The Three Big Questions Janet Yellen Should Answer in Today's Testimony

Feb 11, 2014Mike Konczal

Janet Yellen has her first Humphrey-Hawkins testimony today, where she’ll give a prepared speech, already released online, and testify before the Republican-controlled House Financial Services committee. What are the points that she’ll need to cover?

The first element is how and when she’ll manage the so-called “taper” of monetary policy. At the end of 2012, the Federal Reserve started an extensive program of monetary stimulus designed to boost the economy. They declared that this would stay in full effect until unemployment dropped to 6.5 percent.

We are close to hitting that threshold. The unemployment rate is at 6.6 percent, and will fall below 6.5 percent very soon. Yellen, in her testimony, emphasizes a broader picture of unemployment than just the headline rate, including the amount of people working part-time against their choice and the amount of long-term unemployed.

What’s even more interesting, and a bit new, is her statement that “it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the 2 percent goal.”

Hopefully Congress will ask her to consider these choices in light of the last two weak job reports. Isn’t it more appropriate to step on the gas rather than test the brakes? However, she’ll likely encounter a skeptical Congress, and as such it will be essential for Yellen to make the case that the weak job numbers, combined with the vagueness of what the headline unemployment rate is telling us, requires continued monetary action.

The second point is how she'll handle financial reform. Given that Yellen is considered a monetary dove, it’s been interesting to see the amount of questions she’s taken from Congress about where Dodd-Frank and other reforms stand. This will no doubt continue into this testimony.

Financial reform has hit an interesting point where much of the rule-writing from the Dodd-Frank Act is finished, and now there’s a transition to both enforcement and clean-up action. Yellen notes in her testimony that rules related to derivatives as well as capital requirements still remain in the works. It would be useful for Congress to ask her where she thinks capital requirements for the largest firms should ultimately end up. Does she think that this number is too high, or too low?

It would also be fascinating for someone to ask Yellen about the recent wave of “postal banking” coverage, and the role the government can play in providing essential banking services to unbanked and underbanked Americans.

The third and most important is how the Federal Reserve will transition to prevent periods of mass unemployment like we are currently experiencing. Is a 2 percent inflation target either high enough, or the right target, for the job?

Sadly, this will be the topic least covered of them all. However, it’s the one that is most essential for preventing the economy from falling back into the situation it now finds itself in.

Mike Konczal is a Fellow at the Roosevelt Institute.

Follow or contact the Rortybomb blog:

  
Image via Federal Reserve

Janet Yellen has her first Humphrey-Hawkins testimony today, where she’ll give a prepared speech, already released online, and testify before the Republican-controlled House Financial Services committee. What are the points that she’ll need to cover?

The first element is how and when she’ll manage the so-called “taper” of monetary policy. At the end of 2012, the Federal Reserve started an extensive program of monetary stimulus designed to boost the economy. They declared that this would stay in full effect until unemployment dropped to 6.5 percent.

We are close to hitting that threshold. The unemployment rate is at 6.6 percent, and will fall below 6.5 percent very soon. Yellen, in her testimony, emphasizes a broader picture of unemployment than just the headline rate, including the amount of people working part-time against their choice and the amount of long-term unemployed.

What’s even more interesting, and a bit new, is her statement that “it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the 2 percent goal.”

Hopefully Congress will ask her to consider these choices in light of the last two weak job reports. Isn’t it more appropriate to step on the gas rather than test the brakes? However, she’ll likely encounter a skeptical Congress, and as such it will be essential for Yellen to make the case that the weak job numbers, combined with the vagueness of what the headline unemployment rate is telling us, requires continued monetary action.

The second point is how she'll handle financial reform. Given that Yellen is considered a monetary dove, it’s been interesting to see the amount of questions she’s taken from Congress about where Dodd-Frank and other reforms stand. This will no doubt continue into this testimony.

Financial reform has hit an interesting point where much of the rule-writing from the Dodd-Frank Act is finished, and now there’s a transition to both enforcement and clean-up action. Yellen notes in her testimony that rules related to derivatives as well as capital requirements still remain in the works. It would be useful for Congress to ask her where she thinks capital requirements for the largest firms should ultimately end up. Does she think that this number is too high, or too low?

It would also be fascinating for someone to ask Yellen about the recent wave of “postal banking” coverage, and the role the government can play in providing essential banking services to unbanked and underbanked Americans.

The third and most important is how the Federal Reserve will transition to prevent periods of mass unemployment like we are currently experiencing. Is a 2 percent inflation target either high enough, or the right target, for the job?

Sadly, this will be the topic least covered of them all. However, it’s the one that is most essential for preventing the economy from falling back into the situation it now finds itself in.

Mike Konczal is a Fellow at the Roosevelt Institute.

Follow or contact the Rortybomb blog:

  
 
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In 2013, the Fed Showed Why Fiscal Policy is Still Important

Jan 10, 2014Mike Konczal

Last April I had a piece in Wonkblog saying we’d get to see whether or not the expansion of monetary policy in fall 2012 would offset 2013 fiscal austerity. I concluded that it wasn’t looking too good at the start, that QE3 was a smart idea anyway (and should go further), and, most importantly, that a fiscal multiplier would be in effect, and we should run a larger deficit and cancel out things like the payroll tax cut while the economy is still fragile. It received a lot of responses at the time (see the endnotes here for a list).

Recently, there’s been a wave of posts by Scott Sumner and David Beckworth calling me and others out, saying that the votes are in and it's a victory for the market monetarists, the team that said monetary policy would offset austerity in 2013 and fiscal policy wouldn't matter. (There have also been responses from Brad DeLong and Noah Smith.)

I don’t see it. I’m willing to be convinced, but the two clearest tests I saw the market monetarists put forward in early 2013 have resulted in failure. Let’s go through them:

1. “Paul Krugman Will Not Like These Figures,” David Beckworth, December 2, 2012, Macro and Other Market Musings

At the end of 2012, David Beckworth told the Keynesians they were wrong. In a provocative post, he argued “that nominal GDP (NGDP) growth has been remarkably stable since about mid-2010 despite a contraction in federal government expenditures" and that "the Fed has been doing a remarkable job keeping NGDP growth stable.” He posted a graph showing year-over-year NGDP growth at a steady clip.

My Wonkblog column was addressed to Beckworth specifically, and he reiterated the same exact data graphic in his response, arguing, “The U.S. series shows a stable NGDP growth rate.”

Even though the approach of examining year-over-year NGDP growth drew criticism, I like this test because it draws a line in the sand and it also fits with my understanding of how the market monetarists view the situation. The Federal Reserve picks the NGDP path it wants, as if it was off a menu, no matter what is going on with the rest of the economy.

So how did this line in the sand turn out? Here’s the data updated through 2013, with year-over-year (Beckworth’s line) and two quarters showing:

It was stable, until it wasn’t. You can see the year-over-year stable at 4-5 percent from 2011 through part of 2012, but when government spending starts to fall in late 2012 and through 2013, this falls as well. NGDP growth was lower in the first two quarters of 2013 than it was in 2012.

The third quarter did spike, but it was mostly the result of inventories, which, as Yglesias says, is probably bad news. Even more interesting, there wasn’t any additional government austerity in this quarter. Government spending actually increased slightly as state and local spending increased, which more than canceled out declining federal spending. (If continued, this would be an excellent trend, like the opposite of the downturn in which state and local austerity canceled out additional federal spending. I was hoping we'd have more data before we started this conversation.)

I’d note Beckworth didn’t mention this data or his old approach at all in his victory lap. Scott Sumner used this graph and data for his "Most Important Graphic of 2013," but didn’t include any of the 2013 data.

1.a Another related way of judging how the economy evolved in 2013 is to compare it to the Federal Reserve’s projections of it. As some market monetarists believe (e.g. Ryan Avent), these projections are an engine, not a camera -- they aren’t neutral projections of inflation and growth but also a communication of what the Fed thinks about what it can accomplish, which in turn will have an impact and determine what happens in the economy.

How did the Fed's projections for 2013 turn out? Did the economy end up how the Fed said it would when it announced expanded monetary policy?

It fell, both in real GDP and especially core inflation. Which leads me to the second test…

2: “The Federal Reserve's New Yield Curve,” Matt Yglesias, January 21, 2013, Slate

One way to read 2012’s monetary actions was that the Federal Reserve really wanted to hit a 2 percent inflation target. First they announced said target, then they announced open-ended purchases, then they announced that 2 percent wasn’t a ceiling and that they’d tolerate inflation above 2 percent.

Many people considered this an important part of the Fed’s ability to boost the economy (e.g. “the commitment to allow higher inflation in the future is one of the key methods through which the central bank can have a positive effect on an economy stuck at the zero lower bound”). I had written a lot about the Evans Rule, and why it would be a good idea for people to support, so I was watching this closely.

Yglesias, in the linked post, pointed to higher inflation projections in the short- and medium-term as of January as a success story. But, as you can see above, we then went on to have inflation rates collapse, leading to some of the lowest inflation rates in decades.

Regardless of what you think the Fed wanted in late 2012, they certainly weren't trying to generate lower inflation. If the Fed truly is omnipotent, we shouldn't see this. You can say that the bickering over the taper caused these problems, but this is precisely, as Michael Woodford has pointed out, one of advantages of fiscal stimulus in these situations (as I said in last year’s piece, “Using fiscal policy also avoids the expectations problems that plague monetary policy”).

To reiterate, I think the Federal Reserve should be doing more. I’d love to see Yellen enact a genuine regime change at the Fed. But we shouldn’t doubt that fiscal policy, at this moment, is making a difference in the giant slack that still smothers our economy and is collapsing our labor force.

Follow or contact the Rortybomb blog:

  

 

Last April I had a piece in Wonkblog saying we’d get to see whether or not the expansion of monetary policy in fall 2012 would offset 2013 fiscal austerity. I concluded that it wasn’t looking too good at the start, that QE3 was a smart idea anyway (and should go further), and, most importantly, that a fiscal multiplier would be in effect, and we should run a larger deficit and cancel out things like the payroll tax cut while the economy is still fragile. It received a lot of responses at the time (see the endnotes here for a list).

Recently, there’s been a wave of posts by Scott Sumner and David Beckworth calling me and others out, saying that the votes are in and it's a victory for the market monetarists, the team that said monetary policy would offset austerity in 2013 and fiscal policy wouldn't matter. (There have also been responses from Brad DeLong and Noah Smith.)

I don’t see it. I’m willing to be convinced, but the two clearest tests I saw the market monetarists put forward in early 2013 have resulted in failure. Let’s go through them:

1. “Paul Krugman Will Not Like These Figures,” David Beckworth, December 2, 2012, Macro and Other Market Musings

At the end of 2012, David Beckworth told the Keynesians they were wrong. In a provocative post, he argued “that nominal GDP (NGDP) growth has been remarkably stable since about mid-2010 despite a contraction in federal government expenditures" and that "the Fed has been doing a remarkable job keeping NGDP growth stable.” He posted a graph showing year-over-year NGDP growth at a steady clip.

My Wonkblog column was addressed to Beckworth specifically, and he reiterated the same exact data graphic in his response, arguing, “The U.S. series shows a stable NGDP growth rate.”

Even though the approach of examining year-over-year NGDP growth drew criticism, I like this test because it draws a line in the sand and it also fits with my understanding of how the market monetarists view the situation. The Federal Reserve picks the NGDP path it wants, as if it was off a menu, no matter what is going on with the rest of the economy.

So how did this line in the sand turn out? Here’s the data updated through 2013, with year-over-year (Beckworth’s line) and two quarters showing:

It was stable, until it wasn’t. You can see the year-over-year stable at 4-5 percent from 2011 through part of 2012, but when government spending starts to fall in late 2012 and through 2013, this falls as well. NGDP growth was lower in the first two quarters of 2013 than it was in 2012.

The third quarter did spike, but it was mostly the result of inventories, which, as Yglesias says, is probably bad news. Even more interesting, there wasn’t any additional government austerity in this quarter. Government spending actually increased slightly as state and local spending increased, which more than canceled out declining federal spending. (If continued, this would be an excellent trend, like the opposite of the downturn in which state and local austerity canceled out additional federal spending. I was hoping we'd have more data before we started this conversation.)

I’d note Beckworth didn’t mention this data or his old approach at all in his victory lap. Scott Sumner used this graph and data for his "Most Important Graphic of 2013," but didn’t include any of the 2013 data.

1.a Another related way of judging how the economy evolved in 2013 is to compare it to the Federal Reserve’s projections of it. As some market monetarists believe (e.g. Ryan Avent), these projections are an engine, not a camera -- they aren’t neutral projections of inflation and growth but also a communication of what the Fed thinks about what it can accomplish, which in turn will have an impact and determine what happens in the economy.

How did the Fed's projections for 2013 turn out? Did the economy end up how the Fed said it would when it announced expanded monetary policy?

It fell, both in real GDP and especially core inflation. Which leads me to the second test…

2: “The Federal Reserve's New Yield Curve,” Matt Yglesias, January 21, 2013, Slate

One way to read 2012’s monetary actions was that the Federal Reserve really wanted to hit a 2 percent inflation target. First they announced said target, then they announced open-ended purchases, then they announced that 2 percent wasn’t a ceiling and that they’d tolerate inflation above 2 percent.

Many people considered this an important part of the Fed’s ability to boost the economy (e.g. “the commitment to allow higher inflation in the future is one of the key methods through which the central bank can have a positive effect on an economy stuck at the zero lower bound”). I had written a lot about the Evans Rule, and why it would be a good idea for people to support, so I was watching this closely.

Yglesias, in the linked post, pointed to higher inflation projections in the short- and medium-term as of January as a success story. But, as you can see above, we then went on to have inflation rates collapse, leading to some of the lowest inflation rates in decades.

Regardless of what you think the Fed wanted in late 2012, they certainly weren't trying to generate lower inflation. If the Fed truly is omnipotent, we shouldn't see this. You can say that the bickering over the taper caused these problems, but this is precisely, as Michael Woodford has pointed out, one of advantages of fiscal stimulus in these situations (as I said in last year’s piece, “Using fiscal policy also avoids the expectations problems that plague monetary policy”).

To reiterate, I think the Federal Reserve should be doing more. I’d love to see Yellen enact a genuine regime change at the Fed. But we shouldn’t doubt that fiscal policy, at this moment, is making a difference in the giant slack that still smothers our economy and is collapsing our labor force.

Follow or contact the Rortybomb blog:

  

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Rortybomb's Best of 2013

Dec 31, 2013Mike Konczal

2013. The year we won the argument but lost the war. It’s better than losing both the arguments and the war, I suppose.

2013 brought us a fiscal deficit that closed far too fast, NGDP growth and inflation falling compared to previous years, and unemployment completely falling off the political radar at the same moment the argument that the deficit was a worry collapsed. Before there were elaborate arguments about how the unemployed were this or that, or uncertainty was causing the one thing and the other. Now it's just quiet out there, yet the economy remains below potential. The collapse of the counter-Keynesian position didn't revitalize a position of aggressive action; it just left a void.

But rortybomb enterprises still marches forward. Here are the top posts from this blog for 2013:

1-2) My initial writeup of the work of Thomas Herndon, Michael Ash and Robert Pollin's critical dismantling of the Reinhart and Rogoff argument for austerity crashed this website shortly after it went up. That, and the follow-up from Arin Dube arguing that the causation was certainly backwards, are two of the most read things I’ve been involved with, and I’m honored to have played a role in dismantling this argument. A nice reminder that these things matter and blogs matter too; perhaps some people in Europe aren't being pummeled into dust as a result of this place.

3) I wrote a piece taking apart what kind of problem the ACA botched roll-out is for (neo)liberalism, that got people aruging about what kinds of social insurance we want out there.

4) I discussed the minimum wage, which I'll be doing much more of in 2014, throwing down the argument that it forms an important complement to various tax-based income support measures like the EITC.

5) I also wrote about Samuel Freeman’s argument that We Already Tried Libertarianism - It Was Called Feudalism. The term feudalism was chosen to be provocative, but the real concept is that it is anti-liberal in the traditional sense, and feeds on something darker, more pre-modern, than most people give it credit for.

Wonkblog: This year I wanted to write more regular columns at other venues, and was pretty successful at that goal. I contributed a weekly column to the Washington Post's Wonkblog. My favorites, in case you missed them the first time around:

The arguments surrounding the Universal Basic Income. (I received several notes from people happy to see Gøsta Esping-Andersen name-dropped in the Washington Post.) Creating a theory of the state that went into the shutdown. What we get wrong when we describe the financial crisis. Bernanke versus austerity. The idea of public problems. Is a democratic surveillance state possible? Defending the 30 year mortgage and the Volcker Rule. We are teaching economics backwards. And an interview with Shelia Bair that was mentioned in the House by people trying, successfully, to rally House Democrats against dismantling Section 716 of Dodd-Frank.

In Other News: I also started writing some columns for The New Republic and Al-Jazeera America at the end of the year, which I'll continue into 2014. I also wrote a review of Phillip Mirowski's latest book for the New Inquiry, meaning I've completed the hat-trick of writing for TNI, Jacobin and Dissent in the past year and a half. I also co-edited a big report on the future of financial reform which I’m very proud of, and will continue to build out next year. And Thomas Edsall wrote an excellent overview of the arguments we've built here at rortybomb for the New York Times.

Here’s to a good 2014. There's some exciting stuff already in the works.

Previous editions: 2012, 2011

Follow or contact the Rortybomb blog:

  

 

2013. The year we won the argument but lost the war. It’s better than losing both the arguments and the war, I suppose.

2013 brought us a fiscal deficit that closed far too fast, NGDP growth and inflation falling compared to previous years, and unemployment completely falling off the political radar at the same moment the argument that the deficit was a worry collapsed. Before there were elaborate arguments about how the unemployed were this or that, or uncertainty was causing the one thing and the other. Now it's just quiet out there, yet the economy remains below potential. The collapse of the counter-Keynesian position didn't revitalize a position of aggressive action; it just left a void.

But rortybomb enterprises still marches forward. Here are the top posts from this blog for 2013:

1-2) My initial writeup of the work of Thomas Herndon, Michael Ash and Robert Pollin's critical dismantling of the Reinhart and Rogoff argument for austerity crashed this website shortly after it went up. That, and the follow-up from Arin Dube arguing that the causation was certainly backwards, are two of the most read things I’ve been involved with, and I’m honored to have played a role in dismantling this argument. A nice reminder that these things matter and blogs matter too; perhaps some people in Europe aren't being pummeled into dust as a result of this place.

3) I wrote a piece taking apart what kind of problem the ACA botched roll-out is for (neo)liberalism, that got people aruging about what kinds of social insurance we want out there.

4) I discussed the minimum wage, which I'll be doing much more of in 2014, throwing down the argument that it forms an important complement to various tax-based income support measures like the EITC.

5) I also wrote about Samuel Freeman’s argument that We Already Tried Libertarianism - It Was Called Feudalism. The term feudalism was chosen to be provocative, but the real concept is that it is anti-liberal in the traditional sense, and feeds on something darker, more pre-modern, than most people give it credit for.

Wonkblog: This year I wanted to write more regular columns at other venues, and was pretty successful at that goal. I contributed a weekly column to the Washington Post's Wonkblog. My favorites, in case you missed them the first time around:

The arguments surrounding the Universal Basic Income. (I received several notes from people happy to see Gøsta Esping-Andersen name-dropped in the Washington Post.) Creating a theory of the state that went into the shutdown. What we get wrong when we describe the financial crisis. Bernanke versus austerity. The idea of public problems. Is a democratic surveillance state possible? Defending the 30 year mortgage and the Volcker Rule. We are teaching economics backwards. And an interview with Shelia Bair that was mentioned in the House by people trying, successfully, to rally House Democrats against dismantling Section 716 of Dodd-Frank.

In Other News: I also started writing some columns for The New Republic and Al-Jazeera America at the end of the year, which I'll continue into 2014. I also wrote a review of Phillip Mirowski's latest book for the New Inquiry, meaning I've completed the hat-trick of writing for TNI, Jacobin and Dissent in the past year and a half. I also co-edited a big report on the future of financial reform which I’m very proud of, and will continue to build out next year. And Thomas Edsall wrote an excellent overview of the arguments we've built here at rortybomb for the New York Times.

Here’s to a good 2014. There's some exciting stuff already in the works.

Previous editions: 2012, 2011

Follow or contact the Rortybomb blog:

  

 

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Guest Post: Max Sawicky on the Liberal Case Against a Universal Basic Income

Dec 17, 2013Mike Konczal

Earlier this month, I was on a Wonkblog live event panel discussing a Universal Basic Income (some video clips here), a topic I wrote about at Wonkblog earlier in the year. There was two people for and two people against, one from the left and one from the right. The person who represented the liberal side who was against a Universal Basic Income was Max Sawicky, formerly of EPI and the blog Maxspeak. He had prepared remarks for his introduction. I asked him if I could post them here and he agreed, and here it is:

With the coming referendum in Switzerland has come a flurry of commentary about a “Universal Basic Income” (UBI). There are some strange bedfellows from left and right are saying nice things about it. I suggest that it can be a distraction from more important things.

If you don’t have time to read this, just consider that a payment of $10,000 to every U.S. adult, a pretty basic basic income, would cost $2.5 trillion. Game over.

That aside, first off we need to distinguish between the objective of ensuring a minimum standard of consumption for all persons and the specifics of a UBI. You can support the first without the baggage of the second. More plausible ways to pursue the objective include: promote full employment, raise the minimum wage, rationalize and expand our system of refundable tax credits in the Federal individual income tax, federalize the Temporary Assistance for Needy Families program (reversing the welfare reform of 1996), establish the Federal government as an employer of last resort, support trade unions, and establish pay for caregivers. All of these in some combination are worth more of our time than a UBI. They are all more in keeping with our current system and our political culture.

What’s wrong with the UBI? It is not the utopianism. The measures I note, if you scale them up, are pretty ambitious. Nor do I see incentive problems with a UBI or similar measures. I do not believe that the availability of a UBI would spawn an army of slackers and moochers.

Let's start with the rationale for the UBI, which I would summarize as eliminating poverty with a low overhead cost. That still leaves a lot to the imagination. UBI proposals tend not to be fully baked. Presumably you reduce overhead by eliminating existing programs, but which ones? Are you willing to ding people at 105% of the poverty line to help others below it? Note you would still need eligibility determination and verification with a universal program. And how universal would it be? Immigrants? The aged? Children? Prisoners? Ex-convicts?

Like good fiction, the way to read the UBI is not as a real proposal, but as a message about something else: our existing system. But the implicit critique of the existing system underlying UBI advocacy is not well-founded.

Overhead cost is typically exaggerated in conservative discussions. Conservatives present comparisons of spending under a long list of Federal programs, many of which have broader or entirely different objectives than reducing poverty. The costs of programs that try to do things requiring public employees are not the same as ‘overhead,’ nor are these employees necessarily a bureaucracy. Even the programs explicitly aimed at reducing poverty are designed to cover more than just those under the poverty line. Moreover, the overhead costs of the main programs noted below are low, for the most part.

We also see exaggerations of the number of programs that are dedicated to reducing poverty. The fact is that most anti-poverty spending is concentrated in relatively few places: Medicaid, food stamps, the Earned Income Tax Credit, Supplemental Security Income, Temporary Assistance for Needy Families, unemployment compensation, and housing subsidies. Coverage in most of these programs goes well above the official poverty line.

In the current system, there is plenty to criticize. Eligibility could be simplified and broadened. Assistance could be increased. The main gap in coverage where a UBI would have the most impact is on able-bodied adults without children, who currently get the least from the current system as far as cash transfers are concerned. I’ve already mentioned easier ways to remedy that deficiency.

So why are we talking about the UBI? Dissatisfaction with the current system feeds a dream of wiping the slate clean, but motivations for a clean slate vary drastically.

Some on the right would like to replace existing programs because they disapprove of what those programs do, not because they fail to erase poverty. What the programs do is masked with the epithet of “bureaucracy.” Or they imagine a scenario where Federal spending decreases, and the remaining UBI programs can then be further whittled down over time. In effect, conservative supporters of the UBI concede their major, historic critique of anti-poverty benefits – the moocher issue. One naturally wonders how deeply felt this conversion really is.

Some on the left would like more ample, broader, simpler provision of benefits. This critique actually goes back to the 60s, when the principal anti-poverty program – Aid to Families with Dependent Children – was viewed as intrusive and demeaning.

If you like the transfer of cold cash, your chief target ought to be Temporary Assistance for Needy Families, the fruits of the Clinton/Gingrich welfare reform of 1996. The Feds provide a grant to state governments, who busy themselves with helping people to help themselves. In the actual event, states helped a lot of people off the welfare rolls and into poverty. The national poverty rate, notwithstanding this reform, steadily went up after 2000. So if you want to strike a blow for reduced overhead, simplicity, and adequacy – if you’re serious – go ahead and make my day: Federalize TANF and establish it as an individual, adequate cash payment to which every resident has a legal right. To constrain its cost, limit eligibility to families with dependent children and phase it out as other income grows.

We do have a mix of programs – what’s been called a “mish-mosh” -- aimed at poverty reduction, among other objectives. Why this complexity?

1.  No surprise, poor people don’t have much political power. They are obliged to seek alliances with provider interests – most famously with agriculture behind the food stamp program (an alliance that may be ending).

2.  The disorganization of Congress and associated interest groups encourages fragmentation. Every member wants something specific to attach his or her name to. (In recent decades, instead of spending programs, we have tax breaks named after Members of Congress).

3.  Federalism, hard-wired into our constitution.

4.  Public opinion, a Tower of Babel.

In light of these constraints, why dwell on a proposal founded on the mirage of wiping the slate clean to start from scratch that presumes a completely fantastical political environment? The answer is, to avoid devices that have been used successfully in the past, that exist at some level and actually work, that stand better than a ghost of a chance at being enacted, and importantly, surviving.

People need a basic income, so they need us to talk about the best ways to get it.

Max Sawicky is employed with the Federal government. His views here do not represent those of his employer.

Follow or contact the Rortybomb blog:

  

 

Earlier this month, I was on a Wonkblog live event panel discussing a Universal Basic Income (some video clips here), a topic I wrote about at Wonkblog earlier in the year. There was two people for and two people against, one from the left and one from the right. The person who represented the liberal side who was against a Universal Basic Income was Max Sawicky, formerly of EPI and the blog Maxspeak. He had prepared remarks for his introduction. I asked him if I could post them here and he agreed, and here it is:

With the coming referendum in Switzerland has come a flurry of commentary about a “Universal Basic Income” (UBI). There are some strange bedfellows from left and right are saying nice things about it. I suggest that it can be a distraction from more important things.

If you don’t have time to read this, just consider that a payment of $10,000 to every U.S. adult, a pretty basic basic income, would cost $2.5 trillion. Game over.

That aside, first off we need to distinguish between the objective of ensuring a minimum standard of consumption for all persons and the specifics of a UBI. You can support the first without the baggage of the second. More plausible ways to pursue the objective include: promote full employment, raise the minimum wage, rationalize and expand our system of refundable tax credits in the Federal individual income tax, federalize the Temporary Assistance for Needy Families program (reversing the welfare reform of 1996), establish the Federal government as an employer of last resort, support trade unions, and establish pay for caregivers. All of these in some combination are worth more of our time than a UBI. They are all more in keeping with our current system and our political culture.

What’s wrong with the UBI? It is not the utopianism. The measures I note, if you scale them up, are pretty ambitious. Nor do I see incentive problems with a UBI or similar measures. I do not believe that the availability of a UBI would spawn an army of slackers and moochers.

Let's start with the rationale for the UBI, which I would summarize as eliminating poverty with a low overhead cost. That still leaves a lot to the imagination. UBI proposals tend not to be fully baked. Presumably you reduce overhead by eliminating existing programs, but which ones? Are you willing to ding people at 105% of the poverty line to help others below it? Note you would still need eligibility determination and verification with a universal program. And how universal would it be? Immigrants? The aged? Children? Prisoners? Ex-convicts?

Like good fiction, the way to read the UBI is not as a real proposal, but as a message about something else: our existing system. But the implicit critique of the existing system underlying UBI advocacy is not well-founded.

Overhead cost is typically exaggerated in conservative discussions. Conservatives present comparisons of spending under a long list of Federal programs, many of which have broader or entirely different objectives than reducing poverty. The costs of programs that try to do things requiring public employees are not the same as ‘overhead,’ nor are these employees necessarily a bureaucracy. Even the programs explicitly aimed at reducing poverty are designed to cover more than just those under the poverty line. Moreover, the overhead costs of the main programs noted below are low, for the most part.

We also see exaggerations of the number of programs that are dedicated to reducing poverty. The fact is that most anti-poverty spending is concentrated in relatively few places: Medicaid, food stamps, the Earned Income Tax Credit, Supplemental Security Income, Temporary Assistance for Needy Families, unemployment compensation, and housing subsidies. Coverage in most of these programs goes well above the official poverty line.

In the current system, there is plenty to criticize. Eligibility could be simplified and broadened. Assistance could be increased. The main gap in coverage where a UBI would have the most impact is on able-bodied adults without children, who currently get the least from the current system as far as cash transfers are concerned. I’ve already mentioned easier ways to remedy that deficiency.

So why are we talking about the UBI? Dissatisfaction with the current system feeds a dream of wiping the slate clean, but motivations for a clean slate vary drastically.

Some on the right would like to replace existing programs because they disapprove of what those programs do, not because they fail to erase poverty. What the programs do is masked with the epithet of “bureaucracy.” Or they imagine a scenario where Federal spending decreases, and the remaining UBI programs can then be further whittled down over time. In effect, conservative supporters of the UBI concede their major, historic critique of anti-poverty benefits – the moocher issue. One naturally wonders how deeply felt this conversion really is.

Some on the left would like more ample, broader, simpler provision of benefits. This critique actually goes back to the 60s, when the principal anti-poverty program – Aid to Families with Dependent Children – was viewed as intrusive and demeaning.

If you like the transfer of cold cash, your chief target ought to be Temporary Assistance for Needy Families, the fruits of the Clinton/Gingrich welfare reform of 1996. The Feds provide a grant to state governments, who busy themselves with helping people to help themselves. In the actual event, states helped a lot of people off the welfare rolls and into poverty. The national poverty rate, notwithstanding this reform, steadily went up after 2000. So if you want to strike a blow for reduced overhead, simplicity, and adequacy – if you’re serious – go ahead and make my day: Federalize TANF and establish it as an individual, adequate cash payment to which every resident has a legal right. To constrain its cost, limit eligibility to families with dependent children and phase it out as other income grows.

We do have a mix of programs – what’s been called a “mish-mosh” -- aimed at poverty reduction, among other objectives. Why this complexity?

1.  No surprise, poor people don’t have much political power. They are obliged to seek alliances with provider interests – most famously with agriculture behind the food stamp program (an alliance that may be ending).

2.  The disorganization of Congress and associated interest groups encourages fragmentation. Every member wants something specific to attach his or her name to. (In recent decades, instead of spending programs, we have tax breaks named after Members of Congress).

3.  Federalism, hard-wired into our constitution.

4.  Public opinion, a Tower of Babel.

In light of these constraints, why dwell on a proposal founded on the mirage of wiping the slate clean to start from scratch that presumes a completely fantastical political environment? The answer is, to avoid devices that have been used successfully in the past, that exist at some level and actually work, that stand better than a ghost of a chance at being enacted, and importantly, surviving.

People need a basic income, so they need us to talk about the best ways to get it.

Max Sawicky is employed with the Federal government. His views here do not represent those of his employer.

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Two Simple Reasons to Not Fight Bubbles With Higher Interest Rates

Nov 27, 2013Mike Konczal

I had no idea that Sweden has gone all-in on raising interest rates to fight "financial instability." (Alas poor Lars Svensson!) Simon Wren-Lewis has details, Krugman has more, and Peter Orszag had a great column about how New Zealand is instead using regulations to fight worries about the financial system.

I've been long fascinated by this topic. The stakes are very high: should we endure a mini-recession, with lower employment and output, to fight a thing called “financial instability”? I offered a list of reasons why the answer should be a resounding "no", but I recently found two more. These two are much clearer, and I think should provide a major hurdle to clear for those who think we should raise rates.

First: Every Target Needs an Instrument

I hate to spoil what happens when you try to kill two birds with one stone, but you usually end up missing both of them.

In policy we have targets and we have instruments. Targets are states of the world we want to bring about but don't control, and instruments are means of bringing them about that policymakers do control. Targets for the Federal Reserve are things like full employment, price stability, and now financial stability, and its main instrument is the interest rate.

There's an old principle in policy called Tinbergen's Rule (h/t JW Mason). Tinbergen's Rule says that you need at least as many instruments as there are targets. One instrument can't hit two targets consistently or with any regularity.

In modern macroeconomics there's an interest rate consistent with both full employment and price stability, so that's functionally one target. Now what people are saying is that we will take one instrument, the interest rate, and try to hit both financial stability and full employment. That can't be done, or at least not regularly or with any consistency. (And there's no reason to think that a set of regulatory tools could, with any real effect or consistency, create full employment, so there's no way to cross them.)

Doing something that common sense tells us we can't is a really bad way to establish how we want macroeconomic policy to look after the crisis. If we need financial stability, and I really believe we do, we need to develop a separate set of tools through law and regulations.

Second: What Would the Net Effect Even Be?

The short answer here is that we have no idea what the actual effects of raising interest rates would be on financial stability. This was on clear display in the IMF's "The Interaction of Monetary and Macroprudential Policies" from earlier this year. Here's a great chart from that report:

That's a lot to take in, so let's walk through it. Imagine we raise interest rates right now, in the name of financial stability. That in turn reduces employment and decreases incomes, making it harder for people to make payments and worsening their balance-sheet situations. The higher rates themselves will lead to higher payments for those with loans linked to variable payments. Raising rates to fight financial instability will lead to weaker balance sheets and more defaults, thus increasing the problem it was meant to solve.

(That's why in the balance-sheet channel of the chart above, there's a red arrow, representing a decline in financial stability, under an increase of policy rates.)

But there are other channels as well. Under the risk-taking channel, lowering rates can cause "intermediaries to expand their balance sheets, increase leverage, and reduce efforts in screening borrowers." However, for the risk-shifting channel, increasing rates "tends to reduce the margins of intermediaries that are funded short-term at variable rates, but lend long-term at fixed rates." Thus, to maintain a return on equity, there may need to be a shift into riskier assets. These two effects go in opposite directions, and it's not clear which would be greater.

There's also an asset price channel. It's not clear how much low interest rates cause asset price booms in practice. But to the extent that they do, they can increase financial stability by increasing asset value and borrowers' net worth. However, in the exchange rate channel, raising interest rates will lead to more capital inflows (the IMF says "excessive capital inflow," heh) and capital growth, which will decrease financial stability. (JW Mason flagged this as a major problem with the "raise rates" crew in a guest blog post here a while ago.)

It shouldn't be clear to a random person which of these would dominate over the other, thus making me believe that raising interest rates would likely be a wash in terms of financial stability. But it would definitely move us further away from full employment and price stability.
 
Now if I had to put money on it, I know that the risk channels can be tackled through financial regulation, while I believe the idea that running a larger output gap, with weaker incomes and more unemployment than necessary, will somehow fix consumer balance-sheets is borderline insane.
 
So why are so many countries going this way? Does capital just have an inherent right to a certain level of return regardless of mass suffering?
 
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I had no idea that Sweden has gone all-in on raising interest rates to fight "financial instability." (Alas poor Lars Svensson!) Simon Wren-Lewis has details, Krugman has more, and Peter Orszag had a great column about how New Zealand is instead using regulations to fight worries about the financial system.

I've been long fascinated by this topic. The stakes are very high: should we endure a mini-recession, with lower employment and output, to fight a thing called “financial instability”? I offered a list of reasons why the answer should be a resounding "no", but I recently found two more. These two are much clearer, and I think should provide a major hurdle to clear for those who think we should raise rates.

First: Every Target Needs an Instrument

I hate to spoil what happens when you try to kill two birds with one stone, but you usually end up missing both of them.

In policy we have targets and we have instruments. Targets are states of the world we want to bring about but don't control, and instruments are means of bringing them about that policymakers do control. Targets for the Federal Reserve are things like full employment, price stability, and now financial stability, and its main instrument is the interest rate.

There's an old principle in policy called Tinbergen's Rule (h/t JW Mason). Tinbergen's Rule says that you need at least as many instruments as there are targets. One instrument can't hit two targets consistently or with any regularity.

In modern macroeconomics there's an interest rate consistent with both full employment and price stability, so that's functionally one target. Now what people are saying is that we will take one instrument, the interest rate, and try to hit both financial stability and full employment. That can't be done, or at least not regularly or with any consistency. (And there's no reason to think that a set of regulatory tools could, with any real effect or consistency, create full employment, so there's no way to cross them.)

Doing something that common sense tells us we can't is a really bad way to establish how we want macroeconomic policy to look after the crisis. If we need financial stability, and I really believe we do, we need to develop a separate set of tools through law and regulations.

Second: What Would the Net Effect Even Be?

The short answer here is that we have no idea what the actual effects of raising interest rates would be on financial stability. This was on clear display in the IMF's "The Interaction of Monetary and Macroprudential Policies" from earlier this year. Here's a great chart from that report:

That's a lot to take in, so let's walk through it. Imagine we raise interest rates right now, in the name of financial stability. That in turn reduces employment and decreases incomes, making it harder for people to make payments and worsening their balance-sheet situations. The higher rates themselves will lead to higher payments for those with loans linked to variable payments. Raising rates to fight financial instability will lead to weaker balance sheets and more defaults, thus increasing the problem it was meant to solve.

(That's why in the balance-sheet channel of the chart above, there's a red arrow, representing a decline in financial stability, under an increase of policy rates.)

But there are other channels as well. Under the risk-taking channel, lowering rates can cause "intermediaries to expand their balance sheets, increase leverage, and reduce efforts in screening borrowers." However, for the risk-shifting channel, increasing rates "tends to reduce the margins of intermediaries that are funded short-term at variable rates, but lend long-term at fixed rates." Thus, to maintain a return on equity, there may need to be a shift into riskier assets. These two effects go in opposite directions, and it's not clear which would be greater.

There's also an asset price channel. It's not clear how much low interest rates cause asset price booms in practice. But to the extent that they do, they can increase financial stability by increasing asset value and borrowers' net worth. However, in the exchange rate channel, raising interest rates will lead to more capital inflows (the IMF says "excessive capital inflow," heh) and capital growth, which will decrease financial stability. (JW Mason flagged this as a major problem with the "raise rates" crew in a guest blog post here a while ago.)

It shouldn't be clear to a random person which of these would dominate over the other, thus making me believe that raising interest rates would likely be a wash in terms of financial stability. But it would definitely move us further away from full employment and price stability.
 
Now if I had to put money on it, I know that the risk channels can be tackled through financial regulation, while I believe the idea that running a larger output gap, with weaker incomes and more unemployment than necessary, will somehow fix consumer balance-sheets is borderline insane.
 
So why are so many countries going this way? Does capital just have an inherent right to a certain level of return regardless of mass suffering?
 
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Do Negative Rates Call For a Permanent Expansion of the Government?

Nov 19, 2013Mike Konczal

Everyone has been talking about the recent Larry Summers speech on secular stagnation, written up with force by Paul Krugman here. Gavyn Davies, in his own nice coverage, noted that the Q&A had an interesting exchange about fiscal stimulus between Bernanke and Summers, so I decided to write that up.

From the IMF video, starting around 1h 2m 15s:

Bernanke:
 
I remember another course we had at MIT with Mr. Samuelson, who I think is a relative of yours [laughter], where he explains…why the real interest rate couldn't be negative indefinitely. He said there was always the possibility of leveling a hill so that a locomotive could get to a destination [faster]…
 
If the real return is negative, first of all, monetary policy can get negative interest rates with positive inflation. But on the fiscal side, the return to public investment, as long as it's real, as long as it's above zero, would always be an approach. It would always be profitable at negative interest rates.
 
Summers:
 
[…] If you think about it as a private investment, it requires that there are perfect property rights, that you can get the benefit of that through all of time, which is reasonable to suppose you don't. If you think of it as a public investment, it's sort of the point that there may be a case for what, in some ways of thinking, be a permanent fiscal expansion, where you are constantly undertaking projects of that kind. It is precisely how one should think of medium-term and long-term fiscal policy that the kind of argument that I made goes to, to a very substantial extent.
 
[…] if you generate inflation, you can have as negative of a real interest rate as you want. It's often assumed, from that, that monetary policy can necessarily solve the problem alone. But that depends on the ability of pure monetary policy to achieve any desired inflation.
 
There's no question… if you drop enough dollar bills from enough helicopters, you can get as much inflation as you want, but in the classic economic lexicon, that's expansionary fiscal policy, because you are making a transfer. And we've done a lot of quantitative easing, and the inflation rate is not conspicuously higher than what it was before it started.
I would normally edit a transcript a bit more, but I wanted to make sure you saw that Summers has a triple hedge ("it's sort of the point that there may be a case for what, in some ways of thinking") before he says that we may need a permanent, or at least a permanent enough, fiscal expansion. This is a long way away from the "timely, targeted, and temporary" mantra Summer had for fiscal stimulus in 2008. Stimulus should still be very well targeted, but now temporary and perhaps even timely are up for grabs.
 
Of course, if we needed to expand government for our new era, we have a lot of projects, like fighting global warming and rationalizing our safety net with some kind of basic income, with which we could start. So we aren't lacking for genuine investment opportunities. But would a serious and sustained expansion of the size of government be a necessary or sufficient condition for combating the issue of secular stagnation? I'm curious what everyone thinks and why.
 
I can imagine the steam coming out of Ryan Avent's ears at Summers's description of quantitative easing and the inflation rate (see Avent's response to the Summers speech here). I will say that 11 months ago, when the Evans Rule and QE3 were announced, I thought there would be a small but reasonable chance that we'd experience anemic growth but above-trend inflation (say 2.25 percent). The question then was why people should be happy about this, and whether it would translate into wage growth. Instead, we have anemic growth and record-low inflation, and I don't know how to explain that.
 
The old complaint was that Bernanke was targeting volumes instead of prices (I'll buy so many bonds, but not set the 10 year interest rate at 1.75% and the mortgage rate at 3%), in part because he was afraid of failing at hitting a target and, perhaps, was afraid of the optics of it. But the one target he has gone for - 2% inflation - he hasn't hit. I imagine that's a big problem for bigger actions going forward.
 

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Everyone has been talking about the recent Larry Summers speech on secular stagnation, written up with force by Paul Krugman here. Gavyn Davies, in his own nice coverage, noted that the Q&A had an interesting exchange about fiscal stimulus between Bernanke and Summers, so I decided to write that up.

From the IMF video, starting around 1h 2m 15s:

Bernanke:
 
I remember another course we had at MIT with Mr. Samuelson, who I think is a relative of yours [laughter], where he explains…why the real interest rate couldn't be negative indefinitely. He said there was always the possibility of leveling a hill so that a locomotive could get to a destination [faster]…
 
If the real return is negative, first of all, monetary policy can get negative interest rates with positive inflation. But on the fiscal side, the return to public investment, as long as it's real, as long as it's above zero, would always be an approach. It would always be profitable at negative interest rates.
 
Summers:
 
[…] If you think about it as a private investment, it requires that there are perfect property rights, that you can get the benefit of that through all of time, which is reasonable to suppose you don't. If you think of it as a public investment, it's sort of the point that there may be a case for what, in some ways of thinking, be a permanent fiscal expansion, where you are constantly undertaking projects of that kind. It is precisely how one should think of medium-term and long-term fiscal policy that the kind of argument that I made goes to, to a very substantial extent.
 
[…] if you generate inflation, you can have as negative of a real interest rate as you want. It's often assumed, from that, that monetary policy can necessarily solve the problem alone. But that depends on the ability of pure monetary policy to achieve any desired inflation.
 
There's no question… if you drop enough dollar bills from enough helicopters, you can get as much inflation as you want, but in the classic economic lexicon, that's expansionary fiscal policy, because you are making a transfer. And we've done a lot of quantitative easing, and the inflation rate is not conspicuously higher than what it was before it started.
I would normally edit a transcript a bit more, but I wanted to make sure you saw that Summers has a triple hedge ("it's sort of the point that there may be a case for what, in some ways of thinking") before he says that we may need a permanent, or at least a permanent enough, fiscal expansion. This is a long way away from the "timely, targeted, and temporary" mantra Summer had for fiscal stimulus in 2008. Stimulus should still be very well targeted, but now temporary and perhaps even timely are up for grabs.
 
Of course, if we needed to expand government for our new era, we have a lot of projects, like fighting global warming and rationalizing our safety net with some kind of basic income, with which we could start. So we aren't lacking for genuine investment opportunities. But would a serious and sustained expansion of the size of government be a necessary or sufficient condition for combating the issue of secular stagnation? I'm curious what everyone thinks and why.
 
I can imagine the steam coming out of Ryan Avent's ears at Summers's description of quantitative easing and the inflation rate (see Avent's response to the Summers speech here). I will say that 11 months ago, when the Evans Rule and QE3 were announced, I thought there would be a small but reasonable chance that we'd experience anemic growth but above-trend inflation (say 2.25 percent). The question then was why people should be happy about this, and whether it would translate into wage growth. Instead, we have anemic growth and record-low inflation, and I don't know how to explain that.
 
The old complaint was that Bernanke was targeting volumes instead of prices (I'll buy so many bonds, but not set the 10 year interest rate at 1.75 percent and the mortgage rate at 3 percent), in part because he was afraid of failing to hit a target and, perhaps, was afraid of the optics of it. But the one target he has gone for, 2 percent inflation, he hasn't hit. I imagine that's a big problem for bigger actions going forward.
 

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Given the Myth of Ownership, is the Idea of Redistribution Coherent?

Nov 14, 2013Mike Konczal

Given that all property rights are a creation of the state, is it possible to refer to “redistribution” without reifying a notion of “everyday libertarianism”? I believe so.

However, Matt Bruenig, over at our neighbors Demos, disagrees, and is slowly picking off liberal wonks on this topic. Given that I’m likely on the kill list, I might as well play offense. This post is probably not of interest to general readers.

Given that all property rights are a creation of the state, is it possible to refer to “redistribution” without reifying a notion of “everyday libertarianism”? I believe so.

However, Matt Bruenig, over at our neighbors Demos, disagrees, and is slowly picking off liberal wonks on this topic. Given that I’m likely on the kill list, I might as well play offense. This post is probably not of interest to general readers.

Bruenig argues that instead of redistribution, we “have in front of us a huge variety of potential economic institutional sets that we must pick from. Each set of economic institutions generates its own unique distributive outcome.” Pulling from a previous post, he states that “every single institutional choice that is made surrounding the economy sets the stage for the distribution that results...The cocktail of institutional choices you make dictates the distribution that follows.”

As I read him, Bruenig is meant not to be dealing with matters of justice (i.e. “this distribution of income is unjust”) but instead arguing that there’s no other way for this to be (i.e. “it’s impossible for the state not to create the distribution of income”). This argument, following the Myth of Ownership, is often deployed against the topic of horizontal equity in taxation, arguing that the goal of preserving pre-tax income is a fundamentally incoherent idea. (People in favor of funding all higher-education through income-based repayments from students often rely heavily on such claims to horizontal equity.)

Though relevant for tax policy, this argument becomes more problematic for social insurance. Because even though the distribution of income is created by the state through property rights [1], social insurance itself is then created through said distribution.

It also blurs different ways in which we mean the state to be creating the distribution. It might be better to start this argument not by talking about property, which can put people at the edge of their seats, but instead sports. We’ll use basketball, but you can fill in your own. There are two ways in which the referees determine the distribution of points.

The first is in the creation of the rules themselves. If the three point line became a six point line it would benefit players and teams with better outside shooting relative to those who play close to the net. If the length of the game was doubled it would benefit endurance players versus those who can score quickly. If fouls were called more or less aggressively that would benefit those playing certain strategies against others. And so on.

It quickly becomes clear that the rules of the game are not neutral, and they can have significant impact on the distribution of points, making winners into losers with just minor twists. This is where much of the liberal policy conversation takes place, with people like Ed Miliband saying things like “Markets don’t just drop down from outer space, perfectly formed.”

Here it is completely clear we can speak of “redistribution” of points. Because referees set the rules doesn’t mean they pick the score. One sees a tension in this argument - from the Bruenig quote, above sometimes the state “sets the stage for the distribution” while other times it “dictates the distribution that follows.” So even after setting the rules, we may want to wall off certain distributional outcomes. We can say that the leader should never be more than 20 points ahead of the loser at any time, for instance.

There’s a second, deeper, sense here, and that is that all the points are created and justified by the referees. If someone does a slam dunk, they may say “that was easily worth four points.” Their opponents might retort “no way, it’s only worth one point.” The referee is the one that everyone looks to for the correct score, where he’d say “it’s two points.” However, if the referee calls a penalty on that slam dunk, then those points simply do not appear. At any given moment we can’t refer to the score without justifying it based on what the referee is saying it is.

However, there are two reasons redistribution is still a coherent concept here. That it is absolutely true that any specific distribution of points are created by referees does not mean that that the referees pick whatever distribution they want. Thus they can think of a distribution they create, and have institution responses to move from one distribution to another that operate in a second-order manner. This second-order is what puts the “re” in “redistribution.”

And to move back to the world of public policy and property, this is especially true as the social insurance state dialectically creates itself through engagement with a market distribution and set of prices that was already being created by the government. Various goals like “prevent sudden drops in income” or “provide a certain replacement level of income in old age” or “ensure that food costs are less than a quarter of a family’s budget” or “have the government pay the costs of health insurance and public education” all require a set of market distributions and prices already present to carry out.

To take two specific examples, something like “a universal basic income that prevents poverty” requires a definition of poverty that will need to be drawn from an already existing distribution of market prices. The example that started this discussion, Social Security, is predicated on a replacement rate of market incomes, making any reference to social insurance here impossible without referencing a market distribution.

So yes, when discussing social insurance one needs to have some set of distribution already in play in order to shift it around. That the pre-tax distribution of income is arbitrary and could be done differently doesn’t preclude its existence, and that a set of institutions is put into place to change said income shouldn’t just be folded under the term “distribution.”

 

 

[1] It’s worth noting that we have been talking about property rights, instead of property claims. Taking a point from Jeffrey Winters’ Oligarchy, we should distinguish between property claims and property rights. Like all property, both are secured by violence and coercion. However, property claims are secured personally against the community; property rights are enforced impersonally by (or in the name of) the community.

Because the strong form of the argument that all property is ultimately created by and enforced by the state is wrong. We can imagine a situation much like our world - let’s call this distribution A. Someone named Adam in our world A decides he’ll go out and purchase some illegal drugs, hire a person to perform illegal acts of an adult nature, purchase one of those illegal DVDs of new movies recorded on a handheld cam you always see people selling in cities, and, to top it off, hire someone off-the-books to clean his house for less than minimum wage. Let’s refer to this new distribution as A’.

Perhaps you hope Adam will repent and fix his life, or perhaps you want to party with him. But either way, the new difference in distribution between A’ and A can’t be defended by claims to the state. (It’s not only not constructed by the state, but the state seeks to crush those claims.) If something goes wrong, if Adam is robbed for instance, he can’t rely on an impartial state to adjudicate these disputes. He has to rely on personalized claims to property in a world where the violence in property isn’t centralized in an abstraction and the rules aren’t codified in advance.

And, as economists of the commons like Elinor Ostrom have found, if we don’t put private property rights into everything we don’t descend into chaos. Norms adjust, though it’s hard imagining a capitalist economy running on such things. (Property rights are far more important when wealth is held outside of land and natural resource claims, and instead in capitalist ownership abstractions like “corporations.”) One could turn around and call this new set of customs for adjudicating property claims “the state,” which is fine as far as it goes, but it doesn’t have the same type of elements that modern property rights have.

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Our Big Financial Reform Report, "An Unfinished Mission," is Now Live!

Nov 12, 2013Mike Konczal

It's finally live! Here is the full report, along with pdfs for the individual chapters.

An Unfinished Mission: Making Wall Street Work for Us

A Report by Americans for Financial Reform and the Roosevelt Institute

Edited by Mike Konczal and Marcus Stanley

Published November 12, 2013

More than five years after the financial crisis, there is still an open debate about what it would mean to have a financial sector that works for the benefit of the real economy, and how close we are to achieving that. In An Unfinished Mission: Making Wall Street Work For Us, Americans for Financial Reform and the Roosevelt Institute explore the policy questions that remain, both within and beyond the scope of the Dodd-Frank reforms.

CLICK HERE TO DOWNLOAD THE FULL REPORT (PDF)

Table of Contents:

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It's finally live! Here is the full report, along with pdfs for the individual chapters.

An Unfinished Mission: Making Wall Street Work for Us

A Report by Americans for Financial Reform and the Roosevelt Institute

Edited by Mike Konczal and Marcus Stanley

Published November 12, 2013

More than five years after the financial crisis, there is still an open debate about what it would mean to have a financial sector that works for the benefit of the real economy, and how close we are to achieving that. In An Unfinished Mission: Making Wall Street Work For Us, Americans for Financial Reform and the Roosevelt Institute explore the policy questions that remain, both within and beyond the scope of the Dodd-Frank reforms.

CLICK HERE TO DOWNLOAD THE FULL REPORT (PDF)

Table of Contents:

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Announcing Our Big Financial Reform Report Launch, November 12th in DC!

Oct 25, 2013Mike Konczal
Hey everyone. One reason I've been on radio silence for the past bit is that I've been gearing up for the launch of a big report on financial reform. Roosevelt Institute has teamed up with Americans for Financial Reform to produce An Unfinished Mission: Making Wall Street Work for Us, which will focus on how financial reform should evolve in the next several years.
 
I'm one of the editors as well as a contributor, and I have to say I'm really excited about the content. We have Saule Omarova (whose research blew up the aluminum trading story) contributing on bank activities, Stephen Lubben on the challenges remaining with resolution authority, John Parsons on where the derivatives market stands, I'll be covering capital requirements, and many, many more.
 
I can't be more excited about this, and we are having a big launch event in Washington D.C. on November 12th in the Russell Senate Office Building. We have Senator Elizabeth Warren keynoting it, and we'll have copies of the report available.
 
The important thing is that you RSVP if you want to make it. Email: Nov12UnfinishedMission[at]gmail[dot]com to RSVP.
 
I think there's some remarkable stuff going on with the Senate Banking Committee these days, and a serious reexamination of where financial reform is coming from and where it is going by many different people. I think this report will help provide a roadmap on what still remains, and where it needs to go.
 
What: An Unfinished Mission: Making Wall Street Work for Us
 
When: Tuesday, November 12, 10 a.m.-1:30 p.m.
 
Where: Russell Senate Office Building, Room 325 Washington, D.C.
 
Keynote Speaker: Senator Elizabeth Warren
 
Contact EmailNov12UnfinishedMission[at]gmail[dot]com to RSVP.
 
This event is free and open to the public.
 
PROGRAM
 
10:00 a.m.     Opening and Introductions
 
10:10 a.m.     Making the System Safer
 
Stephen Lubben (Seton Hall Law School)
Mike Konczal (Roosevelt Institute)
Marcus Stanley (Americans for Financial Reform)
 
11:00 a.m.     Protecting Customers in the Financial System
 
Mike Calhoun (Center for Responsible Lending)
Jennifer Taub (Vermont Law School)
Ron Rhoades (Alfred University)
 
12:00 p.m.     Rethinking Bank Activities and Oversight
 
Saule Omarova (UNC School of Law and Cornell University Law School)
Wallace Turbeville (Demos)
Brad Miller (Center for American Progress / Former House Member)
 
KEYNOTE: Senator Elizabeth Warren
1:00pm – 1:30pm
 
The full report will be made available online at that time if you can't make it.
 

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Hey everyone. One reason I've been on radio silence for the past bit is that I've been gearing up for the launch of a big report on financial reform. Roosevelt Institute has teamed up with Americans for Financial Reform to produce An Unfinished Mission: Making Wall Street Work for Us, which will focus on how financial reform should evolve in the next several years.
 
I'm one of the editors as well as a contributor, and I have to say I'm really excited about the content. We have Saule Omarova (whose research blew up the aluminum trading story) contributing on bank activities, Stephen Lubben on the challenges remaining with resolution authority, John Parsons on where the derivatives market stands, I'll be covering capital requirements, and many, many more.
 
I can't be more excited about this, and we are having a big launch event in Washington D.C. on November 12th in the Russell Senate Office Building. We have Senator Elizabeth Warren keynoting it, and we'll have copies of the report available.
 
The important thing is that you RSVP if you want to make it. Email: Nov12UnfinishedMission[at]gmail[dot]com to RSVP.
 
I think there's some remarkable stuff going on with the Senate Banking Committee these days, and a serious reexamination of where financial reform is coming from and where it is going by many different people. I think this report will help provide a roadmap on what still remains, and where it needs to go.
 
What: An Unfinished Mission: Making Wall Street Work for Us
 
When: Tuesday, November 12, 10 a.m.-1:30 p.m.
 
Where: Russell Senate Office Building, Room 325 Washington, D.C.
 
Keynote Speaker: Senator Elizabeth Warren
 
Contact EmailNov12UnfinishedMission[at]gmail[dot]com to RSVP.
 
This event is free and open to the public.
 
PROGRAM
 
10:00 a.m.     Opening and Introductions
 
10:10 a.m.     Making the System Safer
 
Stephen Lubben (Seton Hall Law School)
Mike Konczal (Roosevelt Institute)
Marcus Stanley (Americans for Financial Reform)
 
11:00 a.m.     Protecting Customers in the Financial System
 
Mike Calhoun (Center for Responsible Lending)
Jennifer Taub (Vermont Law School)
Ron Rhoades (Alfred University)
 
12:00 p.m.     Rethinking Bank Activities and Oversight
 
Saule Omarova (UNC School of Law and Cornell University Law School)
Wallace Turbeville (Demos)
Brad Miller (Center for American Progress / Former House Member)
 
KEYNOTE: Senator Elizabeth Warren
1:00pm – 1:30pm
 
The full report will be made available online at that time if you can't make it.
 

Follow or contact the Rortybomb blog:

  

 

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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:

  

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