We Just Had the Lowest Core Inflation in 50 Years. What Does This Mean for "Expectations" and Monetary Policy?

Jun 5, 2013Mike Konczal

Last Friday, the BEA announced the lowest year-over-year rise in core inflation it has ever recorded. The year-over-year PCE core inflation, or inflation stripped of volatile energy and food prices, was 1.05 percent. As Doug Short notes, the previous all-time low was 1.06, and that is from March 1963. (The records go back to 1959.) Inflation is collapsing in 2013, both for observed values and future expectations. This is noteworthy because, as you may remember, the Federal Reserve took extraordinary actions at the end of last year to hit its inflation target.

Let’s put up a chart from Doug Short:

I had mentioned falling inflation in my Bernanke versus austerity column, but wanted a bit more core information before I flagged it. It’s now here. This is a major issue that isn’t being discussed. It gets to the heart of whether or not the Federal Reserve can manage the economy at the zero lower bound of interest rates through expectations, guidance, and purchases, which is a central issue now and for the future of economic policy.

It’s also worth discussing because the idea that the Fed has a lot of room is expanding into new ranks via conservative reformers. Josh Barro, now at Business Insider, just argued that “market monetarism is the shining success of the conservative reform movement.” Crucially, it is being used by thinkers on the right to justify ignoring fiscal stimulus. Ross Douthat just wrote that reform conservatives believe that “monetary policy [is] an alternative...to further fiscal stimulus,” and Brink Lindsey also mentioned being pro-monetary policy but anti-fiscal stimulus at a recent Roosevelt Institute conference.

Market monetarists can mean a range of things, from the generic observation that the Fed could be “doing more” to the idea of tying our monetary policy to a nonexistent futures market. But the idea that the Federal Reserve can be effective at the zero lower bound by setting expectations of future policies through commitments is an important part of the equation.

As David Becksworth noted (discussing a nominal GDP target, but still applicable to an inflation target), “[k]nowing that the Fed would be willing to buy up trillion of dollars of assets if necessary to hit its target would cause the market itself to do much of the heavy lifting.” And that’s what the Federal Reserve did last year.

Bernanke made clear he was going for 2 percent inflation at the beginning of last year. Instead of pegging low rates to future dates, he tied them to economic conditions, like unemployment being above 6.5 percent and inflation being lower than 2.5 percent. The higher ceiling made sure that inflation could go above 2 percent without tightening. And he then backed that up with new open-ended purchases set to those conditions. The Fed committed to purchasing a lot of assets until unemployment or inflation hit a limit or until they hit their inflation target - and so far inflation has done the exact opposite of what a reasonable person would have expected.

(It’s likely that the Federal Reserve’s actions are working through giving everyone ultra-low mortgage rates. That is boosting the housing market by encouraging new homes, bidding up the value of existing homes, and allowing aggressive refinancing. But, as far as I understand it, this is far away from the expectations channel that most ZLB monetary policy people reference. Indeed government actions like FHA backstopping the market, or HARP 2.0 ignoring the legal underwriting of reps and warranties on underwater refis, are big pieces of this story.)

Maybe everything will change and inflation will increase, but for now what should we conclude? First, the move to lock in 4 trillion dollars in deficit reduction was premature and is putting the recovery at serious risk. But perhaps the problem is that Bernanke is still too timid, and that a “regime change” is needed to wake up the financial markets. A move to 4 percent inflation would force the markets to act.

Whether or not you thought that the moves put into place would necessarily get inflation to 2 percent, certainly they should have provided a floor at last fall’s rates. The fact that inflation is falling even when more action is being taken should have us questioning whether a 4 percent move would have any traction. Also, for better or worse, if there was more disinflation after the 4 percent inflation target was announced, the Federal Reserve would likely see it as a major hit to its credibility.

Others think watching inflation is misguided, and we should instead be watching nominal GDP. That too may be in trouble. The NGDP chart that David Becksworth uses is showing a drop, last week showed a 0.1 percent decline in the Q1 2013 revision (instead of a rally), and with lower expected Q2 growth and disinflation real GDP is likely to fall further.

But my concern is that if the Federal Reserve is incapable of establishing even baseline “expectations” management of its institutional 2 percent inflation target at the zero lower bound, it’s not clear that it can do expectations management for brand new targets like nominal GDP while it is still there.

If zero lower bound monetary policy can’t manage a recovery through managing “expectations,” then ironically having something like a 4 percent inflation target in normal times is even more important. If the zero lower bound is this brutal to "unconventional" monetary policy, then it is even more important that we don't reach it. And we are less likely to reach it with more room. The question is how do we get to a situation where that is possible?

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Last Friday, the BEA announced the lowest year-over-year rise in core inflation it has ever recorded. The year-over-year PCE core inflation, or inflation stripped of volatile energy and food prices, was 1.05 percent. As Doug Short notes, the previous all-time low was 1.06, and that is from March 1963. (The records go back to 1959.) Inflation is collapsing in 2013, both for observed values and future expectations. This is noteworthy because, as you may remember, the Federal Reserve took extraordinary actions at the end of last year to hit its inflation target.

Let’s put up a chart from Doug Short:

I had mentioned falling inflation in my Bernanke versus austerity column, but wanted a bit more core information before I flagged it. It’s now here. This is a major issue that isn’t being discussed. It gets to the heart of whether or not the Federal Reserve can manage the economy at the zero lower bound of interest rates through expectations, guidance, and purchases, which is a central issue now and for the future of economic policy.

It’s also worth discussing because the idea that the Fed has a lot of room is expanding into new ranks via conservative reformers. Josh Barro, now at Business Insider, just argued that “market monetarism is the shining success of the conservative reform movement.” Crucially, it is being used by thinkers on the right to justify ignoring fiscal stimulus. Ross Douthat just wrote that reform conservatives believe that “monetary policy [is] an alternative...to further fiscal stimulus,” and Brink Lindsey also mentioned being pro-monetary policy but anti-fiscal stimulus at a recent Roosevelt Institute conference.

Market monetarists can mean a range of things, from the generic observation that the Fed could be “doing more” to the idea of tying our monetary policy to a nonexistent futures market. But the idea that the Federal Reserve can be effective at the zero lower bound by setting expectations of future policies through commitments is an important part of the equation.

As David Becksworth noted (discussing a nominal GDP target, but still applicable to an inflation target), “[k]nowing that the Fed would be willing to buy up trillion of dollars of assets if necessary to hit its target would cause the market itself to do much of the heavy lifting.” And that’s what the Federal Reserve did last year.

Bernanke made clear he was going for 2 percent inflation at the beginning of last year. Instead of pegging low rates to future dates, he tied them to economic conditions, like unemployment being above 6.5 percent and inflation being lower than 2.5 percent. The higher ceiling made sure that inflation could go above 2 percent without tightening. And he then backed that up with new open-ended purchases set to those conditions. The Fed committed to purchasing a lot of assets until unemployment or inflation hit a limit or until they hit their inflation target - and so far inflation has done the exact opposite of what a reasonable person would have expected.

(It’s likely that the Federal Reserve’s actions are working through giving everyone ultra-low mortgage rates. That is boosting the housing market by encouraging new homes, bidding up the value of existing homes, and allowing aggressive refinancing. But, as far as I understand it, this is far away from the expectations channel that most ZLB monetary policy people reference. Indeed government actions like FHA backstopping the market, or HARP 2.0 ignoring the legal underwriting of reps and warranties on underwater refis, are big pieces of this story.)

Maybe everything will change and inflation will increase, but for now what should we conclude? First, the move to lock in 4 trillion dollars in deficit reduction was premature and is putting the recovery at serious risk. But perhaps the problem is that Bernanke is still too timid, and that a “regime change” is needed to wake up the financial markets. A move to 4 percent inflation would force the markets to act.

Whether or not you thought that the moves put into place would necessarily get inflation to 2 percent, certainly they should have provided a floor at last fall’s rates. The fact that inflation is falling even when more action is being taken should have us questioning whether a 4 percent move would have any traction. Also, for better or worse, if there was more disinflation after the 4 percent inflation target was announced, the Federal Reserve would likely see it as a major hit to its credibility.

Others think watching inflation is misguided, and we should instead be watching nominal GDP. That too may be in trouble. The NGDP chart that David Becksworth uses is showing a drop, last week showed a 0.1 percent decline in the Q1 2013 revision (instead of a rally), and with lower expected Q2 growth and disinflation real GDP is likely to fall further.

But my concern is that if the Federal Reserve is incapable of establishing even baseline “expectations” management of its institutional 2 percent inflation target at the zero lower bound, it’s not clear that it can do expectations management for brand new targets like nominal GDP while it is still there.

If zero lower bound monetary policy can’t manage a recovery through managing “expectations,” then ironically having something like a 4 percent inflation target in normal times is even more important. If the zero lower bound is this brutal to "unconventional" monetary policy, then it is even more important that we don't reach it. And we are less likely to reach it with more room. The question is how do we get to a situation where that is possible?

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Guest Post: Dube on Growth, Debt and Past versus Future Windows

Jun 1, 2013Arindrajit Dube

Windows into the Past and the Future:  A Visual Elaboration

Arindrajit Dube

Recently, we have seen a number of explorations of the timing of growth around episodes of high debt as a way to discern the likely direction of causality in that relationship.  This is important, because we do observe that there is a negative correlation between contemporaneous debt and growth. For instance, this is true when using the corrected data from Reinhart and Rogoff, and equal weighting of country-year observations. Although there is no evidence of tipping points, a negative relationship remains.

In a blog post in April, I showed that the timing of this negative relationship went against an interpretation where high debt caused low growth.  I showed that relationship between contemporaneous debt with future growth is much weaker than that with past growth—which is suggestive of reverse causality.  I used a 3-year window for this exercise. In other words, if we label current year as “0” I took the average growth rates in years 1,2 and 3.  In a more recent column at Quartz, Kimball and Wang’s follow-up analysis showed the relationship using a window between years 5-10.  In a working paper I that I wrote based on my blog post—but posted online after Kimball and Wang’s column—I followed the recent literature in taking a 5-year forward average growth rate, i.e., average growth taken over years 1-5.

The general tenor of these findings is that the further into the future that the window stretches, the more attenuated the debt-growth relationship seems to be. However, the same does not appear to be true when considering windows stretching backwards in time: current debt is indeed strongly associated with past growth. 

But how sensitive are these results to specific window lengths? More generally, as suggested by Evan Soltas, how do these results look when using windows of alternative lengths? That’s exactly what I’ll do here, by plotting the coefficients and confidence bounds for bivariate regressions of growth from alternative windows on contemporaneous debt. For example, the window labeled -2 uses average growth rates from dates -2 and -1. Similarly, the window labeled 3 uses growth rates from dates 1, 2 and 3.

The results are stark, and confirm what we have already seen. The bivariate regression of current growth on current debt is around -0.018, meaning a 10 percentage point higher debt ratio (e.g., 110 versus 100) is associated with a lower growth by 0.18 percentage points.  This relationship is statistically significant at conventional levels using country-clustered standard errors. However, a 10 point higher debt ratio is associated with an even lower average growth 3, 5, or 10 years back, and this apparently spurious relationship appears stronger the further we roll back our window, clocking lower growths by 0.25 points or more in magnitude.

In contrast, the further forward we roll our window, the weaker the relationship appears to be, falling roughly by 1/3 when we merely consider the growth rate in the next year. And it attenuates further when we take future rates: a 10 point higher debt ratio is associated with merely a 0.05 point lower growth in the next 10 years, which is statistically indistinguishable from zero.

There is, however, a complication when doing this type of analysis. Namely, we should be mindful of the following possibility. Perhaps today’s high debt is not negatively correlated with the growth rate averaged over the next 10 years because the average debt level in the next 10 years is also not particularly high as compared to today.  (In statistical parlance, perhaps debt is strongly mean reverting.)  This can be checked: we can current debt on the average debt levels in the past and future windows in an analogous fashion as before.

Reassuringly, a 10 point greater debt ratio today is associated with a 7 point or greater debt ratio over the next 10 years.  So this cannot be an explanation for the  near disappearance of the negative debt-growth relationship when taking forward averaged growth rates.  Similarly, there is a roughly symmetric relationship with past debt ratios which means that the highly asymmetric debt-growth relationship in the future versus past cannot be due to a similarly asymmetric relationship of current debt with future versus past debt.

I mentioned the issues of serial correlation of debt and growth levels in passing in my original blog post, which is why I also showed the results with distributed lags, which explicitly controls for the past and future debt levels in the regression. While those fully account for the issues raised here, I think the analysis here showing the serial correlation in debt visually more informative about the patterns in the data.

Of course, there are numerous ways to account for the reverse causality patterns, besides just considering forward-averaged growth rates. One strategy is to explicitly include past growth rates as a control. I did this in my blog post (see the last figure there), as well as in working paper.  This is also exactly what Kimball and Wang do in showing the “excess growth” over and beyond what is predicted by past growth.  However, I think their graphical approach in actually computing the predicted and excess growth rates based on past growth rates was a very nice way to make the point. At any rate, all these results all suggest effectively no relationship between debt and growth in the post-war sample of advanced industrialized countries that we analyzed.

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Windows into the Past and the Future:  A Visual Elaboration

Arindrajit Dube

Recently, we have seen a number of explorations of the timing of growth around episodes of high debt as a way to discern the likely direction of causality in that relationship.  This is important, because we do observe that there is a negative correlation between contemporaneous debt and growth. For instance, this is true when using the corrected data from Reinhart and Rogoff, and equal weighting of country-year observations. Although there is no evidence of tipping points, a negative relationship remains.

In a blog post in April, I showed that the timing of this negative relationship went against an interpretation where high debt caused low growth.  I showed that relationship between contemporaneous debt with future growth is much weaker than that with past growth—which is suggestive of reverse causality.  I used a 3-year window for this exercise. In other words, if we label current year as “0” I took the average growth rates in years 1,2 and 3.  In a more recent column at Quartz, Kimball and Wang’s follow-up analysis showed the relationship using a window between years 5-10.  In a working paper I that I wrote based on my blog post—but posted online after Kimball and Wang’s column—I followed the recent literature in taking a 5-year forward average growth rate, i.e., average growth taken over years 1-5.

The general tenor of these findings is that the further into the future that the window stretches, the more attenuated the debt-growth relationship seems to be. However, the same does not appear to be true when considering windows stretching backwards in time: current debt is indeed strongly associated with past growth. 

But how sensitive are these results to specific window lengths? More generally, as suggested by Evan Soltas, how do these results look when using windows of alternative lengths? That’s exactly what I’ll do here, by plotting the coefficients and confidence bounds for bivariate regressions of growth from alternative windows on contemporaneous debt. For example, the window labeled -2 uses average growth rates from dates -2 and -1. Similarly, the window labeled 3 uses growth rates from dates 1, 2 and 3.

The results are stark, and confirm what we have already seen. The bivariate regression of current growth on current debt is around -0.018, meaning a 10 percentage point higher debt ratio (e.g., 110 versus 100) is associated with a lower growth by 0.18 percentage points.  This relationship is statistically significant at conventional levels using country-clustered standard errors. However, a 10 point higher debt ratio is associated with an even lower average growth 3, 5, or 10 years back, and this apparently spurious relationship appears stronger the further we roll back our window, clocking lower growths by 0.25 points or more in magnitude.

In contrast, the further forward we roll our window, the weaker the relationship appears to be, falling roughly by 1/3 when we merely consider the growth rate in the next year. And it attenuates further when we take future rates: a 10 point higher debt ratio is associated with merely a 0.05 point lower growth in the next 10 years, which is statistically indistinguishable from zero.

There is, however, a complication when doing this type of analysis. Namely, we should be mindful of the following possibility. Perhaps today’s high debt is not negatively correlated with the growth rate averaged over the next 10 years because the average debt level in the next 10 years is also not particularly high as compared to today.  (In statistical parlance, perhaps debt is strongly mean reverting.)  This can be checked: we can current debt on the average debt levels in the past and future windows in an analogous fashion as before.

Reassuringly, a 10 point greater debt ratio today is associated with a 7 point or greater debt ratio over the next 10 years.  So this cannot be an explanation for the  near disappearance of the negative debt-growth relationship when taking forward averaged growth rates.  Similarly, there is a roughly symmetric relationship with past debt ratios which means that the highly asymmetric debt-growth relationship in the future versus past cannot be due to a similarly asymmetric relationship of current debt with future versus past debt.

I mentioned the issues of serial correlation of debt and growth levels in passing in my original blog post, which is why I also showed the results with distributed lags, which explicitly controls for the past and future debt levels in the regression. While those fully account for the issues raised here, I think the analysis here showing the serial correlation in debt visually more informative about the patterns in the data.

Of course, there are numerous ways to account for the reverse causality patterns, besides just considering forward-averaged growth rates. One strategy is to explicitly include past growth rates as a control. I did this in my blog post (see the last figure there), as well as in working paper.  This is also exactly what Kimball and Wang do in showing the “excess growth” over and beyond what is predicted by past growth.  However, I think their graphical approach in actually computing the predicted and excess growth rates based on past growth rates was a very nice way to make the point. At any rate, all these results all suggest effectively no relationship between debt and growth in the post-war sample of advanced industrialized countries that we analyzed.

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Dube, Kimball, and Wang, All on Reinhart/Rogoff

May 31, 2013Mike Konczal

Two excellent new additions to the debate over what the link is between high debt loads and growth came out in the past 24 hours.

The first is by Arindrajit Dube, "A Note on Debt, Growth and Causality": "This note documents the timing in the relationship between the debt-to-GDP ratio and real GDP growth in advanced economies during the post World War II period using the dataset from Carmen Reinhart and Ken Rogoff. I first show that the debt ratio is more clearly associated with the 5-year past average growth rate, rather than the 5-year forward average growth rate–indicating a problem of reverse causality. Indeed, there is little evidence of a lower growth rate above the 90 percent threshold when using the 5-year forward average growth rate....non- and semi-parametric plots provide visual confirmation that the relationship between debt-to-GDP ratio and growth is essentially flat for debt ratios exceeding 30 percent when we (1) use forward growth rates, (2) control for past GDP growth, or both."

This short paper formalizes a recent post Dube wrote at this blog, extending his semi-parametric analysis out to five years. It also provides all the equations, as well as some of the literature on this debate. It's an important piece, dismantling the arguments that debt leads to lower growth.

The second is by Miles Kimball and Yichuan Wang at Quartz. "Based on economic theory, it would be surprising indeed if high levels of national debt didn’t have at least some slow, corrosive negative effect on economic growth. And we still worry about the effects of debt. But the two of us could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth."

Using different ranges (including 5-10 years out) and different techniques, Kimball and Wang can't find any evidence for the Reinhart and Rogoff thesis that high debt loads are correlated with lower growth. It's a remarkable post, where you can read them become surprised at what they are and are not seeing, and how they take pains to make sure they aren't missing something.

Now where are the posts arguing the opposite? The literature hasn't addressed this well at all. Indeed, in their recent letter to Paul Krugman, Reinhart and Rogoff argued that the "repeatedly-expressed view that slow growth causes high debt but not visa-versa, is hardly supported by the recent literature on the subject."  They suggest checking out their appendix to their New York Times piece for more info, which tells us to check out the World Economic Outlook.

But even the Outlook warns us on causation (in the paragraph immediately after the one they cite, no less): "But there are limits to empirical studies on the economic effects of debt overhangs. For example, countries that have high debt levels may have low growth for other reasons that typically are not captured in the econometric models. In fact, some studies find no causal relationship between high debt and lower growth. The October 2012 Global Financial Stability Report finds that countries with debt above 100 percent of GDP experience lower growth, but it also finds that countries with high but falling debt ratios grew faster than countries with lower but increasing debt ratios."

Straightforward checks for casuality are missing from these previous studies. I'm not sure why, but now that people are looking at these issues with fresh eyes, it is suddenly much more difficult to make the statements about high debt leading to low growth with any certainty, much less the one that has dominated the converation during the turn to austerity after 2010.

Follow or contact the Rortybomb blog:

  

 

Two excellent new additions to the debate over what the link is between high debt loads and growth came out in the past 24 hours.

The first is by Arindrajit Dube, "A Note on Debt, Growth and Causality": "This note documents the timing in the relationship between the debt-to-GDP ratio and real GDP growth in advanced economies during the post World War II period using the dataset from Carmen Reinhart and Ken Rogoff. I first show that the debt ratio is more clearly associated with the 5-year past average growth rate, rather than the 5-year forward average growth rate–indicating a problem of reverse causality. Indeed, there is little evidence of a lower growth rate above the 90 percent threshold when using the 5-year forward average growth rate....non- and semi-parametric plots provide visual confirmation that the relationship between debt-to-GDP ratio and growth is essentially flat for debt ratios exceeding 30 percent when we (1) use forward growth rates, (2) control for past GDP growth, or both."

This short paper formalizes a recent post Dube wrote at this blog, extending his semi-parametric analysis out to five years. It also provides all the equations, as well as some of the literature on this debate. It's an important piece, dismantling the arguments that debt leads to lower growth.

The second is by Miles Kimball and Yichuan Wang at Quartz. "Based on economic theory, it would be surprising indeed if high levels of national debt didn’t have at least some slow, corrosive negative effect on economic growth. And we still worry about the effects of debt. But the two of us could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth."

Using different ranges (including 5-10 years out) and different techniques, Kimball and Wang can't find any evidence for the Reinhart and Rogoff thesis that high debt loads are correlated with lower growth. It's a remarkable post, where you can read them become surprised at what they are and are not seeing, and how they take pains to make sure they aren't missing something.

Now where are the posts arguing the opposite? The literature hasn't addressed this well at all. Indeed, in their recent letter to Paul Krugman, Reinhart and Rogoff argued that the "repeatedly-expressed view that slow growth causes high debt but not visa-versa, is hardly supported by the recent literature on the subject."  They suggest checking out their appendix to their New York Times piece for more info, which tells us to check out the World Economic Outlook.

But even the Outlook warns us on causation (in the paragraph immediately after the one they cite, no less): "But there are limits to empirical studies on the economic effects of debt overhangs. For example, countries that have high debt levels may have low growth for other reasons that typically are not captured in the econometric models. In fact, some studies find no causal relationship between high debt and lower growth. The October 2012 Global Financial Stability Report finds that countries with debt above 100 percent of GDP experience lower growth, but it also finds that countries with high but falling debt ratios grew faster than countries with lower but increasing debt ratios."

Straightforward checks for casuality are missing from these previous studies. I'm not sure why, but now that people are looking at these issues with fresh eyes, it is suddenly much more difficult to make the statements about high debt leading to low growth with any certainty, much less the one that has dominated the converation during the turn to austerity after 2010.

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Is There Really a "Conservative Reform" Movement in Policy?

May 23, 2013Mike Konczal

A few years ago, Freddie DeBoer argued that the terms “left” and “liberal” in the political blogosphere were really more descriptive of argument style and political strategy rather than any actual ideological differences. I think there’s a similar issue at play in the wave of articles about conservatives seeking to reform the movement.

As 2013 rolls on, we are seeing more and more articles about conservative reformers. Ryan Cooper had a list of “reformish conservatives” at the Washington Monthly, and now Jonathan Chait has a great profile of Josh Barro at The Atlantic. I understand why these articles are written - they profile interesting conservative writers that people should read more. But I don’t think they actually make their point.

Here’s how Chait sets it up: “conservative reformists... [argue] that the GOP’s product itself, not merely its marketing slogans, needs to change. Writers like David Brooks, Ross Douthat, Reihan Salam, and Ramesh Ponnuru have made versions of this case for several years.”

So there are two elements. First, reformers think that the GOP is currently on the wrong track with its policies, and second, they believe there need to be more “middle-class-friendly solutions” in new policy. This is different than saying that reformers don’t argue that the economy is a giant Randian morality play, or that President Obama is a left-wing radical; it’s about specific policies.

Are either of these things true? I don’t see it. Or, I see it more on the marketing end than on the policy end. I’m going to keep specific individuals vague here and generalize, because the arguments are predicated on a general move rather than any idiosyncratic argument. Here’s what I take to be the current conservative policy consensus:

1. Social Security and Medicare should be privatized. The word privatization is a complicated one with a lot of meanings, but generally competition should come to Medicare and private accounts to Social Security. This is for budgeting reasons, but also ideological ones. As Yuval Levin wrote, “the vision that has dominated our political imagination for a century — the vision of the social-democratic welfare state — is drained and growing bankrupt.”

2. Everything that isn’t nailed to the floor should be block-granted to the states. From there, funding should be slowed, and private agents should be emphasized at all points. Welfare reform, but for everything (especially Medicaid).

3. The tax code is too progressive, and that was true even before the changes in the fiscal cliff. The number of brackets should be reduced, perhaps even to two. Taxes in general should be lower, with some base-broadening to balance it.

4. The way to deal with health care is to allow insurance purchases across state lines while supporting state-level pre-existing condition pools. Ending Obamacare by itself is smart policy, even if something doesn’t “replace” it. And if push comes to shove, universal coverage is not a necessary goal.

5. Inequality is largely a non-issue, manipulated by liberals to justify their programs. The rich work harder in a global market that rewards skills and superstars. The middle class is only stagnating if you ignore health care costs and the fact that you can consume better technology cheaper. The economy works far better for average people than liberals understand.

6. Global warming, to whatever extent it is happening, should not have a government response to try and reduce carbon. Market signals, technology, migration, and adapting are better and cheaper options for even the gloomiest predictions. Or, looking at it in a different way, growth will ultimately solve the problem of global warming, and so any government policy that hurts growth (which they all do) is the wrong option.

I don’t think I’m making a strawman here. (1-3 is directly from Paul Ryan.) So the question is: how many of the reformers disagree with any of those? This is the core of current policy, and I don’t know if any of the reformish crew even disagree with these statements, much less want to spend the energy challenging them.

Now what about disagreements? What are they adding to the table? As far as I read what reformers bring to the table, it consists of:

a. Monetary policy shouldn’t adopt a price stability mandate (or a gold standard, for that matter), and in fact Ben Bernanke could and should be doing more to help the recovery with the powers he has available. (Fiscal policy like the stimulus, however, is a bad idea that largely fails.)

b. Tax credits, particularly the earned income tax credit and the child tax credit, are successful programs which might even be expanded. They’re good even though they mean 47 percent of Americans pay no federal income tax, which conservatives hate. ("Predistribution" means of boosting low-end wages, like a higher minimum wage, should be avoided though.)

c. Financial institutions should hold more capital, and perhaps we should apply a “structural” reform to the sector like a size cap or siloing of functions.

d. The government protects incumbent interests in industry, both with obvious subsidies but also with certain property rights, like copyright.

Am I missing more? These are important things, but it’s really tough to think of this as a general new direction in policy. Much of it is actually a defense and potential extension of already-existing policies against people further to the right. And even here you’ll have major disagreements. (It is amusing to think of Timothy P. Carney writing a column about how Ben Bernanke needs to “commit to being irresponsible.”)

A lot of the reformer articles posit more aggressive conservative reformers like David Frum, Bruce Bartlett, and now Josh Barro. What stands out to me is that these three write as if the Obama administration happened. The rest of the reformers write as if his first term never happened as a baseline, and crucially that they can’t write stuff seen as getting in the way of repeal.

They also understand that the Great Recession destroyed the previous consensus that we had solved the question of the business cycle. It’s tougher to argue that we should have a radically smaller federal government when it looks like the size of the government and automatic stabilizers helped keep the Great Recession from becoming a Great Depression-like collapse. The reformers have bounced around on this topic, but aside from the three mentioned, they haven’t had conversions. Mostly they believe the Great Moderation should have just tried harder.

I’d emphasize one last thing about the policy of conservative reformers: in practice it will likely be more gestural than substantive. I don’t know enough to mediate the health care battles, but I do know financial reform pretty well. And as financial reform is often brought out as an example of new reformers at work, it’s interesting to watch the lack of attention reformers pay to the actual nuts and bolts of the process.

I don’t see reformers call for getting the head of the CFPB appointed. I don’t see them arguing that repealing FDIC’s new resolution authority powers should be taken out of the Ryan Budget. I don’t see them arguing that efforts to repeal derivatives regulations already are premature or bad policy. I don’t see them angry about the mess of the securitization servicing system, which is creating a nightmare of law-breaking in the housing market. I also don’t seem them arguing the opposite either.

It’s focused on “break up the banks!” Crucially, this gets its energy from the idea that We Should Do Something Big about financial reform, rather than how it plays into a larger set of regulations, laws, and markets. It’s to position the Republicans as Doing Something where the Democrats haven’t. It’s sadly less policy and more political strategizing.

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A few years ago, Freddie DeBoer argued that the terms “left” and “liberal” in the political blogosphere were really more descriptive of argument style and political strategy rather than any actual ideological differences. I think there’s a similar issue at play in the wave of articles about conservatives seeking to reform the movement.

As 2013 rolls on, we are seeing more and more articles about conservative reformers. Ryan Cooper had a list of “reformish conservatives” at the Washington Monthly, and now Jonathan Chait has a great profile of Josh Barro at The Atlantic. I understand why these articles are written - they profile interesting conservative writers that people should read more. But I don’t think they actually make their point.

Here’s how Chait sets it up: “conservative reformists... [argue] that the GOP’s product itself, not merely its marketing slogans, needs to change. Writers like David Brooks, Ross Douthat, Reihan Salam, and Ramesh Ponnuru have made versions of this case for several years.”

So there are two elements. First, reformers think that the GOP is currently on the wrong track with its policies, and second, they believe there need to be more “middle-class-friendly solutions” in new policy. This is different than saying that reformers don’t argue that the economy is a giant Randian morality play, or that President Obama is a left-wing radical; it’s about specific policies.

Are either of these things true? I don’t see it. Or, I see it more on the marketing end than on the policy end. I’m going to keep specific individuals vague here and generalize, because the arguments are predicated on a general move rather than any idiosyncratic argument. Here’s what I take to be the current conservative policy consensus:

1. Social Security and Medicare should be privatized. The word privatization is a complicated one with a lot of meanings, but generally competition should come to Medicare and private accounts to Social Security. This is for budgeting reasons, but also ideological ones. As Yuval Levin wrote, “the vision that has dominated our political imagination for a century — the vision of the social-democratic welfare state — is drained and growing bankrupt.”

2. Everything that isn’t nailed to the floor should be block-granted to the states. From there, funding should be slowed, and private agents should be emphasized at all points. Welfare reform, but for everything (especially Medicaid).

3. The tax code is too progressive, and that was true even before the changes in the fiscal cliff. The number of brackets should be reduced, perhaps even to two. Taxes in general should be lower, with some base-broadening to balance it.

4. The way to deal with health care is to allow insurance purchases across state lines while supporting state-level pre-existing condition pools. Ending Obamacare by itself is smart policy, even if something doesn’t “replace” it. And if push comes to shove, universal coverage is not a necessary goal.

5. Inequality is largely a non-issue, manipulated by liberals to justify their programs. The rich work harder in a global market that rewards skills and superstars. The middle class is only stagnating if you ignore health care costs and the fact that you can consume better technology cheaper. The economy works far better for average people than liberals understand.

6. Global warming, to whatever extent it is happening, should not have a government response to try and reduce carbon. Market signals, technology, migration, and adapting are better and cheaper options for even the gloomiest predictions. Or, looking at it in a different way, growth will ultimately solve the problem of global warming, and so any government policy that hurts growth (which they all do) is the wrong option.

I don’t think I’m making a strawman here. (1-3 is directly from Paul Ryan.) So the question is: how many of the reformers disagree with any of those? This is the core of current policy, and I don’t know if any of the reformish crew even disagree with these statements, much less want to spend the energy challenging them.

Now what about disagreements? What are they adding to the table? As far as I read what reformers bring to the table, it consists of:

a. Monetary policy shouldn’t adopt a price stability mandate (or a gold standard, for that matter), and in fact Ben Bernanke could and should be doing more to help the recovery with the powers he has available. (Fiscal policy like the stimulus, however, is a bad idea that largely fails.)

b. Tax credits, particularly the earned income tax credit and the child tax credit, are successful programs which might even be expanded. They’re good even though they mean 47 percent of Americans pay no federal income tax, which conservatives hate. ("Predistribution" means of boosting low-end wages, like a higher minimum wage, should be avoided though.)

c. Financial institutions should hold more capital, and perhaps we should apply a “structural” reform to the sector like a size cap or siloing of functions.

d. The government protects incumbent interests in industry, both with obvious subsidies but also with certain property rights, like copyright.

Am I missing more? These are important things, but it’s really tough to think of this as a general new direction in policy. Much of it is actually a defense and potential extension of already-existing policies against people further to the right. And even here you’ll have major disagreements. (It is amusing to think of Timothy P. Carney writing a column about how Ben Bernanke needs to “commit to being irresponsible.”)

A lot of the reformer articles posit more aggressive conservative reformers like David Frum, Bruce Bartlett, and now Josh Barro. What stands out to me is that these three write as if the Obama administration happened. The rest of the reformers write as if his first term never happened as a baseline, and crucially that they can’t write stuff seen as getting in the way of repeal.

They also understand that the Great Recession destroyed the previous consensus that we had solved the question of the business cycle. It’s tougher to argue that we should have a radically smaller federal government when it looks like the size of the government and automatic stabilizers helped keep the Great Recession from becoming a Great Depression-like collapse. The reformers have bounced around on this topic, but aside from the three mentioned, they haven’t had conversions. Mostly they believe the Great Moderation should have just tried harder.

I’d emphasize one last thing about the policy of conservative reformers: in practice it will likely be more gestural than substantive. I don’t know enough to mediate the health care battles, but I do know financial reform pretty well. And as financial reform is often brought out as an example of new reformers at work, it’s interesting to watch the lack of attention reformers pay to the actual nuts and bolts of the process.

I don’t see reformers call for getting the head of the CFPB appointed. I don’t see them arguing that repealing FDIC’s new resolution authority powers should be taken out of the Ryan Budget. I don’t see them arguing that efforts to repeal derivatives regulations already are premature or bad policy. I don’t see them angry about the mess of the securitization servicing system, which is creating a nightmare of law-breaking in the housing market. I also don’t seem them arguing the opposite either.

It’s focused on “break up the banks!” Crucially, this gets its energy from the idea that We Should Do Something Big about financial reform, rather than how it plays into a larger set of regulations, laws, and markets. It’s to position the Republicans as Doing Something where the Democrats haven’t. It’s sadly less policy and more political strategizing.

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Michael Kinsley Gets It Wrong On "Austerians"

May 23, 2013Mike Konczal

While I was on vacation, the Internet exploded over a column by Michael Kinsley beefing with Paul Krugman and his follow-up response. The biggest problem with his attempt to reclaim the word “austerians” from its detractors is that he doesn’t provide a working definition, an argument, or even specific people or proposals for what he has in mind. He apparently takes “austerian” to mean “anti-Krugman,” and since Kinsley and others feels that they don’t line up with Krugman, they must all be austerians.

This leads into the second biggest problem with Kinsley’s posts: he concludes that everyone is basically on the same page. It’s just a matter of how you weigh your priorities and concerns. Kinsley writes that “Krugman now says that what he is against is ‘premature’ fiscal austerity. So is everybody. They just disagree on what is ‘premature.’” Also that “[y]ou can be a right-wing Austerian, a left-wing Austerian, a right-wing Keynesian, or a left-wing Keynesian. And (as I also noted last week) the differences are not so great.” (My underlines.)

This is wrong. I’ll quickly summarize three different approaches to the deficit, trying hard to not make straw men of them. There’s (1) Team Keynesian, which thinks that the government should increase the short-term deficit, full-stop. Extend the payroll tax cut for two years. Invest in an infrastructure bank. Mail people checks. Get to the point where the Federal Reserve has traction again on the economy before worrying about the debt.

People in this category are all for ways to deal with the long-term deficit. But they realize that: (a) Medicare is the major driver of those costs, Obamacare needs a chance to deal with this, and it may even be working already; (b) reducing the long-term deficit should require a combination of taxes and spending, and the GOP will refuse any and all tax increases, making a deal impossible; and (c) the GOP wants to privatize Social Security and Medicare rather than bring them into a healthy long-term financial situation, so not everyone is even on the same page.

However, people in (2) Team Barbell think that stimulus must be paired with long-term deficit reduction at the same time. For an example, there’s the original Domenici-Rivlin Restoring America's Future plan: "First, we must recover from the deep recession that has thrown millions out of work... Second, we must take immediate steps to reduce the unsustainable debt... These two challenges must be addressed at the same time, not sequentially."

I assume when Kinsley references needing to eat spinach along with dessert as macroeconomic policy he’s referring to a need for both stimulus and deficit reduction to complement each other. Sadly for him, there’s never been a clear economic case for why these should be addressed together, and plenty of evidence that addressing the second will do little for the first.

(Noah Smith started a conversation recently about whether elites want a slower recovery in order to do structural reform. The original Domenici-Rivlin reform quoted above basically said, “We know unemployment is devastating, and we know more upfront stimulus will help. However, we are going to need you to turn Medicare into a giant Groupon system in order to get it.”)

These two approaches are very different than the arguments for (3) Team Austerity. The argument here is that, if done right, austerity will have a negligible effect on the economy and could even increase prosperity by restoring confidence to private capital. This is not a strawman; it’s the economic plan the GOP put forward when they took the House in 2011, which they got from AEI, which they got from Alberto Alesina and Silvia Ardagna of Harvard.

The 2011 GOP plan also noted, “Analyzing 20 developed countries between 1946 and 2009, Reinhart and Rogoff found a distinct threshold for gross government debt equal to 90 percent of GDP.” They believed action was needed to avoid crossing this threshold, even if it might be painful. (Thankfully, it wouldn’t be according this argument.)

No Pain, No Gain?

Kinsley’s misdiagnosis that the policy disagreements are all a matter of relative priorities then leads him to believe that more weight on short-term pain will lead to better long-term conclusions: “I don’t think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be...The problem is the great, deluded middle class—subsidized by government and coddled by politicians.”

This set the Internet on fire. I’m genuinely not sure what he’s referencing here when he mentions the middle-class. Is Kinsley at the point where he doesn’t get editors? I’m going to rewrite this for him: “During the 2000s, the middle class borrowed way too much, speculating on housing and using fake home equity to go on a spending spree. Now that this bubble has burst, the middle class needs to spend less and save more. There will be, yes, suffering, but they should have been saving more all along. Americans didn’t save enough, and now they have to save more and work off all the bad debts.”

And here’s how I would have responded to that better argument: “Yes, but two things. The first is that everyone can’t all save at the same time. If everyone is saving, nobody is spending, and we start to hit some major problems. Second, the bad debts to be worked off aren’t set in stone. If unemployment is higher, or wage growth slower, or inflation is under-target, that means the pile of bad debts is even greater. Since they are greater, people save more, and then there are even more problems. So even if you have a strongly moralistic tone about what needs to be done, or read this as a pox on our middle class, stimulus in the short term is crucial.”

Because austerity won’t even do the job Kinsley is proposing it will do. In 1933, John Maynard Keynes said, “You will never balance the Budget through measures which reduce the national income.” He argued this because he was a childless gay hedonist saw that austerity won’t even function to reduce the debt load, because a weaker GDP will eliminate any debt savings. This is precisely what is happening in Europe, and it could happen here if we suffocate the recovery too early.

 

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While I was on vacation, the Internet exploded over a column by Michael Kinsley beefing with Paul Krugman and his follow-up response. The biggest problem with his attempt to reclaim the word “austerians” from its detractors is that he doesn’t provide a working definition, an argument, or even specific people or proposals for what he has in mind. He apparently takes “austerian” to mean “anti-Krugman,” and since Kinsley and others feels that they don’t line up with Krugman, they must all be austerians.

This leads into the second biggest problem with Kinsley’s posts: he concludes that everyone is basically on the same page. It’s just a matter of how you weigh your priorities and concerns. Kinsley writes that “Krugman now says that what he is against is ‘premature’ fiscal austerity. So is everybody. They just disagree on what is ‘premature.’” Also that “[y]ou can be a right-wing Austerian, a left-wing Austerian, a right-wing Keynesian, or a left-wing Keynesian. And (as I also noted last week) the differences are not so great.” (My underlines.)

This is wrong. I’ll quickly summarize three different approaches to the deficit, trying hard to not make straw men of them. There’s (1) Team Keynesian, which thinks that the government should increase the short-term deficit, full-stop. Extend the payroll tax cut for two years. Invest in an infrastructure bank. Mail people checks. Get to the point where the Federal Reserve has traction again on the economy before worrying about the debt.

People in this category are all for ways to deal with the long-term deficit. But they realize that: (a) Medicare is the major driver of those costs, Obamacare needs a chance to deal with this, and it may even be working already; (b) reducing the long-term deficit should require a combination of taxes and spending, and the GOP will refuse any and all tax increases, making a deal impossible; and (c) the GOP wants to privatize Social Security and Medicare rather than bring them into a healthy long-term financial situation, so not everyone is even on the same page.

However, people in (2) Team Barbell think that stimulus must be paired with long-term deficit reduction at the same time. For an example, there’s the original Domenici-Rivlin Restoring America's Future plan: "First, we must recover from the deep recession that has thrown millions out of work... Second, we must take immediate steps to reduce the unsustainable debt... These two challenges must be addressed at the same time, not sequentially."

I assume when Kinsley references needing to eat spinach along with dessert as macroeconomic policy he’s referring to a need for both stimulus and deficit reduction to complement each other. Sadly for him, there’s never been a clear economic case for why these should be addressed together, and plenty of evidence that addressing the second will do little for the first.

(Noah Smith started a conversation recently about whether elites want a slower recovery in order to do structural reform. The original Domenici-Rivlin reform quoted above basically said, “We know unemployment is devastating, and we know more upfront stimulus will help. However, we are going to need you to turn Medicare into a giant Groupon system in order to get it.”)

These two approaches are very different than the arguments for (3) Team Austerity. The argument here is that, if done right, austerity will have a negligible effect on the economy and could even increase prosperity by restoring confidence to private capital. This is not a strawman; it’s the economic plan the GOP put forward when they took the House in 2011, which they got from AEI, which they got from Alberto Alesina and Silvia Ardagna of Harvard.

The 2011 GOP plan also noted, “Analyzing 20 developed countries between 1946 and 2009, Reinhart and Rogoff found a distinct threshold for gross government debt equal to 90 percent of GDP.” They believed action was needed to avoid crossing this threshold, even if it might be painful. (Thankfully, it wouldn’t be according this argument.)

No Pain, No Gain?

Kinsley’s misdiagnosis that the policy disagreements are all a matter of relative priorities then leads him to believe that more weight on short-term pain will lead to better long-term conclusions: “I don’t think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be...The problem is the great, deluded middle class—subsidized by government and coddled by politicians.”

This set the Internet on fire. I’m genuinely not sure what he’s referencing here when he mentions the middle-class. Is Kinsley at the point where he doesn’t get editors? I’m going to rewrite this for him: “During the 2000s, the middle class borrowed way too much, speculating on housing and using fake home equity to go on a spending spree. Now that this bubble has burst, the middle class needs to spend less and save more. There will be, yes, suffering, but they should have been saving more all along. Americans didn’t save enough, and now they have to save more and work off all the bad debts.”

And here’s how I would have responded to that better argument: “Yes, but two things. The first is that everyone can’t all save at the same time. If everyone is saving, nobody is spending, and we start to hit some major problems. Second, the bad debts to be worked off aren’t set in stone. If unemployment is higher, or wage growth slower, or inflation is under-target, that means the pile of bad debts is even greater. Since they are greater, people save more, and then there are even more problems. So even if you have a strongly moralistic tone about what needs to be done, or read this as a pox on our middle class, stimulus in the short term is crucial.”

Because austerity won’t even do the job Kinsley is proposing it will do. In 1933, John Maynard Keynes said, “You will never balance the Budget through measures which reduce the national income.” He argued this because he was a childless gay hedonist saw that austerity won’t even function to reduce the debt load, because a weaker GDP will eliminate any debt savings. This is precisely what is happening in Europe, and it could happen here if we suffocate the recovery too early.

 

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Beta: Universal Basic Income Calculator

May 14, 2013Mike Konczal

Click here to try a new Universal Basic Income calculator. You can click on which programs you'd like to turn into a UBI, and what taxes you'd be willing to put into motion, and it will tell you how large of a UBI can be supported with those resources. You can also type in your own numbers if you are interested.

Over the weekend I wrote a column for Wonkblog on why a Universal Basic Income would be a good idea. At the same time, Jesse Myerson and Alexis Goldstein discussed the topic in the first episode of their new podcast, Beyond the Pale. Matt Bruenig and Peter Frase discussed whether a UBI is Utopian, and have a fascinating exchange about the idea of a UBI and policy and strategy.

The calculator is in a beta-test mode, and it isn't nice looking, but it might be a useful exercise in how the numbers might actually work. I'll say that playing with the numbers makes me more sympathetic with Barbara Bergmann's point that a “fully developed welfare state deserves priority over Basic Income because it accomplishes what Basic Income does not: it guarantees that certain specific human needs will be met.” You have to jettison a lot of the welfare state, raise taxes a significant amount, or phase it out aggressive and remove the universal component, to get to numbers like $10,000. On the other hand, it isn't that hard to get to the $2,000-$3,000 range.

But I'm interested in what you think of it.

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Click here to try a new Universal Basic Income calculator. You can click on which programs you'd like to turn into a UBI, and what taxes you'd be willing to put into motion, and it will tell you how large of a UBI can be supported with those resources. You can also type in your own numbers if you are interested.

Over the weekend I wrote a column for Wonkblog on why a Universal Basic Income would be a good idea. At the same time, Jesse Myerson and Alexis Goldstein discussed the topic in the first episode of their new podcast, Beyond the Pale. Matt Bruenig and Peter Frase discussed whether a UBI is Utopian, and have a fascinating exchange about the idea of a UBI and policy and strategy.

The calculator is in a beta-test mode, and it isn't nice looking, but it might be a useful exercise in how the numbers might actually work. I'll say that playing with the numbers makes me more sympathetic to Barbara Bergmann's point that a “fully developed welfare state deserves priority over Basic Income because it accomplishes what Basic Income does not: it guarantees that certain specific human needs will be met.” You have to jettison a lot of the welfare state, raise taxes a significant amount, or phase it out aggressively and remove the universal component to get to numbers like $10,000. On the other hand, it isn't that hard to get to the $2,000-$3,000 range.

But I'm interested in what you think of it.

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Liberal Wonk Blogging Could Be Your Life

May 9, 2013Mike Konczal

As the Reinhart-Rogoff story started up, Peter Frase of Jacobin wrote a critique of liberal wonk bloggers titled “The Perils of Wonkery.” Now that things have calmed down, I’m going to respond. Fair warning: this post will be a bit navel-gazing.

I recommend reading Peter’s post first, but to summarize, it makes two broad claims against liberal wonk bloggers. The first is the critique of the academic against the journalist. This doesn’t engage why wonk blogging has evolved or the role it plays. The second critique is the leftist against the technocratic liberal, which I find doesn’t acknowledge the actual ideological space created in wonk blogging. I find both of Frase’s arguments unpersuasive and also under-theorized. Let’s take them in order.

1. Liberal Wonks in Practice

Frase, a sociologist, locates the peril of wonkery in the fact that it needs to engage with academic research that often is more complicated than the writers have the ability to critically evaluate. “The function of the wonk is to translate the empirical findings of experts for the general public.” As such they are subject to a form of source capture, where they need to rely on the experts they are reporting on, as “they will necessarily have far less expertise than the people whose findings are being conveyed.”

We can generalize this critique as one that academics make of journalists all the time. Journalists don’t understand the subtlety of research and how it often functions as a discourse that changes over time. It’s a conversation on a very long time scale, rather than a race with winners and losers. They want dramatic headlines, conflicts, and cliffhangers, often over whether something is “good” or “bad” or other topics that make academics roll their eyes. Where researchers spend a lifetime on a handful of topics, reporters bounce from topic to topic, oftentimes in the course of a single day, made even worse through the “hamster wheel” of online blogs.

That’s a problem, as far as it goes. But bad journalism is easily countered by...good journalism. Source capture actually strikes me as one of the smaller problems wonk bloggers face. If journalists are worried that they are over-influenced by their source, they can just call another expert -- which is what Wonkblog did for the Reinhart/Rogoff studies. Wonk bloggers tend to focus on a group of related areas, and like any other journalist, they develop a list of the top researchers in any area to navigate complicated issues. They call people and ask questions.

It is true that in the wonk space, judgments on where the wonk’s self-declared expertise ends and where the line should be drawn on what is covered explicitly lie with the authors themselves. But this just makes explicit what is hidden in all of journalism, which is the problem of where to draw these lines.

It’s true that these debates take place within the context of existing policy research. A friend noted that Frase’s piece rests on a weird contradiction: it’s about how wonks don’t have enough expertise, but also how expertise is just a way of power and capital exerting itself and should be resisted. But that assumes that wonk blogging is just a replication of ruling ideology.

1.a What Creates Wonks?

We’ll talk about ideology more in a minute, but it’s surprising that Frase doesn’t even try to ground his analysis in the material base of institutions that create and fashion liberal writers. Frase seems to imply that the peril derives from personality-driven ladder-climbing, or to bask in the reflected glory of Serious People; he’s a step away from saying what wonks do is all about getting invited to cocktail parties.

But let’s try to provide that context for him. Why has “wonk” analysis risen in status within the “liberal” parts of the blogosphere, and what does that tell us about our current moment?

Contrasted with their counterparts on the right, young liberal writers come up through journalistic enterprises. That’s where they build their expertise, their approaches, their sensibilities, and their dispositions, even if they go on to other forms of opinion writing. Internships at The Nation, The American Prospect, or The New Republic are a common touchstone, with the Huffington Post, TPM, and Think Progress recently joining them. Though this work has an ideological basis, the work is journalism. Pride, at the end of the day, comes from breaking stories, working sources, building narratives, and giving a clear understanding of the scale and the scope of relevant actions. And part of that reporter fashioning will involve including all sides, and acting like more of a referee than an activist.

Where do young conservatives come from? They are built up as pundits, ideological writers, or as “analysts” or “experts” at conservative think-tanks. These conservatives then go out and populate the broader conservative infrastructure. As Helen Rittlemeyer notes, one reason conservative publications are declining in quality is because they are being filled with those who work at conservative think tanks (and are thus subsidized by the tax code and conservative movement money).

This is an important distinction when you see the numerous criticisms asking for wonky liberals to get more ideological. Bhaskar Sunkara argues that liberal wonks have a kind of “rigid simplicity” that is incapable of even understanding, much less challenging, the conservative ideology it is meant to counter. Conor Williams makes a similar argument, arguing that the “wonks’ focus on policy details blinds them to political realities.” In a fascinating essay comparing wonks to conspiracy theorists like Alex Jones, Jesse Elias Spafford writes in The New Inquiry that wonks “have risen to prominence because they come wrapped in the respectable neutrality of the scientist and have eschewed the partisan bias of the demagogue” and that, instead of agreed-upon facts, “our political discussions need to grapple with ideology and psychology, and with the underlying tendencies that draw people to particular ideologies.”

But just as there are numerous pleas for liberal writers to get more ideological, there are pleas on the right for more actual journalism. The post-election version of this was from Michael Calderone at Huffington Post, ”Conservative Media Struggles For Credibility. The hook was that everyone was excited because there was finally one genuinely good conservative congressional reporter in Robert Costa. Previous versions include Tucker Carlson getting boos at CPAC for saying, “The New York Times is a liberal newspaper. They go out, and they get the facts. Conservatives need to copy that.” Connor Friedersdorf issued a similar call back in 2008: “[a] political movement cannot survive on commentary and analysis alone! Were there only as talented a cadre of young right-leaning reporters dedicated to the journalistic project...the right must conclude that we’re better off joining the journalistic project than trying to discredit it.”

Meanwhile, the attempts by actual reporters (Tucker Carlson, Matthew Continetti) to build journalistic enterprises on the right (Daily Caller, Free Beacon) have collapsed into hackish parodies. The funders are wising up; the Koch Brothers are looking to just purchase newspapers wholesale rather than trying to build them out organically through the movement.

1.b Why Liberal Wonks?

Frase also makes no attempt to understand why wonk blogging has risen right now. And even a cursory glance at the historical moment makes it clear why wonk blogging has become important. From 2009-2010, several major pieces of legislation quickly came up for debate on core economic concerns: the ARRA stimulus and more general macroeconomic stabilization, health care reform, financial reform, immigration reform, unionization law, and carbon pricing.

Some passed, some didn’t. But all of these were complicated, evolved rapidly, and needed to be explained at a quick pace. Conventional journalism wasn’t up to the task, and wonks stepped up. As these reforms unfolded, often shifting week by week, there were important battles over how to understand the individual parts. There’s a passage from Alan Brinkley about businessmen asking, in 1940, if the “basic principle of the New Deal were economically sound?” Wonks had to answer the specific questions - is the public option important? - but also explain what parts were sound and why.

So I disagree with Spafford, who writes, “The startling rise of the wonk to political prominence has been buoyed in large part by the hope that the scientific objectivity of the technocrat might finally resolve political disagreement.“ The wonk rises more with the wave of liberal legislation of the 111th United States Congress, rather than the waves of centrist deficit reduction or conservative counter-mobilization.

It’s true that the right is more ideologically coherent and part of a “movement.” But it’s not clear to me that this is working well for them right now, or that liberals would be right to try a strategy of replication. Especially as I contest that wonk blogging doesn’t have an ideological edge.

2. Liberal Wonkery as Ideology

As an aside, here's Arthur Delaney's first wonk chart:

In Frase’s mind, wonkblogging is a “way of policing ideological boundaries and maintaining the illusion that the ruling ideology is merely bi-partisan common sense.” Wonk bloggers merely reproduce technocracy, performing the Very Serious Analysis that always comes back to a set of narrow concerns that coincide with ruling interests.

But is the background ideology of liberal bloggers a “ruling ideology” committed to the status quo? I don’t buy it. First off, just the act of writing about problems and potential policy solutions casts them as problems in need of a solution. Indeed, as many on the right have noted, a crucial feature of wonk blogging isn’t the creation of “solutions” to policy problem but the creation of “problems” in the first place.

Think of some of the things liberal wonk bloggers (at least in the economics space) focus on: unemployment; lack of access to quality, affordable health care; wages decoupled from productivity. These aren’t just put out there as crappy things that are happening. Wonks don’t focus on how there’s nothing good on television, or rain on your wedding day. And the problems they signal aren’t, usually, thought of as personal failings or requiring private, civic solutions. They are problems that the public needs a response for.

What does that amount to? If you link them together, they tell a story about how unemployment is a vicious problem we can counteract, that the shocks we face in life should be insured against, that markets fail or need to be revealed as constructed. And they don’t argue “just deserts” -- that some should be left behind, or that hierarchy and inequality are virtues in and of themselves -- and instead produce analyses in support of economic and social equality. Everyone should have access to a job, or health care, or a secure retirement.

In other words, they describe the core project of modern American liberalism. Keynesian economics, social insurance, the regulatory state and political equality: wonk blogging builds all of this brick by brick from the bottom-up. Signaling where reform needs to go is increasingly being viewed as the important role pundits and analysts carry out. And rather than derive them from ideology top-down, they’re built bottom-up as a series of problems to be solved.

Wonkiness-as-ideology has its downsides, of course. In line with Frase’s critique, wonky analysis makes virtues uncritically out of economic concepts like “choice” and “markets,” while having no language for “decommodification” or “workplace democracy.” They reflect the economic language of a neoliberal age. (Though if you are Ira Katznelson, you’d argue that this wonky, technocratic, public policy focus of liberalism was baked into the cake in the late 1940s.) There’s an element of liberalism that is focused on “how do we share the fruits of our economic prosperity” that hits a wall in an age of stagnation and austerity.

But I wouldn’t trade it for what the left seems to be offering. Indeed one of the better achievements of mid-century democratic socialism, Michael Harrington’s The Other America, was proto-wonk blogging. He identified problems. He consciously didn't mention ideology, knowing full well that stating the problem in the context of actually existing solutions would create the real politics. And if he had access to modern computing, Harrington certainly would have put a lot of charts in his book and posted them online.

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As the Reinhart-Rogoff story started up, Peter Frase of Jacobin wrote a critique of liberal wonk bloggers titled “The Perils of Wonkery.” Now that things have calmed down, I’m going to respond. Fair warning: this post will be a bit navel-gazing.

I recommend reading Peter’s post first, but to summarize, it makes two broad claims against liberal wonk bloggers. The first is the critique of the academic against the journalist. This doesn’t engage why wonk blogging has evolved or the role it plays. The second critique is the leftist against the technocratic liberal, which I find doesn’t acknowledge the actual ideological space created in wonk blogging. I find both of Frase’s arguments unpersuasive and also under-theorized. Let’s take them in order.

1. Liberal Wonks in Practice

Frase, a sociologist, locates the peril of wonkery in the fact that it needs to engage with academic research that often is more complicated than the writers have the ability to critically evaluate. “The function of the wonk is to translate the empirical findings of experts for the general public.” As such they are subject to a form of source capture, where they need to rely on the experts they are reporting on, as “they will necessarily have far less expertise than the people whose findings are being conveyed.”

We can generalize this critique as one that academics make of journalists all the time. Journalists don’t understand the subtlety of research and how it often functions as a discourse that changes over time. It’s a conversation on a very long time scale, rather than a race with winners and losers. They want dramatic headlines, conflicts, and cliffhangers, often over whether something is “good” or “bad” or other topics that make academics roll their eyes. Where researchers spend a lifetime on a handful of topics, reporters bounce from topic to topic, oftentimes in the course of a single day, made even worse through the “hamster wheel” of online blogs.

That’s a problem, as far as it goes. But bad journalism is easily countered by...good journalism. Source capture actually strikes me as one of the smaller problems wonk bloggers face. If journalists are worried that they are over-influenced by their source, they can just call another expert -- which is what Wonkblog did for the Reinhart/Rogoff studies. Wonk bloggers tend to focus on a group of related areas, and like any other journalist, they develop a list of the top researchers in any area to navigate complicated issues. They call people and ask questions.

It is true that in the wonk space, judgments on where the wonk’s self-declared expertise ends and where the line should be drawn on what is covered explicitly lie with the authors themselves. But this just makes explicit what is hidden in all of journalism, which is the problem of where to draw these lines.

It’s true that these debates take place within the context of existing policy research. A friend noted that Frase’s piece rests on a weird contradiction: it’s about how wonks don’t have enough expertise, but also how expertise is just a way of power and capital exerting itself and should be resisted. But that assumes that wonk blogging is just a replication of ruling ideology.

1.a What Creates Wonks?

We’ll talk about ideology more in a minute, but it’s surprising that Frase doesn’t even try to ground his analysis in the material base of institutions that create and fashion liberal writers. Frase seems to imply that the peril derives from personality-driven ladder-climbing, or to bask in the reflected glory of Serious People; he’s a step away from saying what wonks do is all about getting invited to cocktail parties.

But let’s try to provide that context for him. Why has “wonk” analysis risen in status within the “liberal” parts of the blogosphere, and what does that tell us about our current moment?

Contrasted with their counterparts on the right, young liberal writers come up through journalistic enterprises. That’s where they build their expertise, their approaches, their sensibilities, and their dispositions, even if they go on to other forms of opinion writing. Internships at The Nation, The American Prospect, or The New Republic are a common touchstone, with the Huffington Post, TPM, and Think Progress recently joining them. Though this work has an ideological basis, the work is journalism. Pride, at the end of the day, comes from breaking stories, working sources, building narratives, and giving a clear understanding of the scale and the scope of relevant actions. And part of that reporter fashioning will involve including all sides, and acting like more of a referee than an activist.

Where do young conservatives come from? They are built up as pundits, ideological writers, or as “analysts” or “experts” at conservative think-tanks. These conservatives then go out and populate the broader conservative infrastructure. As Helen Rittlemeyer notes, one reason conservative publications are declining in quality is because they are being filled with those who work at conservative think tanks (and are thus subsidized by the tax code and conservative movement money).

This is an important distinction when you see the numerous criticisms asking for wonky liberals to get more ideological. Bhaskar Sunkara argues that liberal wonks have a kind of “rigid simplicity” that is incapable of even understanding, much less challenging, the conservative ideology it is meant to counter. Conor Williams makes a similar argument, arguing that the “wonks’ focus on policy details blinds them to political realities.” In a fascinating essay comparing wonks to conspiracy theorists like Alex Jones, Jesse Elias Spafford writes in The New Inquiry that wonks “have risen to prominence because they come wrapped in the respectable neutrality of the scientist and have eschewed the partisan bias of the demagogue” and that, instead of agreed-upon facts, “our political discussions need to grapple with ideology and psychology, and with the underlying tendencies that draw people to particular ideologies.”

But just as there are numerous pleas for liberal writers to get more ideological, there are pleas on the right for more actual journalism. The post-election version of this was from Michael Calderone at Huffington Post, ”Conservative Media Struggles For Credibility. The hook was that everyone was excited because there was finally one genuinely good conservative congressional reporter in Robert Costa. Previous versions include Tucker Carlson getting boos at CPAC for saying, “The New York Times is a liberal newspaper. They go out, and they get the facts. Conservatives need to copy that.” Connor Friedersdorf issued a similar call back in 2008: “[a] political movement cannot survive on commentary and analysis alone! Were there only as talented a cadre of young right-leaning reporters dedicated to the journalistic project...the right must conclude that we’re better off joining the journalistic project than trying to discredit it.”

Meanwhile, the attempts by actual reporters (Tucker Carlson, Matthew Continetti) to build journalistic enterprises on the right (Daily Caller, Free Beacon) have collapsed into hackish parodies. The funders are wising up; the Koch Brothers are looking to just purchase newspapers wholesale rather than trying to build them out organically through the movement.

1.b Why Liberal Wonks?

Frase also makes no attempt to understand why wonk blogging has risen right now. And even a cursory glance at the historical moment makes it clear why wonk blogging has become important. From 2009-2010, several major pieces of legislation quickly came up for debate on core economic concerns: the ARRA stimulus and more general macroeconomic stabilization, health care reform, financial reform, immigration reform, unionization law, and carbon pricing.

Some passed, some didn’t. But all of these were complicated, evolved rapidly, and needed to be explained at a quick pace. Conventional journalism wasn’t up to the task, and wonks stepped up. As these reforms unfolded, often shifting week by week, there were important battles over how to understand the individual parts. There’s a passage from Alan Brinkley about businessmen asking, in 1940, if the “basic principle of the New Deal were economically sound?” Wonks had to answer the specific questions - is the public option important? - but also explain what parts were sound and why.

So I disagree with Spafford, who writes, “The startling rise of the wonk to political prominence has been buoyed in large part by the hope that the scientific objectivity of the technocrat might finally resolve political disagreement.“ The wonk rises more with the wave of liberal legislation of the 111th United States Congress, rather than the waves of centrist deficit reduction or conservative counter-mobilization.

It’s true that the right is more ideologically coherent and part of a “movement.” But it’s not clear to me that this is working well for them right now, or that liberals would be right to try a strategy of replication. Especially as I contest that wonk blogging doesn’t have an ideological edge.

2. Liberal Wonkery as Ideology

As an aside, here's Arthur Delaney's first wonk chart:

In Frase’s mind, wonkblogging is a “way of policing ideological boundaries and maintaining the illusion that the ruling ideology is merely bi-partisan common sense.” Wonk bloggers merely reproduce technocracy, performing the Very Serious Analysis that always comes back to a set of narrow concerns that coincide with ruling interests.

But is the background ideology of liberal bloggers a “ruling ideology” committed to the status quo? I don’t buy it. First off, just the act of writing about problems and potential policy solutions casts them as problems in need of a solution. Indeed, as many on the right have noted, a crucial feature of wonk blogging isn’t the creation of “solutions” to policy problem but the creation of “problems” in the first place.

Think of some of the things liberal wonk bloggers (at least in the economics space) focus on: unemployment; lack of access to quality, affordable health care; wages decoupled from productivity. These aren’t just put out there as crappy things that are happening. Wonks don’t focus on how there’s nothing good on television, or rain on your wedding day. And the problems they signal aren’t, usually, thought of as personal failings or requiring private, civic solutions. They are problems that the public needs a response for.

What does that amount to? If you link them together, they tell a story about how unemployment is a vicious problem we can counteract, that the shocks we face in life should be insured against, that markets fail or need to be revealed as constructed. And they don’t argue “just deserts” -- that some should be left behind, or that hierarchy and inequality are virtues in and of themselves -- and instead produce analyses in support of economic and social equality. Everyone should have access to a job, or health care, or a secure retirement.

In other words, they describe the core project of modern American liberalism. Keynesian economics, social insurance, the regulatory state and political equality: wonk blogging builds all of this brick by brick from the bottom-up. Signaling where reform needs to go is increasingly being viewed as the important role pundits and analysts carry out. And rather than derive them from ideology top-down, they’re built bottom-up as a series of problems to be solved.

Wonkiness-as-ideology has its downsides, of course. In line with Frase’s critique, wonky analysis makes virtues uncritically out of economic concepts like “choice” and “markets,” while having no language for “decommodification” or “workplace democracy.” They reflect the economic language of a neoliberal age. (Though if you are Ira Katznelson, you’d argue that this wonky, technocratic, public policy focus of liberalism was baked into the cake in the late 1940s.) There’s an element of liberalism that is focused on “how do we share the fruits of our economic prosperity” that hits a wall in an age of stagnation and austerity.

But I wouldn’t trade it for what the left seems to be offering. Indeed one of the better achievements of mid-century democratic socialism, Michael Harrington’s The Other America, was proto-wonk blogging. He identified problems. He consciously didn't mention ideology, knowing full well that stating the problem in the context of actually existing solutions would create the real politics. And if he had access to modern computing, Harrington certainly would have put a lot of charts in his book and posted them online.

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What Would the "Financial Instability" Argument Look Like For Any Other Industry?

May 7, 2013Mike Konczal

It’s becoming a surprisingly influential argument given that it hasn’t been well presented or argued, much less vetted and challenged. What is it? The argument that we should raise interest rates or otherwise contract monetary policy in order to preserve “financial stability.”

Brad Delong says critiquing this idea is “PRIORITY #1 RED FLAG OMEGA,” while Nick Rowe argues that this idea “may be influential. And that idea is horribly wrong.”

Here’s one version of the argument, from a recent speech by Narayana Kocherlakota:

“On the one hand, raising the real interest rate will definitely lead to lower employment and prices. On the other hand, raising the real interest rate may reduce the risk of a financial crisis—a crisis which could give rise to a much larger fall in employment and prices. Thus, the Committee has to weigh the certainty of a costly deviation from its dual mandate objectives against the benefit of reducing the probability of an even larger deviation from those objectives.”

Tim Duy and Ryan Avent commented on this speech, which essentially argued that that raising rates would certainly cause a problem, but rates at their current value could cause even bigger problems.

Let’s be clear on the terms: should we risk another immediate recession (“lower employment and prices”) to preserve a thing called “financial stability?” Five immediate problems jump out from this argument. Nick Rowe emphasized tackling this on an abstract level; I’m going to focus on practical stuff.

1. This whole story seems predicated on the idea that expansionary monetary policy was behind the housing bubble and collapse. I think there’s very little hard evidence for that. Also, the basic stories surrounding interest rates, as JW Mason mentioned in a guest post here, being too low for too long have some serious contradictions. (For instance, if the problem is a “global savings glut,” expansionary monetary policy should push against that by reducing capital inflows.) So if the idea is to risk another recession in order to not repeat the 2000s, we should work with a clearer story about what went wrong in the housing bubble.

2. The term “reaching for yield” is often deployed in these arguments. Low rates means that traders have to take on bigger risks in order to earn a rate of return that is acceptable. (Is there a minimum level of profit that finance must make on lending? And should we throw people out of work to make sure they make it? I hadn’t heard of that, but sounds like a nice gig.)

But either way, it isn’t clear that low rates drive reaching for yield. Yields are the difference between lending and funding rates. And as JW Mason again writes in an important post, banks’ funding costs are also affected by the policy rate. “Looking at the most recent cycle, the decline in the Fed Funds rate from around 5 percent in 2006-2007 to the zero of today has been associated with a 2.5 point fall in bank funding costs but only a 1.5 point fall in bank lending rates -- in other words, a one point increase in spreads.” If anything, the story is the opposite of what people are arguing.

3. The best empirical evidence at understanding the “reach for yield” phenomenon I’ve seen comes from Bo Becker and Victoria Ivashina from Harvard University, “Reaching for Yield in the Bond Market.” Here’s a Voxeu summary, and here’s the research pdf. They look at holdings of insurance companies, and find that, “conditional on credit ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds...It is also more pronounced for firms with poor corporate governance and for which regulatory capital requirement is more binding.”

This comes across as portfolio managers juking and manipulating capital requirements and the ratings agencies. The authors note that this is a major agency problem for insurance agencies. It was the strongest at the peak of the cycle, but went away during the recession.

Now if I told you we should keep the economy in a permanent recession because senior managers at insurance companies aren’t good at their basic job of monitoring mid-level portfolio managers you’d probably think I was crazy. And I would be. Especially since it seems that “reach for yield” is tied less to monetary policy and more to gaming ratings-based capital requirements.

4. If this is a serious problem, people should be talking about more serious forms of financial regulation. As a starter platform, we can raise capital requirements. Much of this “reach for yield” looks to be a regulatory arbitrage on ratings-based capital requirements, so, say, tripling the leverage requirement should net out the importance of the ratings agencies in capital requirements.

This is why a more coherent story about what we are concerned about when we think about “financial stability” would help. If we need to make the financial system less complex and prone to abusive practices, requiring parties of a derivatives contract to hold a stake in the underlying asset would do a lot. Are we worried about contagion? In that case, force banks to hold more capital as well as convertible instruments. About bad debts holding back the economy? Then reform the bankruptcy code, dropping the 2005 “reforms.” Some people are demanding more jail sentences, not only for the benefit of the public but for boards and shareholders who can’t keep their workers in line.

5. Because imagine this argument in the context of any other industry. Right now the interest rate is above where it needs to be to guarantee full employment. People are arguing that we should raise rates because banks might make loans, even though that is what the financial sector is supposed to do. (As Daniel Davies notes, “If the Federal Reserve sets out on a policy of lowering interest rates in order to encourage banks to make loans to the real economy, it is a bit weird for someone's main critique of the policy to be that it is encouraging banks to make loans.”)

Now imagine the government was going to take some land it owns containing oil and sell it to an oil company. Could you imagine someone saying, “We shouldn’t do this, because we can’t assume that oil companies are capable of drilling, refining and selling that oil” as a valid concern? Not concerns about random spills or global warming? But instead expressing concerns about whether the industry is capable of executing its most basic function.

Or take immigration. Imagine if a common response to letting a large number of high-skilled immigrants into the country would be “but we can’t assume that the labor market is capable of matching people with skills who want to work with employers who are willing to pay to complete jobs.” It’s tantamount to saying, “we shouldn’t assume that the labor market can do its basic function.”

It’s hard not to read the financial stability arguments as saying “look, we can’t trust the financial sector to accomplish its most basic goals.” If true, that’s a very significant problem that should cause everyone a lot of concern. It should make us ask why we even have a financial system if we can’t expect it to function, or function only by putting the entire economy at risk.

Follow or contact the Rortybomb blog:

  

 

It’s becoming a surprisingly influential argument given that it hasn’t been well presented or argued, much less vetted and challenged. What is it? The argument that we should raise interest rates or otherwise contract monetary policy in order to preserve “financial stability.”

Brad Delong says critiquing this idea is “PRIORITY #1 RED FLAG OMEGA,” while Nick Rowe argues that this idea “may be influential. And that idea is horribly wrong.”

Here’s one version of the argument, from a recent speech by Narayana Kocherlakota:

“On the one hand, raising the real interest rate will definitely lead to lower employment and prices. On the other hand, raising the real interest rate may reduce the risk of a financial crisis—a crisis which could give rise to a much larger fall in employment and prices. Thus, the Committee has to weigh the certainty of a costly deviation from its dual mandate objectives against the benefit of reducing the probability of an even larger deviation from those objectives.”

Tim Duy and Ryan Avent commented on this speech, which essentially argued that that raising rates would certainly cause a problem, but rates at their current value could cause even bigger problems.

Let’s be clear on the terms: should we risk another immediate recession (“lower employment and prices”) to preserve a thing called “financial stability?” Five immediate problems jump out from this argument. Nick Rowe emphasized tackling this on an abstract level; I’m going to focus on practical stuff.

1. This whole story seems predicated on the idea that expansionary monetary policy was behind the housing bubble and collapse. I think there’s very little hard evidence for that. Also, the basic stories surrounding interest rates, as JW Mason mentioned in a guest post here, being too low for too long have some serious contradictions. (For instance, if the problem is a “global savings glut,” expansionary monetary policy should push against that by reducing capital inflows.) So if the idea is to risk another recession in order to not repeat the 2000s, we should work with a clearer story about what went wrong in the housing bubble.

2. The term “reaching for yield” is often deployed in these arguments. Low rates means that traders have to take on bigger risks in order to earn a rate of return that is acceptable. (Is there a minimum level of profit that finance must make on lending? And should we throw people out of work to make sure they make it? I hadn’t heard of that, but sounds like a nice gig.)

But either way, it isn’t clear that low rates drive reaching for yield. Yields are the difference between lending and funding rates. And as JW Mason again writes in an important post, banks’ funding costs are also affected by the policy rate. “Looking at the most recent cycle, the decline in the Fed Funds rate from around 5 percent in 2006-2007 to the zero of today has been associated with a 2.5 point fall in bank funding costs but only a 1.5 point fall in bank lending rates -- in other words, a one point increase in spreads.” If anything, the story is the opposite of what people are arguing.

3. The best empirical evidence at understanding the “reach for yield” phenomenon I’ve seen comes from Bo Becker and Victoria Ivashina from Harvard University, “Reaching for Yield in the Bond Market.” Here’s a Voxeu summary, and here’s the research pdf. They look at holdings of insurance companies, and find that, “conditional on credit ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds...It is also more pronounced for firms with poor corporate governance and for which regulatory capital requirement is more binding.”

This comes across as portfolio managers juking and manipulating capital requirements and the ratings agencies. The authors note that this is a major agency problem for insurance agencies. It was the strongest at the peak of the cycle, but went away during the recession.

Now if I told you we should keep the economy in a permanent recession because senior managers at insurance companies aren’t good at their basic job of monitoring mid-level portfolio managers you’d probably think I was crazy. And I would be. Especially since it seems that “reach for yield” is tied less to monetary policy and more to gaming ratings-based capital requirements.

4. If this is a serious problem, people should be talking about more serious forms of financial regulation. As a starter platform, we can raise capital requirements. Much of this “reach for yield” looks to be a regulatory arbitrage on ratings-based capital requirements, so, say, tripling the leverage requirement should net out the importance of the ratings agencies in capital requirements.

This is why a more coherent story about what we are concerned about when we think about “financial stability” would help. If we need to make the financial system less complex and prone to abusive practices, requiring parties of a derivatives contract to hold a stake in the underlying asset would do a lot. Are we worried about contagion? In that case, force banks to hold more capital as well as convertible instruments. About bad debts holding back the economy? Then reform the bankruptcy code, dropping the 2005 “reforms.” Some people are demanding more jail sentences, not only for the benefit of the public but for boards and shareholders who can’t keep their workers in line.

5. Because imagine this argument in the context of any other industry. Right now the interest rate is above where it needs to be to guarantee full employment. People are arguing that we should raise rates because banks might make loans, even though that is what the financial sector is supposed to do. (As Daniel Davies notes, “If the Federal Reserve sets out on a policy of lowering interest rates in order to encourage banks to make loans to the real economy, it is a bit weird for someone's main critique of the policy to be that it is encouraging banks to make loans.”)

Now imagine the government was going to take some land it owns containing oil and sell it to an oil company. Could you imagine someone saying, “We shouldn’t do this, because we can’t assume that oil companies are capable of drilling, refining and selling that oil” as a valid concern? Not concerns about random spills or global warming? But instead expressing concerns about whether the industry is capable of executing its most basic function.

Or take immigration. Imagine if a common response to letting a large number of high-skilled immigrants into the country would be “but we can’t assume that the labor market is capable of matching people with skills who want to work with employers who are willing to pay to complete jobs.” It’s tantamount to saying, “we shouldn’t assume that the labor market can do its basic function.”

It’s hard not to read the financial stability arguments as saying “look, we can’t trust the financial sector to accomplish its most basic goals.” If true, that’s a very significant problem that should cause everyone a lot of concern. It should make us ask why we even have a financial system if we can’t expect it to function, or function only by putting the entire economy at risk.

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Monetary Policy's Jurassic Park Problem at the Zero Lower Bound

May 3, 2013Mike Konczal

Remember those scenes in Jurassic Park where everyone has to stand really still? The T-Rex finds the humans, but its dinosaur brain only senses movements, so as long as nobody moves an inch, they are safe. But if they even twitch, they are going to be ripped to shreds. Those scenes are great.

Last weekend, I wrote a piece for Wonkblog on monetary policy at the zero lower bound alongside austerity that got a great number of responses [1]. I want to respond to two points.

1. One thing I wanted to engage on, and a point I hope gets some additional comments in 2013, is that we had a major shift in “expectations” management at the zero lower bound with the Evans Rule. I think that this form of expectation management is a trial run for more serious moves like using a higher inflation target or a nominal GDP target to gain traction at the zero lower bound. So how has it gone, and how would we know?

I had thought a good measure of its success was whether short-term inflation would approach its 2 percent target, and whether or not it would go past. Other people, notably Matt O’Brien, had already flagged that 2 percent appeared to be a ceiling even with the Evans Rule in place.

Some seem to be abandoning the Evans framework entirely, such as Ryan Avent writing this week that “the Evans rule is consistent with prolonged, Japanese style stagnation.” [2] Others argue that a consistent nominal GDP with austerity is sufficient evidence to show that the Evans Rule worked.

I think this needs more exploration. We don’t often get a serious shift in expectations. That’s why I’m not sure how much the “gas pedal” from David Becksworth’s response is at play. Becksworth notes that the purchases in QE3 don’t automatically react to turbulence in the economy, and hopes that the Federal Reserve will buy more if the economy gets weaker. But if the expectations of where the Fed wants to end up are the real limiting factor for a robust recovery, why would a small change in purchases matter? This is partially why Greg Ip said the FOMC statement this week was “asymmetric,” even though the Fed said it might “increase or reduce” purchases: an increase is a small move, but a reduction is a genuine retrenchment.

2. Another point is that expectations are important. I want to push back on Ryan Avent implying I “knew what conclusions were going to be drawn before the experiment was ever run.” I actually turned more negative about the December announcement while researching the post. I spoke to several economists who supported the Evans Rule at the time to see where they stood months later. I heard from many that they were excited about the proposal at first, but that they thought the policy was undermined significantly by FOMC members’ comments in March.

What happened in March? As the Washington Post’s Ylan Q. Mui wrote in March, the Fed seemed split into two camps: “Hawks, who want to curtail quantitative easing programs because of the risks they create. And doves, who see evidence that they’re working well enough at stimulating growth that they might soon no longer be needed.” The Fed’s March minutes noted “that continued solid improvement in the outlook for the labor market could prompt the Committee to slow the pace of purchases beginning at some point over the next several meetings." Several economists I spoke with thought that this hurt the expansionary impact of monetary policy.

Watch this again in slow-motion: Aggressive monetary policy begins to expand the economy, or at least gives the impression the economy is expanding. Central bankers argue that this means that they can pull back quicker than expected. (They don’t pull back; they just say they will.) The expectations for future policy then collapse, because central bankers signal that it will end too soon. The economy then weakens, going back to where it started.

This is monetary policy in the style of those T-Rex scenes in Jurassic Park. The central bank says, “we are committing to extraordinary action,” and then everyone has to remain incredibly still for a long time. Just a random dovish member of the FOMC saying, “hey, maybe it’s working so well we should consider ending it early” is enough for dinosaurs to eat everyone the policy’s effectiveness in impacting expectations to collapse.

If you believe this is a serious problem for monetary policy, well, this is precisely the time inconsistency problem Krugman identified in the late 1990s for Japan. The neutrality of money will cause an expansion to push up either prices or output, provided markets believe that it is permanent and that the central bank won’t immediately rush to stabilize prices the moment it gets a chance. And if the comments in March show that central banks aren’t going to “credibly promise to be irresponsible” with the Evans Rule, how will they do it with 4 percent inflation?

Note that four months after the stimulus was passed, no Democrats would stand up and defend it. Yet the stimulus was carried out without a problem. Four months after the Evans Rule, it looked like Bernanke’s coalition was weakening, and that has major implications. The Wonkblog piece I wrote notes that the next step will have to be an explicit, permanent, new target. That would get around these issues about how permanent the monetary expansion will be. But if there’s barely enough support for the Evans Rule, it makes me worried we won’t get there anytime soon.

[1] Responses include: Scott Sumner, Matt Yglesias, Paul Krugman, Reihan Salam, Ryan Avent, David Becksworth, Uneasy Money, Ramesh Ponnuru, southofthe49th, as well as a communist anarchist critique at pogoprinciple which notes that my “post-Fordist national fascist state fiscal policy” is exhausted. And that while “Keynesians are playing checkers, the monetarists are playing three dimensional chess.” Hmmm.

[2] If the Evans Rule was a bust from the get-go, was all that 2012 energy put into trying to find clever ways of explaining “Delphic” versus “Odyssean” guidance language to a general audience a waste of time? Boo.

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Remember those scenes in Jurassic Park where everyone has to stand really still? The T-Rex finds the humans, but its dinosaur brain only senses movements, so as long as nobody moves an inch, they are safe. But if they even twitch, they are going to be ripped to shreds. Those scenes are great.

Last weekend, I wrote a piece for Wonkblog on monetary policy at the zero lower bound alongside austerity that got a great number of responses [1]. I want to respond to two points.

1. One thing I wanted to engage on, and a point I hope gets some additional comments in 2013, is that we had a major shift in “expectations” management at the zero lower bound with the Evans Rule. I think that this form of expectation management is a trial run for more serious moves like using a higher inflation target or a nominal GDP target to gain traction at the zero lower bound. So how has it gone, and how would we know?

I had thought a good measure of its success was whether short-term inflation would approach its 2 percent target, and whether or not it would go past. Other people, notably Matt O’Brien, had already flagged that 2 percent appeared to be a ceiling even with the Evans Rule in place.

Some seem to be abandoning the Evans framework entirely, such as Ryan Avent writing this week that “the Evans rule is consistent with prolonged, Japanese style stagnation.” [2] Others argue that a consistent nominal GDP with austerity is sufficient evidence to show that the Evans Rule worked.

I think this needs more exploration. We don’t often get a serious shift in expectations. That’s why I’m not sure how much the “gas pedal” from David Becksworth’s response is at play. Becksworth notes that the purchases in QE3 don’t automatically react to turbulence in the economy, and hopes that the Federal Reserve will buy more if the economy gets weaker. But if the expectations of where the Fed wants to end up are the real limiting factor for a robust recovery, why would a small change in purchases matter? This is partially why Greg Ip said the FOMC statement this week was “asymmetric,” even though the Fed said it might “increase or reduce” purchases: an increase is a small move, but a reduction is a genuine retrenchment.

2. Another point is that expectations are important. I want to push back on Ryan Avent implying I “knew what conclusions were going to be drawn before the experiment was ever run.” I actually turned more negative about the December announcement while researching the post. I spoke to several economists who supported the Evans Rule at the time to see where they stood months later. I heard from many that they were excited about the proposal at first, but that they thought the policy was undermined significantly by FOMC members’ comments in March.

What happened in March? As the Washington Post’s Ylan Q. Mui wrote in March, the Fed seemed split into two camps: “Hawks, who want to curtail quantitative easing programs because of the risks they create. And doves, who see evidence that they’re working well enough at stimulating growth that they might soon no longer be needed.” The Fed’s March minutes noted “that continued solid improvement in the outlook for the labor market could prompt the Committee to slow the pace of purchases beginning at some point over the next several meetings." Several economists I spoke with thought that this hurt the expansionary impact of monetary policy.

Watch this again in slow-motion: Aggressive monetary policy begins to expand the economy, or at least gives the impression the economy is expanding. Central bankers argue that this means that they can pull back quicker than expected. (They don’t pull back; they just say they will.) The expectations for future policy then collapse, because central bankers signal that it will end too soon. The economy then weakens, going back to where it started.

This is monetary policy in the style of those T-Rex scenes in Jurassic Park. The central bank says, “we are committing to extraordinary action,” and then everyone has to remain incredibly still for a long time. Just a random dovish member of the FOMC saying, “hey, maybe it’s working so well we should consider ending it early” is enough for dinosaurs to eat everyone the policy’s effectiveness in impacting expectations to collapse.

If you believe this is a serious problem for monetary policy, well, this is precisely the time inconsistency problem Krugman identified in the late 1990s for Japan. The neutrality of money will cause an expansion to push up either prices or output, provided markets believe that it is permanent and that the central bank won’t immediately rush to stabilize prices the moment it gets a chance. And if the comments in March show that central banks aren’t going to “credibly promise to be irresponsible” with the Evans Rule, how will they do it with 4 percent inflation?

Note that four months after the stimulus was passed, no Democrats would stand up and defend it. Yet the stimulus was carried out without a problem. Four months after the Evans Rule, it looked like Bernanke’s coalition was weakening, and that has major implications. The Wonkblog piece I wrote notes that the next step will have to be an explicit, permanent, new target. That would get around these issues about how permanent the monetary expansion will be. But if there’s barely enough support for the Evans Rule, it makes me worried we won’t get there anytime soon.

[1] Responses include: Scott Sumner, Matt Yglesias, Paul Krugman, Reihan Salam, Ryan Avent, David Becksworth, Uneasy Money, Ramesh Ponnuru, southofthe49th, as well as a communist anarchist critique at pogoprinciple which notes that my “post-Fordist national fascist state fiscal policy” is exhausted. And that while “Keynesians are playing checkers, the monetarists are playing three dimensional chess.” Hmmm.

[2] If the Evans Rule was a bust from the get-go, was all that 2012 energy put into trying to find clever ways of explaining “Delphic” versus “Odyssean” guidance language to a general audience a waste of time? Boo.

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Reinhart-Rogoff a Week Later: Why Does This Matter?

Apr 24, 2013Mike Konczal

Retreat!

Well this is progress. We are seeing distancing by conservative writers on the Reinhart/Rogoff thesis. In Feburary, Douglas Holtz-Eakin wrote, “The debt hurts the economy already. The canonical work of Carmen Reinhart and Kenneth Rogoff and its successors carry a clear message: countries that have gross government debt in excess of 90% of Gross Domestic Product (GDP) are in the debt danger zone. Entering the zone means slower economic growth. Granted, the research is not yet robust enough to say exactly when and how a crisis will engulf the US, but there is no reason to believe that America is somehow immune." (h/t QZ.)

Today, Holtz-Eakin writes about Reinhart and Rogoff in National Review, but drops the "canonical" status. Now they are just two random people with some common sense the left is beating up. "In order to distract from the dismal state of analytic and actual economic affairs, the latest tactic is to blame...two researchers, Carmen Reinhardt and Kenneth Rogoff, who made the reasonable observation that ever-larger amounts of debt must eventually be associated with bad economic news."

That's not actually what they said, and if you read Holtz-Eakin in February Reinhart-Rogoff is sufficient evidence to enact the specific plans he wants. Now there's no defense of the "danger zone" argument; just the idea that the stimulus failed. Retreat!

This is getting a bigger audience. (If you haven't seen The Colbert Report on the Reinhart/Rogoff issue, it's fantastic.) But going foward, plan beats no plan. And a critique isn't a plan. So what should we conclude about Reinhart-Rogoff a week later, now that the critique seems to have won? How should the government approach the debt?

Cliffs and Tradeoffs

One thing about the "cliff" metaphor is that there's no tradeoff that would make it acceptable. If you are driving, there are all kinds of tradeoffs you make with your route, but you'd never agree to a tradeoff that has you driving off a cliff. There were numerous other ways of describing this scenario, either the technical "nonlinearities" or the "danger zone" of Eakin just a few months ago.

With the danger zone metaphor now out of play, perhaps economists can see the relevant tradeoffs more clearly. Reinhart-Rogoff stand with a small negative relationship between debt and growth, one that is likely driven by low growth rather than high debt. And despite what you've heard, there's no literature that shows the casuation in the other direction.

But let's say they found it. Well, what's the relevant tradeoff? If there's even a basic fiscal multipler at work, the upside more than compensates for the downside. As Brad DeLong notes, if you consider a multipler of 1.5 and a marginal tax share of 1/3, the small correlation people are finding - Delong uses 0.006 percent from an in-house estimate - are more than canceled. Spending 2 percent more causes a bump of 3 percent of GDP, while debt goes up 1 percent of GDP. As Delong notes, "3% higher GDP this year and slower growth that leads to GDP lower by 0.06% in a decade. And this is supposed to be an argument against expansionary fiscal policy right now?"

And as the IMF noted recently, "Studies suggest that fiscal multipliers are currently high in many advanced economies. One important implication is that fiscal tightening could raise the debt ratio in the short term, as fiscal gains are partly wiped out by the decline in output." Now is the time to move away from austerity and towards more expansion. There are costs (though debt servicing is at a historic low), but the benefits outweight them.
 
Right now people are debating what level of debt-to-GDP we should level out at and how quickly that debt should begin to come down. There's also the debt ceiling battle coming at the end of the summer. This new information will influence all these conversations.
 
Was it Important?
 
Meanwhile, Ryan Avent at The Economist's Free Exchange writes about Reinhart-Rogoff here. To address one of his points, Avent also thinks that the Reinhart-Rogoff cliff results are overplayed as something that actually impacted policy. This is always a tricky question to answer, but Reinhart-Rogoff certainly dominated the sensible, mainstream conversation over the deficit and was a favorite go-to for conservatives in particular. I also think it was popular among journalists, because it was a straight-line number that was supposed to not require complicated modelng. Media Matters put together this video of people discussing the Reinhart-Rogoff cutoff:

(Bonus fun: in the video, at the 1m20s, Niall Ferguson refers to the 90 percent result as "the law of finance.")

I think the ideas matter. (Why else would we do this?) I think it's important to understand this revelation in light of other players moving against austerity, including both the IMF and the financial industry. As people reposition themselves, understanding that one of the core old ideas is now out of play allows a different reconfiguration of power. Also, it's worth repeating, it's becoming harder to pretend that austerity hasn't failed. It didn't even do the actual goal, which was reduce the debt-to-GDP ratios of the countries that were being targeted.

Citizens across the world who were normally indifferent are realizing that they were sold a bad bag of goods when it came to austerity and belt-tightening. They are now trying to figure out what happened, and how things could be done differently. As these are such critical issues, this examination is important. It's great we are having it.

Follow or contact the Rortybomb blog:

  

 

Retreat!

Well this is progress. We are seeing distancing by conservative writers on the Reinhart/Rogoff thesis. In Feburary, Douglas Holtz-Eakin wrote, “The debt hurts the economy already. The canonical work of Carmen Reinhart and Kenneth Rogoff and its successors carry a clear message: countries that have gross government debt in excess of 90% of Gross Domestic Product (GDP) are in the debt danger zone. Entering the zone means slower economic growth. Granted, the research is not yet robust enough to say exactly when and how a crisis will engulf the US, but there is no reason to believe that America is somehow immune." (h/t QZ.)

Today, Holtz-Eakin writes about Reinhart and Rogoff in National Review, but drops the "canonical" status. Now they are just two random people with some common sense the left is beating up. "In order to distract from the dismal state of analytic and actual economic affairs, the latest tactic is to blame...two researchers, Carmen Reinhardt and Kenneth Rogoff, who made the reasonable observation that ever-larger amounts of debt must eventually be associated with bad economic news."

That's not actually what they said, and if you read Holtz-Eakin in February Reinhart-Rogoff is sufficient evidence to enact the specific plans he wants. Now there's no defense of the "danger zone" argument; just the idea that the stimulus failed. Retreat!

This is getting a bigger audience. (If you haven't seen The Colbert Report on the Reinhart/Rogoff issue, it's fantastic.) But going foward, plan beats no plan. And a critique isn't a plan. So what should we conclude about Reinhart-Rogoff a week later, now that the critique seems to have won? How should the government approach the debt?

Cliffs and Tradeoffs

One thing about the "cliff" metaphor is that there's no tradeoff that would make it acceptable. If you are driving, there are all kinds of tradeoffs you make with your route, but you'd never agree to a tradeoff that has you driving off a cliff. There were numerous other ways of describing this scenario, either the technical "nonlinearities" or the "danger zone" of Eakin just a few months ago.

With the danger zone metaphor now out of play, perhaps economists can see the relevant tradeoffs more clearly. Reinhart-Rogoff stand with a small negative relationship between debt and growth, one that is likely driven by low growth rather than high debt. And despite what you've heard, there's no literature that shows the casuation in the other direction.

But let's say they found it. Well, what's the relevant tradeoff? If there's even a basic fiscal multipler at work, the upside more than compensates for the downside. As Brad DeLong notes, if you consider a multipler of 1.5 and a marginal tax share of 1/3, the small correlation people are finding - Delong uses 0.006 percent from an in-house estimate - are more than canceled. Spending 2 percent more causes a bump of 3 percent of GDP, while debt goes up 1 percent of GDP. As Delong notes, "3% higher GDP this year and slower growth that leads to GDP lower by 0.06% in a decade. And this is supposed to be an argument against expansionary fiscal policy right now?"

And as the IMF noted recently, "Studies suggest that fiscal multipliers are currently high in many advanced economies. One important implication is that fiscal tightening could raise the debt ratio in the short term, as fiscal gains are partly wiped out by the decline in output." Now is the time to move away from austerity and towards more expansion. There are costs (though debt servicing is at a historic low), but the benefits outweight them.
 
Right now people are debating what level of debt-to-GDP we should level out at and how quickly that debt should begin to come down. There's also the debt ceiling battle coming at the end of the summer. This new information will influence all these conversations.
 
Was it Important?
 
Meanwhile, Ryan Avent at The Economist's Free Exchange writes about Reinhart-Rogoff here. To address one of his points, Avent also thinks that the Reinhart-Rogoff cliff results are overplayed as something that actually impacted policy. This is always a tricky question to answer, but Reinhart-Rogoff certainly dominated the sensible, mainstream conversation over the deficit and was a favorite go-to for conservatives in particular. I also think it was popular among journalists, because it was a straight-line number that was supposed to not require complicated modelng. Media Matters put together this video of people discussing the Reinhart-Rogoff cutoff:

(Bonus fun: in the video, at the 1m20s, Niall Ferguson refers to the 90 percent result as "the law of finance.")

I think the ideas matter. (Why else would we do this?) I think it's important to understand this revelation in light of other players moving against austerity, including both the IMF and the financial industry. As people reposition themselves, understanding that one of the core old ideas is now out of play allows a different reconfiguration of power. Also, it's worth repeating, it's becoming harder to pretend that austerity hasn't failed. It didn't even do the actual goal, which was reduce the debt-to-GDP ratios of the countries that were being targeted.

Citizens across the world who were normally indifferent are realizing that they were sold a bad bag of goods when it came to austerity and belt-tightening. They are now trying to figure out what happened, and how things could be done differently. As these are such critical issues, this examination is important. It's great we are having it.

Follow or contact the Rortybomb blog:

  

 

Share This

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