New Deal Numerology: The Not-So-Mighty Middle

Aug 23, 2012Tim Price

This week's numbers: 51%; 85%; 2.3%; 87%; 62%

51%... is a diminished number. That’s how many Americans were part of the middle class in 2011, according to the Pew Research Center. That’s down 10% since 1971 and represents the only way the U.S. has slimmed down in the middle since then.

This week's numbers: 51%; 85%; 2.3%; 87%; 62%

51%... is a diminished number. That’s how many Americans were part of the middle class in 2011, according to the Pew Research Center. That’s down 10% since 1971 and represents the only way the U.S. has slimmed down in the middle since then.

85%... is a struggling number. That’s how many middle class Americans say their lifestyle is getting harder to maintain. Keeping up with the Joneses presents new challenges when the Joneses are underemployed and underwater on their mortgage.

2.3%... is a middling number. That’s how much the median net worth of middle class households has grown since 1983. The trickle-down effect Republicans started touting around then has turned out to be an awfully slow drip.

87%... is a bountiful number. That’s how much the median net worth of the wealthiest households has grown during the same period. Instead of lifting all boats, the rising tide seems to be lifting the luxury yachts and capsizing the canoes.

62%... is a frustrated number. That’s how many middle class Americans blame Congress for their hardships. But policymakers haven't completely ignored the problem; they’ve spent years discussing how their opponents aren’t doing anything about it.

Tim Price is Deputy Editor of Next New Deal. Follow him on Twitter @txprice.

Share This

What's the Best Liberal Case Against Principal Reduction?

Aug 21, 2012Mike Konczal

Binyamin Appelbaum has an article in the New York Times about the administration’s terrible response to the housing crisis.

Binyamin Appelbaum has an article in the New York Times about the administration’s terrible response to the housing crisis. The administration “tried to finesse the cleanup of the housing crash, rejecting unpopular proposals for a broad bailout of homeowners facing foreclosure in favor of a limited aid program — and a bet that a recovering economy would take care of the rest.” This has several responses, including David Dayen at firedoglake, as well as Ezra Klein writing about the administration's response from a balance-sheet recession and housing point of view. That got a response from Dean Baker arguing that this balance-sheet recession point of view, and the subsequent focus on mortgage debt reduction, is a distraction from better policy.

With President Obama pushing for a wider refinancing plan and the debate over refinancing and principal reduction back in the headlines due to the book Bailout and the fight over the GSEs, it might be useful to formalize the best liberal case against principal reduction. It'll give us a set of arguments to wrestle with so that we can then work backwards toward better arguments. So what is the best case? I see three broad arguments.

1. Wealth Effect Means It Doesn't Matter

This is the approach Dean Baker takes, and I think it is influential among many liberal wonks. The housing crashed destroyed a lot of housing value, leaving us feeling poorer, which means we spend less. An important way to understand this argument is that if every house during the housing bubble was paid for with cash instead of a mortgage, and we had the same housing bubble and crash but no mortgage debt overhang, our recession and slow recovery would look virtually identical. Reducing housing debt in our situation won't help the economy as a whole (though it will help the individuals involved), because housing debt hanging on the economy isn't the drag.

Foreclosures are still bad in this argument (and Dean has been at the forefront of fighting against foreclosures), but they only need to be stopped in the sense that all bad things should be stopped; housing crisis policy will help some and hurt some, but it isn't a check on the recovery. It is not necessary and isn't effective in getting us back to full employment.

I think there are some empirical problems with this argument. The elasticities people are finding are an order of magnitude bigger than realistic expectations. Declines in housing prices are nonlinear against wealth distribution. Something else is in play. See this interview or this paper for more on these arguments. The administration seems to be moving in this balance-sheet direction. Let's say we reject this wealth effect argument -- should we change policy?

2. Fiscal and Monetary Uber Alles

Christina Romer would say no. She, like many, would argue that housing debt is probably a drag on demand, but we should respond to it with fiscal and monetary stimulus. She would stay out of the policy in the purple circle above, which is the mapping I use around here to approach how people think of the recession. Romer, from September 2011:

[One argument is that the] bubble and bust in house prices has left households burdened with too much debt. Until we deal with this problem — perhaps by providing principal relief to the 11 million households whose mortgages are larger than the current value of their homeswe’ll never get the economy going.

The premise of this argument is probably true: recent evidence suggests that high debt is holding back consumer demand. But it doesn’t follow that the government needs to directly lower debt burdens to stimulate job growth.

Recent research shows that government spending on infrastructure or other investments raises demand even in an economy beset by over-indebted consumers. Another effective approach is to aim tax cuts and government payments at households that would like to spend, but can’t borrow because of their debt loads (such as the poor and the unemployed).

History actually suggests that the “tackle housing first” crowd may have the direction of causation backwards. In the recovery from the Great Depression, economic growth, which raised incomes and asset prices, played a big role in lowering debt burdens. I strongly suspect that fiscal stimulus will be more cost effective at speeding deleveraging and recovery than government-paid policies aimed directly at reducing debt.

There's a general critique of the president's stimulus program that argues it was too focused on tax cuts instead of long-term investments, which have a better bang for the buck. The same critique can be used on spending money on principal reduction. It's money that by definition isn't spent (it was already spent), so you need second-order effects for it to go. We'd prefer just giving people money (tax cuts) over principal reduction in the same sense that we'd prefer infrastructure over tax cuts.

And one doesn't need to be a conservative worried about helping the "losers" or someone who is uncomfortable with the fairness of mortgage debt reduction to think there are better ways to spend this money. Consider having $250 billion dollars to spend, one benchmark put forward as the amount of money that could have been spent from TARP. You could hand it out in some manner to pay off underwater debts, perhaps a matching scheme with the banks. That wouldn't reduce overall mortgage debt that much because there is a lot of it.

Meanwhile, with $250 billion dollars, you could build 5,000 miles of high-speed rail. You could fund universal pre-K for a decade. You could take the 13 million people unemployed under the traditional unemployment measure and give them a basic income of almost $10,000 for two years. You could build infrastructure, create social goods designed to foster egalitarianism, or tackle poverty. These are all better investments for us to make, plus they build a better society and they get us to full employment faster. Tackling mortgage debt produces none of these benefits.

When Geithner's argued against principal reduction, saying that it would be "dramatically more expensive for the American taxpayer, harder to justify, [and] create much greater risk of unfairness," he followed it up by saying "The whole foreclosure crisis across the country now is really driven by what happened to unemployment and what happened to the income of Americans. The best things we can do now to help mitigate that risk is to help get the economy. growing again, bring unemployment down as quickly as we can, put people back to work." I view that as in line with Romer's argument.

By itself, I think this is correct. But one important response to that is that principal reduction can often pay for itself, especially in situations where a borrower is at risk. A lender will want a consistent, if lower, payment stream rather than to take ownership of an abandoned house in a depressed market. As Lew Ranieri said, "You are almost always better off restructuring a loan in a crisis with a borrower than going to a foreclosure." So it is good economics, especially in a distressed market. Another response is that few people propose just giving money away, but instead want to tie it to some sense of risk and reward, or reaccounting of the banks' balance sheets. So how does that play out?

3. Upsides and Downsides

One reason giving away money to pay off underwater debts is a bailout, and thus politically unpopular, is that there would be a disconnect between who absorbed the costs on the downside and who gains the potential value from the upside. If taxpayers just paid off mortgage debts, banks and homeowners would gain a windfall that isn't directly shared with taxpayers. One way to deal with this is either to force creditors to eat a cost upfront -- they absorb the downside and then can benefit from the upside. The other is for taxpayers to gain from the upside, usually through the mass purchase and/or refinancing of mortgages. Let's look at the first way.

Why aren't bank servicers doing writedowns? There's a mix of bad incentives and poor resources that result in bad practices. The administration hasn't been aggressive with using financial fraud, like the range of practices including robosigning and documentation fraud, to force reform here, instead focusing on removing legal liabilities from the banks. Maybe that task force will someday do something, but from my read even sympathetic observers think it was a wasted opportunity. 

But even if policy is centered on forcing servicers to clean up their fraud, there's a lot of creditor free-riding in ad hoc debt writedowns that becomes problematic. Is writing down first mortgages good policy even if junior mortgages, often held by the biggest banks, are untouched? If home equity lines of credit are acting as a last line of income maintenance and credit for households in this weak recovery, is it wise to push policy to extinguish them to adjust first mortgages? If you wipe out both, isn't that a giant transfer to other creditors like auto lenders, private student loans, and credit card companies? Should we be concerned about moral hazard from the debtor's side? You need some mechanism to coordinate and bind the collective behavior of creditors while preventing free riding and also bringing in impartial adjudication, which is a traditional function of bankruptcy. Bankruptcy reform was famously not pushed by the administration, and to me that was its biggest mistake.

The other approach to avoid a bailout is for the government to gain a share of the upside for taking on the downside. This is one reason writedowns for the GSEs make sense: we gain the upside, as we own the GSEs, and we're already on the hook for the downside, so the risk on the downside isn't a "bailout" but prudent policy.

When it comes to dealing with the broader housing market, a lot of the programs proposed, like revitalizing HOLC or Senator Merkley's plan on refinancing, would have taxpayers put up money but gain in the upside. Even the IMF is now encouraging the United States and other countries to investigate bringing back something like an HOLC. The two counter-arguments would be that HOLC still had a high redefault rate, a rate that would have a lot of people crying foul. The second is the problem of what to pay for the mortgages. Recent attempts to use eminent domain to purchase mortgages at below-market rate in order to compensate taxpayers for absorbing these risks in a terrible market also have a lot of people crying foul.

My general thought is that moral hazard can be a problem, but the misery and wasted lives of mass unemployment is a much bigger problem. That said, bankruptcy and these government programs eliminate most moral hazard concerns. Bankruptcy can be done in such a way to hit homeowners as well; for the government program you'd want people to be trying to take advantage of them. That's why so many people have been shocked that the administration hasn't pushed on either.

What I find interesting is that all these articles about what could have been done with housing take the way TARP played out as given. But starting a HOLC program, rebooting the broken servicing model, or otherwise writing down mortgage principal would have been significantly easier if the banks were put into a receivership in early 2009. TARP policy, which was to protect the banks' balance sheets at all costs, worked counter-productively, putting administration resistence to enacting even the lowest-hanging policy fruit. Receivership would have cost more upfront, but it would have been significantly easier to tackle these problems. There is a major debate to have on this topic.

 

Mike Konczal is a Fellow at the Roosevelt Institute. Follow or contact the Rortybomb blog:

  

Share This

How Does Education Help in the Great Recession?

Aug 21, 2012Mike Konczal

There's a new report from Anthony Carnevale, Tamara Jayasundera, and Ban Cheah, "Weathering the College Storm," that has attracted some attention in the economic blogs.

There's a new report from Anthony Carnevale, Tamara Jayasundera, and Ban Cheah, "Weathering the College Storm," that has attracted some attention in the economic blogs. Dylan Matthews wrote about it here and again here, with Dean Baker and Larry Mishel adding in critical commentary.

The report looks at who has gained the most jobs since the "recovery" started, a period they benchmark to January 2010. They find that people with bachelor's degrees and some college have gained all the jobs, while people with just a high-school diploma or less haven't gained any jobs over this time period. They also find that about 80 percent of the new jobs created since January 2010 have gone to men.

What should one conclude? Well, one conclusion is that we wouldn't have any unemployment if we had fewer women and more men. Since men are gaining all the jobs, it stands to reason that if we, on net, had more men and fewer women, we'd have a lot more people employed. Public policy should involve job-training programs where unemployed women get boyish haircuts and study movies like the cult 1980s hit Just One of the Guys and other high school movies loosely based on Twelfth Night. They should learn about swagger, sports metaphors, and that thing where dudes treat job requirements as suggestions when they apply for them, while women don't apply unless they have all of the requirements.

You might point out that I must have skipped a step somewhere. When we are so far away from full employment, does this analysis make sense? Instead of actually reflecting the proper allocation of labor this is just reflecting the fact that, for a variety of reasons including discrimination, men are jumping to the front of the queue to take all of the new jobs that are created. But the report seems to go in the other direction and argue that if there were a lot more college-educated workers we'd have more employment; alternatively, the lack of properly educated workers is a check on recovery.

Dean Baker and Larry Mishel focus on the fact that unemployment rates have gone up for college-educated workers and that most of the big net job increases have gone to those with post-bachelor degrees. I'm interested in the issue of line-jumping. How much does growing employment for college-educated workers in this recession have to do with being prepared for a variety of new, cutting-edge jobs that require a high level of education? And how much is education like a zero-sum hedge that puts the person in question at the front of the line for the limited jobs the economy is creating, even if those jobs require less education?

This chart from the report is interesting:

These are numbers since the recovery began in January 2010. Here people with bachelor's degrees have substantial growth in "high education" occupations. But they also have substantial growth in middle-education ones as well. Meanwhile, those with associate degress have significant growth in "low education" occupations. All the while those with high school diplomas are falling out of middle-education occupations. So two big trends are those with a high-school diploma being kicked out of middle-education (and presumably middle-class) jobs, combined with a down-tier move in education -- those with bachelor's degrees taking middle-education jobs and those with associate degrees taking low education jobs.

The 866,000 jobs lost in middle-education for those with a high school diploma or less are largely a function of the job category "office and administrative support occupations" (see Table 9 of the main report). There were 502,000 jobs lost for high-school diploma or less education in this category; if this is excluded it is a significantly different analysis. Bryce Covert and I flagged this category of work as explaining a lot of missing jobs for women and a broader change in the work environment for GOOD Magazine (data supplement here). This is a function of both longer-term trends and a speedup that has taken place in workplaces since the recession, where people are expected to do more with less. Workplaces keep the same amount of work even as they lose their support staff. So these changes aren't just the result of technological change, but reflect the way that recessions are reworking office environments to put more pressure on workers.

There's no denominator in the graphic above. Is the percentage of those with an associate degree working in the low-education occupations increasing, or has it held constant? What do these changes look like? Though not definitive, it would give us a clue as to whether or not this hedge aspect of education, the ability to jump to the front of the line for jobs, even crappy jobs, is in play in this weak recovery. I take education by occupation for all workers over 25, first quarter 2010 and first quarter 2012, from BLS/CPS, using the reports division of education levels, and compare the percentage of each education group in an occupation before and after to see how they are changing:

As we can see, there is a movement downward in education. BAs gain in their share of medium-education jobs, while AAs and some college gain in the low-education jobs.

In a buried part of the report, the authors anticipate this, noting "increased hiring of more educated workers in low- and middle-education occupations raises a valid concern about whether the workers need more education to perform the tasks or whether workers are being 'underemployed' in a slack labor market. This concern is addressed in detail in the Center on Education and the Workforce report, The Undereducated American....The analysis found a Bachelor’s degree wage premium in jobs at all education levels. The simple fact that employers are willing to pay more for educated workers suggests that they see added benefit in such workers."

I'm willing to believe this, though it still wouldn't directly address the underemployment issue. However, the analysis cited (page 28) only looks at 2007 through 2009, and doesn't look at people specifically hired in that period, much less the recovery. That premium has a lot to do with differentiation within occupations that analysis isn't capturing, like rookie cops and veteran detectives falling under the same occupation, but the second more likely to have more education and pay. But to the extent that premium exists, it isn't clear that it is going to people who now require some college to get even the most menial jobs our economy is producing.

When the economy is stalled, the limited number of new jobs will create certain winners and certain losers. But the first priority for us isn't to make sure that we help people fight for the scraps of a weak economy; it's that we grow the economy and demand full employment to provide for all.

Mike Konczal is a Fellow at the Roosevelt Institute. Follow or contact the Rortybomb blog:

  

Share This

Romney's Failed Unemployment Strategy and the Bizarro Stimulus of Paul Ryan

Aug 13, 2012Mike Konczal

Mitt Romney aired an ad last summer titled "Bump in the Road." It attacked President Obama's record on mass unemployment by linking it to a comment he made about there being bumps in the road to economic recovery. A group of people stood on a road in a desert, holding signs explaining their years of unemployment, their student debts, and their struggling families (something not dissimilar to the We Are the 99% Tumblr that started later that year).

Mitt Romney aired an ad last summer titled "Bump in the Road." It attacked President Obama's record on mass unemployment by linking it to a comment he made about there being bumps in the road to economic recovery. A group of people stood on a road in a desert, holding signs explaining their years of unemployment, their student debts, and their struggling families (something not dissimilar to the We Are the 99% Tumblr that started later that year). They pointed to the real suffering that goes on beyond numerical aggregates like the unemployment rate.

I remember this ad, because I remember several liberals being worried about this type of Romney campaign. Why? Because the liberals in question basically agreed with it. President Obama was trying to make a Grand Bargain with unemployment above 9 percent. The weak recovery was accepted as a given by the administration instead of the problem that had to be tackled. There was a lot of debate over what could be done and how, but at that point unemployment was off the table. President Obama would pivot back to jobs that fall, but it would remain a quiet priority, especially after so much time had been wasted. And it was a worry that if Mitt Romney ran a campaign that was all about unemployment all the time, President Obama would lose. I thought this was correct at the time.

That has changed with Paul Ryan now announced as Romney's vice presidential running mate. This appears to signal that the Romney campaign will move away from the previous focus on unemployment towards arguing for the conservative transformation of the federal government and the social safety net. This move is being interpreted as a sign of weakness from the campaign, one where they are worried that their previous strategy was failing. But why was the unemployment message failing? The economy isn't much stronger, so it hasn't lost its potency. Mitt Romney's job creation record was being attacked, but that only gets you so far. I think a major reason why is because of an odd contradiction one can see from the recent "Romney Program for Economic Recovery, Growth, and Jobs" released by Romney's economics team. Romney has no actual interest in trying to bring unemployment down faster, which blunts the ability to really say anything about unemployment, but his economics team also wasn't signing off on the far-right's bizarro stimulus plans.

There's already been a lot written on how the paper distorts the research it cites. The paper claims to "speed up the recovery in the short run." How? "By changing course from the policies of the current administration and ending economic uncertainty." What are the bold policies to help those unemployed people President Obama ignored? Tax code reform, block-granting Medicaid, and repealing Dodd-Frank and Obamacare while making "cost-benefit analysis important features of regulation."

Which is to say that Romney wanted to focus on unemployment, but had no real serious plan on how to get unemployed people jobs. I can, quickly, come up with a set of conservative stimulus ideas on how to get the economy going again, but the wide range of these programs are missing from Romney's economics report. They aren't going to hire market monetarists to run the Federal Reserve. Mitt Romney just publicly said the Federal Reserve shouldn't go ahead with another round of quantitive easing [1]. There isn't the argument that the government should just not collect taxes for a year or two with borrowing costs so low, which will also make it that much harder to raise taxes to Clinton-era rates afterwards. There's nothing in the paper about housing, even though one of Romney's advisors is well known for his mass refinancing program to help boost demand. And there's no conditional lending to states to prevent layoffs on the condition that they dismantle public sector unions, or privatize certain government services, or whatever.

Ideas have consequences, and the fact that Romney has no actual ideas for how to get the unemployed jobs means that making unemployment a big issue is only going to have so much traction with the electorate. "The long-term unemployed should vote for me so I can go after financial regulations," or "Vote for me, because I'll just ignore mass unemployment outright rather than not do enough and then pivot away" aren't political strategies that capitalize on the big vunerability Obama has on economic weakness.

Given the number of policy entrepreneurs on the right, it's almost shocking how little effort I've seen to get creative with getting unemployment down. The policy for unemployment is just a set of conservative reforms conservatives would want to see anyway regardless of the economy. And the general message seems to be that unemployment is unfortunate, but the downside risks of trying to combat it are far too high. Better to just get through this period and focus on the long-term economy. The unemployed are, in fact, just bumps in the road.

But the Romney Program document is interesting because it avoids embracing something I'll call "bizarro stimulus." These are arguments that doing things traditionally thought of as the opposite of economic stimulus will be the real stimulus and help bring unemployment down. Romney's economics team doesn't seem to want to go in that direction, yet that is the direction of the House Republicans and of Paul Ryan.

Many economists believe that the Federal Reserve should lower rates, but that a "zero lower bound" holds conventional monetary policy in check. The debate is whether and how unconventional monetary policy can help. In bizarro stimulus, the problem is that the rate is at zero. If you were to raise that rate, you would get capital going again. Here's Paul Ryan from Summer 2010, arguing that "I think literally that if we raised the federal funds rate by a point, it would help push money into the economy, as right now, the safest play is to stay with the federal money and federal paper." This is usually thought of as incorrect by most economists, but that's why it is bizarro stimulus. Ryan has also promoted bills to drop the dual mandate of the Federal Reserve, even though the problem is the Federal Reserve not taking its dual mandate seriously enough.

When the economy is weak and we are far away from full employment, we should run a larger deficit in order to boost demand. Austerity and the slashing of government spending will actually make the economy worse in these times. Unless you are in bizarro economics, under which austerity can expand the economy. David Brook wrote back in 2010, in an article called "Prune and Grow," that “Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions.” Though this research has many serious problems, it became part of the core of the new conservatives in the House, a group Paul Ryan is influential with. Republicans' economic policy in 2011 was all about expansionary austerity, with their JEC report making several references to the possibility of austerity being offset by confidence and certainty. Romney actually pointed out the absurdity of expansionary austerity back in May of this year, noting "I don’t want to have us go into a recession in order to balance the budget." Nobody could tell if Romney was going off message with that statement.

It's interesting that Romney's advisors don't touch either of these ideas, yet they are an important part of how the House Republicans approach the economy. Will the Ryan pick also signal that Romney will move much further to the right on economic issues? We've rarely ever had to ask if a presidential candidate agrees with the views of his vice-presidential running mate, rather than the other way around, but that is now a relevant question.

[1] Can you imagine the debate and coverage that would happen if President Obama encouraged Bernanke to move with QE3? Yet Mitt Romney calling out against QE3 doesn't get noticed, and certainly isn't thought of as "politicizing the Federal Reserve," even though it obviously is.

Mike Konczal is a Fellow at the Roosevelt Institute. Follow or contact the Rortybomb blog:

  

Share This

America's Future in an Enduring Recession

Aug 9, 2012Herbert J. Gans

Americans have been taught to hope for the best, but to avoid a bleak future, we need to push for policies that support job creation.

Americans have been taught to hope for the best, but to avoid a bleak future, we need to push for policies that support job creation.

America's national optimism is so pervasive that not much public thought has yet been given to the possibility that the Great Recession could endure for many years. Even if GDP, the Dow Jones, and other standard economic indicators suggest that the overall economy is healthy once more, labor markets may not recover. Thus, all employment-related indicators could remain low to the end of the decade and beyond, justifying a guess about the social and political effects of an enduring recession. (Guess must be underlined because many unexpected happenings can always wreck predictions.)

If the country faces a continuing labor market recession, short- and long-term unemployment are likely to rise. So will underemployment, such as involuntary part-time work and shorter work weeks for full-time workers. Discouraged workers will continue to drop out of the labor market, older ones will head for involuntary retirement, and some young people may not obtain a steady job during the entire period. The total number of labor market victims will rise well above the current official estimate of close to 15 percent of the labor force. And this estimate leaves out other victims of the recession -- people brought down by foreclosures, humongous debt, and lost pensions, as well as poor people driven into more severe poverty. 

If the numbers rise sufficiently, the social effects of the enduring recession, which are now still mostly hidden, will become apparent. High levels of depression and other emotional illnesses and related physical ones will multiply, as will family conflict and breakup, interpersonal and criminal violence, and other kinds of self and social destruction. Militant extremists threatening bodily destruction of immigrant and other vulnerable populations may increase in number as well. The medical community and the media are likely to be talking about post-traumatic economic stress disorder. America will be full of very unhappy people.

Of course, November 6, 2012 could bring a Democratic victory of sufficient proportions so that the advocates of serious government action to revive the economy could get their way. If the Democratic majority in the Senate is filibuster-proof and the president is prepared to be transformative, only the conservative House Republicans can effectively sabotage their agenda. If all went well, a new, large, and targeted stimulus, complemented by tax reforms and related policies, would enable the federal government to help create decent jobs and provide sufficient income support for the still-jobless victims of the recession. In the process, consumer demand would be stimulated and the consumer economy would be revived.

But in the event that government continues to be polarized and dysfunctional, politics could worsen economic victimization. In hard economic times, even the economically secure citizens tend to become less generous toward victims, worrying that government funds for the suffering would be taken out of their income and wealth. Some will fear that they will become economic victims too. The greater the shrinkage in public generosity, the greater also the readiness to demonize the economy's victims. The better off and even some not so well off are already describing the needy as moochers or takers and the jobless as too lazy to work. The recession's victims will be described as undeserving of help. Since the better off are more likely to be white and the economic victims disproportionally nonwhite, the latter will probably also experience more intense racial antagonism.

Since many Americans still see no difference between family and governmental budgets, and since recessionary times require familial belt-tightening, many people even outside the GOP base might support additional governmental belt-tightening as well. As a result, elected officials who are required to cut their budgets can further reduce the welfare state and welfare programs without suffering political consequences. And despite what people tell the pollsters about the desirability of higher taxes on the rich, the citizens that matter politically do not seem to contest the GOP argument that the wealthy need further tax reductions so that they can be "job creators."

So far, my long range guessing has emphasized the dark side of the future, but some corrective measures could take place, too. Three such developments seem most likely.

The first is new economic growth. All recessions and depressions, great or small, must end some day, and presumably so will the present one. They could end as a result of the pent up demand that is unfulfilled during deflationary times; for example, as people's necessities wear out and the population increases.

Demand may also return as a result of unpredictable new economic growth resulting from technological and other innovations. New products resulting from cyberspace breakthroughs, including robots as standard equipment at work and at home, are possible examples. So are new industries and businesses to help people survive 105 degree summers.

To be sure, American innovations that can be copied by lower wage economies are eventually copied, and even correlations that once existed between a high GDP and a healthy labor market can no longer be guaranteed. If global competition and an expensive dollar, high U.S. worker productivity, employer reductions in wages and working conditions, and other current impediments to job security and a "middle class" income remain in place, America's standard of living will not return to past levels.

The Great Depression was ended by World War II, which eventually brought about full employment at high wages. Although possible future wars are presumably on the Pentagon's drawing boards, they will not be labor-intensive and can no longer rescue a crippled labor market.

The second possibility is business community protest. Despite the business community's never-ending demand for reductions in taxes and "onerous" regulations, one could imagine that eventually at least the big corporations that earn their profits from consumer demand will begin to hurt. As a result, they might support the public pressure on government to stimulate that demand. They might even do so while continuing to ask for lower taxes and less regulation; giving up such a once profitable ideology will take time. However, some might be ready to trade, supporting stimuli, infrastructure projects, and anything else that provides purchasing power to the people they need to buy their goods and services.

If the business community's economic pain is sufficient, it might support a revival of the moderate Republican wing. Under such conditions, the rest of the party may agree to direct stimulation of the country's purchasing power. Conceivably, such a GOP might even initiate some of the economic policies they have long prevented Democrats from implementing. One must remember that nearly half a century ago, President Nixon was able to persuade his party to let him initiate relations with Communist China.

The third possibility is popular protest. Although the Left has traditionally believed that eventually the general public will demand economic relief, America's voters have only rarely pressed for such change. Right now, they seem to be angered more by social and related issues than economic ones. Or maybe they suspect that demonstrating for economic change is unlikely to be successful.

Moreover, mainstream America has become more diverse, more spread out, and harder to organize than in the past, and the radical unions that mobilized workers during the Great Depression no longer exist. New sociopolitical movements that fit the times are conceivable, but so far only some of the remaining Occupy groups are working toward economic goals, and none yet look as if they could turn into national movements. The victims of the current economy remain politically passive, if only because they must devote themselves to surviving economically and emotionally. In addition, they may feel (rightly) that they have nowhere to turn. Trust in government is at an all-time low, and other political organizations of the needed magnitude do not exist. Liberals and the left stand ready to offer help, but they have not shown that they can transcend the class and ideological differences that separate them from the economy's victims.

Historians still do not agree about the political effects of the popular protests that occurred during the Great Depression. The ghetto uprisings that took place in the 1960s, some simultaneously all across the country, did not produce immediate economic results. Since then, the de facto national incarceration policy has helped to keep the ghettos "quiet," and in recent years, the poor young men not (yet) in jail seem to have more often taken their discontents out on each other.

Perhaps effective political responses to the recession will emerge when more affluent sectors of the population are seriously hurt by the economy, notably the professional and managerial classes that have flourished economically in recent decades. They are politically skillful and know how to make themselves heard. Even Republicans might pick up their ears if the Tea Party and related groups, as well as the evangelicals who have previously concerned themselves only with "social" issues, indicate they now also need economic help. What if they hinted strongly that they will now have to vote their pocket books? Then it is even possible to imagine an election that unites many of the economically victimized and brings them together with liberals and liberally inclined independents, at least temporarily. If they can coalesce with others who stand to gain from a healthier labor market, they might be able to persuade the incumbent president to turn into a contemporary FDR or LBJ.

One would think that if a recessionary or deflationary economy endures, eventually something has to give. Although a dystopian welfare state in which the economy's many victims will live at bare subsistence level is conceivable, perhaps America will instead elect a government devoted above all to saving and creating jobs. However, such ideas are credible only in a country in which ordinary people exercise more political clout than entrepreneurs and speculators.

Herbert J Gans is the Robert S. Lynd Professor Emeritus of Sociology at Columbia University. His most recent book is Imagining America in 2033 (2008).

Share This

What is the Economic Policy Uncertainty Index Really Telling Us?

Aug 8, 2012Mike Konczal

Conservatives have crafted a measurement that uses their own rhetoric as evidence to support their economic talking points.

Do you want to see a magic trick? It doesn't involves cards, fire, or anyone levitating. Instead I'm going to show you a set of Republican talking points magically turn into an economic index -- an index that Republicans then use to argue for their policies.

Mitt Romney's economics team of Hubbard, Mankiw, Taylor, and Hassett have rapidly turned around an economic policy sheet titled "The Romney Program for Economic Recovery, Growth, and Jobs." Matt Yglesias has a post on the issue of sluggish growth and Dylan Matthews has one on their review of the stimulus literature. Brad DeLong takes the deep dive through the entire piece here.

I'm interested in something I haven't seen people critically discuss enough, and that is the "policy uncertainty index." The Romney plan argues that "uncertainty over policy - particularly over tax and regulatory policy - limited both the recovery and job creation. One recent study by Scott Baker and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago found that this uncertainty reduced GDP by 1.4 percent in 2011 alone, and that restoring pre-crisis levels of uncertainty would add 2.3 million jobs in 19 months." This appears to be a new talking point for the candidate's team, as the same language was in a Wall Street Journal editorial by Hubbard over the weekend.

Let's take a critical look at this paper, "Measuring Economic Policy Uncertainty," which also has its own website, as it is likely to come up again in the election season. There are two sets of issues, one related to what the index actually shows and another related to the construction of the index itself.

Interpreting the Index

First off, does the paper show what Romney's team claims? Matt O'Brien notes that the big run-up in uncertainty in 2011 is a function of the battle over the debt ceiling. This is very obvious from the graph of their index:

 

 

I personally think we can blame that fiasco on House Republicans. But even if you think the Democrats share some of the blame, it has nothing to do with Dodd-Frank or Obamacare. But Romney's team is using this uncertainty issue to call for repealing both.

That said, the rate is elevated starting around 2009. Why is that? The uncertainty index consists of three parts. The first a news search for articles on policy uncertainty, which we'll return to in a minute. The second part has to do with disagreements among economic forecasters. And the last part is "the number of federal tax code provisions set to expire in future years." Tax code provisions set to expire are weighted by the formula 0.5^((T+1)/12), where T is the number of months until the tax code expires. That means these provisions weigh more in the analysis as they get closer to expiring -- those with more time left have weights approaching 0, and those close to expiration approach 1.

And of course, as the paper notes, "An important recent example involves the Bush-era income tax cuts originally set to expire at the end of 2010." The way the weighting works is that it jumps in the two years before expiration, which means the tax cuts scheduled to expire at the end of 2010 really start to matter for the index starting in late 2008, when President Obama is elected.

Watch that again. George W. Bush's economic advisors, like Glenn Hubbard, pass a series of tax cuts in the early 2000s that are set to expire 10 years out. When Obama gets into office the deadline starts to approach, creating "uncertainty" in this index. Then people like Hubbard blame President Obama for all that uncertainty caused by the design of the Bush tax cuts. Brilliant.

A Magic Trick

But now for that magic trick. How do they construct the search of newspaper articles for their index, which generates a lot of the movement?

Their news search index is constructed with four steps. They first isolate their search to a set of articles from 10 major newspapers (USA Today, the Miami Herald, the Chicago Tribune, the Washington Post, the Los Angeles Times, the Boston Globe, the San Francisco Chronicle, the Dallas Morning News, the New York Times, and the Wall Street Journal). They then search articles for the term "uncertainty" or "uncertain." They then filter again for the word "economic" or "economy." With economic uncertainty flagged, they then filter again for one of the following words to identify government policy: "policy," "'tax," "spending," "regulation," "federal reserve," "budget," or "deficit."

See the problem? We don't know what specific stories are in their index; however, we can use their search terms listed above to find which articles would have likely qualified. Let's take a story from their first listed paper, USA Today"Obama taking aim at GOP pledge on campaign trail," from August 28, 2010 (for the rest of this post, I'm going to underline the words in quotes that would trigger inclusion in their policy uncertainty index):

Brendan Buck, a spokesman for the House GOP lawmakers who crafted the pledge, said "it's laughable that the president would try to lecture anyone on spending." [....] Buck said the pledge was developed to address voter worries about high unemployment and record levels of government spending and debt.

"While the president has exploded federal spending and ignored Americans who are asking, 'Where are the jobs?', the pledge offers a plan to end the economic uncertainty and create jobs, as well as a concrete plan to rein in Washington's runaway spending spree," Buck said.
Spokespeople for the conservative movement tell reporters that President Obama's policies are causing economic uncertainty. Reporters write it down and publish it. Economic researchers search newspapers for stories about economic uncertainty and policy, and create a policy uncertainty index out of those talking points. The conservative movement then turns around and points to the policy uncertainty index as scientifically justifying their initial talking points about Obama and uncertainty as well as the need to implement their policies. Taa-daa! Magic.
 
Two Other Issues
 

It's amazing how much of the GOP rhetoric you find when trying to replicate this index. With that in mind, there are two additional issues with the index, one empirical and the other theoretical. Let's start with this story, likely caught in their index, USA Today's "Minority leader accuses Obama, aides of 'job-killing,'" from August 28, 2010: "House Minority Leader John Boehner of Ohio used a speech in Cleveland to blame Obama's spendingtax and regulatory policies for creating uncertainty and stalling economic growth."

Let's pretend, after this story came out, that reporters follow up by asking a lot of experts what they think, and those experts say "There's little evidence to support Boehner's idea that uncertainty over regulation and policy are contributing to economic weakness." What happens? Do they cancel? No, the uncertainty index flags it as more economic uncertainty.

If Boehner, upon reading that story, went out the next day and gave a quote to a reporter that said "I no longer think that uncertainty caused by regulation is contributing to our economic problems," that would be flagged as more uncertainty!

Which is to say that the empirical problems with this measure of policy uncertainty always bias the results upward. Data is never perfect, so it is important to understand which way it is likely to bias. The noise machine of talking points biases this index upwards, but any stories pushing back against this uncertainty meme would also push the index upwards.

There's also the theoretical issue. Their story is one of a weak economy created by government policy uncertainty, of "taxes, government spending and other policy matters." Last fall, the authors wrote an editorial for Bloomberg arguing that their model showed that "harmful rhetorical attacks on business and millionaires," the NLRB's actions against Boeing, and Obamacare were all major factors in the weak recovery. These all point to the supply side of the economy.

But what about uncertainty from lack of demand? Consider a story that begins with "Keynesian economists argue that the economy today is weak because businesses are uncertain about future customers and workers are uncertain about their future jobs, and the textbook response to this situation is expansionary monetary and fiscal policy." This would be flagged in their index as a problem of government policy, though it is a story of weak aggregate demand.

This isn't a hypothetical. Let's look at another story likely captured by their index, USA Today, "Retail sales drop for first time in 5 months," August 13, 2008:

Retail sales fell in July, the weakest performance in five months, as shoppers shunned autos and other big ticket items. [....] Analysts said the poor showing in July, the last month for bulk mailings of stimulus checks, raised concerns about consumer spending going forward.

"Cautious and uncertain consumers are watching their wallets and with the back-to-school shopping season under way, that does not bode well for retailers," said Joel Naroff, chief economist for Naroff Economic Advisors. [....] The disappointing performance of retail sales meant that the consumer sector, which accounts for two-thirds of total economic activity, got off to a weak start at the beginning of the third quarter.

As the economy is going into freefall, as the worst recession since the Great Depression is starting, as the Great Moderation is coming to an end and the violence of the business cycle and a prolonged downturn shows its ugly head again, consumers are reducing consumption because of economic uncertainty. Yet this index reads this as just another example of out-of-control government policy and records it as such. The index will see stories about demand uncertainty as stories about supply, which means it will have trouble telling any accurate story about the Great Recession and our current troubles.

(I have a follow up post, taking apart the rest of the index, here.)

Follow or contact the Rortybomb blog:

  

 

Conservatives have crafted a measurement that uses their own rhetoric as evidence to support their economic talking points.

Do you want to see a magic trick? It doesn't involves cards, fire, or anyone levitating. Instead I'm going to show you a set of Republican talking points magically turn into an economic index -- an index that Republicans then use to argue for their policies.

Mitt Romney's economics team of Hubbard, Mankiw, Taylor, and Hassett have rapidly turned around an economic policy sheet titled "The Romney Program for Economic Recovery, Growth, and Jobs." Matt Yglesias has a post on the issue of sluggish growth and Dylan Matthews has one on their review of the stimulus literature. Brad DeLong takes the deep dive through the entire piece here.

I'm interested in something I haven't seen people critically discuss enough, and that is the "policy uncertainty index." The Romney plan argues that "uncertainty over policy - particularly over tax and regulatory policy - limited both the recovery and job creation. One recent study by Scott Baker and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago found that this uncertainty reduced GDP by 1.4 percent in 2011 alone, and that restoring pre-crisis levels of uncertainty would add 2.3 million jobs in 19 months." This appears to be a new talking point for the candidate's team, as the same language was in a Wall Street Journal editorial by Hubbard over the weekend.

Let's take a critical look at this paper, "Measuring Economic Policy Uncertainty," which also has its own website, as it is likely to come up again in the election season. There are two sets of issues, one related to what the index actually shows and another related to the construction of the index itself.

Interpreting the Index

First off, does the paper show what Romney's team claims? Matt O'Brien notes that the big run-up in uncertainty in 2011 is a function of the battle over the debt ceiling. This is very obvious from the graph of their index:

 

 

I personally think we can blame that fiasco on House Republicans. But even if you think the Democrats share some of the blame, it has nothing to do with Dodd-Frank or Obamacare. But Romney's team is using this uncertainty issue to call for repealing both.

That said, the rate is elevated starting around 2009. Why is that? The uncertainty index consists of three parts. The first a news search for articles on policy uncertainty, which we'll return to in a minute. The second part has to do with disagreements among economic forecasters. And the last part is "the number of federal tax code provisions set to expire in future years." Tax code provisions set to expire are weighted by the formula 0.5^((T+1)/12), where T is the number of months until the tax code expires. That means these provisions weigh more in the analysis as they get closer to expiring -- those with more time left have weights approaching 0, and those close to expiration approach 1.

And of course, as the paper notes, "An important recent example involves the Bush-era income tax cuts originally set to expire at the end of 2010." The way the weighting works is that it jumps in the two years before expiration, which means the tax cuts scheduled to expire at the end of 2010 really start to matter for the index starting in late 2008, when President Obama is elected.

Watch that again. George W. Bush's economic advisors, like Glenn Hubbard, pass a series of tax cuts in the early 2000s that are set to expire 10 years out. When Obama gets into office the deadline starts to approach, creating "uncertainty" in this index. Then people like Hubbard blame President Obama for all that uncertainty caused by the design of the Bush tax cuts. Brilliant.

A Magic Trick

But now for that magic trick. How do they construct the search of newspaper articles for their index, which generates a lot of the movement?

Their news search index is constructed with four steps. They first isolate their search to a set of articles from 10 major newspapers (USA Today, the Miami Herald, the Chicago Tribune, the Washington Post, the Los Angeles Times, the Boston Globe, the San Francisco Chronicle, the Dallas Morning News, the New York Times, and the Wall Street Journal). They then search articles for the term "uncertainty" or "uncertain." They then filter again for the word "economic" or "economy." With economic uncertainty flagged, they then filter again for one of the following words to identify government policy: "policy," "'tax," "spending," "regulation," "federal reserve," "budget," or "deficit."

See the problem? We don't know what specific stories are in their index; however, we can use their search terms listed above to find which articles would have likely qualified. Let's take a story from their first listed paper, USA Today"Obama taking aim at GOP pledge on campaign trail," from August 28, 2010 (for the rest of this post, I'm going to underline the words in quotes that would trigger inclusion in their policy uncertainty index):

Brendan Buck, a spokesman for the House GOP lawmakers who crafted the pledge, said "it's laughable that the president would try to lecture anyone on spending." [....] Buck said the pledge was developed to address voter worries about high unemployment and record levels of government spending and debt.

"While the president has exploded federal spending and ignored Americans who are asking, 'Where are the jobs?', the pledge offers a plan to end the economic uncertainty and create jobs, as well as a concrete plan to rein in Washington's runaway spending spree," Buck said.
Spokespeople for the conservative movement tell reporters that President Obama's policies are causing economic uncertainty. Reporters write it down and publish it. Economic researchers search newspapers for stories about economic uncertainty and policy, and create a policy uncertainty index out of those talking points. The conservative movement then turns around and points to the policy uncertainty index as scientifically justifying their initial talking points about Obama and uncertainty as well as the need to implement their policies. Taa-daa! Magic.
 
Two Other Issues
 

It's amazing how much of the GOP rhetoric you find when trying to replicate this index. With that in mind, there are two additional issues with the index, one empirical and the other theoretical. Let's start with this story, likely caught in their index, USA Today's "Minority leader accuses Obama, aides of 'job-killing,'" from August 28, 2010: "House Minority Leader John Boehner of Ohio used a speech in Cleveland to blame Obama's spendingtax and regulatory policies for creating uncertainty and stalling economic growth."

Let's pretend, after this story came out, that reporters follow up by asking a lot of experts what they think, and those experts say "There's little evidence to support Boehner's idea that uncertainty over regulation and policy are contributing to economic weakness." What happens? Do they cancel? No, the uncertainty index flags it as more economic uncertainty.

If Boehner, upon reading that story, went out the next day and gave a quote to a reporter that said "I no longer think that uncertainty caused by regulation is contributing to our economic problems," that would be flagged as more uncertainty!

Which is to say that the empirical problems with this measure of policy uncertainty always bias the results upward. Data is never perfect, so it is important to understand which way it is likely to bias. The noise machine of talking points biases this index upwards, but any stories pushing back against this uncertainty meme would also push the index upwards.

There's also the theoretical issue. Their story is one of a weak economy created by government policy uncertainty, of "taxes, government spending and other policy matters." Last fall, the authors wrote an editorial for Bloomberg arguing that their model showed that "harmful rhetorical attacks on business and millionaires," the NLRB's actions against Boeing, and Obamacare were all major factors in the weak recovery. These all point to the supply side of the economy.

But what about uncertainty from lack of demand? Consider a story that begins with "Keynesian economists argue that the economy today is weak because businesses are uncertain about future customers and workers are uncertain about their future jobs, and the textbook response to this situation is expansionary monetary and fiscal policy." This would be flagged in their index as a problem of government policy, though it is a story of weak aggregate demand.

This isn't a hypothetical. Let's look at another story likely captured by their index, USA Today, "Retail sales drop for first time in 5 months," August 13, 2008:

Retail sales fell in July, the weakest performance in five months, as shoppers shunned autos and other big ticket items. [....] Analysts said the poor showing in July, the last month for bulk mailings of stimulus checks, raised concerns about consumer spending going forward.

"Cautious and uncertain consumers are watching their wallets and with the back-to-school shopping season under way, that does not bode well for retailers," said Joel Naroff, chief economist for Naroff Economic Advisors. [....] The disappointing performance of retail sales meant that the consumer sector, which accounts for two-thirds of total economic activity, got off to a weak start at the beginning of the third quarter.

As the economy is going into freefall, as the worst recession since the Great Depression is starting, as the Great Moderation is coming to an end and the violence of the business cycle and a prolonged downturn shows its ugly head again, consumers are reducing consumption because of economic uncertainty. Yet this index reads this as just another example of out-of-control government policy and records it as such. The index will see stories about demand uncertainty as stories about supply, which means it will have trouble telling any accurate story about the Great Recession and our current troubles.

(I have a follow up post, taking apart the rest of the index, here.)

Follow or contact the Rortybomb blog:

  

 

Share This

A Year After S&P's Rating Downgrade, US Treasuries Trade 1% Lower

Aug 5, 2012Mike Konczal

On August 5th, 2011, one year ago today, S&P downgraded the United States from AAA to AA+. This was four days after Congress voted to raise the debt ceiling. S&P did this because they didn't like the politics of the debt ceiling, implicitly blaming the Republicans' aggressive threat of a default on the national debt to obtain their political goals.

On August 5th, 2011, one year ago today, S&P downgraded the United States from AAA to AA+. This was four days after Congress voted to raise the debt ceiling. S&P did this because they didn't like the politics of the debt ceiling, implicitly blaming the Republicans' aggressive threat of a default on the national debt to obtain their political goals. "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed." And they did this because they wanted to nudge Congress to make big, Grand Bargain type changes. S&P was worried that, in the aftermath of the debt ceiling agreement, "new revenues have dropped down on the menu of policy options" and "only minor policy changes on Medicare and little change in other entitlements" would potentially be achieved in the near future.

Analysts at Treasury quickly noted, after reviewing the numbers, that S&P made a $2 trillion dollar mistake, which dramatically overstated the medium-term debt levels of the United States that were their economic justification. S&P stood by their downgrade while admitting the error.

The United States losing its AAA rating was a political shock. The verdict was quick from the center and the right - this would be incredibly harmful to the United States' ability to deal with its national debt. When S&P first brought up the possibility of the downgrade in July, the centrist think tank Third Way highlighted that "S&P estimates that a downgrade would increase the interest rates on U.S. treasuries by 50-basis points," and urged "Congress and the Administration [to] come together and pass a 'grand bargain' that will put us on a sustainable path and avoid a credit downgrade."

After the downgrade Mitt Romney noted that “America’s creditworthiness just became the latest casualty in President Obama’s failed record of leadership on the economy. Standard & Poor’s rating downgrade is a deeply troubling indicator of our country’s decline under President Obama."

Those are two empirical predictions. Did the downgrade increase interest rates on U.S. Treasuries 50-basis points? Would you go further and describe our creditworthiness itself as a casualty?

Here's FRED data on Treasury 10 years:

They are down a little over 1 full percentage point, from 2.58 percent to 1.51 percent. If you want to consider the baseline the 3 percent interest rates from right before the downgrade, or the 2 percent interest rates that happened afterwards, then rates are down either 1.5 or 0.5 percentage points. That's a major decline in the borrowing cost of the United States. One can't find the increase in rates in this market. Counterfactuals are difficult - perhaps S&P is correct, and 10-year Treasuries would be closer to 1 percent had there been no downgrade.

But that seems unlikely. Here's a previous link discussing ratings agencies' internal research finding that they consistently overstate the default risk of government debt. The ratings agencies can add value in thin markets with little history, or as a means of a coordinating research and action among market participants. But the United States' debt market is one of the most liquid, traded, researched and transparent markets in the world, and it seemed doubtful the ratings agencies were going to add much information with their downgrade. A year later the downgrade appeared to have been irrelevant to United States' borrowing costs. To the extent that they were relevant they signaled and reinforced a further move away from potential stimulus for the economy, which collapsed demand and drove even more money into government bonds and the interest rate down to 2 percent almost right away. But either way, low interest rates on US debt continues their downward march. Contrary to S&P, the financial markets are calling for a larger deficit, not a smaller one.

Follow or contact the Rortybomb blog:

  

Share This

The Republicans’ Medicaid Cruelty

Jul 30, 2012Jeff Madrick

This piece originally appeared in The New York Review of Books.

“The essential American soul,” claimed D.H. Lawrence, “is hard, isolate, stoic, and a killer.” While the rejection by five state governments of the Affordable Care Act’s Medicaid expansion may not precisely illustrate Lawrence’s heated observation, it does suggest a contemporary vein of cruelty in America that is deeply disturbing.

This piece originally appeared in The New York Review of Books.

“The essential American soul,” claimed D.H. Lawrence, “is hard, isolate, stoic, and a killer.” While the rejection by five state governments of the Affordable Care Act’s Medicaid expansion may not precisely illustrate Lawrence’s heated observation, it does suggest a contemporary vein of cruelty in America that is deeply disturbing.

A new study published in The New England Journal of Medicine shows that providing greater medical insurance coverage for the poor has saved lives. Moreover, the ACA’s expansion of Medicaid requires little state money, since the federal government will pick up more than 90 percent of the costs over time, and 100 percent of the costs for the first few years. Yet Texas, Florida, Louisiana, South Carolina, and Mississippi—which together account for more than a sixth of the overall US population—have already rejected the plan, and as many as twenty other states, including New Jersey, Missouri, Iowa, Nebraska, and Nevada, have indicated they may follow suit.

Furthermore, these states already have among the highest numbers of citizens with no health insurance. Twenty-five percent of non-elderly Texans have no health insurance, for example, compared to the national average of about 18 percent. If the Obama Medicaid reforms were fully implemented, 15 to 17 million of the nation’s 50 million without health insurance would be covered. In a report just issued in late July, however, the non-partisan Congressional Budget Office estimates that the Medicaid expansion will only cover some ten million more, or a full third fewer than anticipated, because of the rejection of the plan by large states like Florida and Texas and others who have not yet formally announced their intentions.

This is particularly troubling in view of how important the Medicaid expansion is to low-income Americans. The two Harvard economists who authored the NEJMstudy have found that there are 6 percent fewer deaths in several states that had expanded Medicaid in earlier years compared to nearly contiguous states that did not. Fortunately, according to the recent CBO report, three million of those who will not be covered in states that reject the Medicaid expansion will qualify for and probably buy insurance through another provision in the ACA—a program that provides subsidies to buy insurance for those who earn between 100 and 400 percent of the federal poverty level, which is $22,350 for a family of four.

What has enabled states to reject the expansion is the curveball thrown by the Supreme Court in its decision in June to uphold President Obama’s Affordable Care Act: not only did the court argue that the states need not participate in the new expansion, which the Obama administration had intended to be mandatory; it also said that the federal government could not withhold Medicaid payments for states that decide not to participate. Thus, the court created a way to undermine one of the most admirable achievements of the ACA, a sweeping expansion of a medical safety net for the neediest.

Read the full article here. 

Share This

Can We Start the Merkley Plan Now Using TARP (And Bypass a Dysfunctional Congress)?

Jul 30, 2012Mike Konczal

Senator Jeff Merkley (D-OR) has just released a new housing plan for dealing with the mortgage crisis by refinancing underwater mortgages titled "The 4% Mortgage: Rebuilding American Homeownership." This plan would create a Rebuilding American Homeownership (RAH) Trust, modeled after the HOLC plan in the Great Depression. It would buy out underwater mortgages for three years, then wind down while managing its mortgage portfolio.

Senator Jeff Merkley (D-OR) has just released a new housing plan for dealing with the mortgage crisis by refinancing underwater mortgages titled "The 4% Mortgage: Rebuilding American Homeownership." This plan would create a Rebuilding American Homeownership (RAH) Trust, modeled after the HOLC plan in the Great Depression. It would buy out underwater mortgages for three years, then wind down while managing its mortgage portfolio. Underwater mortgages would have three payment options, including a 15-year 4 percent interest rate plan to help rebuild equity, a 30-year 5 percent plan like a standard mortgage, and a two-part plan that splits the loan into a first mortgage equal to 95 percent of the home's current value and a "soft second" for the rest. Here are links to the summarythe full plan and a YouTube video introduction.

I think it is a great plan. Felix Salmon is also a "huge fan" of the plan and has a description of several of the positive features. Many will probably react to it like Matt Yglesias, who, after discussing the positive parts of the plan, notes that the "chances of Congress actually doing this are slim to none."

But what if this plan didn't need Congress? What if the Executive Branch could do this right now, on its own?

There is interest is moving forward. Senator Merkley told David Dayen that he was hoping that "pilot programs for RAH operating in several states between now and the end of the year." Treasury Secretary Timothy Geithner said that he'd be willing to try to "find legal authority and resources to -- to test [the RAH] on a pilot basis."

The report notes three potential homes for the plan: (1) FHA, (2) Federal Home Loan Banks system, or (3) the Federal Reserve. Of those, FHA seems like a potential place to launch the plan immediately. As the report mentions, "FHA already implements the FHA Short Refi program as one of the government's foreclosure prevention programs." What if the administration took the FHA Short Refi program and replaced it with what is needed to run the RAH? To launch this right away by replacing FHA Short Refi with the Merkley plan you'd need authority and cash, and FHA Short Refi has both.

Why does FHA Short Refi have the authority to implement this plan? FHA Short Refi plan is a part of TARP designed to deal with the housing crisis by modifying underwater mortgages. When Dodd-Frank passed in July 2010, special language was put in to limit the creation of new programs or initiatives under TARP. However, this project exists as part of that already-existing housing priority, and those programs can be modified. These programs are modified all the time to try to make them work better. HAMP, for instance, was modified earlier this year.

FHA Short Refi was designed to "enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth." So it looks like it has the authority to act and change its mission structure from Short Refi to the Merkley plan, provided that Treasury's lawyers (I believe) approve of the changes.

FHA Short Refi also has moneyAccording to SIGTARP's quarterly report to Congress from July 2012, Treasury had allocated $8.1 billion for FHA Short Refinance.

How many mortgages have been modified under the FHA Short Refi program since it started? "As of June 30, 2012, there have been 1,437 refinancings under the program." Less than 1,500 mortgages in the country have gone through this program. How much money has been spent? "Treasury has pre-funded a reserve account with $50 million to pay future claims and spent $6.6 million on administrative expenses." Less than $57 million dollars. Given $8.1 billion dollars to spend on helping the housing market, less than 0.7 percent of it has been allocated, impacting less than 1,500 people.

That's a bit mind-boggling, but the failure of FHA Short Refi to either impact homeowners, help the economy or use its resources could be the genesis for the success of the RAH. FHA can provide the baseline funding for the part of the mortgage that isn't underwater, while the additional resources necessary to ensure the additional funding for the underwater part of the mortgage can come from this FHA Short Refi. That $8 billion could be used to insure the other part of the mortgages involved, which would then be sold off in a new bond. Amplified in this way, that $8 billion dollars could be used to backstop tens of billions of dollars of new mortgages.

At that point funding would end, but we'd have a sense if it was working or not. And if that $8 billion can insure $100 billion dollars worth of underwater debt, between 10 and 18 percent of underwater debt could be refinanced. If it is successful, there will both be a good empirical argument for continuing with additional funding and a political coalition of other underwater homeowners who would want to participate. If it is a failure, then it is a good opportunity to end it right there.

With that in mind, it might be useful to remind ourselves why this plan is important as an economic matter. Most of the recent research finds that underwater mortgage debt is strongly linked with weak consumption, high unemployment, and sluggish wage growth - our economy is stuck in a "balance-sheet recession." The blockage of prepayment has created a windfall for creditors in a weak economy with low interest rates; as Felix Salmon notes "the CBO is saying that if we paid off current bondholders at 100 cents on the dollar, they would lose as much as $15 billion...They’re basically taking unfair advantage of the fact that homeowners are locked into above-market mortgage rates" and can't prepay or refinance their mortgages.

Beyond creating a hangover effect on aggregate demand and basic unfairness, underwater mortgages also blunt the ability of monetary policy to do its full job. Even Federal Reserve Chairman Ben Bernanke believes this is happening. Here's Bernanke at a press conference from last November:

One area where monetary policy has been blunted, the effects have been blunted, has been the mortgage market where very tight credit standards have prevented many people from purchasing or refinancing their homes and therefore the low mortgage rates that we’ve achieved have not been as effective as we had hoped. So, monetary policy maybe is somewhat less powerful in the current context than it has been in the past but nevertheless it is affecting economic growth and job creation.

That’s Fed speak for underwater mortgage refinancing being a major boom to boosting demand, which helps the economy as a whole, even people who have no mortgage or debt but are stuck in a terrible jobs market. Given how interested the Federal Reserve is in this blocked channel for the efficiency of monetary policy, I hope they are considering how they can play a role in this.

All in all, Merkley has put together an excellent plan and I believe we have the means to do it. It provides new stimulus while amplifying already existing monetary stimulus, plus it contains a measure of fairness between creditors and everyone else. When can we start?

 

Follow or contact the Rortybomb blog:

  

Share This

A Big Banker’s Belated Apology

Jul 30, 2012Jeff Madrick

This op-ed originally appeared at NYTimes.com.

This op-ed originally appeared at NYTimes.com.

Last week, in a CNBC interviewSanford I. Weill, the former chairman of Citigroup, said that America should separate investment banking from commercial banking. This separation, of course, was the prime purpose of the Glass-Steagall Act of 1933, a piece of legislation that Mr. Weill and other bankers had successfully watered down, with Alan Greenspan’s support, before Mr. Weill helped engineer its official demise in 1999. Now, Mr. Weill, the creator of what was once the largest financial conglomerate in the world, suggests that Citigroup and others should be broken up. Banks can no longer “be too big to fail,” he told CNBC.

But what was most eye-catching was Mr. Weill’s claim that the conglomerate model “was right for that time.” Nothing could be further from the truth.

Mr. Weill’s original business concept — the justification of financial conglomeration — was to provide one-stop shopping to any and all customers. This could now include clients for investment banking, stock research, brokerage and insurance. Then, with the 1998 merger of his Travelers Group with Citicorp, it could include savers, business borrowers and credit card users, too. But few, even among his own executives, ever believed the strategy would work.

Rather, conglomeration bred conflicts of interest in Mr. Weill’s firms, and others — the very conflicts that the original Glass-Steagall Act was designed to prevent. This inevitably led to investment in and promotion of risky, poorly run and, in some cases, deceitful companies that brought us the high-technology and telecommunications bubble of the late 1990s.

Indeed, Mr. Weill’s Citigroup was a primary underwriter of and one of the two largest lenders to the oil and futures trading firm Enron, whose accounting charade resulted in what was in 2001 the biggest bankruptcy of its time. Citigroup was a major underwriter for the telecommunications giants Global Crossing and WorldCom, which would later go bankrupt as a result of flagrant accounting deceptions. There were many other, if less visible, debacles.

Read the full article here.

Share This

Pages