The Rules are What Matter for Inequality: Our New Report

May 12, 2015Mike Konczal

I’m very excited to announce the release of “Rewriting the Rules of the American Economy” (pdf report), Roosevelt Institute’s new inequality agenda report by Joe Stiglitz. I’m thrilled to be one of the co-authors, as I think this report really tells a compelling story about inequality and the challenges the economy faces.

Recently there’s been a lot of discussion about a “new” conventional wisdom (“a force to be reckoned with” according to one observer), one in which choices about the rules of the economy are a major driver of the outcomes we see. This is in contrast to the normal narrative about inequality we hear, one in which globalization, technology, or individual choices are the only important parts. I like to think this report is a major advancement in this discussion, bringing together the best recent research on this topic.

As we argue, inequality is not inevitable: it is a choice that we’ve made with the rules that structure our economy. Over the past 35 years, the rules, or the regulatory, legal and institutional frameworks, that make up the economy and condition the market have changed. These rules are a major driver of the income distribution we see, including runaway top incomes and weak or precarious income growth for most others. Crucially, however, these changes in the rules have not made our economy better off than we would be otherwise; in many cases we are weaker for these changes. We also now know that “deregulation” is, in fact, “reregulation”—that is, a new set of rules for governing the economy that favor a specific set of actors, and that there's no way out of these difficult choices. But what were these changes?

Financial deregulation exploded both the size of finance and its incomes, roughly doubling the share of finance in the top 1 percent. However, finance grew as a result of intermediating credit in a “shadow banking” sector, which led to disastrous results. It also grew from asset management, a field in which pay is often determined by luck and by fees driven by the increasing prevalence of opaque alternative investment vehicles like hedge funds. For all the resources it uses, finance is no more efficient than it was a century ago.

Corporate governance also radically changed during this period, led by public policy decisions. CEO pay fundamentally shifted toward a high pay model in the 1980s. The shareholder revolution also changed the nature of investment. We now see finance acting as a mechanism for getting money out of firms rather than into them; similarly, private firms are investing more than public firms. CEOs regularly use buybacks to hit earnings targets and say they’d rather hit accounting goals than invest long-term, indicating that short-termism is now a serious problem for investment and its positive spillovers.

High marginal tax rates were cut, but there’s no evidence that the high-end marginal tax rate has any effect on growth; cutting it does, however, raise the share of income the top 1 percent takes home. Low taxes don’t just make the equalizing effects of taxes weaker; they also mean that CEOs and other executives in the top 1 percent have more of an incentive to bargain aggressively with boards or seek opportunities for extracting rents, all zero-sum games for the economy. Lowering capital taxes showed no impact on higher investment, but a positive effect on increased capital payouts; capital income growth is one of the main drivers of inequality during this time period.

During this time, the Federal Reserve’s focus moved toward low and stable inflation at the cost of higher unemployment. Unemployment from weak Federal Reserve action rises the most for low-skilled and minority workers. Inequality generally doesn’t come down unless unemployment is below 6 percent, and this has become less of a priority.

The rules changed, or were not updated, for the labor market as well. Decreasing unionization has taken a toll on workers’ wages. Men’s inequality, in particular, has risen due to collapsing unionization rates. Women’s inequality has suffered due to a falling minimum wage, which went from 54 percent of the average hourly wage in the late 1960s to just 35 percent now. Labor market protections and institutions that give workers voice and power, in general, have not been updated for a new world of service and care work.

Though not an effective driver of lower crime rates, a dramatic turn toward mass and punitive incarceration has reduced the employment prospects for millions of Americans, especially people of color. In particular, there’s a dense web of discriminatory codes for those with a record, which pushes them toward second-class citizenship. One estimate finds 38,000 such punitive statutes, with most of them related to employment and having no end date.

Our institutions and rules haven’t been updated to fully facilitate women’s ability to participate in the labor force. As a result of gender discrimination in the workplace, lack of paid sick and family leave, and the unavailability of affordable child care, women’s participation in the U.S. labor force has declined over the past 15 years, while it increased in most other OECD countries.

Many people agree inequality is a challenge, but would say that this is all driven by technology and globalization. We discuss this at length in the report, but we don’t find these traditional stories either convincing, in the case of technology, or sufficient, in the case of globalization. Both of these forces are playing out, in quite similar ways, in other advanced countries, whose growth of inequality nowhere mirrors our own. Technology and globalization don’t fall from the sky, but instead are determined in important ways by rules and institutions. This is especially important in the era of free trade agreements, which are really managed trade agreements. These agreements are less about trade and more about the regulatory environment corporations face.

But rules matter even in these straightforward stories about supply and demand for labor. Advancements in search theory tell us that supply and demand, rather than strictly determining wages, instead place boundaries or endzones on where wages can go. What determines where wages fall within those boundaries is a whole host of economic rules, including bargaining power, institutions, and social conventions. Even in the strong version of these arguments, the rules matter.

This report describes what has happened, going far deeper than this summary here. It also has a policy agenda focused on both taming the top and growing the rest of the economy. Some may emphasize some pieces more than others; but no matter what this argument about the rules is what is missing in the current debates over the economy. I hope you get a chance to check out the report!

Follow or contact the Rortybomb blog:
 
  

 

I’m very excited to announce the release of “Rewriting the Rules of the American Economy” (pdf report), Roosevelt Institute’s new inequality agenda report by Joe Stiglitz. I’m thrilled to be one of the co-authors, as I think this report really tells a compelling story about inequality and the challenges the economy faces.

Recently there’s been a lot of discussion about a “new” conventional wisdom (“a force to be reckoned with” according to one observer), one in which choices about the rules of the economy are a major driver of the outcomes we see. This is in contrast to the normal narrative about inequality we hear, one in which globalization, technology, or individual choices are the only important parts. I like to think this report is a major advancement in this discussion, bringing together the best recent research on this topic.

As we argue, inequality is not inevitable: it is a choice that we’ve made with the rules that structure our economy. Over the past 35 years, the rules, or the regulatory, legal and institutional frameworks, that make up the economy and condition the market have changed. These rules are a major driver of the income distribution we see, including runaway top incomes and weak or precarious income growth for most others. Crucially, however, these changes in the rules have not made our economy better off than we would be otherwise; in many cases we are weaker for these changes. We also now know that “deregulation” is, in fact, “reregulation”—that is, a new set of rules for governing the economy that favor a specific set of actors, and that there's no way out of these difficult choices. But what were these changes?

Financial deregulation exploded both the size of finance and its incomes, roughly doubling the share of finance in the top 1 percent. However, finance grew as a result of intermediating credit in a “shadow banking” sector, which led to disastrous results. It also grew from asset management, a field in which pay is often determined by luck and by fees driven by the increasing prevalence of opaque alternative investment vehicles like hedge funds. For all the resources it uses, finance is no more efficient than it was a century ago.

Corporate governance also radically changed during this period, led by public policy decisions. CEO pay fundamentally shifted toward a high pay model in the 1980s. The shareholder revolution also changed the nature of investment. We now see finance acting as a mechanism for getting money out of firms rather than into them; similarly, private firms are investing more than public firms. CEOs regularly use buybacks to hit earnings targets and say they’d rather hit accounting goals than invest long-term, indicating that short-termism is now a serious problem for investment and its positive spillovers.

High marginal tax rates were cut, but there’s no evidence that the high-end marginal tax rate has any effect on growth; cutting it does, however, raise the share of income the top 1 percent takes home. Low taxes don’t just make the equalizing effects of taxes weaker; they also mean that CEOs and other executives in the top 1 percent have more of an incentive to bargain aggressively with boards or seek opportunities for extracting rents, all zero-sum games for the economy. Lowering capital taxes showed no impact on higher investment, but a positive effect on increased capital payouts; capital income growth is one of the main drivers of inequality during this time period.

During this time, the Federal Reserve’s focus moved toward low and stable inflation at the cost of higher unemployment. Unemployment from weak Federal Reserve action rises the most for low-skilled and minority workers. Inequality generally doesn’t come down unless unemployment is below 6 percent, and this has become less of a priority.

The rules changed, or were not updated, for the labor market as well. Decreasing unionization has taken a toll on workers’ wages. Men’s inequality, in particular, has risen due to collapsing unionization rates. Women’s inequality has suffered due to a falling minimum wage, which went from 54 percent of the average hourly wage in the late 1960s to just 35 percent now. Labor market protections and institutions that give workers voice and power, in general, have not been updated for a new world of service and care work.

Though not an effective driver of lower crime rates, a dramatic turn toward mass and punitive incarceration has reduced the employment prospects for millions of Americans, especially people of color. In particular, there’s a dense web of discriminatory codes for those with a record, which pushes them toward second-class citizenship. One estimate finds 38,000 such punitive statutes, with most of them related to employment and having no end date.

Our institutions and rules haven’t been updated to fully facilitate women’s ability to participate in the labor force. As a result of gender discrimination in the workplace, lack of paid sick and family leave, and the unavailability of affordable child care, women’s participation in the U.S. labor force has declined over the past 15 years, while it increased in most other OECD countries.

Many people agree inequality is a challenge, but would say that this is all driven by technology and globalization. We discuss this at length in the report, but we don’t find these traditional stories either convincing, in the case of technology, or sufficient, in the case of globalization. Both of these forces are playing out, in quite similar ways, in other advanced countries, whose growth of inequality nowhere mirrors our own. Technology and globalization don’t fall from the sky, but instead are determined in important ways by rules and institutions. This is especially important in the era of free trade agreements, which are really managed trade agreements. These agreements are less about trade and more about the regulatory environment corporations face.

But rules matter even in these straightforward stories about supply and demand for labor. Advancements in search theory tell us that supply and demand, rather than strictly determining wages, instead place boundaries or endzones on where wages can go. What determines where wages fall within those boundaries is a whole host of economic rules, including bargaining power, institutions, and social conventions. Even in the strong version of these arguments, the rules matter.

This report describes what has happened, going far deeper than this summary here. It also has a policy agenda focused on both taming the top and growing the rest of the economy. Some may emphasize some pieces more than others; but no matter what this argument about the rules is what is missing in the current debates over the economy. I hope you get a chance to check out the report!

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What John Oliver Can Tell Us about Foreclosure Fraud, Sweat Boxes and the Profit Motive

Mar 26, 2015Mike Konczal

John Oliver dedicated his main segment on last Sunday’s episode to the epidemic of municipal fees. He walks through several stories about tickets and citations that are overpriced and end up being more expensive for poor people because of a series of burdensome fees. This was one of the conclusions of the Justice Department’s report on Ferguson, which argued that “law enforcement practices are shaped by the City’s focus on revenue rather than by public safety needs.”

Oliver had a memorable phrase to describe how this system catches people and won’t let them go: he called it a “f*** barrel,” and started a NSFW hashtag on Twitter to draw attention to it.

But I had actually heard a similar (and safe-for-work) phrase for this years ago: the “sweat box.” Law professor Ronald Mann coined it in 2006 to describe how the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) would affect consumer debt, and it applies to the criminal justice system now. The problems with this system also sound like the problems in mortgage debt servicing, which has been a focus here. It turns out that these issues are generalizable, and they illustrate some of the real dilemmas with privatization and introducing the profit-motive into the public realm.

The Sweat Box

First, the barrel/box. Credit card companies and other creditors really wanted BAPCPA to become law. But why? Mann argued that the act wouldn’t reduce risky borrowing, reduce the number of bankruptcies, or increase the recoveries these companies got in bankruptcy.

But what it would do is make it harder to start a bankruptcy, thanks to a wide variety of delaying tactics. The act did this “by raising filing fees, but also by lengthening the period between permitted filings and by imposing administrative hurdles related to credit counseling, debt relief agencies, and attorney certifications.” This kept distressed debtors in a period where they faced high fees and high interest payments, which would allow the credit card companies to collect additional revenue. Instead of trying to alter bankruptcy on the front or back ends, what it really did was give consumers fewer options and more confusion in the middle. It trapped them in a box (or over a barrel, if you will).

Mortgage Servicing

But this also sounds familiar to those watching the scandals taking place in servicer fraud as the foreclosure crisis unfolded over the past seven years. Servicers are the delegated, third-party managers of debts, particularly mortgage securitizations but also student debt. They sound disturbingly similar to the companies Oliver describes as managing municipal fees.

As Adam Levitin and Tara Twomey have argued, third-party servicing introduces three major agency problems. The first is that servicers are incentivized to pad costs, as costs are their revenues, even at the expense of everyone else. The second is that they will often pursue their own goals and objectives as the expense of other options, especially when they don’t ultimately care about the overall goals of those who hire them. And a third problem is that when problems do occur, they are often incentivized to drag them out rather than resolve them the best way possible.

Among other heart-breaking stories, Oliver walks through the story of Harriet Cleveland, who had unpaid parking tickets with Montgomery, Alabama. Montgomery, however, outsourced the management of this debt to Judicial Correction Services (JCS). JCS followed this script perfectly.

JCS had every reason to increase its fees and keep them at a burdensome rate, as it was to be paid first. It was completely indifferent to public notions of the county that hired it, such as proportional justice or the cost-benefit ratio of incarceration, such that they threw Cleveland in jail once she couldn’t handle the box anymore. And it economically benefited from keeping Cleveland in the sweat box as long as possible, rather than trying to find some way to actually resolve the tickets.

For those watching the mortgage servicing industry during the foreclosure crisis, this is a very similar story. Mortgage servicers can pyramid nuisance fees knowing that, even if the loan goes into foreclosure when the debtor can’t handle the box, they will be paid first. They are ultimately indifferent to the private notion of maximizing the value of the loan for investors, so much so that, compared to traditional banks that hold loans directly, servicers are less likely to do modifications and do them in a way that will work out. And servicers will often refuse to make good modifications that would get the mortgage current, because doing so can reduce the principal that forms the basis of their fees.

The Perils of the Profit Motive

There are three elements to draw out here. The first is that these problems are significantly worse for vulnerable populations, particularly those whose exit options are limited by background economic institutions like backruptcy or legal defense. The second is that many of our favorite buzzword policy goals, be they privatization of public services or the market-mediation of credit, involve piling on more and more of these third-party agents whose interests and powers aren’t necessarily aligned with what those who originally hired them expected. Assuming good faith for a second, privatization of these carceral services by municipalities requires a level of control of third-party agents that even the geniuses on Wall Street haven’t been able to pull off.

But we see the sweat box when it comes to purely public mechanisms too, as we see in Ferguson. So the third takeaway is that this is what happens when the profit motive is introduced in places where it normally doesn’t exist. Introducing the profit motive requires delegation and coordination, and it can often cause far more chaos than whatever efficiencies it is meant to produce. Traditional banking serviced mortgage debts as part of the everyday functions within the firm. Putting that function outside the firm, where the profit-motive was meant to increase efficiency, also created profit-driven incentives to find ways to abuse that gap in accountability.

The same dynamics come into play with the profit motive is reintroduced into the municipal level. Our government ran under the profit motive through the 1800s, and it was a major political struggle to change that. Municipal fees are very much part of the reintroduction of the profit motive into city services. As libertarian scholar and Reason Foundation co-founder Robert Poole wrote in 1980 regarding municipal court costs, “Make the users (i.e., the criminals) pay the costs, wherever possible.” As Sarah Stillman found, this is what an “offender-funded” justice system, one that aims “to shift the financial burden of probation directly onto probationers,” looks like now as for-profit carceral service providers shift their businesses to probation and parole. Catherine Rampell reports this as a total shift away from taxes and towards fees for public revenues, and the data shows it.

This is the model of the state as a business providing services, one in which those who use or abuse its functions should fund it directly. And it’s a system that can’t shake the conflicts inherent whenever the profit motive appear.

Follow or contact the Rortybomb blog:
 
  

 

John Oliver dedicated his main segment on last Sunday’s episode to the epidemic of municipal fees. He walks through several stories about tickets and citations that are overpriced and end up being more expensive for poor people because of a series of burdensome fees. This was one of the conclusions of the Justice Department’s report on Ferguson, which argued that “law enforcement practices are shaped by the City’s focus on revenue rather than by public safety needs.”

Oliver had a memorable phrase to describe how this system catches people and won’t let them go: he called it a “f*** barrel,” and started a NSFW hashtag on Twitter to draw attention to it.

But I had actually heard a similar (and safe-for-work) phrase for this years ago: the “sweat box.” Law professor Ronald Mann coined it in 2006 to describe how the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) would affect consumer debt, and it applies to the criminal justice system now. The problems with this system also sound like the problems in mortgage debt servicing, which has been a focus here. It turns out that these issues are generalizable, and they illustrate some of the real dilemmas with privatization and introducing the profit-motive into the public realm.

The Sweat Box

First, the barrel/box. Credit card companies and other creditors really wanted BAPCPA to become law. But why? Mann argued that the act wouldn’t reduce risky borrowing, reduce the number of bankruptcies, or increase the recoveries these companies got in bankruptcy.

But what it would do is make it harder to start a bankruptcy, thanks to a wide variety of delaying tactics. The act did this “by raising filing fees, but also by lengthening the period between permitted filings and by imposing administrative hurdles related to credit counseling, debt relief agencies, and attorney certifications.” This kept distressed debtors in a period where they faced high fees and high interest payments, which would allow the credit card companies to collect additional revenue. Instead of trying to alter bankruptcy on the front or back ends, what it really did was give consumers fewer options and more confusion in the middle. It trapped them in a box (or over a barrel, if you will).

Mortgage Servicing

But this also sounds familiar to those watching the scandals taking place in servicer fraud as the foreclosure crisis unfolded over the past seven years. Servicers are the delegated, third-party managers of debts, particularly mortgage securitizations but also student debt. They sound disturbingly similar to the companies Oliver describes as managing municipal fees.

As Adam Levitin and Tara Twomey have argued, third-party servicing introduces three major agency problems. The first is that servicers are incentivized to pad costs, as costs are their revenues, even at the expense of everyone else. The second is that they will often pursue their own goals and objectives as the expense of other options, especially when they don’t ultimately care about the overall goals of those who hire them. And a third problem is that when problems do occur, they are often incentivized to drag them out rather than resolve them the best way possible.

Among other heart-breaking stories, Oliver walks through the story of Harriet Cleveland, who had unpaid parking tickets with Montgomery, Alabama. Montgomery, however, outsourced the management of this debt to Judicial Correction Services (JCS). JCS followed this script perfectly.

JCS had every reason to increase its fees and keep them at a burdensome rate, as it was to be paid first. It was completely indifferent to public notions of the county that hired it, such as proportional justice or the cost-benefit ratio of incarceration, such that they threw Cleveland in jail once she couldn’t handle the box anymore. And it economically benefited from keeping Cleveland in the sweat box as long as possible, rather than trying to find some way to actually resolve the tickets.

For those watching the mortgage servicing industry during the foreclosure crisis, this is a very similar story. Mortgage servicers can pyramid nuisance fees knowing that, even if the loan goes into foreclosure when the debtor can’t handle the box, they will be paid first. They are ultimately indifferent to the private notion of maximizing the value of the loan for investors, so much so that, compared to traditional banks that hold loans directly, servicers are less likely to do modifications and do them in a way that will work out. And servicers will often refuse to make good modifications that would get the mortgage current, because doing so can reduce the principal that forms the basis of their fees.

The Perils of the Profit Motive

There are three elements to draw out here. The first is that these problems are significantly worse for vulnerable populations, particularly those whose exit options are limited by background economic institutions like backruptcy or legal defense. The second is that many of our favorite buzzword policy goals, be they privatization of public services or the market-mediation of credit, involve piling on more and more of these third-party agents whose interests and powers aren’t necessarily aligned with what those who originally hired them expected. Assuming good faith for a second, privatization of these carceral services by municipalities requires a level of control of third-party agents that even the geniuses on Wall Street haven’t been able to pull off.

But we see the sweat box when it comes to purely public mechanisms too, as we see in Ferguson. So the third takeaway is that this is what happens when the profit motive is introduced in places where it normally doesn’t exist. Introducing the profit motive requires delegation and coordination, and it can often cause far more chaos than whatever efficiencies it is meant to produce. Traditional banking serviced mortgage debts as part of the everyday functions within the firm. Putting that function outside the firm, where the profit-motive was meant to increase efficiency, also created profit-driven incentives to find ways to abuse that gap in accountability.

The same dynamics come into play with the profit motive is reintroduced into the municipal level. Our government ran under the profit motive through the 1800s, and it was a major political struggle to change that. Municipal fees are very much part of the reintroduction of the profit motive into city services. As libertarian scholar and Reason Foundation co-founder Robert Poole wrote in 1980 regarding municipal court costs, “Make the users (i.e., the criminals) pay the costs, wherever possible.” As Sarah Stillman found, this is what an “offender-funded” justice system, one that aims “to shift the financial burden of probation directly onto probationers,” looks like now as for-profit carceral service providers shift their businesses to probation and parole. Catherine Rampell reports this as a total shift away from taxes and towards fees for public revenues, and the data shows it.

This is the model of the state as a business providing services, one in which those who use or abuse its functions should fund it directly. And it’s a system that can’t shake the conflicts inherent whenever the profit motive appear.

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Four Ways to Prune a Rose: Why the NYT Missed the Mark on the Inequality Debate

Feb 19, 2015Eric Harris Bernstein

On Tuesday, the New York Times' data-minded blog The Upshot posted an article reporting on an inequality study performed by Georgetown University's Stephen J. Rose. The article's title boldly stated that "Inequality Has Actually Not Risen Since the Financial Crisis."

On Tuesday, the New York Times' data-minded blog The Upshot posted an article reporting on an inequality study performed by Georgetown University's Stephen J. Rose. The article's title boldly stated that "Inequality Has Actually Not Risen Since the Financial Crisis."

Although the study's analysis is mathematically correct, the study is framed and conducted in a way that makes its findings irrelevant to the larger discussion of inequality in America. Here's why:

1.    Rose's study examines income and ignores wealth, which is actually the most stark indicator of inequality in America today; the top 10 percent owns 93 percent of all stocks and 61.9 percent of all wealth. This is equivalent to judging someone's wealth by looking at their paychecks without considering the value and appreciation of the businesses, houses, cars, and bank accounts that are also in their name.

2.    Rose's analysis ends in 2011, so he does not consider the ongoing recovery, the majority benefits of which are once again going to the very wealthy.

3.    The current inequality dialogue, championed by Capital author Thomas Piketty and Roosevelt Institute Senior Fellow and Chief Economist Joseph Stiglitz, specifies that wealth is the primary driver of inequality, so singling out income makes the Rose study irrelevant to the important public discourse going on today.

4.    Even if we were to accept the income-only study as valid, there are many facts that call Rose's findings into question:

  • The income group he describes fell from a record historical high to a slightly lower historical high.
  • Higher incomes have continued to recover since the study's statistical conclusion.
  • The primary reason lower incomes didn't fall further is that they were bolstered by government transfers (see chart and caption below).

Rose examines post-tax-and-transfer figures rather than pre-tax-and-transfer figures and argues that this supports his thesis of declining inequality. In fact, the difference is largely due to the rising number of individuals who paid less taxes and qualified for more government benefits due to their loss of income. A greater number of people dependent on government assistance would not fit most definitions of a reduction in inequality.

Eric Bernstein is a Program Associate at the Roosevelt Institute.

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Did Ending Unemployment Insurance Extensions Really Create 1.8 Million Jobs?

Jan 27, 2015Mike Konczal

According to a new study by Marcus Hagedorn, Iourii Manovskii and Kurt Mitman (HMM), Congress failing to reauthorized the extension of unemployment insurance (UI) resulted in 1.8 million additional people getting jobs. But wait, how does that happen when only 1.3 million people had their benefits expire?

The answer is by going off the normal path of these arguments in models, techniques and data. The paper has a nice write-up by Patrick Brennan here, but it’s one that doesn’t convey how different this paper is compared to the vast majority of the research. The authors made a well-criticized splash in 2013 by arguing that most of the rise in unemployment in the Great Recession was UI-driven; this new paper is a continuation of that approach.

Gold Standard Model. Before we go further, let’s understand what the general standard in UI research looks like. The model here is that UI makes it easier for workers to pass up job offers. As a result they’ll take a longer time to find a job, which creates a larger pool of unemployed people, raising unemployment. In order to test this, researchers use longitudinal data for individuals to compare the length of job searches for individuals who receive UI with those who do not.

This is the standard in the two biggest UI studies from the Great Recession. Both essentially use individuals not receiving UI as a control group to see what getting UI does for people’s job searches over time. Jesse Rothstein (2011) found that UI raised unemployment “by only about 0.1 to 0.5 percentage point.” Using a similar approach, Farber and Valletta (2013) later found “UI increased the overall unemployment rate by only about 0.4 percentage points.” These are generally accepted estimated.

And though small, they are real numbers. The question then becomes an analysis of the trade-offs between this higher unemployment and the positive effects of unemployment insurance, including income support, increased aggregate demand and the increased efficiency of people taking enough time to get the best job for them.

This is not what HMM do in their research. Either in terms of their data, which doesn’t look at any individuals, or their model, which tells a much different story than what we traditionally understand, or their techniques, which add additional problems. Let’s start with the model.

Model Problems. The results HMM get are radically higher than these other studies. They argue that this is because they look at the “macro” effects of unemployment insurance. Instead of just people searching for a job, they argue that labor-search models show that employers must boost the wages of workers and create fewer job openings as a result of unemployment insurance tightening the labor market.

But in their study HMM only look at aggregate employment. If these labor search dynamics were the mechanism, there should be something in the paper about actual wage data or job openings moving in response to this change. There is not. Indeed, their argument hinges entirely on the idea that the labor market was too tight, with workers having too much bargaining power, in 2010-2013. The end of UI finally relaxed this. If that’s the case, then where are the wage declines and corporate profit gains in 2014?

This isn’t an esoteric discussion. They are, in effect, taking a residual and calling it the “macro” effect of UI. But we shouldn’t take it for granted that search models can confirm these predictions without a lot of different types of evidence; as Marshall Steinbaum wrote in his appreciation of these models, when it comes to business cycles and wages predictions they are “an empirical disaster.”

Technique Problems. The model’s vagueness is amplified by the control issue. One of the nice things about the standard model is that people without UI make a nice control group for contrast. Here, HMM simply compare high-UI and low-UI duration states and then counties, without looking at individuals. They argue that since the expiration was done by Congress, it is essentially a random change.

But a quick glance shows their high benefits states group had an unemployment rate of 8.4 percent in 2012, while their low benefits states had an unemployment rate of 6.5 percent. Not random. As the economy recovers, we’d naturally expect to see the states with a higher initial unemployment rate recover faster. But that would just be “recovery”, not an argument about UI, much less workers' bargaining power.

Data Problems. Their county-by-county analysis is meant to cover for this, but this data is problematic here. As Dean Baker notes in an excellent post, the local area data they use is noisy, confusing based on whether the state is where one works versus lives, and is largely model driven. The fact that much of it is model-driven is problematic for their cross-state county comparisons.

Baker replaces their employment data with the more reliable CES employment data (the headline job creation number you hear every month) and finds the opposite headline result:

It's not encouraging that you can get the opposite result by changing from one data source to another. Baker isn’t the first to question the robustness of these results to even minor changes in the data. The Cleveland Fed, on an earlier version of their argument, found their results collapsed with a longer timeframe and excluding outliers. The fact that the paper doesn’t have robustness tests to a variety of data sources and measures also isn’t encouraging.

So data problems, control problems, and the vague sense that this is just them finding a residual and attribute all of it to their “macro” element without enough supporting evidence. Rather than turning over the vast research already done, I think it’s best to conclude as Robert Hall of Stanford and the Hoover Institute did for their earlier paper with a similar argument: “This paper has attracted a huge amount of attention, much of it skeptical. I think it is an imaginative and potentially important contribution, but needs a lot of work to convince a fair-minded skeptic (like me).” This newest version is no different.

 
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According to a new study by Marcus Hagedorn, Iourii Manovskii and Kurt Mitman (HMM), Congress failing to reauthorized the extension of unemployment insurance (UI) resulted in 1.8 million additional people getting jobs. But wait, how does that happen when only 1.3 million people had their benefits expire?

The answer is by going off the normal path of these arguments in models, techniques and data. The paper has a nice write-up by Patrick Brennan here, but it’s one that doesn’t convey how different this paper is compared to the vast majority of the research. The authors made a well-criticized splash in 2013 by arguing that most of the rise in unemployment in the Great Recession was UI-driven; this new paper is a continuation of that approach.

Gold Standard Model. Before we go further, let’s understand what the general standard in UI research looks like. The model here is that UI makes it easier for workers to pass up job offers. As a result they’ll take a longer time to find a job, which creates a larger pool of unemployed people, raising unemployment. In order to test this, researchers use longitudinal data for individuals to compare the length of job searches for individuals who receive UI with those who do not.

This is the standard in the two biggest UI studies from the Great Recession. Both essentially use individuals not receiving UI as a control group to see what getting UI does for people’s job searches over time. Jesse Rothstein (2011) found that UI raised unemployment “by only about 0.1 to 0.5 percentage point.” Using a similar approach, Farber and Valletta (2013) later found “UI increased the overall unemployment rate by only about 0.4 percentage points.” These are generally accepted estimated.

And though small, they are real numbers. The question then becomes an analysis of the trade-offs between this higher unemployment and the positive effects of unemployment insurance, including income support, increased aggregate demand and the increased efficiency of people taking enough time to get the best job for them.

This is not what HMM do in their research. Either in terms of their data, which doesn’t look at any individuals, or their model, which tells a much different story than what we traditionally understand, or their techniques, which add additional problems. Let’s start with the model.

Model Problems. The results HMM get are radically higher than these other studies. They argue that this is because they look at the “macro” effects of unemployment insurance. Instead of just people searching for a job, they argue that labor-search models show that employers must boost the wages of workers and create fewer job openings as a result of unemployment insurance tightening the labor market.

But in their study HMM only look at aggregate employment. If these labor search dynamics were the mechanism, there should be something in the paper about actual wage data or job openings moving in response to this change. There is not. Indeed, their argument hinges entirely on the idea that the labor market was too tight, with workers having too much bargaining power, in 2010-2013. The end of UI finally relaxed this. If that’s the case, then where are the wage declines and corporate profit gains in 2014?

This isn’t an esoteric discussion. They are, in effect, taking a residual and calling it the “macro” effect of UI. But we shouldn’t take it for granted that search models can confirm these predictions without a lot of different types of evidence; as Marshall Steinbaum wrote in his appreciation of these models, when it comes to business cycles and wages predictions they are “an empirical disaster.”

Technique Problems. The model’s vagueness is amplified by the control issue. One of the nice things about the standard model is that people without UI make a nice control group for contrast. Here, HMM simply compare high-UI and low-UI duration states and then counties, without looking at individuals. They argue that since the expiration was done by Congress, it is essentially a random change.

But a quick glance shows their high benefits states group had an unemployment rate of 8.4 percent in 2012, while their low benefits states had an unemployment rate of 6.5 percent. Not random. As the economy recovers, we’d naturally expect to see the states with a higher initial unemployment rate recover faster. But that would just be “recovery”, not an argument about UI, much less workers' bargaining power.

Data Problems. Their county-by-county analysis is meant to cover for this, but this data is problematic here. As Dean Baker notes in an excellent post, the local area data they use is noisy, confusing based on whether the state is where one works versus lives, and is largely model driven. The fact that much of it is model-driven is problematic for their cross-state county comparisons.

Baker replaces their employment data with the more reliable CES employment data (the headline job creation number you hear every month) and finds the opposite headline result:

It's not encouraging that you can get the opposite result by changing from one data source to another. Baker isn’t the first to question the robustness of these results to even minor changes in the data. The Cleveland Fed, on an earlier version of their argument, found their results collapsed with a longer timeframe and excluding outliers. The fact that the paper doesn’t have robustness tests to a variety of data sources and measures also isn’t encouraging.

So data problems, control problems, and the vague sense that this is just them finding a residual and attribute all of it to their “macro” element without enough supporting evidence. Rather than turning over the vast research already done, I think it’s best to conclude as Robert Hall of Stanford and the Hoover Institute did for their earlier paper with a similar argument: “This paper has attracted a huge amount of attention, much of it skeptical. I think it is an imaginative and potentially important contribution, but needs a lot of work to convince a fair-minded skeptic (like me).” This newest version is no different.

 
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Daily Digest - January 23: Politics Broke the Economy

Jan 23, 2015Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Politics of Economic Stupidity (Project Syndicate)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Politics of Economic Stupidity (Project Syndicate)

Roosevelt Institute Chief Economist Joseph Stiglitz says the economy's "near-global stagnation" is the result of "stupid politics," meaning austerity policies that slow demand.

It's 'Pathetic' What Politicians Have To Do To Stay In Office (HuffPost Live)

Roosevelt Institute Senior Fellow Robert Johnson discusses the State of the Union and campaign financing, noting that fundraising makes our government less healthy.

The Most Dangerous Man In American Politics (Buzzfeed)

Ben Smith says that U.S. Attorney for the Southern District of New York Preet Bharara has proven he's willing to cross not just Wall Street but his own political party in pursuing justice.

The Government Just Took a Step Toward Ending Mass Homelessness (ThinkProgress)

Allowing Fannie Mae and Freddie Mac to contribute to the National Housing Trust Fund could mean a small but steady supply of cash for building affordable housing, reports Bryce Covert.

McDonald's Sued Over Claims Workers Were Fired From Store With 'Too Many Black People' (The Guardian)

Jana Kasperkevic reports on the lawsuit, filed by 10 former McDonald's employees in Virginia, which tries to hold the parent company accountable alongside the franchise owner.

Americans Overwhelmingly Want Paid Sick Time, Even if It Lowers Their Wages (WaPo)

Christopher Ingraham counters the common conservative argument that mandatory sick leave will lead to lower wages with data that shows workers support sick leave anyway.

New on Next New Deal

After Four Decades with Roe, U.S. Women Still Need Abortion Access, and So Much More

Roosevelt Institute Fellow Andrea Flynn and Shulie Eisen look at Kansas as an example of how economic inequality intersects with lack of access to reproductive care to create a crisis for women.

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Daily Digest - January 21: State of the Union Asks Congress to Actually Work on Policy

Jan 21, 2015Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Problem With Obama's Bold SOTU (MoJo)

David Corn thinks President Obama needs to advance a stronger narrative about the GOP's obstructionism preventing his policy agenda from becoming reality.

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Problem With Obama's Bold SOTU (MoJo)

David Corn thinks President Obama needs to advance a stronger narrative about the GOP's obstructionism preventing his policy agenda from becoming reality.

In State of the Union Speech, Obama Defiantly Sets an Ambitious Agenda (NYT)

Michael D. Shear and Julie Hirschfeld Davis call the president's tone "defiant" as he called on Republicans to join him in an extensive domestic agenda.

Rebounding Economy Gives President Breathing Room at State of the Union (AJAM)

Naureen Khan says President Obama was able to make his ambitious proposals because the economy is in the best shape it's been in his six years in office.

The Economy Has Improved. The GOP's Talking Points Have Not. (TNR)

The five Republican responses to the State of the Union show that the GOP is still claiming the president's major achievements will crush the economy – but they aren't, writes Danny Vinik.

Toward a New Solidarity (TAP)

Rich Yeselson says that if the "labor question" is to return to the forefront of political thinking, the labor movement's best shot is to fight for all workers, not just its own members.

Debunking the Chatter: The Truth About Wall Street’s Volcker Rule Assault (Medium)

Alexis Goldstein breaks down the Wall Street public relations apparatus's push against the Volcker Rule, pointing out inaccurate data and straight-up falsehoods in their fact sheets.

New on Next New Deal

The 2003 Dividend Tax Cut Did Nothing to Help the Real Economy

Roosevelt Institute Fellow Mike Konczal looks at the data available on the 2003 dividend tax cut, which shows that the corporations affected disgorged more cash to shareholders, but didn't raise wages or investment.

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A Battle Map for the Republican War Against Dodd-Frank

Jan 15, 2015Mike Konczal

The Republicans have declared war against Dodd-Frank. But what kind of war is it, and on what fronts are they waging this war? I think there are at least three campaigns, each with its own strategic goals and tactics. Distinguishing these campaigns from each other will help us understand what Republicans are trying to do and how to keep them in check.

First, to understand the Republican campaigns, it’s useful go over what Dodd-Frank does. Dodd-Frank can be analogized to the way we regulate driving. First, there are simple rules of the road, like speed limits and stop signs, designed as outright prevention against accidents. Then there are efforts to help with stabilization if the driver gets in trouble, such as anti-lock brakes or road design. And then there are regulations for the resolution of accidents that do occur, like seat belts and airbags, designed to avoids worst-case scenarios.

These three goals map onto Dodd-Frank pretty well. Dodd-Frank also puts rules upfront to prevent certain actions, requires additional regulations to create stability within large financial firms, and lays out plans to allow for a successful resolution of a firm once it fails. Let’s graph that out:

Prevention: Dodd-Frank created a Consumer Financial Protection Bureau (CFPB), reforming consumer protection from being an “orphan mission” spread across 11 agencies by establishing one dedicated agency for it. The act also requires that derivatives trade with clearinghouses and through exchanges or else face additional capital requirements, which brought price transparency and additional capital to the market that brought down AIG. Another piece is the Volcker Rule, which separates the proprietary trading that can cause rapid losses from our commercial banking and payment systems.

Stabilization: Dodd-Frank also provides for the expansion of capital requirements across the financial sector, including higher requirements for the biggest firms relative to smaller ones, as well as higher requirements for those who use short-term funding in the “shadow” banking sector relative to traditional banks. These firms are designed by the Financial Stability Oversight Council (FSOC).

Resolution:  The firms FSOC designates as systemically risky have to prepare themselves for a rapid resolution for when they do fail. They have to prove that they can survive bankruptcy without bringing down the entire system (an effort currently being fought). The FDIC has prepared a second line of defense, a special “resolution authority” (OLA) to use if bankruptcy isn’t a viable option in a crisis.

These elements of the law all flow naturally from the financial crisis of 2008. It would have been very helpful in the crisis for there to be more clarity in the derivatives market, more capital in shadow banks, and a process to resolve Lehman Brothers. Maybe these are great ways to approach the problem or maybe they aren’t, but to suggest they have no basis in the crisis, as the American Enterprise Institute comically does, is pure ideology.

But ignore the more ridiculous arguments. The actual war against Dodd-Frank is much more sophisticated, and it’s being waged on numerous fronts. Let’s make a map of the battlefield:

There are three distinct campaigns being waged:

Guerrilla Deregulation. The goal here is to undermine as much of the efforts of derivatives regulation, the Volcker Rule, and the CFPB as possible through quick, surprise attacks. This, in turn, has a chilling effect across regulators and throws the regulatory process into chaos.

The main tactic, as in any good guerrilla campaign, is to do hit-and-run ambushes of key, important targets vulnerable to raids. David Dayen had a helpful list of some key bills that must pass in 2015, bills likely to be perfect targets for a good guerrilla raid. The guerrilla campaign had a major victory in weakening the Section 716 “push-out” rule in the Cromnibus bill. And that will probably be a model going forward for these tactics, replicated in the recent attacks we’ve seen, down to counting the small handful of Democrats signing on as some sort of concession of bipartisanship.

Another guerrilla element will be the focus on victory through attrition. It’s not like the House Republicans have their own theory of how to regulate the derivatives market, or that they are making the full case against the Volcker Rule or the CFPB, or even proposing their own anything. They are winning simply through weakening both the rules and the resolve of reformers.

Administrative Siege: Aside from the guerrilla war of deregulation, the GOP is also waging war on another front, through a long-term siege of the regulatory agencies. This includes blockading them from resources like funding and personnel, consistent harassment, discrediting them in the eyes of the broader public, and weakening their power to act. This is a long-term battle, going back to the beginning of Dodd-Frank, and their terms are unconditional surrender.

The seriousness of this campaign became clear when the GOP first refused to appoint any director of the CFPB unless there was a complete overhaul to weaken it. This campaign has continued against the CFTC, and now extends to the FSOC trying to designate firms as systemically risky. The recent House bill to extend cost-benefit analysis to financial regulations, where it has little history, unclear analytical benefit, and could easily lead to worse rules, is also part of this siege.

One key argument the GOP is pushing is that the regulators are historically too powerful and out of control. As House Financial Services Committee chairman Jeb Hensarling said to the Wall Street Journal, the CFPB is “the single most unaccountable agency in the history of America.” This is just silly agitprop. The structure -- independent budgets and a single director -- looks exactly like their counterparts in the OCC. It’s not only subject to the same rule-making process as other regulators, but other regulators can in fact veto the CFPB, making it significantly more accountable compared to any other agency.

The same is being said about FSOC. Note that there’s always room for improvement; Americans for Financial Reform (AFR) have some ways to improve the transparency of FSOC here. But as AFR’s Marcus Stanley notes, the House’s recent FSOC bill “appears better calculated to hinder FSOC operations than to improve its transparency.” Indeed, as Better Markets notes, this FSOC battle is in large part over the regulation of money market funds, a crucial reform in fixing shadow banking. But making government work better isn’t the goal of the siege; this campaign’s goal is to break these agencies and their ability to regulate the financial system.

Reactionary Rhetoric: The goal of this ideological programming campaign is to push the argument that Dodd-Frank simply reinforces the worst part of the bailouts and does nothing productive toward reform. Instead of a series of methods to check and reduce Too Big To Fail, this campaign argues that Dodd-Frank does worse than fail. Following the rhetoric of reaction, reform simply makes the problem far worse. The point here is to remove the FDIC’s ability to put systemically risky firms into a receivership while also preparing the ground for a full repeal.

Advancing the argument that Dodd-Frank has made the bailouts of 2008-2009 permanent and serves only to benefit the biggest financial firms has become a marching order for the movement right. It was basically the entire GOP argument against Dodd-Frank in 2012 (Mitt Romney calling the act "the biggest kiss" to Wall Street), and it still dominates their talking points. If this were the case, the largest banks would receive a large Too Big To Fail subsidy, and we’d subsequently see a reduction in their borrowing costs.

Major studies tells us that the opposite is the case; since 2010 Too Big To Fail subsidies have fallen instead of stabilized or increased. This doesn’t mean the work is done - we could still see a major failure cause systemic risk, and just “avoiding catastrophic collapses” isn’t really a headline goal for a functioning financial system. There’s also little evidence that Dodd-Frank enriches the biggest banks; firms go out of their way to avoid a SIFI designation, which they wouldn’t if there were a benefit to them, and Wall Street analysts take it for granted that capital requirements and other regulations are more binding for the largest firms.

There could be a productive discussion here about finding a way to reform the bankruptcy code to help combat Too Big To Fail while keeping resolution authority as a backup option. That backup option is key though. Unlike OLA, bankruptcy is slow and deliberate, isn't designed to preserve ongoing firm business, doesn't have guaranteed funding available, can’t prevent runs from short-term creditors, and has trouble internationally. But again, the point for Republicans isn’t to try to come up with the best regime; it’s to discredit the effort at reform entirely so the other campaigns, and the overall campaign for repeal, can be that much easier.

Why do Republicans want all this? The answer you will normally hear is that they are in the pocket of Wall Street or in the thrall of free-market fundamentalism. And there’s truth to that. But they’ve also created a whole institutionally enforced counter-narrative where there was no real crisis and Wall Street committed no bad behavior except for when ACORN made them. This narrative is, bluntly, dumb. But it is the narrative their movement has chosen, and movements have a way of forcing well-meaning people who’d otherwise want to find good solutions to fall in line.

2015 will require reformers to wage their own campaigns to push additional reform (here’s a start), push for stronger action from regulators, and make the public understand the progress that has been made. But first we need to understand that while conservatives may look like they are running a smash-and-grab operation when it comes to Dodd-Frank, it’s actually a quite sophisticated series of campaigns, and they are already winning battles.

Follow or contact the Rortybomb blog:
 
  

 

The Republicans have declared war against Dodd-Frank. But what kind of war is it, and on what fronts are they waging this war? I think there are at least three campaigns, each with its own strategic goals and tactics. Distinguishing these campaigns from each other will help us understand what Republicans are trying to do and how to keep them in check.

First, to understand the Republican campaigns, it’s useful go over what Dodd-Frank does. Dodd-Frank can be analogized to the way we regulate driving. First, there are simple rules of the road, like speed limits and stop signs, designed as outright prevention against accidents. Then there are efforts to help with stabilization if the driver gets in trouble, such as anti-lock brakes or road design. And then there are regulations for the resolution of accidents that do occur, like seat belts and airbags, designed to avoids worst-case scenarios.

These three goals map onto Dodd-Frank pretty well. Dodd-Frank also puts rules upfront to prevent certain actions, requires additional regulations to create stability within large financial firms, and lays out plans to allow for a successful resolution of a firm once it fails. Let’s graph that out:

Prevention: Dodd-Frank created a Consumer Financial Protection Bureau (CFPB), reforming consumer protection from being an “orphan mission” spread across 11 agencies by establishing one dedicated agency for it. The act also requires that derivatives trade with clearinghouses and through exchanges or else face additional capital requirements, which brought price transparency and additional capital to the market that brought down AIG. Another piece is the Volcker Rule, which separates the proprietary trading that can cause rapid losses from our commercial banking and payment systems.

Stabilization: Dodd-Frank also provides for the expansion of capital requirements across the financial sector, including higher requirements for the biggest firms relative to smaller ones, as well as higher requirements for those who use short-term funding in the “shadow” banking sector relative to traditional banks. These firms are designed by the Financial Stability Oversight Council (FSOC).

Resolution:  The firms FSOC designates as systemically risky have to prepare themselves for a rapid resolution for when they do fail. They have to prove that they can survive bankruptcy without bringing down the entire system (an effort currently being fought). The FDIC has prepared a second line of defense, a special “resolution authority” (OLA) to use if bankruptcy isn’t a viable option in a crisis.

These elements of the law all flow naturally from the financial crisis of 2008. It would have been very helpful in the crisis for there to be more clarity in the derivatives market, more capital in shadow banks, and a process to resolve Lehman Brothers. Maybe these are great ways to approach the problem or maybe they aren’t, but to suggest they have no basis in the crisis, as the American Enterprise Institute comically does, is pure ideology.

But ignore the more ridiculous arguments. The actual war against Dodd-Frank is much more sophisticated, and it’s being waged on numerous fronts. Let’s make a map of the battlefield:

There are three distinct campaigns being waged:

Guerrilla Deregulation. The goal here is to undermine as much of the efforts of derivatives regulation, the Volcker Rule, and the CFPB as possible through quick, surprise attacks. This, in turn, has a chilling effect across regulators and throws the regulatory process into chaos.

The main tactic, as in any good guerrilla campaign, is to do hit-and-run ambushes of key, important targets vulnerable to raids. David Dayen had a helpful list of some key bills that must pass in 2015, bills likely to be perfect targets for a good guerrilla raid. The guerrilla campaign had a major victory in weakening the Section 716 “push-out” rule in the Cromnibus bill. And that will probably be a model going forward for these tactics, replicated in the recent attacks we’ve seen, down to counting the small handful of Democrats signing on as some sort of concession of bipartisanship.

Another guerrilla element will be the focus on victory through attrition. It’s not like the House Republicans have their own theory of how to regulate the derivatives market, or that they are making the full case against the Volcker Rule or the CFPB, or even proposing their own anything. They are winning simply through weakening both the rules and the resolve of reformers.

Administrative Siege: Aside from the guerrilla war of deregulation, the GOP is also waging war on another front, through a long-term siege of the regulatory agencies. This includes blockading them from resources like funding and personnel, consistent harassment, discrediting them in the eyes of the broader public, and weakening their power to act. This is a long-term battle, going back to the beginning of Dodd-Frank, and their terms are unconditional surrender.

The seriousness of this campaign became clear when the GOP first refused to appoint any director of the CFPB unless there was a complete overhaul to weaken it. This campaign has continued against the CFTC, and now extends to the FSOC trying to designate firms as systemically risky. The recent House bill to extend cost-benefit analysis to financial regulations, where it has little history, unclear analytical benefit, and could easily lead to worse rules, is also part of this siege.

One key argument the GOP is pushing is that the regulators are historically too powerful and out of control. As House Financial Services Committee chairman Jeb Hensarling said to the Wall Street Journal, the CFPB is “the single most unaccountable agency in the history of America.” This is just silly agitprop. The structure -- independent budgets and a single director -- looks exactly like their counterparts in the OCC. It’s not only subject to the same rule-making process as other regulators, but other regulators can in fact veto the CFPB, making it significantly more accountable compared to any other agency.

The same is being said about FSOC. Note that there’s always room for improvement; Americans for Financial Reform (AFR) have some ways to improve the transparency of FSOC here. But as AFR’s Marcus Stanley notes, the House’s recent FSOC bill “appears better calculated to hinder FSOC operations than to improve its transparency.” Indeed, as Better Markets notes, this FSOC battle is in large part over the regulation of money market funds, a crucial reform in fixing shadow banking. But making government work better isn’t the goal of the siege; this campaign’s goal is to break these agencies and their ability to regulate the financial system.

Reactionary Rhetoric: The goal of this ideological programming campaign is to push the argument that Dodd-Frank simply reinforces the worst part of the bailouts and does nothing productive toward reform. Instead of a series of methods to check and reduce Too Big To Fail, this campaign argues that Dodd-Frank does worse than fail. Following the rhetoric of reaction, reform simply makes the problem far worse. The point here is to remove the FDIC’s ability to put systemically risky firms into a receivership while also preparing the ground for a full repeal.

Advancing the argument that Dodd-Frank has made the bailouts of 2008-2009 permanent and serves only to benefit the biggest financial firms has become a marching order for the movement right. It was basically the entire GOP argument against Dodd-Frank in 2012 (Mitt Romney calling the act "the biggest kiss" to Wall Street), and it still dominates their talking points. If this were the case, the largest banks would receive a large Too Big To Fail subsidy, and we’d subsequently see a reduction in their borrowing costs.

Major studies tells us that the opposite is the case; since 2010 Too Big To Fail subsidies have fallen instead of stabilized or increased. This doesn’t mean the work is done - we could still see a major failure cause systemic risk, and just “avoiding catastrophic collapses” isn’t really a headline goal for a functioning financial system. There’s also little evidence that Dodd-Frank enriches the biggest banks; firms go out of their way to avoid a SIFI designation, which they wouldn’t if there were a benefit to them, and Wall Street analysts take it for granted that capital requirements and other regulations are more binding for the largest firms.

There could be a productive discussion here about finding a way to reform the bankruptcy code to help combat Too Big To Fail while keeping resolution authority as a backup option. That backup option is key though. Unlike OLA, bankruptcy is slow and deliberate, isn't designed to preserve ongoing firm business, doesn't have guaranteed funding available, can’t prevent runs from short-term creditors, and has trouble internationally. But again, the point for Republicans isn’t to try to come up with the best regime; it’s to discredit the effort at reform entirely so the other campaigns, and the overall campaign for repeal, can be that much easier.

Why do Republicans want all this? The answer you will normally hear is that they are in the pocket of Wall Street or in the thrall of free-market fundamentalism. And there’s truth to that. But they’ve also created a whole institutionally enforced counter-narrative where there was no real crisis and Wall Street committed no bad behavior except for when ACORN made them. This narrative is, bluntly, dumb. But it is the narrative their movement has chosen, and movements have a way of forcing well-meaning people who’d otherwise want to find good solutions to fall in line.

2015 will require reformers to wage their own campaigns to push additional reform (here’s a start), push for stronger action from regulators, and make the public understand the progress that has been made. But first we need to understand that while conservatives may look like they are running a smash-and-grab operation when it comes to Dodd-Frank, it’s actually a quite sophisticated series of campaigns, and they are already winning battles.

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Guest Post: Will Wall Street Win Again with Antonio Weiss Nomination?

Jan 7, 2015Brad Miller

Mike here. This post is from my colleague Brad Miller over the important debate on the Antonio Weiss nomination. Brad is a former U.S. Representative who recently joined the Roosevelt Institute as a Senior Fellow, so he has firsthand knowledge of the internal negotiations around financial reform. Check it out below.

The opposition to the nomination of another investment banker, Antonio Weiss, to a top position in the U.S. Treasury is not just a demagogic appeal to anti-Wall Street prejudices, as his supporters argue.

Weiss’s actual experience appears to be a poor match for the specific duties of the position in question, and may be less laudable than his supporters claim. Weiss’s principal credential appears to be that he is a product of the same culture that produced our other recent economic policymakers.

And that is the real problem for opponents, who believe that economic policies should be subject to democratic debate and require the consent of the governed.

The response to the financial crisis was the most consequential economic policy in generations. Wall Street and Washington insiders alike argue that those policies, endlessly indulgent of banks and pitiless to homeowners, were technocratic decisions that required the recondite knowledge of Wall Street professionals.

To Weiss’s supporters, disregard for public opinion is a virtue. “Making economic policy isn’t a popularity contest,” David Ignatius wrote in The Washington Post, “especially when financial markets are in a panic.” “Our job was to fix it,“ former Treasury Secretary Timothy Geithner said, “not make people like us.”

Criticism did not just come from politicians pandering to the great unwashed, however.

Most economists argued that the lesson of past financial crises was to take economic pain quickly, recognize losses on distressed debt, and take insolvent banks through an orderly receivership. The standard playbook” for financial crises since the 1870s was to “shut down insolvent institutions so executives and shareholders in the future do not think they will escape the consequences of the moral hazard they created.” “Zombie” banks, economists argued, only delay recovery.

The Bush and Obama Administrations instead helped too-big-to-fail banks pretend to be solvent and provided subsidies and other dispensations until the banks became profitable, an effort that continues.

Unfortunately, any effective effort to reduce foreclosures required banks to recognize losses on mortgages. Insiders regarded foreclosures as a lesser concern. Geithner said that even if the government used federal funds “to wipe out every dollar of negative equity in the U.S. housing market…it would have increased annual consumption by just 0.1 to 0.2 percent.”

According to Atif Mian and Amir Sufi, two prominent economists, “that is dead wrong.” Household wealth fell by $9 trillion after the housing bubble burst in 2006, which greatly reduced consumer demand. “The evidence,” Amir and Sufi said, “is pretty clear: an aggressive bold attack on household debt would have significantly reduced the horrible impact of the Great Recession on Americans.”

Wall Street’s critics did not lose that debate. There was no debate.

Senator Obama endorsed legislation in his presidential campaign to allow the judicial modification of mortgages in bankruptcy. President Obama never publicly wavered from that position, but Treasury officials privately lobbied against the legislation in the Senate, where the legislation died. The determination by economic policymakers to protect their immaculate policies from tawdry politics may extend to attempts by the President to intrude.

Meddling by Members of Congress was certainly unwelcome. In a private meeting between Administration officials and disgruntled House Democrats, I said that foreclosure relief efforts appeared designed to help banks absorb losses gradually, not to help homeowners. Geithner was offended—indignant—at the suggestion. Neil Barofsky, then the Special Inspector General for the Troubled Asset Recovery Program, later confirmed that was exactly the purpose of the programs—in Geithner’s words, to “foam the runway” for the banks.

The success of policies that are unacknowledged or even denied is difficult to measure. Since the financial crisis, however, the financial sector, from whence our unguarded platonic guardians came and soon will return, has prospered. Others fared less well. Wealth and income inequality widened dramatically.

Weiss has not served in government, so opposition to his nomination may punish him for the sins of others, perhaps unfairly. There is nothing to indicate, however, that Weiss questions the assumption that the North Star of economic policy should be the prosperity of the financial sector, or that policies should be freely debated unless there’s money involved.

The presidential campaign in 2016 will undoubtedly largely be about economic policy. Voters may assume that the election of one candidate or another will result in implementation of that candidate’s economic policies.

If the culture of economic policymakers remains unchanged, the public positions of candidates and the votes of citizens may not matter much.

Brad Miller is a Senior Fellow at the Roosevelt Institute. Previously, he served for a decade in the U.S. House of Representatives.

Mike here. This post is from my colleague Brad Miller over the important debate on the Antonio Weiss nomination. Brad is a former U.S. Representative who recently joined the Roosevelt Institute as a Senior Fellow, so he has firsthand knowledge of the internal negotiations around financial reform. Check it out below.

The opposition to the nomination of another investment banker, Antonio Weiss, to a top position in the U.S. Treasury is not just a demagogic appeal to anti-Wall Street prejudices, as his supporters argue.

Weiss’s actual experience appears to be a poor match for the specific duties of the position in question, and may be less laudable than his supporters claim. Weiss’s principal credential appears to be that he is a product of the same culture that produced our other recent economic policymakers.

And that is the real problem for opponents, who believe that economic policies should be subject to democratic debate and require the consent of the governed.

The response to the financial crisis was the most consequential economic policy in generations. Wall Street and Washington insiders alike argue that those policies, endlessly indulgent of banks and pitiless to homeowners, were technocratic decisions that required the recondite knowledge of Wall Street professionals.

To Weiss’s supporters, disregard for public opinion is a virtue. “Making economic policy isn’t a popularity contest,” David Ignatius wrote in The Washington Post, “especially when financial markets are in a panic.” “Our job was to fix it,“ former Treasury Secretary Timothy Geithner said, “not make people like us.”

Criticism did not just come from politicians pandering to the great unwashed, however.

Most economists argued that the lesson of past financial crises was to take economic pain quickly, recognize losses on distressed debt, and take insolvent banks through an orderly receivership. The standard playbook” for financial crises since the 1870s was to “shut down insolvent institutions so executives and shareholders in the future do not think they will escape the consequences of the moral hazard they created.” “Zombie” banks, economists argued, only delay recovery.

The Bush and Obama Administrations instead helped too-big-to-fail banks pretend to be solvent and provided subsidies and other dispensations until the banks became profitable, an effort that continues.

Unfortunately, any effective effort to reduce foreclosures required banks to recognize losses on mortgages. Insiders regarded foreclosures as a lesser concern. Geithner said that even if the government used federal funds “to wipe out every dollar of negative equity in the U.S. housing market…it would have increased annual consumption by just 0.1 to 0.2 percent.”

According to Atif Mian and Amir Sufi, two prominent economists, “that is dead wrong.” Household wealth fell by $9 trillion after the housing bubble burst in 2006, which greatly reduced consumer demand. “The evidence,” Amir and Sufi said, “is pretty clear: an aggressive bold attack on household debt would have significantly reduced the horrible impact of the Great Recession on Americans.”

Wall Street’s critics did not lose that debate. There was no debate.

Senator Obama endorsed legislation in his presidential campaign to allow the judicial modification of mortgages in bankruptcy. President Obama never publicly wavered from that position, but Treasury officials privately lobbied against the legislation in the Senate, where the legislation died. The determination by economic policymakers to protect their immaculate policies from tawdry politics may extend to attempts by the President to intrude.

Meddling by Members of Congress was certainly unwelcome. In a private meeting between Administration officials and disgruntled House Democrats, I said that foreclosure relief efforts appeared designed to help banks absorb losses gradually, not to help homeowners. Geithner was offended—indignant—at the suggestion. Neil Barofsky, then the Special Inspector General for the Troubled Asset Recovery Program, later confirmed that was exactly the purpose of the programs—in Geithner’s words, to “foam the runway” for the banks.

The success of policies that are unacknowledged or even denied is difficult to measure. Since the financial crisis, however, the financial sector, from whence our unguarded platonic guardians came and soon will return, has prospered. Others fared less well. Wealth and income inequality widened dramatically.

Weiss has not served in government, so opposition to his nomination may punish him for the sins of others, perhaps unfairly. There is nothing to indicate, however, that Weiss questions the assumption that the North Star of economic policy should be the prosperity of the financial sector, or that policies should be freely debated unless there’s money involved.

The presidential campaign in 2016 will undoubtedly largely be about economic policy. Voters may assume that the election of one candidate or another will result in implementation of that candidate’s economic policies.

If the culture of economic policymakers remains unchanged, the public positions of candidates and the votes of citizens may not matter much.

Brad Miller is a Senior Fellow at the Roosevelt Institute. Previously, he served for a decade in the U.S. House of Representatives.

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Wall Street's Choice: Antonio Weiss Nomination Illustrates What's Wrong With Economic Policy

Jan 6, 2015Brad Miller

Installing another Wall Street insider at the Treasury Department will only reinforce the administration's anti-democratic approach to crafting economic policy.

The opposition to the nomination of another investment banker, Antonio Weiss, to a top position in the U.S. Treasury is not just a demagogic appeal to anti-Wall Street prejudices, as his supporters argue.

Installing another Wall Street insider at the Treasury Department will only reinforce the administration's anti-democratic approach to crafting economic policy.

The opposition to the nomination of another investment banker, Antonio Weiss, to a top position in the U.S. Treasury is not just a demagogic appeal to anti-Wall Street prejudices, as his supporters argue.

Weiss’s actual experience appears to be a poor match for the specific duties of the position in question, and may be less laudable than his supporters claim. Weiss’s principal credential appears to be that he is a product of the same culture that produced our other recent economic policymakers.

And that is the real problem for opponents, who believe that economic policies should be subject to democratic debate and require the consent of the governed.

The response to the financial crisis was the most consequential economic policy in generations. Wall Street and Washington insiders alike argue that those policies, endlessly indulgent of banks and pitiless to homeowners, were technocratic decisions that required the recondite knowledge of Wall Street professionals.

To Weiss’s supporters, disregard for public opinion is a virtue. “Making economic policy isn’t a popularity contest,” David Ignatius wrote in The Washington Post, “especially when financial markets are in a panic.” “Our job was to fix it,“ former Treasury Secretary Timothy Geithner said, “not make people like us.”

Criticism did not just come from politicians pandering to the great unwashed, however.

Most economists argued that the lesson of past financial crises was to take economic pain quickly, recognize losses on distressed debt, and take insolvent banks through an orderly receivership. The standard playbook” for financial crises since the 1870s was to “shut down insolvent institutions so executives and shareholders in the future do not think they will escape the consequences of the moral hazard they created.” “Zombie” banks, economists argued, only delay recovery.

The Bush and Obama Administrations instead helped too-big-to-fail banks pretend to be solvent and provided subsidies and other dispensations until the banks became profitable, an effort that continues.

Unfortunately, any effective effort to reduce foreclosures required banks to recognize losses on mortgages. Insiders regarded foreclosures as a lesser concern. Geithner said that even if the government used federal funds “to wipe out every dollar of negative equity in the U.S. housing market…it would have increased annual consumption by just 0.1 to 0.2 percent.”

According to Atif Mian and Amir Sufi, two prominent economists, “that is dead wrong.” Household wealth fell by $9 trillion after the housing bubble burst in 2006, which greatly reduced consumer demand. “The evidence,” Amir and Sufi said, “is pretty clear: an aggressive bold attack on household debt would have significantly reduced the horrible impact of the Great Recession on Americans.”

Wall Street’s critics did not lose that debate. There was no debate.

Senator Obama endorsed legislation in his presidential campaign to allow the judicial modification of mortgages in bankruptcy. President Obama never publicly wavered from that position, but Treasury officials privately lobbied against the legislation in the Senate, where the legislation died. The determination by economic policymakers to protect their immaculate policies from tawdry politics may extend to attempts by the President to intrude.

Meddling by Members of Congress was certainly unwelcome. In a private meeting between Administration officials and disgruntled House Democrats, I said that foreclosure relief efforts appeared designed to help banks absorb losses gradually, not to help homeowners. Geithner was offended—indignant—at the suggestion. Neil Barofsky, then the Special Inspector General for the Troubled Asset Recovery Program, later confirmed that was exactly the purpose of the programs—in Geithner’s words, to “foam the runway” for the banks.

The success of policies that are unacknowledged or even denied is difficult to measure. Since the financial crisis, however, the financial sector, from whence our unguarded platonic guardians came and soon will return, has prospered. Others fared less well. Wealth and income inequality widened dramatically.

Weiss has not served in government, so opposition to his nomination may punish him for the sins of others, perhaps unfairly. There is nothing to indicate, however, that Weiss questions the assumption that the North Star of economic policy should be the prosperity of the financial sector, or that policies should be freely debated unless there’s money involved.

The presidential campaign in 2016 will undoubtedly largely be about economic policy. Voters may assume that the election of one candidate or another will result in implementation of that candidate’s economic policies.

If the culture of economic policymakers remains unchanged, the public positions of candidates and the votes of citizens may not matter much.

Brad Miller is a Senior Fellow at the Roosevelt Institute. Previously, he served for a decade in the U.S. House of Representatives.

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Daily Digest - January 5: Time for Federal Regulations for Predatory Payday Loans

Jan 5, 2015Rachel Goldfarb

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Roosevelt Institute Fellow Saqib Bhatti's proposal to allow the Fed to lend directly to municipalities is one of many ideas you can vote on in the Progress Change Institute's Big Ideas Project. The top 20 ideas will be presented members of Congress. Voting ends on Sunday, January 11. Click here to vote!

CFPB Sets Sights on Payday Loans (WSJ)

Alan Zibel reports on the Consumer Financial Protection Bureau's plans to explore creating new rules to regulate predatory payday lending, the first such rules on a federal level.

Signs of Economic Promise Are Offering Some Hope for the New Year (NYT)

Rachel Swarns reports on the positive signs that some are seeing, including new jobs for long-term job seekers and raises and more hours for workers at retail chains like Zara.

Don't Believe What You Hear About the U.S. Economy (AJAM)

Dean Baker says it's not yet time to celebrate an economic comeback. Growth is still slow enough that the labor market won't reach pre-recession numbers by the end of 2015.

Why the Democrats Need Labor Again (Politico Magazine)

Timothy Noah interviews Thomas Geoghegan on his new book, which he describes as a "last-ditch effort for the Democrats" to revive the labor movement and win elections.

California Colleges See Surge in Efforts to Unionize Adjunct Faculty (LA Times)

Larry Gordon speaks to adjunct faculty at some of the private colleges in California that are seeing union organizing on campus for the first time.

Austerity’s End Strengthens U.S. Recovery (MSNBC)

Steve Benen corrects Grover Norquist's attempt to give Republicans credit for economic growth, pointing to small increases in public spending as proof that austerity didn't fix anything.

The Five Major Things We Screwed Up in Inequality in 2014 (The Guardian)

Suzanne McGee's list includes the minimum wage, which she says needs a boost at a federal level, and race and economic opportunity, an issue she says we practically ignored.

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