Romney's Missing Link: What Caused Our Economic Crisis?

Sep 4, 2012Richard Kirsch

Mitt Romney wants voters to blame Barack Obama for mishandling the crisis, but he'd also like you to forget who caused it.

Mitt Romney wants voters to blame Barack Obama for mishandling the crisis, but he'd also like you to forget who caused it.

In his acceptance speech, Mitt Romney tried hard to communicate how much he empathizes with the economic squeeze on middle-class families. Last Thursday in Tampa, he talked about a symbolic worker who lost one good paying job and replaced it with “two jobs at nine bucks an hour and fewer benefits.” And twice he emphasized that a majority of Americans no longer believe that our children will do better than we have done.

But one thing was missing. Romney made absolutely no attempt to explain how families ended up in such precarious financial straits. Not a word referring to what happened before 2008, other than “this president can tell us it was someone else's fault.” For Mitt, the recession was a spontaneous event. It just happened; Obama inherited it and hasn’t been up to the task of fixing the crisis. So it’s time to give Romney, the job creator, a chance to fix it.

Romney knows that any reference to the recent past will evoke toxic memories of George W. Bush. The last thing he needs to do is to remind voters that the last Republican president triggered the nation’s economic crash. Instead, he wants Americans to start the script they are bringing into the voting booth this year on November 2008. It’s okay, he’s telling us, to accept our disappointment with President Obama, and give the businessman – who really does understand our plight and what it takes to create jobs – a try. After all, when things are this bad, what do you have to lose?

The missing link in Romney’s story is a huge invitation for President Obama to fill in the blanks. It provides an opportunity for him to convince hard-pressed Americans that they should stick with him through tough times. It is a story that President Obama knows how to tell powerfully. But it’s not one that he has been telling on the campaign trail.

President Obama is not starting the clock in November 2008 like Romney did. He is reminding people that they don’t want to “go back.” But the references in his campaign speeches to the Bush years are fleeting; most of his speeches are contrasts between his agenda and Romney-Ryan vision. He absolutely needs to make that contrast, but the problem for swing voters – those Americans who are feeling the intense financial pressure and loss of hope – is that they don’t have a way of understanding which candidate’s program will work better for them. These are people who aren’t ideological and who respond to personalities, which is why Obama has been attacking Romney’s Bain record so hard and why Romney is telling voters that you can like the president but still not vote for him.

What would help move these voters to embrace the Obama agenda and keep them from voting for Romney out of desperation is a story that links how we got into this financial mess with why the Obama agenda is the better way forward. That is what the most powerful political narratives do. The right has a broad and easily understood story about limited government and free enterprise. But the left has a powerful story too, and when he wants to, as he did last December 6th in Osawatomie, Kansas, the president tells it as well as anyone. Here are sections from Obama’s speech last year that lay out how we got into this mess, and in doing so, set up why we need to go forward with him:

Long before the recession hit, hard work stopped paying off for too many people. Fewer and fewer of the folks who contributed to the success of our economy actually benefited from that success. Those at the very top grew wealthier from their incomes and their investments -- wealthier than ever before. But everybody else struggled with costs that were growing and paychecks that weren't -- and too many families found themselves racking up more and more debt just to keep up….

When middle-class families can no longer afford to buy the goods and services that businesses are selling, when people are slipping out of the middle class, it drags down the entire economy from top to bottom. [Emphasis added.] America was built on the idea of broad-based prosperity, of strong consumers all across the country.…

Inequality also distorts our democracy. It gives an outsized voice to the few who can afford high-priced lobbyists and unlimited campaign contributions, and it runs the risk of selling out our democracy to the highest bidder. It leaves everyone else rightly suspicious that the system in Washington is rigged against them, that our elected representatives aren't looking out for the interests of most Americans.…

Finally, a strong middle class can only exist in an economy where everyone plays by the same rules, from Wall Street to Main Street.

In his acceptance speech this past Thursday, Mitt Romney left a huge hole to be filled in our economic narrative. Let’s hope that this Thursday in Charlotte, President Obama fills it as eloquently as he did in Kansas last December. By doing so, he will tell a powerful story that will show those swing voters that he’s not only a nice guy doing his best, but that he understands how we got into this mess and will keep working to get us out of it. 

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, a Senior Adviser to USAction, and the author of Fighting for Our Health. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform.

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Romney Will Solve the Crisis with the Exact Same GOP Plan of 2008, 2006, 2004...

Aug 31, 2012Mike Konczal

Romney's five-point plan to adress the specific aspects of our current jobs crisis recycles, nearly word for word, plans from far different economic times.

Romney's five-point plan to adress the specific aspects of our current jobs crisis recycles, nearly word for word, plans from far different economic times.

I've been watching the 2012 Republican National Convention, trying to get a sense of what the conservative diagnosis is for our weak economy and what they'd do in response. Is it the bizarro stimulus of raising interest rates, balancing the budget, and forcing foreclosures? Is there a secret housing plan? Or will it be a program of Reactionary Keynesianism, with an expanded military, massive tax cuts for the rich, and a SuperDuperCommittee to recommend tax expenditures that will go nowhere?

I take these arguments seriously -- I actually really enjoy making maps to help explore them. One argument worth bringing up is the idea that they are just proposing to do the policies they want all the time anyway -- the policies they wanted in 2008, or 2006, or 2004 -- but are pretending there's a reason it would be extra important given our current recession.

So on August 30th, 2012, with unemployment at 8.3 percent and with a serious long-term unemployment problem, Mitt Romney gives the RNC acceptance speech. He outlines a plan to create 12 million jobs in the next four years. As Jared Bernstein pointed out, that's what Moody's says will be created anyway. But forget that. How will Mitt Romney do this? He has a five point plan (numbers in [brackets] here and in the rest of the post are added by me):

And unlike the president, I have a plan to create 12 million new jobs. It has 5 steps.

[1] First, by 2020, North America will be energy independent by taking full advantage of our oil and coal and gas and nuclear and renewables.

[2] Second, we will give our fellow citizens the skills they need for the jobs of today and the careers of tomorrow. When it comes to the school your child will attend, every parent should have a choice, and every child should have a chance.

[3] Third, we will make trade work for America by forging new trade agreements. And when nations cheat in trade, there will be unmistakable consequences.

[4] Fourth, to assure every entrepreneur and every job creator that their investments in America will not vanish as have those in Greece, we will cut the deficit and put America on track to a balanced budget.

[5] And fifth, we will champion SMALL businesses, America’s engine of job growth. That means reducing taxes on business, not raising them. It means simplifying and modernizing the regulations that hurt small business the most. And it means that we must rein in the skyrocketing cost of healthcare by repealing and replacing Obamacare.

So his plan focuses on domestic energy production, school choice, trade agreements, cutting spending, and reducing taxes and regulations. This must be a set of priorities reflecting our terrifying moment of mass unemployment, right?

Let's flash back to September 4th, 2008, at the RNC where John McCain is giving his speech accepting the 2008 Republican presidential nomination. Unemployment is 6.1 percent, though the Great Moderation is coming to an end; within a year it'll be close to 10 percent. Two weeks later, as Lehman Brothers was collapsing, McCain would say "the fundamentals of our economy are strong." What were his recommendations for the economy in that nomination speech?

I know some of you have been left behind in the changing economy, and it often sees that your government hasn't even noticed... That's going to change on my watch...

[3] I will open new markets to our goods and services. My opponent will close them...

[4] I will cut government spending. He will increase it...

[5] We all know that keeping taxes low helps small businesses grow and create new jobs...

[4] Reducing government spending and getting rid of failed programs will let you keep more of your own money to save, spend, and invest as you see fit...

[2] Education -- education is the civil rights issue of this century. Equal access to public education has been gained, but what is the value of access to a failing school? We need to shake up failed school bureaucracies with competition, empower parents with choice...

[1] We'll attack -- we'll attack the problem on every front. We'll produce more energy at home.. Senator Obama thinks we can achieve energy independence without more drilling and without more nuclear power. But Americans know better than that.

It's the same exact agenda. Specifically, the Romney agenda for job creation in 2012 is stuff that John McCain wanted to do anyway in 2008.

Let's go back further. On September 2nd, 2004, George W. Bush is at the RNC, giving his speech accepting the nomination to run for a second term as President of the United States. Unemployment is 5.4 percent. A major housing bubble is kicking into high gear, and the country is debating the aftermath of the invasion of Iraq and the future of the War on Terror. A few months later, people will be talking about a permanent Republican majority. What are some priorities for a second George W. Bush term in creating jobs?

To create more jobs in America, America must be the best place in the world to do business.

[5] To create jobs, my plan will encourage investment and expansion by restraining federal spending, reducing regulation and making the tax relief permanent.

[1] To create jobs, we will make our country less dependent on foreign sources of energy.

[3] To create jobs, we will expand trade and level the playing field to sell American goods and services across the globe.

[5] And we must protect small-business owners and workers from the explosion of frivolous lawsuits that threaten jobs across our country. Another drag on our economy is the current tax code, which is a complicated mess...

[4]  To be fair, there are some things my opponent is for. He's proposed more than $2 trillion in new federal spending so far, and that's a lot, even for a senator from Massachusetts.

It's the same agenda, mentioned back to back almost in the same order. Bush mentioned No Child Left Behind several times, though I'm not sure if that matches up with the school choice of [2] in Romney's economic plan for school choice, so I excluded [2]. It's always time for cutting spending, more oil drilling, free trade, and lower taxes and regulation to fix the economy.

Let's do one last one. January 31st, 2006, George W. Bush is giving his State of the Union address. Unemployment is 4.7 percent. With the economy healthy and growing (in Bush's mind), now is the time to build on the strengths and address the weaknesses of the economy. What does he suggest?

Our economy is healthy and vigorous, and growing faster than other major industrialized nations...

[5] Because America needs more than a temporary expansion, we need more than temporary tax relief. I urge the Congress to act responsibly and make the tax cuts permanent.

[4] Keeping America competitive requires us to be good stewards of tax dollars. Every year of my presidency, we've reduced the growth of nonsecurity discretionary spending. And last year you passed bills that cut this spending.

[3] Keeping America competitive requires us to open more markets for all that Americans make and grow... With open markets and a level playing field, no one can out- produce or out-compete the American worker...

[1] Breakthroughs on this and other new technologies will help us reach another great goal: to replace more than 75 percent of our oil imports from the Middle East by 2025.

Again, President Bush mentions No Child Left Behind, but I'm not sure whether it overlaps with [2].

But the same exact playbook is there in 2006, as it was in 2004 and 2008, and as it is in 2012. Domestic oil production, school choice, trade agreements, cut spending and reduce taxes and regulations -- it's been the conservative answer to times of deep economic stress, times of economic recovery, times of economic worries, and times of economic panic. Which is another way of saying that the Republicans have no plan for how to actually deal with this specific crisis we face.

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George W. Bush image via Shutterstock.com.

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What Could Romney's Secret Housing Plan Look Like?

Aug 24, 2012Mike Konczal

Josh Barro, writing from his new column at Bloomberg, wonders if Mitt Romney has a secret economic plan to fix housing: "But where I think a big improvement from Romney is likely is on housing policy. While Romney has been conspicuously silent on housing, one of his top advisers, Glenn Hubbard, advocates an aggressive plan to restructure mortgages.

Josh Barro, writing from his new column at Bloomberg, wonders if Mitt Romney has a secret economic plan to fix housing: "But where I think a big improvement from Romney is likely is on housing policy. While Romney has been conspicuously silent on housing, one of his top advisers, Glenn Hubbard, advocates an aggressive plan to restructure mortgages. The Hubbard plan would lower mortgage rates and reduce principal for underwater borrowers, both of which would stimulate the economy. That's a tough sell to Republicans in Congress -- but they would be much more open to it under a Republican president than a Democratic one."

As David Dayen noted in a great, comprehensive Salon piece, none of this matters if Congress doesn't extend a special law put into place during the crisis that keeps principal reduction, even reduction from a short sale, from being treated as income, and thus requiring it to be taxed. The law is set to expire on Dec. 31, 2012. Extending it has bipartisan support in the Senate, but none in the House so far. I can't emphasize how much this matters - homeowners would get a giant tax bill under any relief program, making them difficult to do. It isn't clear what Romney would do about this.

It's worth noting that the Hubbard plan is very similar to the ongoing Home Affordable Refinance Program (HARP) in that it uses the GSEs to refinance underwater mortgages. HARP was revamped earlier this year to HARP 2.0, which removed a 125 percent loan-to-value limit and waived certain representations and warranties for lenders. It's still early, but it looks like there is a big increase in the number of underwater mortgages refinancing (FHFA data). Over 40 percent of the HARP refinances in July were from mortgages with an LTV over 125 percent. As will become relevant in this post, their proposal is GSE driven and avoids bankruptcy reform, as "moving mortgage debt into bankruptcy courts could well reduce future credit availability and hamper long-run economic growth and homeownership."
 
(The original Hubbard plan from 2008 featured mandatory principal writedowns for negative equity, with the losses shared equally by the lender and the government. In exchange, the government gets a lien on the home worth 20 percent of any increase in value. This is much different than current HARP policy and constitutes a really bold approach. However, this negative equity and shared appreciation part is entirely missing from the current 2011 version of the proposal. I'm not sure why Hubbard dropped that section; certainly it's not because the housing market has done better than expected.)
 
How can we analyize what potential solutions a Romney presidency could embrace? There's normally one dimension we think of in terms of housing crisis policy, and that is how aggressive we are in dealing with underwater debt and foreclosures. Should we refinance underwater mortgages to create lower monthly payments and take advantage of low interest rates? Should we go further and reduce principal debt, either outright or in exchange for some form of equity claim?
 
But there's another, equally important dimension, and that's the mechanism through which these policies are enacted. What is the vehicle that will be used to execute policy? There are four general cases that can be put into play.
 
The first policy mechanism tries to go through the financial sector and the mortgage servicing system as it currently exists. This takes the market as it is and tries to nudge agents to act a different way with various incentives. The Home Affordable Modification Program (HAMP) program does this by trying to nudge the industry with payments to make modifications that lower interest rates and payments. HAMP was consciously not designed to do principal reductions, though it does have a very small, limited program now. 
 
There's a second policy vehicle driven by the fact that the GSEs are in conservatorship under the FHFA. The FHFA's mission is to "Provide effective supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market," which can support a variety of policy ideas. As mentioned above, HARP is responsible for refinancing GSE loans, and the Hubbard plan focuses on refinancing through the GSEs. Timothy Geithner's recent effort to get the FHFA to support principal reduction through a program called Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA) was recently rejected by FHFA acting director Ed DeMarco. Several progressives responded by calling for DeMarco to be fired.
 
There's a third policy vehicle designed to change the basic legal framework for how bankruptcy works. Bankruptcy law could be modified, even temporarily, to deal with the consequences of the housing bust. The mass modification program (also see here at Slate) proposed by Eric Posner and Luigi Zingales, for instance, worked through bankruptcy law. The failed effort to pass a "cramdown" or lien-stripping amendment was entirely about letting judges write down mortgage debt in bankruptcy.
 
And then there's the fourth mechanism of direct government policy. Here the government actively goes out and purchases and manages mortgages. The New Deal created the Home Owners' Loan Corporation (HOLC) to directly purchase mortgages; we could recreate such a mechanism today. Both John McCain and Hillary Clinton argued for such programs during the 2008 campaign. Senator Merkley's recent plan would do this for refinancing; eminent domain proposals would do this for principal reduction.

Let's grid out those two dimensions:

With this grid in mind, let's re-examine the high-level critique of the Obama administration's housing policy. During the debate over the second round of TARP, the then-incoming Obama administration promised to take action on bankruptcy reform and hinted toward direct government action, or the top two rows in the grid. Larry Summers wrote to Harry Reid promising action on "reforming our bankruptcy laws." Donna Edwards wrote that she "appreciate[d] the personal commitment that Senator Obama" would look "at a program such as one that existed in the 1930s to 1950s to work directly with homeowners."

This did not happen. Timothy Geithner was against direct government action from the beginning, as this letter he wrote to Brad Miller shows. The administration was publicly silent and privately pushed against reforming bankruptcy. The administration also seemed asleep at the wheel when it came to pushing for big action through the GSEs, making no recess appointments and only updating HARP and pushing for principal writedowns this year.

Their main effort was to work through the already existing mortgage framework. This effort has largely been seen as a failure. This isn't surprising, as there are well-documented problems with our current mortgage servicing system. The same problems with Wall Street slicing and dicing mortgages that were present when the housing bubble was inflating are still there now that it has collapsed.

We often don't get second chances in life, but the Obama administration had a second chance at a serious reform of this broken system when news of the scandals surrounding financial fraud started breaking. Though there's still a taskforce out there somewhere, I think it is safe to say the administration wanted to remove these problems rather than take them on directly, which would have opened up a space to reform the current system. They succeeded. This only leaves working through the system.

Maybe your eyes roll when you read the term "neoliberal hegemony," but there's something to the idea that the Obama administration simply felt that the only legimate way to try and deal with the foreclosure crisis was by nudging the incentives of various markets this or that way. The market is the ultimate, efficient arbiter of value, and policy should only seek to adjust some incentives here and there. Measures to intervene directly by the government, or measures to change the way property is regulated through bankruptcy, were ignored right away. Those actions require the government to act as a force in the marketplace directly, or to acknowledge that the economy is created through law and can be adjusted accordingly, both of which are taboo under neoliberal economic ideology.

Working within a system, no matter how aggressive your actions are, means you don't ultimately have to challenge that system. As Harper's wrote back in 2009, in a great essay on President Obama as Hoover, "The common thread running through all of Obama’s major proposals right now is that they are labyrinthine solutions designed mainly to avoid conflict." In a practical sense, for Romney to go bigger than Obama on housing would require either adjusting the bankruptcy code, running a government program that directly intervenes in the marketplace in a big way, or firing DeMarco. In the theoretical sense, it would likely require challenging the reigning paradigm in political economy as well as challenging the current financial system. Are these actions realistic for Romney?

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

  

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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.

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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:

  

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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:

  

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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:

  

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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).

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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.)

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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.

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