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.
 

Follow or contact the Rortybomb blog:

  

 

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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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.

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“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.

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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.
 

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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.

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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.

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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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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.

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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.

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