How Do the Elderly Spend Money and the Difficulty of Protecting Against Social Security Cuts

Dec 18, 2012Mike Konczal

Dean Baker and Doug Henwood both have good analysis on the cuts involved in chaining inflation. Since the rumored cuts to Social Security will hinge on this way of calculating inflation, I want to dig one level into the data to convey what it will mean and then look at some of the distributional impact.

I.

Let's start with two groups of people. The first is urban wage earners and clerical workers, one select group of the population, who purchase a representative basket of goods and services. How much does the basket of goods they purchase increase in price over time? This cost is called CPI-W, and it is currently used for adjusting Social Security benefits. The second group is all people aged 62 and over. Since the 1980s, the government has calculated the cost of goods and services for this group as well, and it is referred to as CPI-E. What do they spend money on? Here's the relative importance of major categories of spending, provided by the BLS, for each group from December 2007:

Green is where the group spends compartively less. As we can see, the elderly spend a lot more of their (more limited) money on housing, utilities, and medical care. And as you probably know, health care costs have been rising rapidly over the past several decades. With the notable exception of college costs, the things urban wage earners spend money on haven't increased in prices as fast as what the elderly purchase. As a result, the CPI-E has increased 3.3 percent a year from 1982 to 2007, while the CPI-W has only increased 3.0 a year.

But wait, what's this chained thing that is being proposed? Picture that in response to a price increase for one good you could substitute similar items. So if the price of chicken goes up, you could eat more beef. Or if the price of a movie went up, you would rent movies more often. This substitution effect blunts some of the price increases. As such, inflation is lower when you take this into account. It's more complicated than that, but it is a start for a definition.

But we don't have a "chained" version of the CPI-E. And the items that the elderly purchase probably aren't impacted in the same competitive way. If the price of beer goes up, you can drink more wine; if the price of utilities go up, your options are limited. The areas where the elderly pay more don't have the same competitive pressures, and their geography is going to be more limited. We could get a chained version of the CPI-E if Congress told economists to make one. However it's likely not to have the cuts built in the same way.

II.

Brad Delong, who signed a letter from over 300 economist experts and social scientists organized by EPI arguing that there's no empirical basis for the COLA change, says that "Chained-CPI" is code for "let's really impoverish some women in their 90s!" This will fall on those who live the longest and rely on Social Security the most. But can we find a way to have this impact the poor less so that it doesn't fall too hard on those with the least?

The White House is saying that there will be such a set of protections, and think tanks have proposed some, but we won't know what they'll entail until they are better reported. No matter what additional measures are proposed, it's important to understand how compressed the distribution of income is for those receiving Social Security. From the Social Security Administration, here's a chart on the importance of Social Security relative to total income by income quintile for beneficiary families over 65 years of age (Table 9.B6):

I hate using charts that have so many percents of a percent of a percent, but this data is really important. To get a sense of what this chart is telling us, let's look at a box. From this chart, in the botom 20 percent of income, or those that make $11,417 or less, 65 percent of beneficiaries families get 90 percent of their income from Social Security. So the poorest are very dependent on Social Security, and a large cut will impact them harshly.

But let's say we wave a policy wand and protect those in the bottom 20 percent. The problem is that the income here is very compressed, and that Social Security is a major source of income up the ladder. Even for those in the 60-80 percent of income bracket, 41 percent of their income comes from Social Security. The group around the middle, in the third quintile, have only around $20,000 a year to live on and get a majority of their income from Social Security.

This is not a program that just helps the destitute; it provides a broad level of income security in old age for the majority of retirees. The average elderly family receiving Social Security gets 58.2 percent of their income from the program. A quarter of families get 90 percent or more of their income from Social Security. Once you leave the top income quintile, Social Security is the major source of retirement security. It is hard to see how means-testing these across-the-board cuts will be sufficient to prevent this from having a serious impact on our most vulnerable.

 

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Dean Baker and Doug Henwood both have good analysis on the cuts involved in chaining inflation. Since the rumored cuts to Social Security will hinge on this way of calculating inflation, I want to dig one level into the data to convey what it will mean and then look at some of the distributional impact.

I.

Let's start with two groups of people. The first is urban wage earners and clerical workers, one select group of the population, who purchase a representative basket of goods and services. How much does the basket of goods they purchase increase in price over time? This cost is called CPI-W, and it is currently used for adjusting Social Security benefits. The second group is all people aged 62 and over. Since the 1980s, the government has calculated the cost of goods and services for this group as well, and it is referred to as CPI-E. What do they spend money on? Here's the relative importance of major categories of spending, provided by the BLS, for each group from December 2007:

Green is where the group spends compartively less. As we can see, the elderly spend a lot more of their (more limited) money on housing, utilities, and medical care. And as you probably know, health care costs have been rising rapidly over the past several decades. With the notable exception of college costs, the things urban wage earners spend money on haven't increased in prices as fast as what the elderly purchase. As a result, the CPI-E has increased 3.3 percent a year from 1982 to 2007, while the CPI-W has only increased 3.0 a year.

But wait, what's this chained thing that is being proposed? Picture that in response to a price increase for one good you could substitute similar items. So if the price of chicken goes up, you could eat more beef. Or if the price of a movie went up, you would rent movies more often. This substitution effect blunts some of the price increases. As such, inflation is lower when you take this into account. It's more complicated than that, but it is a start for a definition.

But we don't have a "chained" version of the CPI-E. And the items that the elderly purchase probably aren't impacted in the same competitive way. If the price of beer goes up, you can drink more wine; if the price of utilities go up, your options are limited. The areas where the elderly pay more don't have the same competitive pressures, and their geography is going to be more limited. We could get a chained version of the CPI-E if Congress told economists to make one. However it's likely not to have the cuts built in the same way.

II.

Brad Delong, who signed a letter from over 300 economist experts and social scientists organized by EPI arguing that there's no empirical basis for the COLA change, says that "Chained-CPI" is code for "let's really impoverish some women in their 90s!" This will fall on those who live the longest and rely on Social Security the most. But can we find a way to have this impact the poor less so that it doesn't fall too hard on those with the least?

The White House is saying that there will be such a set of protections, and think tanks have proposed some, but we won't know what they'll entail until they are better reported. No matter what additional measures are proposed, it's important to understand how compressed the distribution of income is for those receiving Social Security. From the Social Security Administration, here's a chart on the importance of Social Security relative to total income by income quintile for beneficiary families over 65 years of age (Table 9.B6):

I hate using charts that have so many percents of a percent of a percent, but this data is really important. To get a sense of what this chart is telling us, let's look at a box. From this chart, in the botom 20 percent of income, or those that make $11,417 or less, 65 percent of beneficiaries families get 90 percent of their income from Social Security. So the poorest are very dependent on Social Security, and a large cut will impact them harshly.

But let's say we wave a policy wand and protect those in the bottom 20 percent. The problem is that the income here is very compressed, and that Social Security is a major source of income up the ladder. Even for those in the 60-80 percent of income bracket, 41 percent of their income comes from Social Security. The group around the middle, in the third quintile, have only around $20,000 a year to live on and get a majority of their income from Social Security.

This is not a program that just helps the destitute; it provides a broad level of income security in old age for the majority of retirees. The average elderly family receiving Social Security gets 58.2 percent of their income from the program. A quarter of families get 90 percent or more of their income from Social Security. Once you leave the top income quintile, Social Security is the major source of retirement security. It is hard to see how means-testing these across-the-board cuts will be sufficient to prevent this from having a serious impact on our most vulnerable.

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Social Security cards image via Shutterstock.com.

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A Cost of Living Adjustment for Social Security in the Fiscal Cliff?

Dec 17, 2012Mike Konczal

I haven't been writing about the various trial balloons and back-and-forths in the fiscal cliff austerity phase-in negotiations. But I do want to make a comment on the latest one. From Ezra Klein, there's rumors that there will be more revenue, some extended unemployment insurance, and additional stimulus money. However, "the Democrats’ headline concession will be accepting chained-CPI, which is to say, accepting a cut to Social Security benefits." Krugman isn't sure if this is better than no deal.

I think it's terrible, and the best way to understand it is by comparing it to the two reasons some liberals, Kevin Drum for instance, give for making a deal on Social Security. This is not my argument, but it's a useful comparison. The first reason is that by proactively changing Social Security you can secure a deal that has more revenue and fewer cuts than you would otherwise. The second reason is that by making a deal on Social Security you take the issue off the policy table. Sure, the people who think Social Security is a form of tyranny will still be after it. But all the deficit scolds will pack up and go home on the issue.

This deal would do neither. You'd cut Social Security without putting in any new revenue. And it wouldn't be sufficient to close the long-term gap, so the issue would stay on the table. Indeed, it's obvious that Very Serious People would view this as a "downpayment" on future cuts, and require any future attempts to get more revenue for Social Security, say by raising the payroll tax cap, to involve significant additional cuts.

From CBO's Social Security Policy Options, you can see 30 options for Social Security. 

The CBO puts the 75-year actuarial balance deficit at 0.6 percent, and this chart shows how much of that 0.6 percent would be filled by various options. The last one, basing the cost-of-living-adjustments (COLA) on the chained CPI-U, is only 0.2, or about a third of what the deficit hawks will say is necessary. From the CBO, it would only extend the trust fund four years. There will be demands for going back to Social Security in the years ahead, and those changes will not come solely from revenue increases. That's giving up a major piece for nothing in terms of Social Security, which is a very bad deal.

Personally, I think changing the COLA is a bad idea in general. The elderly face a higher rate of inflation since their spending is so dependent on health care, which is difficult to adjust or comparison shop for (the idea behind chaining the inflation rate). More importantly, of the three legs of the stool of retirement security - Social Security, private savings and employer savings plans - the two that aren't Social Security are struggling. Employer pensions will become less secure and less available going forward. Housing wealth was wiped out in the crash. 401(k)s appear to have been a great way to shovel tax savings to the rich, but are in no shape to take over for a lack of pensions. Median wages have dropped in the recession, and are likely to show little growth in the years ahead, which makes building private savings harder. Social Security will become more important, not less, in the decades ahead. Its benefits should be expanded, not cut.

UPDATE: Kevin Drum has a similar conclusion on the deal.

I haven't been writing about the various trial balloons and back-and-forths in the fiscal cliff austerity phase-in negotiations. But I do want to make a comment on the latest one. From Ezra Klein, there's rumors that there will be more revenue, some extended unemployment insurance, and additional stimulus money. However, "the Democrats’ headline concession will be accepting chained-CPI, which is to say, accepting a cut to Social Security benefits." Krugman isn't sure if this is better than no deal.

I think it's terrible, and the best way to understand it is by comparing it to the two reasons some liberals, Kevin Drum for instance, give for making a deal on Social Security. This is not my argument, but it's a useful comparison. The first reason is that by proactively changing Social Security you can secure a deal that has more revenue and fewer cuts than you would otherwise. The second reason is that by making a deal on Social Security you take the issue off the policy table. Sure, the people who think Social Security is a form of tyranny will still be after it. But all the deficit scolds will pack up and go home on the issue.

This deal would do neither. You'd cut Social Security without putting in any new revenue. And it wouldn't be sufficient to close the long-term gap, so the issue would stay on the table. Indeed, it's obvious that Very Serious People would view this as a "downpayment" on future cuts, and require any future attempts to get more revenue for Social Security, say by raising the payroll tax cap, to involve significant additional cuts.

From CBO's Social Security Policy Options, you can see 30 options for Social Security. 

The CBO puts the 75-year actuarial balance deficit at 0.6 percent, and this chart shows how much of that 0.6 percent would be filled by various options. The last one, basing the cost-of-living-adjustments (COLA) on the chained CPI-U, is only 0.2, or about a third of what the deficit hawks will say is necessary. From the CBO, it would only extend the trust fund four years. There will be demands for going back to Social Security in the years ahead, and those changes will not come solely from revenue increases. That's giving up a major piece for nothing in terms of Social Security, which is a very bad deal.

Personally, I think changing the COLA is a bad idea in general. The elderly face a higher rate of inflation since their spending is so dependent on health care, which is difficult to adjust or comparison shop for (the idea behind chaining the inflation rate). More importantly, of the three legs of the stool of retirement security - Social Security, private savings and employer savings plans - the two that aren't Social Security are struggling. Employer pensions will become less secure and less available going forward. Housing wealth was wiped out in the crash. 401(k)s appear to have been a great way to shovel tax savings to the rich, but are in no shape to take over for a lack of pensions. Median wages have dropped in the recession, and are likely to show little growth in the years ahead, which makes building private savings harder. Social Security will become more important, not less, in the decades ahead. Its benefits should be expanded, not cut.

UPDATE: Kevin Drum has a similar conclusion on the deal.

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Are High College Costs Redistributive?

Dec 11, 2012Mike Konczal

Aaron Bady has a fantastic piece on the boosters who argue that MOOCs and other forms of online education will fundamentally transform higher education, addressed as a response to Clay Shirky. There's a few important moves to watch when people make this line of argument. Many who prize the "disruptive innovation" of higher education usually concede that what it will mostly do is provide a cheaper but poorer alternative to the large number of non-elite public institutions that educate the majority of those who seek higher education. The talk is all "Watch out Harvard and Yale! This online education company is going to take you down like Napster took down the record companies." Then it quickly reverts to the idea of providing "access," which gets much of its power through the ongoing dismantling of mass public higher education.

Note that, given that online education's success will be a function of the weakness of public education, there's a huge incentive for for-profit higher education firms to participate in that dismantling project. And sure enough, there's a great new article by Sarah Pavlus at the American Independent, "University of Phoenix fought against community college expansion." There's "so much money to be made online, and [for-profit schools] didn’t want community colleges coming in at a much lower tuition rate,” she writes. Public institutions are attempting to innovate and provide better services to citizens, but for-profit schools are trying to stop them to bolster their own bottom lines.

This is why the debate about the actual quality of online education is important. Online education can succeed not by providing a better service at a cheaper price, but instead by just providing "access" if public education slowly becomes unavailable. If there's no public option, then the quality issue becomes moot - then it is just about providing the now missing access to meet the large demand our country has for higher-level education.

Also watch for when online education boosters make an argument of higher education decline rather than online success. They do a rhetorical move to argue that the problems in the non-profit private education institutions extend to public ones. Kevin Carey, for instance, argues that "college spending is the driving force behind affordability or lack thereof in the long run" before noting several paragraphs later that "Inflation-adjusted per-student spending at private research universities, in particular, increased sharply." He quickly notes that "private universities set the aspirational standards for the industry as a whole," but public higher education cost inflation is driven mostly by declining public support, not a competitive war with private schools.

As Josh Mason pointed out, this is the equivalent of saying that since the private savings vehicle of 401(k)s have turned out to be a bit of a bust, we should scale back the public retirement vehicle of Social Security. That's not the case at all! And, if anything, we should view the public option as a version that works.

Tuition as Redistribution

But maybe higher tuition isn't a real problem. Maybe higher costs are driven by the rich paying more to help out the poor in a private form of egalitarian redistribution. A few weeks ago, Evan Soltas at Bloomberg wrote a version of this argument, which Matt Bruenig picked up on his blog (and here as well). Soltas argues that the huge rise in the advertised ("sticker") price of colleges is misleading, because the actual cost people pay ("net cost") is much lower and has been increasing at a lower rate. Soltas argues that "what has happened is a shift toward price discrimination -- offering multiple prices for the same product. Universities have offset the increase in sticker price for most families through an expansion of grant-based financial aid and scholarships." Bruenig and Soltas both emphasize that the rich pay more while the poorest pay less. They use data from the most recent Trends in College Pricing.

There are a few critical points to bring up about this analysis. Contrary to Soltas, this is driven as much, if not more, by public policy, specifically the effect of of a significant expansion in public funding, notably in Pell Grants and military grants. (I believe Soltas' graph also uses data that includes the extensive network of tax credits, which add up to a lot of money; the cross-section graphs in Bruenig's graphs does not.) From Trends in Student Aid:

This is one way of providing public funding. Another would be to drive down tuition directly. I took up the idea of supporting public provisioning directly, instead of coupons that provide targeted support, in my recent New America paper. If there are market imperfections, incumbents can capture some of the subsidy while driving up the price for all those who aren't getting the coupons. Public provisioning, in these cases, lowers the cost for everyone.

Now if you look at the net price by income, you also see those in the top income bracket, here being those with incomes over $100K a year, paying more than the poor, those under $33,000. From Bruenig's piece:

Soltas argues that "the cost burden of college has become significantly more progressive since the 1990s. Students from wealthier families not only now pay more for their own educations but also have come to heavily subsidize the costs of the less fortunate." He argues that differences in price reflects an institutional goal of cross-subsidization, where private firms make the rich pay more to compensate the poor. This didn't strike me as obvious from the data or other resources. In general, price discrimination should be thought of as a transfer from consumers to producers' surplus. Meanwhile, businesses usually don't cross-subsidize, and as we saw from the Pell Grant information, a big driver of this is poor people's payments beng compensated through public funding.

Just to confirm that higher tuition wasn't redistribution, I emailed one of the authors of the study, Sandy Baum, who told me that "very few students pay more than the actual cost of their education. Affluent students are generally subsidized less than low-income students, but they aren't actually paying any part of the cost of education for low-income students. Taxpayers generally are subsidizing Pell Grant recipients. But that's quite different from students paying more than their educational costs to cross-subsidize low-income students."

Another technical note worth making: Bruenig's graph also assumes that the poor are attending the same institutions as those who are better off. But they are almost certainly attending schools part-time instead of full-time, and cheaper institutions compared to more expensive ones. One can see this by just looking at the sticker cost of tuition. The sticker price by income has large differences that are slowly increasing.

(Net room and board and other costs has a similar dynamic.)

 Making sure that the poor can access education through grants could work as a plan over the future, though we must understand that it is a plan, specifically government planning. There are other plans we could do as well.

 

Follow or contact the Rortybomb blog:
  

Aaron Bady has a fantastic piece on the boosters who argue that MOOCs and other forms of online education will fundamentally transform higher education, addressed as a response to Clay Shirky. There's a few important moves to watch when people make this line of argument. Many who prize the "disruptive innovation" of higher education usually concede that what it will mostly do is provide a cheaper but poorer alternative to the large number of non-elite public institutions that educate the majority of those who seek higher education. The talk is all "Watch out Harvard and Yale! This online education company is going to take you down like Napster took down the record companies." Then it quickly reverts to the idea of providing "access," which gets much of its power through the ongoing dismantling of mass public higher education.

Note that, given that online education's success will be a function of the weakness of public education, there's a huge incentive for for-profit higher education firms to participate in that dismantling project. And sure enough, there's a great new article by Sarah Pavlus at the American Independent, "University of Phoenix fought against community college expansion." There's "so much money to be made online, and [for-profit schools] didn’t want community colleges coming in at a much lower tuition rate,” she writes. Public institutions are attempting to innovate and provide better services to citizens, but for-profit schools are trying to stop them to bolster their own bottom lines.

This is why the debate about the actual quality of online education is important. Online education can succeed not by providing a better service at a cheaper price, but instead by just providing "access" if public education slowly becomes unavailable. If there's no public option, then the quality issue becomes moot - then it is just about providing the now missing access to meet the large demand our country has for higher-level education.

Also watch for when online education boosters make an argument of higher education decline rather than online success. They do a rhetorical move to argue that the problems in the non-profit private education institutions extend to public ones. Kevin Carey, for instance, argues that "college spending is the driving force behind affordability or lack thereof in the long run" before noting several paragraphs later that "Inflation-adjusted per-student spending at private research universities, in particular, increased sharply." He quickly notes that "private universities set the aspirational standards for the industry as a whole," but public higher education cost inflation is driven mostly by declining public support, not a competitive war with private schools.

As Josh Mason pointed out, this is the equivalent of saying that since the private savings vehicle of 401(k)s have turned out to be a bit of a bust, we should scale back the public retirement vehicle of Social Security. That's not the case at all! And, if anything, we should view the public option as a version that works.

Tuition as Redistribution

But maybe higher tuition isn't a real problem. Maybe higher costs are driven by the rich paying more to help out the poor in a private form of egalitarian redistribution. A few weeks ago, Evan Soltas at Bloomberg wrote a version of this argument, which Matt Bruenig picked up on his blog (and here as well). Soltas argues that the huge rise in the advertised ("sticker") price of colleges is misleading, because the actual cost people pay ("net cost") is much lower and has been increasing at a lower rate. Soltas argues that "what has happened is a shift toward price discrimination -- offering multiple prices for the same product. Universities have offset the increase in sticker price for most families through an expansion of grant-based financial aid and scholarships." Bruenig and Soltas both emphasize that the rich pay more while the poorest pay less. They use data from the most recent Trends in College Pricing.

There are a few critical points to bring up about this analysis. Contrary to Soltas, this is driven as much, if not more, by public policy, specifically the effect of of a significant expansion in public funding, notably in Pell Grants and military grants. (I believe Soltas' graph also uses data that includes the extensive network of tax credits, which add up to a lot of money; the cross-section graphs in Bruenig's graphs does not.) From Trends in Student Aid:

This is one way of providing public funding. Another would be to drive down tuition directly. I took up the idea of supporting public provisioning directly, instead of coupons that provide targeted support, in my recent New America paper. If there are market imperfections, incumbents can capture some of the subsidy while driving up the price for all those who aren't getting the coupons. Public provisioning, in these cases, lowers the cost for everyone.

Now if you look at the net price by income, you also see those in the top income bracket, here being those with incomes over $100K a year, paying more than the poor, those under $33,000. From Bruenig's piece:

Soltas argues that "the cost burden of college has become significantly more progressive since the 1990s. Students from wealthier families not only now pay more for their own educations but also have come to heavily subsidize the costs of the less fortunate." He argues that differences in price reflects an institutional goal of cross-subsidization, where private firms make the rich pay more to compensate the poor. This didn't strike me as obvious from the data or other resources. In general, price discrimination should be thought of as a transfer from consumers to producers' surplus. Meanwhile, businesses usually don't cross-subsidize, and as we saw from the Pell Grant information, a big driver of this is poor people's payments beng compensated through public funding.

Just to confirm that higher tuition wasn't redistribution, I emailed one of the authors of the study, Sandy Baum, who told me that "very few students pay more than the actual cost of their education. Affluent students are generally subsidized less than low-income students, but they aren't actually paying any part of the cost of education for low-income students. Taxpayers generally are subsidizing Pell Grant recipients. But that's quite different from students paying more than their educational costs to cross-subsidize low-income students."

Another technical note worth making: Bruenig's graph also assumes that the poor are attending the same institutions as those who are better off. But they are almost certainly attending schools part-time instead of full-time, and cheaper institutions compared to more expensive ones. One can see this by just looking at the sticker cost of tuition. The sticker price by income has large differences that are slowly increasing.

(Net room and board and other costs has a similar dynamic.)

 Making sure that the poor can access education through grants could work as a plan over the future, though we must understand that it is a plan, specifically government planning. There are other plans we could do as well.

 

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What Does the New Community Reinvestment Act (CRA) Paper Tell Us?

Dec 11, 2012Mike Konczal

There are two major, critical questions that show up in the literature surrounding the 1977 Community Reinvestment Act (CRA).

The first question is how much compliance with the CRA changes the portfolio of lending institutions. Do they lend more often and to riskier people, or do they lend the same but put more effort into finding candidates? The second question is how much did the CRA lead to the expansion of subprime lending during the housing bubble. Did the CRA have a significant role in the financial crisis?
 
There's a new paper on the CRA, Did the Community Reinvestment Act (CRA) Lead to Risky Lending?, by Agarwal, Benmelech, Bergman and Seru, h/t Tyler Cowen, with smart commentary already from Noah Smith. (This blog post will use the ungated October 2012 paper for quotes and analysis.) This is already being used as the basis for an "I told you so!" by the conservative press, which has tried to argue that the second question is most relevant. However, it is important to understand that this paper answers the first question, while, if anything, providing evidence against the conservative case for the second.
 
Where is the literature on these two questions? One starting point is the early 2009 research of two Federal Reserve economists, Neil Bhutta and Glenn B. Canner, also summarized in this Randy Kroszner speech. On the first question Kroszner summarizes research by the Federal Reserve, the latest being from 2000, arguing that "lending to lower-income individuals and communities has been nearly as profitable and performed similarly to other types of lending done by CRA-covered institutions." The CRA didn't cause changes to banks' portfolios, but instead required them to find better opportunities. More on this in a minute.
 
What about the second question? Here the Bhutta/Canner research notes that only six percent of higher-priced loans (their proxy for subprime loans) were extended by CRA-covered lenders to lower-income borrowers or CRA neighborhoods. 94 percent of these loans were either made by non-traditional banks not covered by the CRA (the "shadow banking system"), or not counted towards CRA credits. As Kroszner noted, "the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis."
 
How did those loans do? Here the research compared the performance of subprime and alt-A loans in neighborhoods right above and right below the CRA's income threshold, and found that there was no difference in how the loans performed. Hence the idea that a CRA-driven subprime bubble isn't found in the data. (The FCIC's final report, starting at page 219, has more on this and other research.)
 
So what does this new research do? It takes banks that were undergoing a normal examination to see if they were in compliance with the CRA, and thus under heightened regulatory scrunity, and compares their loan portfolios with banks that were not undergoing a CRA examination. It finds that the CRA exam increases loans 5 percent every quarter surrounding the event and those loans default 15 percent more often, under the idea that those banks were ramping up their loans to pass the CRA exam.
 
But this is question 1 territory. 94 percent of higher priced loans came outside CRA firms and outside CRA loans, and this research doesn't really change that. Since we are talking about regular mortgages - more on that in a second - that higher default isn't that scary. To put that in perspective, loans made in the quarter following the initiation of a CRA exam in a non-CRA tract are 8.3 percent more likely to be 90 days delinquent. That sounds scary, but it is an increase of 0.1, from 1.2 percent to 1.3 percent. In the CRA tract it is 33 percent more likely to default, going from 1.2 percent to 1.6 percent. FICO scores drop 7 points from 713.9 to 706.9. That's an increase I wouldn't want in my portfolio, but it is light-years away from 25%+ default rates, and very low FICO scores, on actual subprime.
 

This research, if anything, pushes against movement conservative CRA arguments. In light of the evidence in question 2, many conservatives argue that regulators used CRA to push down lending standards, which then impacted other firms. But this paper finds that extra loans aren't more likely to have higher interest rates, lower loan-to-value, or be balloon/interest-only/jumbo/buy-down mortgages, although there is a slight increase in undocumented loans. And their borrowers aren't more likely to have risky characteristics themselves. The authors conclude that "this pattern is consistent with banks’ strategic attempts to convince regulators that the loans they extend that meet CRA criteria are not overtly risky."

Read that again. The authors argue, from their empirical evidence, that regulators were trying to make sure these loans had high standards, and CRA banks tried to comply with that as best they could on the major, visible risks of their loans. This is the opposite argument made by people like John Carney, who believes the CRA "encourag[ed] lenders to adopt loose standards for mortgages." It also pushes against people like Peter Wallison, who, in his FCIC dissent, argued that CRA loans were more likely to have subprime characteristics or riskier borrowers in ways not captured by a higher-price variable. Not the case.

It also finds that loan volume and risk increases the most during 2004-2006, and points to the private securitization market as an important channel. This, along with characteristics above, pushes back against the idea that the CRA primed a subprime pump in the late 1990s and early 2000s, another favorite of movement conservative finance writers. If anything, banks undergoing CRA exams were caught up in the same mechanisms that were causing the housing bubble itself.

I'm not sure I buy all of the research. If CRA banks take on too many loans during examination, why wouldn't they just loan less afterwards, balancing out? The paper jumps to argue the opposite, as it is worried that "adjustment costs may cause banks to keep elevated lending rates even after the CRA exam is formally completed." This is meant to establish their results as a lower-bound, rather than an upper-bound. But really? They managed to ramp up their lending in enough time during this time. Either way it would throw a very different set of interpretations on their research. I'm interested in seeing how other researchers react to these problems. But for now these results don't change the way we approach the financial crisis.

 

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There are two major, critical questions that show up in the literature surrounding the 1977 Community Reinvestment Act (CRA).

The first question is how much compliance with the CRA changes the portfolio of lending institutions. Do they lend more often and to riskier people, or do they lend the same but put more effort into finding candidates? The second question is how much did the CRA lead to the expansion of subprime lending during the housing bubble. Did the CRA have a significant role in the financial crisis?
 
There's a new paper on the CRA, Did the Community Reinvestment Act (CRA) Lead to Risky Lending?, by Agarwal, Benmelech, Bergman and Seru, h/t Tyler Cowen, with smart commentary already from Noah Smith. (This blog post will use the ungated October 2012 paper for quotes and analysis.) This is already being used as the basis for an "I told you so!" by the conservative press, which has tried to argue that the second question is most relevant. However, it is important to understand that this paper answers the first question, while, if anything, providing evidence against the conservative case for the second.
 
Where is the literature on these two questions? One starting point is the early 2009 research of two Federal Reserve economists, Neil Bhutta and Glenn B. Canner, also summarized in this Randy Kroszner speech. On the first question Kroszner summarizes research by the Federal Reserve, the latest being from 2000, arguing that "lending to lower-income individuals and communities has been nearly as profitable and performed similarly to other types of lending done by CRA-covered institutions." The CRA didn't cause changes to banks' portfolios, but instead required them to find better opportunities. More on this in a minute.
 
What about the second question? Here the Bhutta/Canner research notes that only six percent of higher-priced loans (their proxy for subprime loans) were extended by CRA-covered lenders to lower-income borrowers or CRA neighborhoods. 94 percent of these loans were either made by non-traditional banks not covered by the CRA (the "shadow banking system"), or not counted towards CRA credits. As Kroszner noted, "the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis."
 
How did those loans do? Here the research compared the performance of subprime and alt-A loans in neighborhoods right above and right below the CRA's income threshold, and found that there was no difference in how the loans performed. Hence the idea that a CRA-driven subprime bubble isn't found in the data. (The FCIC's final report, starting at page 219, has more on this and other research.)
 
So what does this new research do? It takes banks that were undergoing a normal examination to see if they were in compliance with the CRA, and thus under heightened regulatory scrunity, and compares their loan portfolios with banks that were not undergoing a CRA examination. It finds that the CRA exam increases loans 5 percent every quarter surrounding the event and those loans default 15 percent more often, under the idea that those banks were ramping up their loans to pass the CRA exam.
 
But this is question 1 territory. 94 percent of higher priced loans came outside CRA firms and outside CRA loans, and this research doesn't really change that. Since we are talking about regular mortgages - more on that in a second - that higher default isn't that scary. To put that in perspective, loans made in the quarter following the initiation of a CRA exam in a non-CRA tract are 8.3 percent more likely to be 90 days delinquent. That sounds scary, but it is an increase of 0.1, from 1.2 percent to 1.3 percent. In the CRA tract it is 33 percent more likely to default, going from 1.2 percent to 1.6 percent. FICO scores drop 7 points from 713.9 to 706.9. That's an increase I wouldn't want in my portfolio, but it is light-years away from 25%+ default rates, and very low FICO scores, on actual subprime.
 

This research, if anything, pushes against movement conservative CRA arguments. In light of the evidence in question 2, many conservatives argue that regulators used CRA to push down lending standards, which then impacted other firms. But this paper finds that extra loans aren't more likely to have higher interest rates, lower loan-to-value, or be balloon/interest-only/jumbo/buy-down mortgages, although there is a slight increase in undocumented loans. And their borrowers aren't more likely to have risky characteristics themselves. The authors conclude that "this pattern is consistent with banks’ strategic attempts to convince regulators that the loans they extend that meet CRA criteria are not overtly risky."

Read that again. The authors argue, from their empirical evidence, that regulators were trying to make sure these loans had high standards, and CRA banks tried to comply with that as best they could on the major, visible risks of their loans. This is the opposite argument made by people like John Carney, who believes the CRA "encourag[ed] lenders to adopt loose standards for mortgages." It also pushes against people like Peter Wallison, who, in his FCIC dissent, argued that CRA loans were more likely to have subprime characteristics or riskier borrowers in ways not captured by a higher-price variable. Not the case.

It also finds that loan volume and risk increases the most during 2004-2006, and points to the private securitization market as an important channel. This, along with characteristics above, pushes back against the idea that the CRA primed a subprime pump in the late 1990s and early 2000s, another favorite of movement conservative finance writers. If anything, banks undergoing CRA exams were caught up in the same mechanisms that were causing the housing bubble itself.

I'm not sure I buy all of the research. If CRA banks take on too many loans during examination, why wouldn't they just loan less afterwards, balancing out? The paper jumps to argue the opposite, as it is worried that "adjustment costs may cause banks to keep elevated lending rates even after the CRA exam is formally completed." This is meant to establish their results as a lower-bound, rather than an upper-bound. But really? They managed to ramp up their lending in enough time during this time. Either way it would throw a very different set of interpretations on their research. I'm interested in seeing how other researchers react to these problems. But for now these results don't change the way we approach the financial crisis.

 

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Another Reason to Kill the Debt Ceiling: Conservative Think Tanks' Responses to Default

Dec 5, 2012Mike Konczal

House Republicans are looking to weaponize the debt ceiling again, while the Obama administration is trying to make removing the threat of default part of any agreement.

Here's one reason why the debt ceiling needs to go: the conservative intellectual infrastructure cheered on a potential default. I had imagined that there would be a good cop/bad cop dynamic to the right. Very conservative political leaders would be the bad cop, saying that they weren't afraid to default on the debt, while conservative think tanks would play a version of the good cop, warning of the dire consequences of a default for the economy if their bad cop friend didn't get his way.

For instance, here's bad cop Sen. Pat Toomey (R-PA) saying that the markets "would actually accept even a delay in interest payments on the Treasuries," especially "if it meant that Congress would right this ship, address this fiscal imbalance, and put us on a sustainable path, and that the bond market would rally if it saw we were making real progress towards this." Missing interest payments is fine; in fact, it is great for the country if it is used to pass the Ryan Plan.

Financial analysts, to put it mildly, disagreed. JP Morgan analysts wrote that "any delay in making a coupon or principal payment by Treasury would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the US economy."

Here's where the think tanks are fascinating. You could image them saying "our partner Toomey is nuts, we can't control him, and you better do what he says or there's going to be real damage." But that's not what they did. It's best to split the work they did on the debt ceiling in two directions:

1. Technical Default Ain't No Thang. The first is arguing, like Toomey, that a "technical default" wouldn't matter, and in fact it could be a great thing if the Ryan Plan passed as a result. How did James Pethokoukis, then of Fortune and now of AEI, deal with a Moody's report arguing a "short-lived default" would hurt the economy? Pethokoukis: "I guess I would care more about what Moody’s had to say if a) they hadn’t missed the whole financial crisis, b) didn’t want to see higher taxes as part of any fiscal fix and c) if they made any economic sense." Default doesn't matter because Pethokoukis doesn't want taxes to go up, and there's no economic sense because of an interview he read in the Wall Street Journal.

Others went even further, arguing that the real defaulters are those who, umm, don't want to default on the debt. Here's the conservative think tank e21 with a staff editorial arguing that "policymakers need to stay focused on the real default issue: whether the terms of the debt limit increase this summer will be sufficiently tough to ensure that the nation’s debt-to-GDP ratio is stabilized and eventually sharply reduced." All these people who want a clean debt ceiling increase are causing the real default issue. As someone who used to do a lot of credit risk modeling, this is my favorite: "Indeed, those demanding the toughest concessions today actually have a strong pro-creditor bias." S&P disagreed with whoever wrote that editorial and increased the credit risk (downgraded) based on the threat of this technical default.

Heritage wrote a white paper saying that you could just "hold the debt limit in place, thereby forcing an immediate reduction in non-interest spending averaging about $125 billion each month," and that "refusing to raise the debt limit would not, in and of itself, cause the United States to default on its public debt." Dana Milbank noted that these kinds of shuffling plans would still leave the government short and likely cause a recession. Milbank: "Without borrowing, we’d have to cut Obama’s budget for 2012 by $1.5 trillion. That means even if we shut down the military and stopped writing Social Security checks, the government would still come up about $200 billion short." Cato also jumped in with the technical default crowd here.

But that was the reaction from the number-crunching analysts. What about the bosses?

2. Civilization Hangs in the Balance of the Debt Ceiling Fight. Here's the president of AEI, Arthur C. Brooks, in July 2011: "The battle over the debt ceiling...is not a political fight between Republicans and Democrats; it is a fight against 50-year trends toward statism...No one deserves our political support today unless he or she is willing to work for as long as it takes to win the moral fight to steer our nation back toward enterprise and self-governance."

Even better, the president of the Heritage Foundation, also in July 2011, compares Democrats to Japan during World War II and then argues: "We must win this fight. The debate over raising the debt limit seems complicated, but it is really very simple. Look beyond the myriad details of the awkward compromises, and you see an epic struggle between two opposing camps....Congress should not raise the debt limit without getting spending under control."

So the the conservative intellectual infrastructure, which consumes hundreds of millions of dollars a year, looked at the possibility of a debt default and determined it was both inconsequential and also the only way to stop statism in our lifetimes. No wonder the time period around the debt ceiling in 2011 was such a disaster for our economy, killing around 250,000 jobs that should have been created. There's no reason to assume all the same players won't play an even worse cop this time around.

There's no good reason for the debt ceiling, and now there are really bad consequences for its existence. Time to end it.

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House Republicans are looking to weaponize the debt ceiling again, while the Obama administration is trying to make removing the threat of default part of any agreement.

Here's one reason why the debt ceiling needs to go: the conservative intellectual infrastructure cheered on a potential default. I had imagined that there would be a good cop/bad cop dynamic to the right. Very conservative political leaders would be the bad cop, saying that they weren't afraid to default on the debt, while conservative think tanks would play a version of the good cop, warning of the dire consequences of a default for the economy if their bad cop friend didn't get his way.

For instance, here's bad cop Sen. Pat Toomey (R-PA) saying that the markets "would actually accept even a delay in interest payments on the Treasuries," especially "if it meant that Congress would right this ship, address this fiscal imbalance, and put us on a sustainable path, and that the bond market would rally if it saw we were making real progress towards this." Missing interest payments is fine; in fact, it is great for the country if it is used to pass the Ryan Plan.

Financial analysts, to put it mildly, disagreed. JP Morgan analysts wrote that "any delay in making a coupon or principal payment by Treasury would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the US economy."

Here's where the think tanks are fascinating. You could image them saying "our partner Toomey is nuts, we can't control him, and you better do what he says or there's going to be real damage." But that's not what they did. It's best to split the work they did on the debt ceiling in two directions:

1. Technical Default Ain't No Thang. The first is arguing, like Toomey, that a "technical default" wouldn't matter, and in fact it could be a great thing if the Ryan Plan passed as a result. How did James Pethokoukis, then of Fortune and now of AEI, deal with a Moody's report arguing a "short-lived default" would hurt the economy? Pethokoukis: "I guess I would care more about what Moody’s had to say if a) they hadn’t missed the whole financial crisis, b) didn’t want to see higher taxes as part of any fiscal fix and c) if they made any economic sense." Default doesn't matter because Pethokoukis doesn't want taxes to go up, and there's no economic sense because of an interview he read in the Wall Street Journal.

Others went even further, arguing that the real defaulters are those who, umm, don't want to default on the debt. Here's the conservative think tank e21 with a staff editorial arguing that "policymakers need to stay focused on the real default issue: whether the terms of the debt limit increase this summer will be sufficiently tough to ensure that the nation’s debt-to-GDP ratio is stabilized and eventually sharply reduced." All these people who want a clean debt ceiling increase are causing the real default issue. As someone who used to do a lot of credit risk modeling, this is my favorite: "Indeed, those demanding the toughest concessions today actually have a strong pro-creditor bias." S&P disagreed with whoever wrote that editorial and increased the credit risk (downgraded) based on the threat of this technical default.

Heritage wrote a white paper saying that you could just "hold the debt limit in place, thereby forcing an immediate reduction in non-interest spending averaging about $125 billion each month," and that "refusing to raise the debt limit would not, in and of itself, cause the United States to default on its public debt." Dana Milbank noted that these kinds of shuffling plans would still leave the government short and likely cause a recession. Milbank: "Without borrowing, we’d have to cut Obama’s budget for 2012 by $1.5 trillion. That means even if we shut down the military and stopped writing Social Security checks, the government would still come up about $200 billion short." Cato also jumped in with the technical default crowd here.

But that was the reaction from the number-crunching analysts. What about the bosses?

2. Civilization Hangs in the Balance of the Debt Ceiling Fight. Here's the president of AEI, Arthur C. Brooks, in July 2011: "The battle over the debt ceiling...is not a political fight between Republicans and Democrats; it is a fight against 50-year trends toward statism...No one deserves our political support today unless he or she is willing to work for as long as it takes to win the moral fight to steer our nation back toward enterprise and self-governance."

Even better, the president of the Heritage Foundation, also in July 2011, compares Democrats to Japan during World War II and then argues: "We must win this fight. The debate over raising the debt limit seems complicated, but it is really very simple. Look beyond the myriad details of the awkward compromises, and you see an epic struggle between two opposing camps....Congress should not raise the debt limit without getting spending under control."

So the the conservative intellectual infrastructure, which consumes hundreds of millions of dollars a year, looked at the possibility of a debt default and determined it was both inconsequential and also the only way to stop statism in our lifetimes. No wonder the time period around the debt ceiling in 2011 was such a disaster for our economy, killing around 250,000 jobs that should have been created. There's no reason to assume all the same players won't play an even worse cop this time around.

There's no good reason for the debt ceiling, and now there are really bad consequences for its existence. Time to end it.

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Should Plummeting Interest Rates Change Deficit Hawks' Arguments?

Dec 5, 2012Mike Konczal

Several deficit reduction plans came out at the end of 2010, including a proposal of the co-chairs of the Simpson-Bowles comission and another by Pete Domenici and Alice Rivlin. Since then, the economic recovery has been sluggish, with unemployment stubbornly high. The Republicans threatened what they called a "technical default" during the debt ceiling fight, a move which led to a ratings downgrade for the United States and months of subpar growth. Rather than balancing the budget, the deficit was 8.7 percent of GDP in 2011, and is projected to be 7.3 percent of GDP for 2012.

What else has happened? Borrowing costs for the United States have plummeted. While real interest rates for borrowing 10 years out were still positive in late 2010 when these plans came out, they have since gone negative and stayed there. Investors are paying us to borrow money for the next 10 years.

If you were concerned about our nation's deficits in late 2010 and you follow this crucial market signal, you should be significantly less worried now, right? It's important to note that this fall in our borrowing costs hasn't been incorporated into any of the debt discussion happening right now, discussions which still use frameworks created in 2010.

Take Version 2.0 of the Domenici-Rivlin Plan, released on Monday. Defenders argue that this plan calls for stimulus right away, and even has an "economic growth" checkbox in its slideshow to prevent immediate austerity. However, there are two big things in Version 2.0 that don't incorporate collapsing interest rates.

1. It Cuts Its Stimulus Plan by 80 Percent. When I brought this up on Twitter, several people noted that Version 2.0, much like Version 1.0, contains stimulus. However, it wasn't noted that it recommends significantly less stimulus in the second version, even though borrowing costs are significantly cheaper and getting to full employment is equally crucial for dealing with our deficits.

The first version recommends a payroll tax holiday of $650 billion. The new version calls for an income tax rebate of just $120 billion dollars (line 34). That's 80 percent less stimulus than in the original version, even though the price of providing stimulus has plummeted. Is getting to full employment suddenly less of a priority? We are still quite a ways away from there.

2. It Reuses "Down Payment" and Credibility Theories. A popular theory in 2010 was that any short-term stimulus needed to be paired with long-term deficit reduction. Why? Not for political reasons, like that being the only way to get either through Congress. It was because of strictly economic reasons. Without deficit reduction, the upfront stimulus would panic the financial markets, raising interest rates and canceling out the stimulus. (This ignores that rates would rise because the economy was getting stronger, but forget that.)

Here's Version 1.0, recommending "a short-term jump-start to growth and a commitment to long-term deficit reduction that makes stimulus credible." In Version 2.0 we get a similar claim: "Of course, this and any other policies that add to the short-term deficit should be paired with a long-term debt reduction agreement rather than be enacted in isolation." The authors also think that removing the fiscal cliff requires a "down payment" to satiate the markets for the time being.

Once again, it isn't clear what macroeconomic theory is animating the "of course" here other than a vague sense of credibility. To whatever extent that theory made sense in 2010, it's significantly less, ahem, credible now. The end of 2010 saw an increase in stimulus through extensions of the Bush tax cuts, unemployment insurance, and the payroll tax without any long-term deficit reduction, and there's no evidence it caused a market panic. Indeed, one of the sadder moments for President Obama's economic team was them walking through confidence fairy arguments during the debt ceiling fight in summer 2011, the logical end results of this credibility argument.

If we can pass stimulus right now, why don't we do it? Certainly Version 2.0 doesn't think Medicare changes must go with, say, their plans to adjust the COLA of Social Security. I'd say it's because making it clear that these are two separate issues with very different solutions keeps the Very Serious People from using manufactured short-term crises and mass unemployment to reengineer social insurance programs to do the things they want them to do. Regardless of whether you like those ideas, there's no reason to hold our current unemployed hostage in the process. And unfortunately for them, the capital markets for U.S. debt, one of the most liquid and transparent markets in the history of modern capitalism, agree. I'm still not hearing good reasons to ignore this big market movement from those still worried about the deficit as the major priority.

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Several deficit reduction plans came out at the end of 2010, including a proposal of the co-chairs of the Simpson-Bowles comission and another by Pete Domenici and Alice Rivlin. Since then, the economic recovery has been sluggish, with unemployment stubbornly high. The Republicans threatened what they called a "technical default" during the debt ceiling fight, a move which led to a ratings downgrade for the United States and months of subpar growth. Rather than balancing the budget, the deficit was 8.7 percent of GDP in 2011, and is projected to be 7.3 percent of GDP for 2012.

What else has happened? Borrowing costs for the United States have plummeted. While real interest rates for borrowing 10 years out were still positive in late 2010 when these plans came out, they have since gone negative and stayed there. Investors are paying us to borrow money for the next 10 years.

If you were concerned about our nation's deficits in late 2010 and you follow this crucial market signal, you should be significantly less worried now, right? It's important to note that this fall in our borrowing costs hasn't been incorporated into any of the debt discussion happening right now, discussions which still use frameworks created in 2010.

Take Version 2.0 of the Domenici-Rivlin Plan, released on Monday. Defenders argue that this plan calls for stimulus right away, and even has an "economic growth" checkbox in its slideshow to prevent immediate austerity. However, there are two big things in Version 2.0 that don't incorporate collapsing interest rates.

1. It Cuts Its Stimulus Plan by 80 Percent. When I brought this up on Twitter, several people noted that Version 2.0, much like Version 1.0, contains stimulus. However, it wasn't noted that it recommends significantly less stimulus in the second version, even though borrowing costs are significantly cheaper and getting to full employment is equally crucial for dealing with our deficits.

The first version recommends a payroll tax holiday of $650 billion. The new version calls for an income tax rebate of just $120 billion dollars (line 34). That's 80 percent less stimulus than in the original version, even though the price of providing stimulus has plummeted. Is getting to full employment suddenly less of a priority? We are still quite a ways away from there.

2. It Reuses "Down Payment" and Credibility Theories. A popular theory in 2010 was that any short-term stimulus needed to be paired with long-term deficit reduction. Why? Not for political reasons, like that being the only way to get either through Congress. It was because of strictly economic reasons. Without deficit reduction, the upfront stimulus would panic the financial markets, raising interest rates and canceling out the stimulus. (This ignores that rates would rise because the economy was getting stronger, but forget that.)

Here's Version 1.0, recommending "a short-term jump-start to growth and a commitment to long-term deficit reduction that makes stimulus credible." In Version 2.0 we get a similar claim: "Of course, this and any other policies that add to the short-term deficit should be paired with a long-term debt reduction agreement rather than be enacted in isolation." The authors also think that removing the fiscal cliff requires a "down payment" to satiate the markets for the time being.

Once again, it isn't clear what macroeconomic theory is animating the "of course" here other than a vague sense of credibility. To whatever extent that theory made sense in 2010, it's significantly less, ahem, credible now. The end of 2010 saw an increase in stimulus through extensions of the Bush tax cuts, unemployment insurance, and the payroll tax without any long-term deficit reduction, and there's no evidence it caused a market panic. Indeed, one of the sadder moments for President Obama's economic team was them walking through confidence fairy arguments during the debt ceiling fight in summer 2011, the logical end results of this credibility argument.

If we can pass stimulus right now, why don't we do it? Certainly Version 2.0 doesn't think Medicare changes must go with, say, their plans to adjust the COLA of Social Security. I'd say it's because making it clear that these are two separate issues with very different solutions keeps the Very Serious People from using manufactured short-term crises and mass unemployment to reengineer social insurance programs to do the things they want them to do. Regardless of whether you like those ideas, there's no reason to hold our current unemployed hostage in the process. And unfortunately for them, the capital markets for U.S. debt, one of the most liquid and transparent markets in the history of modern capitalism, agree. I'm still not hearing good reasons to ignore this big market movement from those still worried about the deficit as the major priority.

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New Inquiry's Drive; Twilight of the Bureaucratic Elite

Dec 3, 2012Mike Konczal

The New Inquiry is running a subscription drive for their $2/month pdf magazine and for keeping the site running and free. Given that their project is very different than this blog, I'm not sure how to recommend them. So here are some of my favorite 2012 items from them, which should give you a sense of whether or not you'd enjoy subscribing yourself.

Given that the project emphasizes younger voices outside institutions currently circling their wagons, a lot of their writing is more interesting and closer to the issues at hand than what you'd normally read. Atossa Abrahamian's piece on Going Lebron and Malcolm Harris' review of Julia Leigh’s film Sleeping Beauty are two of the more interesting pieces on youth unemployment I've read, particularly since they approach it from a much different angle than the normal stories. David Noriega's piece on serving as a Civilian Complaint Review Board investigator for the NYPD is again another way of understanding NYPD abuses outside the regular critique of abuses. I found Kate Redburn's piece on the GLBTQ case against hate crimes laws convincing and well-argued. Molly Knefel's piece reflecting on teaching and her brother's arrest was a fascinating look into dealing with the realities of policing and privilege. Freddie DeBoer's review of Twilight of the Elites was an aggressive, left-wing review unlikely to be seen at other venues. This excerpt (and interview) from Kate Zambreno's Heroines on the role of madness, gender and genius is brilliant. And Lili Loofbourow's review of the movie Brave was the best read of it I've seen.

There's a blogging sabermetrics element to the site, either publishing writers who are up-and-coming, giving talented people in other fields a space to write with good editing, or providing a more prominent home for some of the Internet's better bloggers. Aaron Bady, who had the best take on the Mike Daisey flap, found a new home for his zunguzungu blog there, as did other blogs I enjoy like those of Rob Horning and Austerity Kitchen. If you find this or other articles by them interesting, and are looking for new places to read, consider subscribing.

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While going through those New Inquiry articles, I re-read Freddie DeBoer's review of Chris Hayes's Twilight of the Elites. One of the challenges of the book is that Hayes doesn't actually want to tear down the meritocracy period or wage war against all institutions -- there's no "and good riddance" subtitle. I noticed that this is a postiive tension in my review of the book for Dissent, because it allows the book to come up with a model of how the meritocratic elite function in society and ways in which it fails, pointing to possible better ways.

But why the ambivalence? Freddie argues that mainstream liberals can't cope with the implications. They are used to proposing "a moderate, capitalism-sustaining set of policy proposals" because, either professionally or ideologically, "alternatives to capitalism are beyond the realms of acceptable discussion."

Maybe. Post-Dworkin, there's been a lot of energy in fleshing out a liberal project that is, to use the jargon, "ambition-sensitive and endowment-insensitive," so I don't think it is a complete blindspot. The book argues, following Robert Michels' arguments in Political Parties, that some level of stratification and power is inevitable to any sufficiently large and important enterprise. The important part is to have that stratification best embody democratic principles, particularly by resisting ossification, and keep the project as a search for and a process of democracy.

But I think the book gives a very clear and specific reason I haven't seen emphasized on why it thinks a meritocratic elite is necessary - we need it to combat global warming. From Twilight:

Certain political issues do not require elite mediation...that doesn't hold for global warming, which I would argue is the single most pressing challenge our civilization faces...Here, we need elites and experts to tell us it's happening and that we have to take steps to prevent it. Implementing corrective policy on the scale necessary requires, as a precondition, a robust and widely shared level of pubic trust that climate scientists and the political leaders who favor a carbon policy are telling us the truth. But the crisis of authority makes that impossible...

Progress is dependent upon a productive and dynamic tension between institutionalism and insurrectionism. Insurrectionists keep our institutions honest. Institutionalists are stewards of our collective public life...without the social cohesion that trusted institutions provide, we cannot produce the level of consensus necessary to confront our greatest challenges. I believe the most important of these is climate change.

Without functioning institutions, trustworthy because some ideal of merit is guiding credentials and access, we can't tackle global warming. We can't trust the scientists to diagnosis the problem, or the bureaucrats to carry out the policy solutions.

Abstracting away from the specifics of the book, I wonder how much a meritocratic elite is necessary for social democratic liberalism generally. If you are going to have a bureaucratic system determining access and pricing of health insurance, projecting the costs of old age pensions, determining what kinds of activities count as market-making for financial regulations, figuring out the costs of pollution, etc., you'll need some way of ensuring that this system is accountable and competent.

But, and here I think the book misses the opportunity to discuss this, does that require a meritocracy as we understand it? How does the need for good government policy carried out well square with, or contrast against, the winner-take-all form of meritocracy, where everything is collapsable into a combination of wealth and IQ? Competence, accountability, a spirit of public service, and dependability are missing from our elite, though they are values that are, or should be, prized in a bureaucracy.

I think I'm going to have to spend some time in 2013 coming up with a better working theory of the bureaucracy, especially how we want it to be. What features does it take from our meritocracy and, more importantly, in what ways can it serve as a corrective? Several people noted to me that the ethos of public service is one of the things missing from the paper I just wrote on the general case for public options, as a public service ethic is exactly what you don't get from private provisioning. What should I be reading?

 

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The New Inquiry is running a subscription drive for their $2/month pdf magazine and for keeping the site running and free. Given that their project is very different than this blog, I'm not sure how to recommend them. So here are some of my favorite 2012 items from them, which should give you a sense of whether or not you'd enjoy subscribing yourself.

Given that the project emphasizes younger voices outside institutions currently circling their wagons, a lot of their writing is more interesting and closer to the issues at hand than what you'd normally read. Atossa Abrahamian's piece on Going Lebron and Malcolm Harris' review of Julia Leigh’s film Sleeping Beauty are two of the more interesting pieces on youth unemployment I've read, particularly since they approach it from a much different angle than the normal stories. David Noriega's piece on serving as a Civilian Complaint Review Board investigator for the NYPD is again another way of understanding NYPD abuses outside the regular critique of abuses. I found Kate Redburn's piece on the GLBTQ case against hate crimes laws convincing and well-argued. Molly Knefel's piece reflecting on teaching and her brother's arrest was a fascinating look into dealing with the realities of policing and privilege. Freddie DeBoer's review of Twilight of the Elites was an aggressive, left-wing review unlikely to be seen at other venues. This excerpt (and interview) from Kate Zambreno's Heroines on the role of madness, gender and genius is brilliant. And Lili Loofbourow's review of the movie Brave was the best read of it I've seen.

There's a blogging sabermetrics element to the site, either publishing writers who are up-and-coming, giving talented people in other fields a space to write with good editing, or providing a more prominent home for some of the Internet's better bloggers. Aaron Bady, who had the best take on the Mike Daisey flap, found a new home for his zunguzungu blog there, as did other blogs I enjoy like those of Rob Horning and Austerity Kitchen. If you find this or other articles by them interesting, and are looking for new places to read, consider subscribing.

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While going through those New Inquiry articles, I re-read Freddie DeBoer's review of Chris Hayes's Twilight of the Elites. One of the challenges of the book is that Hayes doesn't actually want to tear down the meritocracy period or wage war against all institutions -- there's no "and good riddance" subtitle. I noticed that this is a postiive tension in my review of the book for Dissent, because it allows the book to come up with a model of how the meritocratic elite function in society and ways in which it fails, pointing to possible better ways.

But why the ambivalence? Freddie argues that mainstream liberals can't cope with the implications. They are used to proposing "a moderate, capitalism-sustaining set of policy proposals" because, either professionally or ideologically, "alternatives to capitalism are beyond the realms of acceptable discussion."

Maybe. Post-Dworkin, there's been a lot of energy in fleshing out a liberal project that is, to use the jargon, "ambition-sensitive and endowment-insensitive," so I don't think it is a complete blindspot. The book argues, following Robert Michels' arguments in Political Parties, that some level of stratification and power is inevitable to any sufficiently large and important enterprise. The important part is to have that stratification best embody democratic principles, particularly by resisting ossification, and keep the project as a search for and a process of democracy.

But I think the book gives a very clear and specific reason I haven't seen emphasized on why it thinks a meritocratic elite is necessary - we need it to combat global warming. From Twilight:

Certain political issues do not require elite mediation...that doesn't hold for global warming, which I would argue is the single most pressing challenge our civilization faces...Here, we need elites and experts to tell us it's happening and that we have to take steps to prevent it. Implementing corrective policy on the scale necessary requires, as a precondition, a robust and widely shared level of pubic trust that climate scientists and the political leaders who favor a carbon policy are telling us the truth. But the crisis of authority makes that impossible...

Progress is dependent upon a productive and dynamic tension between institutionalism and insurrectionism. Insurrectionists keep our institutions honest. Institutionalists are stewards of our collective public life...without the social cohesion that trusted institutions provide, we cannot produce the level of consensus necessary to confront our greatest challenges. I believe the most important of these is climate change.

Without functioning institutions, trustworthy because some ideal of merit is guiding credentials and access, we can't tackle global warming. We can't trust the scientists to diagnosis the problem, or the bureaucrats to carry out the policy solutions.

Abstracting away from the specifics of the book, I wonder how much a meritocratic elite is necessary for social democratic liberalism generally. If you are going to have a bureaucratic system determining access and pricing of health insurance, projecting the costs of old age pensions, determining what kinds of activities count as market-making for financial regulations, figuring out the costs of pollution, etc., you'll need some way of ensuring that this system is accountable and competent.

But, and here I think the book misses the opportunity to discuss this, does that require a meritocracy as we understand it? How does the need for good government policy carried out well square with, or contrast against, the winner-take-all form of meritocracy, where everything is collapsable into a combination of wealth and IQ? Competence, accountability, a spirit of public service, and dependability are missing from our elite, though they are values that are, or should be, prized in a bureaucracy.

I think I'm going to have to spend some time in 2013 coming up with a better working theory of the bureaucracy, especially how we want it to be. What features does it take from our meritocracy and, more importantly, in what ways can it serve as a corrective? Several people noted to me that the ethos of public service is one of the things missing from the paper I just wrote on the general case for public options, as a public service ethic is exactly what you don't get from private provisioning. What should I be reading?

 

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New Paper: Against the Coupon State

Dec 3, 2012Mike Konczal

Imagine if current neoliberal policymakers had to sit down today and invent the idea of a library. What would it look like? They'd likely create a tax credit to subsidize the purchasing and reselling of books, like much of our submerged welfare state. They might require a mandate for people to rent books from approved private libraries run by Amazon or Barnes and Noble, with penalties for those who don’t and vouchers for those who can’t afford it, like the recent health care expansion. 

Or maybe they’d create means-tested libraries only accessible to the poor, with a requirement that the patrons document how impoverished they are month after month to keep their library card. Maybe they’d also exempt the cost of private library cards from payroll taxes. Or let any private firm calling itself a library pay nothing in taxes while exempting their bonds from taxation and insuring their losses by, say, paying for books that go missing. You can imagine them going through every possible option rather than the old-fashioned, straightforward, public library, open to all, provided and run by the government, that our country enjoys everyday.
 
I have a new white paper out with New America's "Renewing the American Social Contract" series, titled "No Discount: Comparing the Public Option to the Coupon Welfare State." Here's the introduction, and here's the full pdf.
 
Given that the state wants to provide a certain good, I wanted to find the arguments over whether or not the government should provide that good itself or provide coupons for purchases in the private market. Surprisingly, there were few cohensive summaries, so I created one myself. Though not explicitly stated, It's relevant for discussions over whether or not the welfare state should be entirely replaced with cash (the ultimate coupon).
The rest of the papers in the series are very much worth your time too. I hope you check them out. Mine starts out with:
 
The fundamental ideological conflict surrounding the Welfare State in the U.S. is no longer over the scope of government, but instead how the government carries out its responsibilities and delivers services. The conservative and neoliberal vision is one of a government that provides a comparable range of benefits as conventional liberals, but rather than designing and delivering the services directly, it provides coupons for citizens. Coupons – whether by that name or more anodyne terms such as “vouchers” or “premium support” or tax subsidies – could then be used to purchase the services in the private market. Whenever neoliberals have sought to expand the scope of the welfare state or conservatives have tried to fundamentally shrink it, both have come bearing coupons.
 
Read the rest at New America.
 
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Imagine if current neoliberal policymakers had to sit down today and invent the idea of a library. What would it look like? They'd likely create a tax credit to subsidize the purchasing and reselling of books, like much of our submerged welfare state. They might require a mandate for people to rent books from approved private libraries run by Amazon or Barnes and Noble, with penalties for those who don’t and vouchers for those who can’t afford it, like the recent health care expansion. 

Or maybe they’d create means-tested libraries only accessible to the poor, with a requirement that the patrons document how impoverished they are month after month to keep their library card. Maybe they’d also exempt the cost of private library cards from payroll taxes. Or let any private firm calling itself a library pay nothing in taxes while exempting their bonds from taxation and insuring their losses by, say, paying for books that go missing. You can imagine them going through every possible option rather than the old-fashioned, straightforward, public library, open to all, provided and run by the government, that our country enjoys everyday.
 
I have a new white paper out with New America's "Renewing the American Social Contract" series, titled "No Discount: Comparing the Public Option to the Coupon Welfare State." Here's the introduction, and here's the full pdf.
 
Given that the state wants to provide a certain good, I wanted to find the arguments over whether or not the government should provide that good itself or provide coupons for purchases in the private market. Surprisingly, there were few cohensive summaries, so I created one myself. Though not explicitly stated, It's relevant for discussions over whether or not the welfare state should be entirely replaced with cash (the ultimate coupon).
The rest of the papers in the series are very much worth your time too. I hope you check them out. Mine starts out with:
 
The fundamental ideological conflict surrounding the Welfare State in the U.S. is no longer over the scope of government, but instead how the government carries out its responsibilities and delivers services. The conservative and neoliberal vision is one of a government that provides a comparable range of benefits as conventional liberals, but rather than designing and delivering the services directly, it provides coupons for citizens. Coupons – whether by that name or more anodyne terms such as “vouchers” or “premium support” or tax subsidies – could then be used to purchase the services in the private market. Whenever neoliberals have sought to expand the scope of the welfare state or conservatives have tried to fundamentally shrink it, both have come bearing coupons.
 
Read the rest at New America.
 
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Following Walmart and Black Friday

Nov 21, 2012Mike Konczal

My colleague Dorian Warren describes what is going on with Walmart in the video above and here.

Here's a list of events and ways to particpate by standing with Walmart on Black Friday. I encourage you to check it out.

Josh Eidelson has been a must read on this topic. Read him at his new Nation blog here, and follow him on twitter here.

Also, I enjoyed reading Sarah Jaffe reporting at the Guardian, and Seth Ackerman talking about Walmart via Hostess here.

My colleague Dorian Warren describes what is going on with Walmart in the video above and here.

Here's a list of events and ways to particpate by standing with Walmart on Black Friday. I encourage you to check it out.

Josh Eidelson has been a must read on this topic. Read him at his new Nation blog here, and follow him on twitter here.

Also, I enjoyed reading Sarah Jaffe reporting at the Guardian, and Seth Ackerman talking about Walmart via Hostess here.

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Are We at the End of the Welfare State?

Nov 21, 2012Mike Konczal

I have a piece at the American Prospect, The Great Society's Next Frontier, about potential futures for the welfare state. It attempts to answer the question over whether or not the passage of Obamacare means that the welfare state is now complete.

I have a piece at the American Prospect, The Great Society's Next Frontier, about potential futures for the welfare state. It attempts to answer the question over whether or not the passage of Obamacare means that the welfare state is now complete. If we take the project of American liberalism to be Keynesian economics, plus the mixed economy, plus social insurance, plus political liberalism, can we check the social insurance part as complete? I decided to ask several scholars of the welfare state what they see as potential steps in the decades ahead, and lay out their answers.

The "completed welfare state" usually means a few different things. One is that the major committments of social insurance are now determined, and it is just a matter how broadly or narrowly to construe those committments. That's many people's answer for the issue. Dylan Matthews gave a similar answer on bloggingheads recently, noting that things like universal pre-K will fall out of our obligations to provide universal K-12 schooling. Many of the changes experts in the piece proposed were extensions of already functioning programs, like the EITC or unemployment insurance or expanding K-12 schooling to a younger age.

Another is that the level of expenditure and revenue is set for the near future, so if social insurance is expanded it'll require a more fundamental change in what we are willing to pay for our government. And indeed many of the debates going forward will be about spending less than projected on health care through controlling costs, or changing how we fund things, such as taking the tax expenditures for 401(k)s and making them more progressive. There are many things that don't require changing the level of expenditure and revenue, such as raising the minimum wage (which compliments the EITC quite well). This is one reason we may see more of a focus on "predistribution" policy in the years ahead.

I wanted to add this point from Envisioning Real Utopias about a basic income, but also pertains to both the minimum wage and things like Demos' call for raising retail wages. In addition to reducing coercion as workers aren't separated from the means of subsistence, eliminating poverty without creating the major pathologies of means-tested anti-poverty transfers, recognizing the value of decommodified care-giving activities and subsidizing the social and cooperative market economies, a basic income also does the following:

Second, universal basic income is likely to generate greater egalitarianism within labor markets. If workers are more able to refuse employment, wages for unpleasant work are likely to increase relative to wages for highly enjoyable work. The wage structure in labor markets, therefore, will begin to reflect more systematically the relative disutility of different kinds of labor rather than simply the relative scarcity of different kinds of labor power. This, in turn, will generate an incentive structure for employers to seek technical and organizational innovations that eliminate unpleasant work. Technical change would therefore have not just a labor-saving bias, but a labor-humanizing bias.
This connection between cheap labor and technology change is a constant theme of Peter Frase, who mentioned the Prospect piece in a recent post.
 
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