U.S. 30-year FRM is a more systemically stable product than the shorter duration rollover loan that is popular in Canada. Within the United States, of course, there is ample evidence that the 30-year FRM performs far better than short-term rollover loans. During the Great Depression, the delinquency rates on short-term rollover loans reached 50 percent, as underwater borrowers were unable to find sources of refinancing (sound familiar?). More recently, adjustable-rate mortgages experienced delinquency rates that were two to three times higher than fixed-rate mortgages made to comparable borrowers, as both the Federal Housing Finance Agency and the Mortgage Bankers Association have found.

All of this evidence suggests that critics of the 30-year FRM need to be treading a little more carefully in trashing the benefits of this particular product.

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Mike here. Over the weekend I wrote a post at Wonkblog, "In Defense of the 30 Year Mortgage." Many people have responded to this idea by bringing up the housing market of our neighbors in Canada. In order to keep this conversation running, I have a guest post by David Min, friend of the blog and a University of California, Irvine law professor. Take it away, David:

Does Canada prove the 30-year fixed-rate mortgage is of limited value? Here’s Matt Yglesias from last week:

If you cross the border into Canada it's not like people are living in yurts. It works fine. But since homebuyers have to carry a bit more interest rate risk, they seem to purchase slightly smaller houses. Alternatively if you imagine a jumbo loan scenario where the 30-year fixed rate mortgage lives but with systematically higher interest rates, you'd find that people would have to respond by purchasing slightly smaller houses. And it's not a coincidence that Americans live in the biggest houses in the world.

As I’ve outlined in the past, the dominant mortgage product in Canada is a five-year fixed-rate mortgage, amortized over 25 years, that essentially requires refinancing every five years. This product leaves borrowers open to two important types of mortgage-related risk.

First, there is the risk that interest rates will rise significantly between the time the loan is first originated and the time that it must be refinanced, causing a payment shock that the borrower may not be able to afford. Second, there is the risk that when the loan comes due, there may not be refinancing options available to the borrower, either because the property has declined in value so much that the loan does not meet loan-to-value requirements, or perhaps because banks have reduced their lending due to a credit contraction.

For what it’s worth, Canada has historically had a greater government involvement in its housing finance system, through a combination of government-backed mortgage securitization and mortgage insurance offered by the Canada Mortgage and Housing Corporation (an entity similar in many ways to Fannie and Freddie), as well as governmental reinsurance for all mortgage insurance, which in total accounts for some 70-80 percent of all Canadian home loans. So if you’re looking to Canada as a model of getting the government out of housing finance, look again (and don’t look to Europe, which also has very high levels of government guarantees for housing finance, as I explained recently in congressional testimony).

As to Matt’s broader point about Canadian mortgage finance, there is no question that we can have a housing finance system without the 30-year FRM that drives sufficient capital into housing to meet our needs (both for owner-occupied and rental housing), but that’s not the point of the debate over the 30-year FRM. The key difference between Canada’s five-year FRM and the American 30-year FRM is that the former leaves interest rate risk (and refinancing risk) with consumers, whereas the latter leaves rate risk (and prepayment risk) with financial institutions such as banks, pension funds, and insurance companies.

The key question is whether interest rate risk is better placed with households or with banks and investors. Those of us who favor the 30-year FRM argue that this risk should be placed with the latter, who are better equipped to handle this risk. The available evidence suggests that average mortgage borrowers do not attempt to predict what mortgage rates will be five years down the line. And even if they could do this, they lack access to the financial instruments that might allow them to hedge against this risk. Conversely, banks and MBS investors already spend quite a lot of resources trying to protect against interest rate volatility.  

Moreover, when households are unable to deal with interest rate risk, they are unable to make their mortgage payments. This creates a double whammy insofar as higher rate risk for borrowers means higher credit risk for banks and investors. Thus, from a systemic stability standpoint, it seems to make more sense to place rate risk with financial institutions rather than with consumers.

Neither the U.S. nor Canada has experienced significant interest rate increases since the early 1980s, so the difference between the five- and 30-year FRMs has largely been a theoretical debate since that time. But as Karl Case (the economist who helped create the eponymous Case-Shiller home price index) has noted, we have at least one important data point from that last episode of interest rate volatility that suggests the 30-year FRM is preferable from a financial stability standpoint.

Both Vancouver and California had housing booms in the late 1970s, and both of course went through the double-digit interest rate increases of the early 1980s, which led to U.S. mortgage rates settling at about 17-18 percent. Then, as now, the dominant mortgage in the U.S. was the 30-year FRM and the dominant mortgage in Canada was the five-year FRM. Vancouver and California experienced starkly different housing markets in response to this interest rate volatility. Because Canadian mortgages were designed to be refinanced every few years, Canadian borrowers faced enormous payment shocks (with mortgage payments doubling or tripling), which resulted in a huge housing bust, with Vancouver experiencing a 60 percent (!) home price decline in the early 1980s. Conversely, California experienced a few years of a stagnant housing market in which potential sellers simply held onto their existing mortgages, and prices never fell in nominal terms.

This limited historical data suggests that the U.S. 30-year FRM is a more systemically stable product than the shorter duration rollover loan that is popular in Canada. Within the United States, of course, there is ample evidence that the 30-year FRM performs far better than short-term rollover loans. During the Great Depression, the delinquency rates on short-term rollover loans reached 50 percent, as underwater borrowers were unable to find sources of refinancing (sound familiar?). More recently, adjustable-rate mortgages experienced delinquency rates that were two to three times higher than fixed-rate mortgages made to comparable borrowers, as both the Federal Housing Finance Agency and the Mortgage Bankers Association have found.

All of this evidence suggests that critics of the 30-year FRM need to be treading a little more carefully in trashing the benefits of this particular product.

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Denialism and Bad Faith in Policy Arguments

Aug 14, 2013Mike Konczal

Here’s the thing about Allan Meltzer: he knows. Or at least he should know. It’s tough to remember that he knows when he writes editorials like his latest, "When Inflation Doves Cry." This is a mess of an editorial, a confused argument about why huge inflation is around the corner. “Instead of continuing along this futile path, the Fed should end its open-ended QE3 now... Those who believe that inflation will remain low should look more thoroughly and think more clearly. ”

But he knows. Because here’s Meltzer in 1999 with "A Policy for Japanese Recovery": “Monetary expansion and devaluation is a much better solution. An announcement by the Bank of Japan and the government that the aim of policy is to prevent deflation and restore growth by providing enough money to raise asset prices would change beliefs and anticipations.”

He knows that there’s an actual debate, with people who are “thinking clearly,” about monetary policy at the zero lower bound as a result of Japan. He participated in it. So he must have been aware of Ben Bernanke, Paul Krugman, Milton Friedman, Michael Woodford, and Lars Svensson all also debating it at the same time. But now he’s forgotten it. In fact, his arguments for Japan are the exact opposite of what they are now for the United States.

This is why I think the Smithian “Derp” concept needs fleshing out as a diagnosis of our current situation. (I’m not a fan of the word either, but I’ll use it for this post.) For those not familiar with the term, Noah Smith argues that a major problem in our policy discussions is “the constant, repetitive reiteration of strong priors.” But if that was the only issue, Meltzer would support more expansion like he did for Japan!

Simply blaming reiteration of priors is missing something. The problem here isn’t that Meltzer may have changed his mind on his advice for Japan. If that’s the case, I’d love to read about what led to that change. The problem is one of denialism, where the person refuses to acknowledge the actually existing debate, and instead pantomimes a debate with a shadow. It involves the idea of a straw man, but sometimes it’s simply not engaging at all. For Meltzer, the extensive debate about monetary policy at the zero lower bound is simply excised from the conversation, and people who only read him will have no clue that it was ever there.

There’s also another dimension that I think is even more important, which is whether or not the argument, conclusions, or suggestions are in good faith. Eventually, this transcends the “reiteration of strong priors” and becomes an updating of the case but a reiteration of the conclusion. Throughout 2010 and 2011, an endless series of arguments about how a long-term fiscal deal would help with the current recession were made, without any credible evidence that this would help our short-term economy. But that’s what people want to do, and so they acknowledge the fresh problem but simply plug in their wrong solutions. The same was true with Mitt Romney’s plan for the economy, which wasn’t specific to 2012 in any way.

Bad faith solutions don’t have to be about things you wanted to do anyway. Phillip Mirowski’s new book makes a fascinating observation about conservative think tanks when it comes to global warming. On the one hand, they have an active project arguing global warming isn’t happening. But on the other hand, they also have an active project arguing global warming can be solved through geoengineering the atmosphere. (For an example, here’s AEI arguing worries over climate change are overblown, but also separately hosting a panel on geoengineering.)

So global warming isn’t real, but if it is, heroic atmospheric entrepreneurs will come in at the last minute and save the day. Thus, you can have denialism and bad-faith solutions in play at the same time.

The fact that we can get to the denial and bad-faith corner makes me think this can be made generalizable and charted on a grid, but I still feel it’s missing some dimensions. What Smith identifies is real, but I’m not sure how to place it on these axes. What do you make of it?

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Here’s the thing about Allan Meltzer: he knows. Or at least he should know. It’s tough to remember that he knows when he writes editorials like his latest, "When Inflation Doves Cry." This is a mess of an editorial, a confused argument about why huge inflation is around the corner. “Instead of continuing along this futile path, the Fed should end its open-ended QE3 now... Those who believe that inflation will remain low should look more thoroughly and think more clearly. ”

But he knows. Because here’s Meltzer in 1999 with "A Policy for Japanese Recovery": “Monetary expansion and devaluation is a much better solution. An announcement by the Bank of Japan and the government that the aim of policy is to prevent deflation and restore growth by providing enough money to raise asset prices would change beliefs and anticipations.”

He knows that there’s an actual debate, with people who are “thinking clearly,” about monetary policy at the zero lower bound as a result of Japan. He participated in it. So he must have been aware of Ben Bernanke, Paul Krugman, Milton Friedman, Michael Woodford, and Lars Svensson all also debating it at the same time. But now he’s forgotten it. In fact, his arguments for Japan are the exact opposite of what they are now for the United States.

This is why I think the Smithian “Derp” concept needs fleshing out as a diagnosis of our current situation. (I’m not a fan of the word either, but I’ll use it for this post.) For those not familiar with the term, Noah Smith argues that a major problem in our policy discussions is “the constant, repetitive reiteration of strong priors.” But if that was the only issue, Meltzer would support more expansion like he did for Japan!

Simply blaming reiteration of priors is missing something. The problem here isn’t that Meltzer may have changed his mind on his advice for Japan. If that’s the case, I’d love to read about what led to that change. The problem is one of denialism, where the person refuses to acknowledge the actually existing debate, and instead pantomimes a debate with a shadow. It involves the idea of a straw man, but sometimes it’s simply not engaging at all. For Meltzer, the extensive debate about monetary policy at the zero lower bound is simply excised from the conversation, and people who only read him will have no clue that it was ever there.

There’s also another dimension that I think is even more important, which is whether or not the argument, conclusions, or suggestions are in good faith. Eventually, this transcends the “reiteration of strong priors” and becomes an updating of the case but a reiteration of the conclusion. Throughout 2010 and 2011, an endless series of arguments about how a long-term fiscal deal would help with the current recession were made, without any credible evidence that this would help our short-term economy. But that’s what people want to do, and so they acknowledge the fresh problem but simply plug in their wrong solutions. The same was true with Mitt Romney’s plan for the economy, which wasn’t specific to 2012 in any way.

Bad faith solutions don’t have to be about things you wanted to do anyway. Phillip Mirowski’s new book makes a fascinating observation about conservative think tanks when it comes to global warming. On the one hand, they have an active project arguing global warming isn’t happening. But on the other hand, they also have an active project arguing global warming can be solved through geoengineering the atmosphere. (For an example, here’s AEI arguing worries over climate change are overblown, but also separately hosting a panel on geoengineering.)

So global warming isn’t real, but if it is, heroic atmospheric entrepreneurs will come in at the last minute and save the day. Thus, you can have denialism and bad-faith solutions in play at the same time.

The fact that we can get to the denial and bad-faith corner makes me think this can be made generalizable and charted on a grid, but I still feel it’s missing some dimensions. What Smith identifies is real, but I’m not sure how to place it on these axes. What do you make of it?

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