Mike Konczal and Chris Hayes: How Meritocracy Produces Inequality

Jun 26, 2012Danielle Bella Ellison

In the most recent installment of “Fireside Chats,” the Roosevelt Institute’s Bloggingheads series, Fellow Mike Konczal talks with MSNBC host Chris Hayes, discussing the distortion of meritocracy and the problems of self-perpetuating elitism. As Konczal explains, the culture of “anxiety about the person who’s one step up from you” creates an environment where everyone knows everyone else is cheating, but "the rewards are so high, and conversely, the penalty for being left behind...

In the most recent installment of “Fireside Chats,” the Roosevelt Institute’s Bloggingheads series, Fellow Mike Konczal talks with MSNBC host Chris Hayes, discussing the distortion of meritocracy and the problems of self-perpetuating elitism. As Konczal explains, the culture of “anxiety about the person who’s one step up from you” creates an environment where everyone knows everyone else is cheating, but "the rewards are so high, and conversely, the penalty for being left behind... [is] so severe, then even the most unethical things become a no brainer that you’re just compelled to take part of.”

“There’s the depth of failure but also the breadth of failure,” Konczal says. In a myriad of areas, from Washington and Wall Street to the test prep industry and steroids in baseball, the system we have now is a “meritocratic competitive arms race.” This has lead to extraordinary corruption and crisis in every sphere of American life, and with it a collapse of trust in our institutions that are increasingly run by distant elites. 

To add insult to injury, this elitism is self-perpetuating. Any organization, even if it begins as completely egalitarian and democratic, will have to utilize the mechanisms of meritocracy to determine some sort of leadership. However, Hayes explains that those who end up with this power will “inevitably use that disproportionate power to subvert whatever mechanisms of accountability, turnover, mobility,” that were initially in place. Konczal laments that things have gotten so bad that failures such as WorldCom and Enron “just feel like historical footnotes now compared to Lehman Brothers." He concludes that “People need to understand that the game is rigged.”

Watch the full video below:

Share This

Mike Konczal and Chris Hayes: How Meritocracy Produces Inequality

Jun 25, 2012

In the most recent installment of “Fireside Chats,” the Roosevelt Institute’s Bloggingheads series, Fellow Mike Konczal talks with MSNBC host Chris Hayes, discussing the distortion of meritocracy and the problems of self-perpetuating e

In the most recent installment of “Fireside Chats,” the Roosevelt Institute’s Bloggingheads series, Fellow Mike Konczal talks with MSNBC host Chris Hayes, discussing the distortion of meritocracy and the problems of self-perpetuating elitism. As Konczal explains, the culture of “anxiety about the person who’s one step up from you” creates an environment where everyone knows everyone else is cheating, but "the rewards are so high, and conversely, the penalty for being left behind... [is] so severe, then even the most unethical things become a no brainer that you’re just compelled to take part of.”

“There’s the depth of failure but also the breadth of failure,” Konczal says. In a myriad of areas, from Washington and Wall Street to the test prep industry and steroids in baseball, the system we have now is a “meritocratic competitive arms race.” This has lead to extraordinary corruption and crisis in every sphere of American life, and with it a collapse of trust in our institutions that are increasingly run by distant elites. 

To add insult to injury, this elitism is self-perpetuating. Any organization, even if it begins as completely egalitarian and democratic, will have to utilize the mechanisms of meritocracy to determine some sort of leadership. However, Hayes explains that those who end up with this power will “inevitably use that disproportionate power to subvert whatever mechanisms of accountability, turnover, mobility,” that were initially in place. Konczal laments that things have gotten so bad that failures such as WorldCom and Enron “just feel like historical footnotes now compared to Lehman Brothers." He concludes that “People need to understand that the game is rigged.”

Watch the full video below:

Share This

Debunking the Myths About Government

Jun 25, 2012

Rediscovering Government presented four mainstream, empirically based analyses of major government-related questions in the Myths About Government panel in Washington DC on June 21st. The panelists from the roundtable discussion addressed four common misconceptions about government and the economy. Read their summary responses below, and click through to view their bios and full presentations.

Rediscovering Government presented four mainstream, empirically based analyses of major government-related questions in the Myths About Government panel in Washington DC on June 21st. The panelists from the roundtable discussion addressed four common misconceptions about government and the economy. Read their summary responses below, and click through to view their bios and full presentations.

Does big government impede growth?

Government Social Programs and Economic Growth: Verdicts from History

Peter Lindert, University of California, Davis

Economic history does not find any net cost in GDP from democratic large-budget welfare states. The “free lunch puzzle” of welfare states is this: They avoided any net GDP cost while achieving many social goals: reducing poverty and inequality, extending life spans, and having cleaner government. In addition, their government budget deficits are no greater, and people are no less happy in these large-budget welfare states.

Peter Lindert Bio

Full Presentation

Presentation Handout

Do high taxes create disincentives?

Evidence on the Economic Effects of Taxes

Jon Bakija, Williams College

There have been many econometric studies of cross-country data that have attempted to estimate the effects of the overall level of taxes on economic growth, and many other econometric studies (using a variety of types of data) that have attempted to estimate the causal effect of changes in marginal income tax rates on peoples' efforts to earn income. This presentation displays the basic facts on these issues, discusses why neither approach has provided convincing evidence of a strong negative effect of taxes on long-run real economic activity, and explains why healthy skepticism of any claims to the contrary is in order.

Jon Bakija Bio

Full Presentation

Presentation Handout

Do markets distribute income fairly and equitably?

America’s Struggling Lower Half

Lane Kenworthy, University of Arizona

When the country prospers, everyone should prosper. In the period between World War II and the mid-to-late 1970s, economic growth was good for Americans in the middle and below. Since then, however, relatively little of our economy's growth has reached households in the lower half. Wages for this group have barely budged. Rising employment helped in the 1980s and 1990s, but that wasn't enough to ensure that incomes kept pace with economic growth, and employment stopped increasing after 2000. Government transfers are another key source of income for many households in the lower half, but they too have lagged behind growth of the economy. What are the prospects going forward? Will we see a return to rising wages or employment for Americans in the lower half, or are the trends of the past few decades likely to continue? What, if anything, could our government do to help?

Lane Kenworthy Bio

Full Presentation

Presentation Paper

Do Americans want smaller government?

Better, Not Smaller: What Americans Want from Federal Government

Ruy Teixeira, Century Foundation, Center for American Progress

Americans lack confidence in the federal government's ability to solve problems.  A wide range of other indicators show that people think the government wastes a lot of the money it spends, is inefficient, not accountable for its actions, unresponsive and more a hindrance than a help to getting ahead in life. Not a pretty picture.  However, that doesn't mean the public necessarily wants the government to be smaller.  They would prefer instead that it worked better and solved problems.  Therefore, reforming the way government works could potentially contribute to building public support for government programs both old and new.  This is particularly true among members of the Millennial generation.  The other important factor is better macroeconomic performance, which would go a long way toward making people more receptive to an active role for government, especially a government that seemed to be performing more efficiently and effectively.

Ruy Teixeira Bio

Full Presentation

 

Rediscovering Government is an initiative of the Roosevelt Institute dedicated to exploring the purpose and value of government. Led by Roosevelt Institute Senior Fellow Jeff Madrick, the program aims to reinvigorate conversation surrounding government and what it can and should be doing for its citizens, through the website, blog, roadshows, and conferences.

Share This

Myths About Government

Jun 20, 2012Jeff Madrick

The Rediscovering Government roundtable discussion in DC tomorrow sets out to debunk misconceptions about government spending and the economy and reinvigorate a dialogue about the importance and positive potential of government. 

The Rediscovering Government roundtable discussion in DC tomorrow sets out to debunk misconceptions about government spending and the economy and reinvigorate a dialogue about the importance and positive potential of government. 

Perhaps it isn’t odd that the American people are so skeptical of the uses and purposes of government. As a nation built on a revolution against a monarchy, such skepticism is likely built into our national character.

But it doesn’t accord with our history, and that is why it remains surprising. Government was inseparable from American economic and social development. It did not reduce freedom, but protected it.

I am always disturbed when economists in particular talk about the “role of government.” It is like talking about the role of parents in their children’s lives, or the role of the basketball in a basketball game. There is no economy without government, even in America. The government does not merely correct market failures; its purpose is far more profound. It is about true freedom, true opportunity, and necessary change.

We have organized an important panel discussion on June 21st in Washington, D.C., to put to rest some of the prevailing myths about government. Peter Lindert of the University of California at Davis will tell us about his empirical work on whether large government impedes growth; his extensive research shows it has not. Jon Bakija of Williams College will similarly tell us about how little hard evidence there is that high taxes impede growth. Lane Kenworthy of the University of Arizona will show how much of the income of the lower half of the distribution depends on social policies. Nancy Altman of Social Security Works will put straight the true finances of Social Security. And finally Ruy Teixeira of the Center for American Progress will tell us how extensive the American antagonism towards government is despite these facts, and whether these views can be changed.  

Our goal is to present a counter-narrative to the prevailing anti-government ideology. We will not argue that government is all good, requires no radical reforms, or cannot be made to work better. After all, why should we expect politicians to act in the interests of others, rather than their own sometimes contradictory interests?  

But there is reason to expect this, because it has happened time and again in American history. Moreover, acting in the interests of others is often acting in one’s self interest. Thomas Jefferson championed regulations of land sales in early America to make sure many people got a chance at ownership. The result was a strengthened democracy of secure and satisfied citizens.

His party built the canals through public financing in the states, led by New York. Many, and probably most, prospered when New York City became the giant hub of trade and commerce with the opening of the Erie Canal. American government created free and mandatory schools, subsidized the railroads, started technical colleges, and sanitized the cities, which in turn became sources of growth. In the 1800s, these activities were typically led by the state and local governments.

Markets don’t work when monopolies gather power, and the federal government in the next century set out to limit that from happening. It protected workers in all kinds of ways. In the 1930s, it recognized that financial markets were different from others and required special regulations. It built highways, invested in medical and technical research, subsidized college, and established necessary product, safety, and environmental regulations.   

As Lane Kenworthy points out in his fine summary piece on our site, if big government were a problem, why did the U.S. economy keep growing fast even as government got bigger?  

And let me point out one other factor that is neglected. As I emphasized in my book, The Case for Big Government, government is the key agent of change. No one anticipated we’d need high schools and colleges when the Constitution was written, but government was the instrument to create these critical institutions. No one knew of germ theory, but government led the way in sanitizing water and making large cities habitable. Who knew about the computer chip?

Perhaps I am biased because I live in New York. The New York City government eventually took over and aggressively expanded the subways. It built the dramatic walls of Riverside Drive, so often neglected. Miracle of miracles, it collects the garbage in this densest of cities.

But consider the great water works of the west. This was the work of state and federal government. And the highways, of course.  And the university system of California, among others.

If one needs further historical examples, consider the first great European city, Rome. Its aqueducts and enormous road network were the work of the government. Its devotion to law is a model to this day. It was highly productive and conducive to commerce because of these advances.  

American attitudes towards government have always shifted; sometimes pro-government and public investment and social programs, sometimes against them. We were usually at our best when we favored government, but government was far from always efficient. America was not immune to substantial corruption. Government always needed a good wringing out. But when it was widely vilified and weakened, America often failed. Political instability, widespread sacrifice, and jeopardized democracy were results.  

As for contemporary times, the Great Depression was an important catalyst. It turned an already partly progressive nation (since Teddy Roosevelt and Woodrow Wilson) far more so. It gave us a minimum wage, unemployment insurance, Social Security, labor organizing protections, securities regulations, and great public works to create jobs. The New Deal was followed by Johnson’s remarkable Great Society in the 1960s -- Medicare, Medicaid, historic civil rights legislation, and on. The American social sphere was brought into modern time along with its economy, which required those social investments.

But these attitudes shifted strongly beginning in the 1970s. Attitudes towards government had already become somewhat more skeptical in the 1960s, with new poverty programs and racial demands. The Vietnam War was a further blow to confidence in government, as was the Watergate scandal.  

In my view, however, the economic devastation of the 1970s was the major blow. Inflation of 12 percent, unemployment soaring, mortgage rates at 18 percent. In 1972, Governor Ronald Reagan of California supported a referendum to demand a sharp and permanent cut in state income taxes. Californians voted against it; they said they would pay their state taxes. By 1978, only six years later, Proposition 13 passed overwhelmingly, sharply cutting property taxes and with it undermining the state’s great education system.  Nationally, the Kemp-Roth tax proposal to cut federal income taxes up to 30 percent was rapidly gaining support in Congress. Economic pain caused Americans to seek quick and sometimes vindictive solutions, even personally self-destructive ones.  

In my view, the lost faith in and mismanagement of government is the key cause of the crisis of the future the nation now faces. This lost faith resulted in deregulation, unaffordable tax cuts, and the failure of government to develop new programs and act as the agent of change it should be.  

We can argue about these issues philosophically. But Rediscovering Government will stay as close to the demonstrable facts as possible. We will present the evidence about government, the economy, and growth. Then we can discuss how to restore a true sense of our own history, rebalance our sense of the purpose of government, and move on constructively.  

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

 

Capitol image via Shutterstock.com.

Share This

Reagan Redux: The Truth About Romney Economics

Jun 15, 2012Jeff Madrick

The oversimplification of Romney’s economic plan avoids calling it out for what it really is: an extension of failed Republican economic policies.

In the home of Sarah Jessica Parker and Matthew Broderick this week, The New York Times reported that President Obama described Romney’s campaign attacks, which claim all current problems are “the fault of the guy in the White House,” as “an elegant message. It happens to be wrong.”

The oversimplification of Romney’s economic plan avoids calling it out for what it really is: an extension of failed Republican economic policies.

In the home of Sarah Jessica Parker and Matthew Broderick this week, The New York Times reported that President Obama described Romney’s campaign attacks, which claim all current problems are “the fault of the guy in the White House,” as “an elegant message. It happens to be wrong.”

This is as clear an example as we have of Obama’s inability to make a powerful message in a few words. Sounding professorial, he uses the word “elegant” as if referring to a mathematical proof. Clean and simple, I suppose. But to many a listener and reader, elegant only has positive connotations. Why this loftiness when plain, honest, focused language will do the job?

The fact is that almost all of our current situation is a result of economic policies that were put into effect before Obama took office. Not only is Romney’s message not elegant, but his economic plan will boldly extend these failed policies. His central message is simplistic, ignorant, and, to use a lofty word, ahistorical. In actuality, the plan has been underway since the 1980s and even before, and look where it’s gotten us. It serves the interests of the wealthy very well, but has it served America at all? It’s not the collapse of the welfare state, but the ravages of a rising oligarchy, that are undoing America.

Which brings me to another New York Times piece, today’s David Brooks column. Brooks’s methodology as a “thinker” is to develop arguments that he knows will sound plausible to his readers and maybe to a significant swatch of centrists. He is good at these over-simplifications. Today’s column is as unaware or deliberately neglectful of history as ever. What Democrats don’t understand is that the system is broken, he says. Republicans understand this and want to return us to some early (if mythological) economic state. The welfare state is on the cusp of failing; he quotes a Weekly Standard piece on this idea that he thinks definitive. This welfare model, he goes on, “favors security over risk, comfort over effort, stability over innovation.”

This is breathtaking nonsense. The so-called welfare state—whose main features are benefits to the elderly, by the way—favors opportunity for those who have no access to it,  substantial government investment in education and research, which are the great sources of innovation, adequate transportation to enable business to operate efficiently, and fewer and more moderate recessions so that the nation does not lose investment, human capital, and many good businesses due to short-term fluctuations.

And, oh, yes, the welfare state does promote some compassion for the less fortunate—those thrown out of work through no fault of their own—and a sense that all of us owe something to each other. And, yes, it does require government.

What’s truly mind-numbing about the Brooks view, which clearly represents a Republican body of what is considered highly sensible thought, is that all the Romney proposals have been on the ascendancy since Ronald Reagan, and some of them before. These include lower progressive tax rates (Reagan and Bush); deregulation and weak regulatory implementation (Reagan, Bush I and II, Carter, and most important for financial regulations, Clinton); reduced social spending on many categories, notably welfare (Reagan and Clinton); few new programs even as social needs change; and inordinately tight monetary policy since Paul Volcker’s chairmanship at the Federal Reserve, to keep inflation and therefore wages in check. And what happened? Stagnating wages, modest capital investment, unequal public education, and collapsing infrastructure. These are the results of Romney economics.       

If there is theory at all in the Brooks view, it is of course the spurious generalization that individualism will win the day. Just make everyone take care of him or herself. Republicans love this notion. The other idea is that if business is just allowed to do its job, free of most regulation and taxes, everyone will do just fine.  The historical evidence clearly points to the opposite. Look at the levels of inequality in the good old regulation-free and low-tax days of post-Civil War America. Do you we need a better example?

Returning to Obama—he better fight this battle head on, not in professorial dignities, but on the sweaty mat where victory is won. He better understand that the Brooks's over-simplifications are appealing because they blame victims and relieve the rest of responsibility. Call these things what they are, Mr. President. Make America the responsible society once again. The Romney policies failed not just since George W. Bush, but since Ronald Reagan and even Jimmy Carter. 

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

Share This

Jeff Madrick Leads Expert Panel on Government's Economic Impact

Jun 12, 2012

event Join the Roosevelt Institute for our latest Rediscovering Government event in Washington, D.C. on Thursday, June 21.

event Join the Roosevelt Institute for our latest Rediscovering Government event in Washington, D.C. on Thursday, June 21. Roosevelt Institute Senior Fellow Jeff Madrick will lead a roundtable of scholars including public opinion expert Ruy Teixeira and economists Peter Lindert, Lane Kenworthy, and Jon Bakija as they present the best available evidence about how the size and scope of government affect the U.S. economy. 

As Republicans cheer for public sector job losses and warn that big government is crowding out the private sector, our roundtable seeks to challenge anti-government economic myths and reframe the national dialogue around the positive impact and irreplaceable role of government spending.

To RSVP for the event, please contact Madeleine Ehrlich.

Date: June 21, 2012 from 12:00 p.m. to 1:30 p.m.

Location: Washington, D.C.

Share This

Millennials' Lack of Faith in Government is Leading to a Grayer Congress

Jun 7, 2012Brad Bosserman

To get more young people on Capitol Hill we have to prove that government can play a positive role in American life.

To get more young people on Capitol Hill we have to prove that government can play a positive role in American life.

A recent survey conducted by Harvard University revealed that while 69 percent of 18-29 year olds believed community service was an honorable thing to do, only 35 percent felt that way about running for office. This has real ramifications for the make-up of our legislatures. A recent article in Salon explained that Congress is getting older not because incumbent members are sticking around longer, but because the age of incoming members is rising.

It is worth considering the impact of having telecommunications and Internet policy drafted by politicians who are still “learning to get online” and leaving foreign policy decisions to people whose views were shaped and developed during the Cold War. Stephen Marche made the case earlier this year that these trends have also led to “thirty years of economic and social policy that has been rigged to serve the comfort and largesse of the old at the expense of the young.” So where are the Millennials who should be beating down the doors to the Capitol?

Some have suggested that the absence of young people in elected office is all about economics. Older Americans have gone from out-earning their younger counterparts by 10 times in the mid-'80s to nearly 50 times in 2008. This migration of wealth from young to old has occurred alongside a dramatic growth in the cost of running a successful campaign, with political spending in House and Senate races increasing eight-fold between 1970 and 2000.

This alone does not seem to explain the systemic aging of our legislatures, however. The technology booms of the '90s and aughts also produced a record number of young millionaires and billionaires. Yet they have chosen to stay out of elected office in far greater numbers than wealthy members of previous generations. Why?

I have a theory. The Millennial generation has come of age in an America influenced by a conservative ideology that changed our views about the role of public and private civil society. Heather McGhee, the Washington Director of Demos, has observed, “[T]he most pernicious effect of the Reagan revolution was to take the horizon of public policy solutions off the table entirely. We know that there are problems, but we no longer imagine that there are public policy solutions to them.” This is a profoundly different vision of American government than that which animated the New Deal and Great Society.

The modern Republican Party’s commitment to shrinking the size and scope of the public sector has led them to shake our confidence in key government institutions. The GOP has been able to convince the public that the government is corrupt and ineffective, in part by making the government corrupt and ineffective. This campaign has disproportionately affected the generation of young people who have been forging their views about politics over the last 15 years. Gallup reports that cynicism and negativity toward the government has been building for over a decade, recently culminating in “record or near-record criticism of Congress, elected officials, government handling of domestic problems, the scope of government power, and government waste of tax dollars.”

This phenomenon parallels another recent trend: the rise of the independent voter. Research has long shown that despite the conventional wisdom, self-identified independents actually behave much more like weak partisans than they do like hyper-informed mavericks. The ranks of these “independents” have grown dramatically over the last 20 years, and much of that growth has been concentrated among young Americans. In 2009, Gallup found “more than one-third of the youngest Americans identify as independents, a percentage that drops steadily as the population ages, reaching a low of around 20% among those 80 years of age and older.”

This is not entirely bad news. Even as they have lost faith in our political parties, young Americans have flocked to other forms of civic engagement. The Corporation for National and Community Service reports that volunteer rates for 16- to 24-year-olds has nearly doubled over the last 20 years. In many ways, volunteerism has become second nature to the Millennial generation, taking the place of more traditional political involvement.

But the challenge remains for those who want to see young Americans in Congress. To reverse these trends, we must actively promote the belief that public policy and institutions of government have a powerful and positive role to play in American life. The graying of the House and Senate shows that allowing conservatives to demean public service, institutionalize gridlock, and breed public cynicism will drive away the young and idealistic. This vacuum hands power over to increasingly older politicians with entrenched views and distinct generational interests that do not represent the largest generation in American history.

Bradley Bosserman is a member of the Roosevelt Institute | Pipeline and a Policy Analyst and Director of the MENA Initiative at NDN and the New Policy Institute. 

 

Congress image via Shutterstock.

Share This

Austerity Replaces Economics With Disciplinarian Ideology

Jun 6, 2012Jeff Madrick

Ludger Schuknecht's insistance on continued austerity is merely a discipinarian's argument, which has already been proven wrong time and again. 

Ludger Schuknecht's insistance on continued austerity is merely a discipinarian's argument, which has already been proven wrong time and again. 

The letter in today’s Financial Times, "Jointly Agreed Strategy is Good for Germany and Europe," from Ludger Schuknecht, the Director General of the German Ministry of Finance, will likely live in infamy. In any case, frame it for your children as a symbol of the folly of mankind. In the sternest terms, Mr. Schuknecht chastises Martin Wolf for demanding a reversal of fiscal austerity. Why? “The public and markets have been led to believe in short-term measures for far too long.” Goodbye to Keynes, and even Friedman.

Moreover, he argues, “it is expansionary policies and weak fiscal positions that created the current problems of high debt and low competitiveness.” Of course, the Eurozone deficit was only 0.5 percent of GDP before the crisis. In Spain, fiscal policy was clearly restrained before the crisis. Few could argue the European Central Bank practiced loose monetary policy over these years.  

According to Mr. Schuknecht, we need “a combination of fiscal consolidation and structural reforms.” And all of this with the goal of rebuilding confidence. How can we be hearing this again, after the failure of austerity in country after country?  Now even the conservative Spanish government is admitting failure.

Evidence is not the issue here. Surely the impressive IMF research on the failure of austerity time and again cannot be simply dismissed. But dismiss it Mr. Schuknecht clearly does. Heaven forbid we introduce Eurobonds, which will undermine the confidence being built.

Clearly the German government sees confidence somewhere, but it is surely not in the financial markets.

I long to ask Mr. Schuknecht what he believes caused the Great Depression. He may have written about this somewhere; I assume he thinks uncertainty and government spending were the causes. I wonder if he can point to one credible case where austerity worked without a concurrent devaluation of the currency.

But such arguments do not seem to turn on evidence or theory.  They come from the stern gut of a schoolmaster, and they come from a nation that has yet to suffer the consequences of the current crisis. The inability or refusal to see ahead is the sure sign of an ideologue. But I think this is not even ideology; it is the instinct of the disciplinarian. And it is mixed with a desire to diminish government. Another rap on the knuckles with the ruler will bring confidence, confidence will bring investment, and investment, prosperity. We were told the same in the 1930s, but never mind all that.  

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

Share This

A Message to World Leaders: Ignore the Financial Markets

May 7, 2012Jeff Madrick

A solution for the eurozone? Listen to the people, not to the markets.

For 40 years, there has been a tug of war between government in democracies and what we may call “the other government.” By the latter I mean, of course, the financial markets. James Carville highlighted his concerns when he announced that in the next life he would want to be a bond trader. Alan Greenspan followed the bond markets religiously for signs of increased or reduced inflationary expectations.

A solution for the eurozone? Listen to the people, not to the markets.

For 40 years, there has been a tug of war between government in democracies and what we may call “the other government.” By the latter I mean, of course, the financial markets. James Carville highlighted his concerns when he announced that in the next life he would want to be a bond trader. Alan Greenspan followed the bond markets religiously for signs of increased or reduced inflationary expectations.

Now Europe faces the threat of a financial market rebellion. Democracy has spoken loudly in this weekend’s elections on the Continent and in England. Voters said, "We have had all the austerity economics we can take."  They threw over Sarkozy in France and many Conservative and Liberal candidates in England. In Greece they ran for the extremes. The moderate liberal Pasok party won the least votes in memory, but it may yet form a coalition to run a new government. Italian election results will be in soon.

And democracy is working! The instinct among those in the financial markets is that democracy usually reflects the weak-willed demands of the public. But the public is generally right this time, and it has been many times before. Austerity economics is self-destructive when economies are so weak.   

Yet of course the financial markets’ initial reaction to the European elections was to sell, as if austerity economics was actually working to make nations' bond payments easier to handle. It was not! But the markets fear that a new strategy will make matters worse.

Political leaders should ignore the financial markets in the short run, pure and simple. This may drive up financing costs for a while, but the eurozone should absorb those and adjust policies. The European Central Bank (ECB) ought to accommodate its needs. The right policies are stimulus from the current account countries and the end of extreme austerity in the periphery. Wages should rise in the eurozone core and stabilize in the periphery; they can even rise from their current lows in places like Greece. The 17-nation Eurozone or the 27-nation EU should issue jointly backed bonds to provide social safety net support to the financially weak nations, to raise demand for them and get their economies going, while reducing the extreme financial pain and sacrifice that now jeopardize social stability. As examples, the Greeks voted for extremist parties, the Le Pen party did well in France, and the Tea Party runs amok in the U.S. Austerity fever even grips Washington, which makes the November election especially important.

What the crisis requires is elected government, not bond trader government. Any idea that the financial markets are rational should have been discarded four years ago. They have been absurdly wrong for decades. In the U.S., they persistently overestimated future inflation by driving interest rates too high compared to the CPI and the GDP deflator. Greenspan treated them as the height of rational forecasting, when indeed they were simply following the latest conventional wisdom. In my informal opinion, he used long-term rates as a guide to policy. Now the ECB remains too tight as well. In the U.S., the “rational” bond traders actually traded what they thought the market would think, rather than what rational foretellers of the future would think. It was Keynes’ beauty contest analogy—choose the woman you think others believe is beautiful. The belief that the markets were right was the fallout of extreme efficient markets theory.

The media too often treated the markets as rational as well. Bond traders implicitly endorsed austerity economics until fairly recently, and the media usually reported them as being right. The supposedly sophisticated financial media (with some noted columnists as exceptions) wondered what could possibly work if not austerity. Now there are signs that the press is waking up to reality and realizing that it, along with the financial markets, is not working.

There are some signs of the ice breaking. The German finance minister announced it was okay for German wages to rise. They have actively restrained wage growth to make their exports more competitive for over ten years. The main sources of their demand were the European periphery, where wages were rising a bit due to a property bubble caused by irrationally low interest rates offered in the financial markets. But there are still signs of backward thinking. Many in Europe think of growth policies as nothing more than making labor markets more competitive through deregulation and reduced wages. As if the more flexible labor markets in the U.S. are leading to rapid recovery.

In sum, what’s needed in Europe is fiscal stimulus, a more accommodative ECB, social transfers from rich states, higher wages in many nations, a change in the silly EU agreement to keep deficits absurdly low, and industrial policy to gear capital investment across the continent, free of prejudice and nationalistic tendencies. The elections may bring some of this about. Then, once policies are working to support growth and reduce financial burdens as tax revenues rise, the financial markets will at last respond constructively. They must be waited out for now.

To put it most simply, what’s needed is the will of the government of the people to ignore the financial markets and stop treating them like a more rational government than democracy itself.   

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

Banner image courtesy of Shutterstock.com.

Share This

More on the Case for the Public University as a Public Option

May 3, 2012Mike Konczal

Josh Barro has an editorial at the Daily, Making U. Pay, about the college affordability cost crisis.  Barro:

Josh Barro has an editorial at the Daily, Making U. Pay, about the college affordability cost crisis.  Barro:

What the University of Florida (along with every other American college and university) really needs is cost discipline...Colleges still need to employ a lot of highly skilled workers, and college costs are tied to their wages, which rise faster than inflation...colleges and universities have failed to mitigate this phenomenon. For example, over the last few decades, the typical public four-year college has seen a sharp expansion of its support and managerial staff — from 5.5 per 100 students in 1987 to 7.5 per 100 in 2007...

Unfortunately, consumers do not have the necessary incentives to impose cost discipline in the market. The perceived necessity of a college degree to find a middle-class job gives students few options but to pay up...State legislatures, too, should put pressure on public colleges and universities not to increase staffing relative to student populations, and to respond to budgetary strains with cost control instead of tuition hikes or reductions in enrollment...Colleges and universities should take greater advantage of technological advances that could finally improve productivity in the education sector, such as distance learning and video instruction...

These reforms, different though they are, have one aim in common: creating incentives for all actors in the market to make higher education not just cheaper, but more efficient. That may sound unromantic, but it’s necessary to maintain educational opportunity for all.

I agree with most of the piece.  Barro doesn't take his argument in this direction, but, with the risk of dragging Josh into a social democratic quicksand pit, it's useful to reframe this discussion as one of reclaiming a "public option" in higher education.  Much of the discussion on the technical efficiency of the public provisioning of merit goods focuses on scale and compulsion, which is relevant for higher education, but there's also advantages in cost control and baseline quality.  By holding down tuition, the public university can act as a check on runaway price inflation in the private university market.  Considerations about dynamic efficiency - improvements in quality - seem not as relevant here in the formal education market: private sector tuition is exploding as fast as public tuition.  If we are concerned that boosting demand through price subsidies is captured by incumbent suppliers, then boosting access through reducing tuition on public universities should negate those rents.

Dynamic efficency is very important when it comes to the online and future sectors of higher education.  However public options help here as well: having a strong baseline of quality is important for vetting the actual efficiency improvements of these new institutions.  Public options solve a certain type of informational problem.  If prices are lowered, it can be difficult for the government and citizens to tell if it is because market innovations have allowed for lower cost production or because they are providing services of a cheaper quality.  The private market is more incentivized to provide new benefit options and offer greater flexibility when they have to compete against a baseline product.  This creates the incentives mentioned above, but these incentives work more towards actual quality improvements instead of rent-seeking when they are competing against a public baseline.  We know for-profit schools are a bad deal because they statistically underperform public community colleges while having larger debt burdens.  Online education at California looks to have equally high drop-out rates. This was part of the important intellectual firepower over the debate on "vanilla products" that erupted during the early parts of Dodd-Frank, brought over to the education sector.

Tim Noah wondered to Matt Yglesias if we should impose cost controls on colleges; I think we should instead do what we know has worked - make sure a public option is available to all, and have a private market develop alongside it, filling in the efficiency gaps wherever they are.  I forgot to link to this, but Aaron Bady had a powerful defense of the California Master Plan, the mid-century public higher education model, when we did a bloggingheads a few weeks ago:

 

Follow or contact the Rortybomb blog:

  

Share This

Pages