Speaking to a small group at MIT, State Department spokesman P.J. Crowley said that accused WikiLeaker Bradley Manning is “in the right place” in federal custody, but the way he has been treated is “ridiculous and counterproductive and stupid.” Just now, ABC News’ Jake Tapper asked President Obama about the comments in the White House Briefing Room. “With respect to Private Manning, I have actually asked the Pentagon whether the procedures that have been taken in terms of his confinement are appropriate and are meeting basic standards,” Obama replied. “They assured me that they are. I can’t go into details about some of their concerns, but some of that has to do with Private Manning’s safety as well.” In other news, apparently Manning’s no longer sleeping naked: Now he gets to have a “suicide-proof” sleeping smock.
Resignation of Philip J. Crowley as Assistant Secretary of State for Public Affairs
Press Statement
Hillary Rodham Clinton
Secretary of State
Washington, DC
March 13, 2011
It is with regret that I have accepted the resignation of Philip J. Crowley as Assistant Secretary of State for Public Affairs. PJ has served our nation with distinction for more than three decades, in uniform and as a civilian. His service to country is motivated by a deep devotion to public policy and public diplomacy, and I wish him the very best. Principal Deputy Assistant Secretary (PDAS) Michael Hammer will serve as Acting Assistant Secretary for Public Affairs.
STATEMENT BY PHILIP J. CROWLEY
The unauthorized disclosure of classified information is a serious crime under U.S. law. My recent comments regarding the conditions of the pre-trial detention of Private First Class Bradley Manning were intended to highlight the broader, even strategic impact of discrete actions undertaken by national security agencies every day and their impact on our global standing and leadership. The exercise of power in today’s challenging times and relentless media environment must be prudent and consistent with our laws and values.
Given the impact of my remarks, for which I take full responsibility, I have submitted my resignation as Assistant Secretary for Public Affairs and Spokesman for the Department of State.
I am enormously grateful to President Obama and Secretary Clinton for the high honor of once again serving the American people. I leave with great admiration and affection for my State colleagues, who promote our national interest both on the front lines and in the quiet corners of the world. It was a privilege to help communicate their many and vital contributions to our national security. And I leave with deep respect for the journalists who report on foreign policy and global developments every day, in many cases under dangerous conditions and subject to serious threats. Their efforts help make governments more responsible, accountable and transparent.
Crowley’s Twitter personality mirrored his real-life personality — affable, edgy, sometimes sarcastic, and occasionally a little off-message. Crowley’s energy and willingness to take measured risks by going beyond the Obama administration’s standard talking points is what endeared him to the reporters he worked with each day. It was that same openness that cost him his job, after he admitted that he believed the Marine Corps’ treatment of alleged WikiLeaks source Private Bradley Manning was “ridiculous and counterproductive and stupid.”
Crowley’s last tweet before resigning was a gem, but he deleted it. “We’ve been watching hopeful #tsunami sweep across #MiddleEast. Now seeing a tsunami of a different kind sweep across Japan,” read the March 11 tweet.
Of the remaining 400-plus tweets he sent out to his 24,000-plus followers, here are The Cable‘s top 10, in reverse chronological order:
March 1, 7:08 a.m.: “#Qaddafi tells #ABCNews: All my people with me, they love me. They will die to protect me. The #Libyan people tell Qaddafi: You go first!”
Feb. 26, 7:37 a.m.: “Despite #Qaddafi‘s hardly sober claim that the protesters are on drugs, the people of #Libya are clear-eyed in their demand for change.”
Feb. 22, 7:28 p.m.: “We are surprised that #Argentina has chosen not to resolve a simple dispute involving training equipment. And we still want our stuff back.”
Aug. 20, 11:34 a.m.: “North #Korea has joined #Facebook, but will it allow its citizens to belong? What is Facebook without friends?”
May 18, 10:37 p.m.: “It doesn’t take a reading test to recognize misguided legislation. I have read the #Arizona law. Comprehensive reform is the right answer.”
This argument is the liberal argument. This is what distinguishes liberals from conservatives in this space. The liberal argument isn’t that we have an extensive, unaccountable security state and feel really bad about it (while the conservative argument is that we cheerlead it), it’s that this kind of state is a bad deal. The machine Cheney et al were operating in the dark, away from any oversight gave us no useful intelligence, corrupted offices, people and practices, and left us less safe than had we not done anything. This is the argument I find convincing. That Obama campaigned as the constitutional law professor from Chicago who could push back on the 8-year power grab was one reason I found him so compelling as a candidate.
Three related: 1. Kudos to the people who cover this material. Glenn Greenwald, FDL, Adam Serwer, etc. I can link to an unemployment number to tell you what you already know – things are bad in the economy. That Obama has an aggressive war on whistleblowers when he campaigned to expand their protections is a tough narrative to establish, especially since everyone has wanted to believe otherwise in the liberal space.
2. Emptywheel has a post about the Brothers Daley and torture, relating Bill Daley’s comment – “he’s done” – to the sordid history of Richard Daley’s time as a prosecutor and Chicago Police Commander Jon Burge’s torture of African-American residents of Chicago during interrogations. I’ve talked with people who know the Burge situation well from Chicago, and when I ask how could it happen I always get some variety of “that’s how things were done back then.” I worry that a “that’s how things are done” is taking to the surveillance state now that Obama hasn’t broke it but instead established and, in some cases, expanded it.
3. Robert Chlala at Jadaliyya has a post – Of Predators and Radicals: King’s Hearings and the Political Economy of Criminalization – that gives a disturbing look at where all this can go. Discussing “From Super Predator to Predator Drone” Chlala argues that the current work done on Muslim so-called radicalization in America looks very similar to the African-American “youth gang” hysteria of the 1990s, an argument that lead to a massive expansion of the incarceration state along with a political ideology of making “state violence the only solution to social questions…while nurturing a broader racialized political economy of fear that entwines media, police, military, prisons, urban “entrepreneurs,” and security/crime “experts” towards the solidification of the neoliberal punitive state.” We’ve seen where this hysteria leads. Serious leadership and mechanisms for accountability when it fails is needed.
It sounds even stranger when you type it out: the spokesman for the Secretary of State resigned over comments he made at a seminar of around 20 people at MIT. It sounds so strange that the Guardian muddled it a bit in one of the first stories on the matter.
Not really; it was a non-reported, non-televised talk to a small group that happened to be blogged. He wasn’t saying he spoke for the administration, much less that he knew the facts of the case. It was a comment in confidence; that was enough to embarrass the administration and boost him out.
Reflexive leftism is pretty common at State, and I suppose this was a classic gaffe, i.e., Crowley said what he actually believed. Still, it is hard to understand how Crowley could have thought it would be OK to slam the Defense Department. Isn’t the State Department supposed to be all about diplomacy? Isn’t it a bit weird that they can’t come up with a spokesman who is diplomatic enough not to insult the guys on his own side?
The military says that Manning is on suicide watch which necessitates his being stripped to make sure he can’t harm himself. If Crowley thinks that’s “ridiculous” he also thinks the Defense Department are violating the law by enforcing common sense procedures to make sure we have a live suspect to stand trial and not a dead martyr.
There are many myths within the political blogosphere, but none is so deeply troubling or so highly treasured by mainstream political bloggers than this: that the political blogosphere contains within it the whole range of respectable political opinion, and that once an issue has been thoroughly debated therein, it has had a full and fair hearing. The truth is that almost anything resembling an actual left wing has been systematically written out of the conversation within the political blogosphere, both intentionally and not, while those writing within it congratulate themselves for having answered all left-wing criticism.
That the blogosphere is a flagrantly anti-leftist space should be clear to anyone who has paid a remote amount of attention. Who, exactly, represents the left extreme in the establishment blogosphere? You’d likely hear names like Jane Hamsher or Glenn Greenwald. But these examples are instructive. Is Hamsher a socialist? A revolutionary anti-capitalist? In any historical or international context– in the context of a country that once had a robust socialist left, and in a world where there are straightforwardly socialist parties in almost every other democracy– is Hamsher particularly left-wing? Not at all. It’s only because her rhetoric is rather inflamed that she is seen as particularly far to the left. This is what makes this whole discourse/extremism conversation such a failure; there is a meticulous sorting of far right-wing rhetoric from far right-wing politics, but no similar sorting on the left. Hamsher says bad words and is mean in print, so she is a far leftist. That her politics are largely mainstream American liberalism that would have been considered moderate for much of the 20th century is immaterial.
Meanwhile, consider Tim Carney and Mark Levin. Levin has outsized, ugly rhetoric. Carney is, by all impressions, a remarkably sweet and friendly guy. But Carney, in an international and historical context, is a reactionary. Those who sort various forms of extremism differentiate Levin and Carney because Levin’s extremism is marked in language, and Carney’s extremism is marked in policy. The distinction matters to bloggy taste makers. Meanwhile, Hamsher’s extremism in language is considered proof positive of extreme left-wing policy platform. No distinction matters; genuinely left-wing politics are forbidden and as such are a piece with angry vitriol.
Greenwald, meanwhile, might very well have actually left-wing domestic policy preferences. I honestly have no idea; Greenwald blogs almost exclusively about foreign policy and privacy issues. In other words, his voice is permitted into the range of the respectable (when it is permitted at all; ask Joe Klein if Greenwald belongs at the adult table) exactly to the degree that it tracks with libertarian ideology. Someone whose domestic policy might (but might not) represent a coherent left-wing policy platform has entrance into the broader conversation precisely because that domestic policy preference remains unspoken.
I hardly even need to explain the example of Markos Moulitsas. Moulitsas is a blogging pioneer and one with a large audience. But within the establishmentarian blogosphere, the professional blogosphere of magazines, think tanks, and the DC media establishment, he amounts to an exiled figure. See how many times supposedly leftist bloggers within this establishment approvingly quote Moulitsas, compared to those who approvingly quote, say, Will Wilkinson, Ross Douthat, or John Cole. Do some of these bloggers have legitimate beef with Kos? Sure. But the fact that his blog is a no-go zone for so many publications, while bad behavior from those of different ideological persuasions is permitted, ensures that the effects of this will be asymmetrical. I believe that people have to create positive change by changing their own behavior, but I also am aware that the nominal left capitulates to demands that they know the right absolutely will not capitulate to themselves. And so the right wins, again and again.
No, the nominal left of the blogosphere is almost exclusively neoliberal. Ask for a prominent left-wing blogger and people are likely to respond with the names of Matt Yglesias, Jon Chait, Kevin Drum…. Each of them, as I understand it, believe in the general paternalistic neoliberal policy platform, where labor rights are undercut everywhere for the creation of economic growth (that 21st century deity), and then, if things go to plan, wealth is redistributed from the top to those whose earnings and quality of life have been devastated by the attack on labor. That there are deep and cogent criticisms of the analytic, moral, and predictive elements of neoliberalism is an argument for another day. That those criticisms exist, and that they emanate from a genuine left-wing position, is a point I find perfectly banal but largely undiscussed in political blogs. And that’s the problem. Whatever those bloggers are, they are not left-wing, and the fact that they are the best people can generally come up with is indicative of the great imbalance.
I don’t really know what it means to criticize a writer for holding that his own views are “the truth of man.” Obviously, I agree with my political opinions and disagree with those who disagree with me. If I didn’t agree I’d change my mind.
But one point that I agree with here, is that while I’ll cop to being a “neoliberal” I don’t acknowledge that I have critics to the “left” of me. On economic policy, here are the main things I’m trying to accomplish:
— More redistribution of money from the top to the bottom.
— A less paternalistic welfare state that puts more money directly in the hands of the recipients of social services.
— Macroeconomic stabilization policy that seriously aims for full employment.
— Curb the regulatory privileges of incumbent landowners.
— Roll back subsidies implicit in our current automobile/housing-oriented industrial policy.
— Break the licensing cartels that deny opportunity to the unskilled.
— Much greater equalization of opportunities in K-12 education.
— Reduction of the rents assembled by privileged intellectual property owners.
— Throughout the public sector, concerted reform aimed at ensuring public services are public services and not jobs programs.
— Taxation of polluters (and resource-extractors more generally) rather than current de facto subsidization of resource extraction.
Is this a “neoliberal” program? Well, this is one of these terms that was invented by its critics so I hesitate to embrace it though I recognize that the shoe fits to a considerable extent. I’d say it’s liberalism, a view recognizably derived from the thinking of JS Mill and Pigou and Keynes and Maury “Freedom Plus Groceries” Maverick and all the rest. I recognize that many people disagree with this agenda, and that many of those who disagree with it think of themselves as “to the left” of my view. But I simply deny that there are positions that are more genuinely egalitarian than my own. I really and sincerely believe that liberalism is the best way to advance the interests of the underprivileged and to make the world a better place. I offer “further left” people the (unreturned) courtesy of not questioning the sincerity of their belief that they have some better solutions, but I think they’re mistaken.
That’s hardly a comprehensive reply to everything DeBoer wrote, but I hope it’s an explanation of what the hell happened to me.
I’ll cop to a couple things. First, I’m not a left-winger. I don’t agree with the left about very much. If you’re looking for genuine left-wing thought, this is not the blog for you.
Second, I don’t spend a whole lot of time discussing left-wing thought because my interest in ideas is primarily, though not completely, in proportion to their influence on American politics. There’s room for bringing in ideas that have little or no impact at the moment, but I don’t do much of that.
One time I did argue with the left was on health care reform, where you had left-wingers making the absurd claim that the Affordable Care Act did not improve the status quo. I found this created an angry reaction and multiple accusations that I was engaged in “hippie punching” or other unfair attacks on the left. So, from my perspective, it seems like left-wingers get upset if I engage with with and upset if I ignore them. Obviously, they wouldn’t be upset if I wrote about their ideas and agreed with them, but on most issues I don’t agree with them.
The post discusses the positions of quite a few political bloggers, including Ezra Klein, Matt Yglesias, Mickey Kaus, Jon Chait, Kevin Drum, and the economic, social and career forces that contribute to the rightward pull.
And I have to say I understand that part, even thought I do not sympathize. Readers have often said I should be on certain TV shows. And logically, I should be on at least some of them. But guess what, they won’t have me (not even Democracy Now, but that’s because they are not that interested in finance, and when they do that type of story, they seem to prefer either Real People or academics). Even though a TV veteran says it has a lot to do with bookers (they are pretty much all female and he insists they prefer to book men), I suspect another big reason is my outspoken views. One ought to think that would make me a useful guest, since good talking heads TV often involves friction between participants with diverging views. But some types of divergence appear not to be terribly welcome.
I plead guilty to some general neoliberal instincts, of course, but I plead guilty with (at least) one big exception: I am very decidedly not in favor of undercutting labor rights in order to stimulate economic growth, and I’m decidedly not in favor of relying solely on the tax code to redistribute wealth from the super rich to the rest of us. What’s more, the older I get and the more obvious the devastating effects of the demise of the American labor movement become, the less neoliberal I get. The events of the past two years, in which the massed forces of capital came within a hair’s breadth of destroying the world economy, and yet, phoenix-like, have come out richer and more powerful than before, ought to have convinced nearly everyone that business interests and the rich are now almost literally out of control. After all, if the past two years haven’t done it, what would?
Now, I agree that a real left-wing – socialists, serious advocates of unionization, etc. – is not terribly well represented at least in the corners of the blogosphere that I haunt. I don’t believe, however, that this is simply due to some larger, concerted effort to ignore and marginalize the left.
First, I think that the left-wing as Freddie wants it to exist represents a very small demographic in this country. It is not surprising, then, that it is less represented in public debate and online.
Second and much more to the point, I’ve seen Freddie make this complaint before – that his arguments and positions were being written out of debate. This makes no sense to me. When we started The League, Freddie was by far the most linked-to among us. Even now that he no longer (or very rarely) blogs, his posts tend to generate links all over the place. Hell, it wasn’t long ago he got a link at The Dish for a comment he made on someone else’s blog post. This is because Freddie is a tremendous writer, and people find his arguments and ideas – and the way he presents them – compelling and interesting. He’s fun to read. And he gets all these links and responses and discussion in spite of the fact that he is a died in the wool leftist.
Indeed, so far as I can tell the greatest threat to Freddie’s ideas receiving no exposure by Very Serious People is Freddie deBoer himself. By removing himself from the debate he has contributed vastly to his own complaint. Because Freddie was getting his ideas out there and then he stopped. Maybe he was frustrated because his ideas weren’t spreading into the liberal blogosphere the way they were getting attention on many conservative and libertarian blogs. That’s fair – it certainly can be frustrating to feel as though you aren’t being taken seriously by the people who matter most. I guess I’d just suggest patience.
Actually patience might not be enough – Freddie should organize. If organized labor in this country is withering it isn’t for lack of money or political influence, it is because those who advocate for its survival are not organizing for its survival. In the age of the internet there is no reason people like Freddie aren’t creating their own publications to push their ideas to the surface. Freddie could do it, and he should. It would be far more beneficial to his cause then posts lamenting the decline of the left-wing in America.
The barrier to entry for ideas is lower than it has ever been – but those last hurdles – the Washington establishment; the Very Serious People and institutional bloggers and so forth – they can be hard to leap, no doubt about it. But I don’t think Freddie is right to stop trying.
Can anyone deny that Glenn Greenwald will never get a gig at Cato or Reason, that Digby and Matt Taibbi will never get gigs at the Atlantic (I consider GG a libertarian)? Can anyone deny that Glenn Greenwald would generate more pageviews than anyone who is at Reason or Cato, that Digby or Matt Taibbi would get more pageviews than anyone but Sully at the Atlantic?
Of course, the first rule of establishment corporate journalism is that you do not call it establishment corporate journalism. ED (for example) would like to earn living as a journalist, so it’s natural that he pooh-poohs Freddie’s point. I don’t mean to single ED out; to the contrary, the fact that he takes deBoer’s point seriously at all puts him miles above Joe Klein and James Fallows and the rest, who will always simply ignore these sorts of arguments.
They may not even know that these arguments are valid. After all, it’s hard to make a man understand something when his livelihood depends on him not understanding it.
3. One thing I’ve noticed that separates the people Freddie disapproves of from everyone else is that the ones Freddie disapproves of are primarily journalists. Journalists of policy, of ideological movements and changes, and of institutional day-to-day fighting, but liberal people whose primary career training and arc are one of journalism. A journalistic approach to politics has its strengths and its weaknesses. Its strengths are a solid understanding of the micro elements that move things forward or backwards yard-by-yard. Its weaknesses can be a form of source capture, and a myopia on what is achievable in the short run rather than what moves things in the long run. I don’t think the professionalization of bloggers as reporters has moved them rightward, but it could be argued that it has caused them to focus on the short-term, in part because what the Democrats were trying to be bill-wise required a lot of explanation and in part because journalism requires that.
In its worse form, it becomes what Jay Rosen and others call A Church of the Savvy, where access, the art of the possible, and a healthy disdain for broader scope thinking are all privileged. This is less disdain for socialist or left-wing thinking (which is disdained by all kinds of people) but disdain for outsiders, a broader and more worrisome issue than Freddie lets on.
4. It’s important to realize that the right-wing wonks Freddie seems to respect as building a long-term vision are running under different assumptions of what to do. To them, the problem isn’t thinking of a better solution to a problem, it’s arguing why there is no problem. This comes from an explicit goal to view their project as an ideological one, one that comes out of a Banfield critique that social science is necessarily ideological. This, by definition, orientates towards long-term visions of the possible.
Freddie might want to engage with a left-modified form of the Banfield critique, one that points out when you have a wonk politics hammer every problem looks like a nail. Aaron Bady noticed this with the wonkosphere’s embrace of DIY U and other producitivity related ‘solutions’ to higher ed (also googling that made me realize I stole the title of this from Aaron, sorry!). If all you know are techniques of neoliberalism, then those are the solutions you’ll naturally gravitate towards. That’s different than where Freddie goes, which is one centered around prestige and access.
5. I’ll gladly defend Ezra and Matt on the charges Freddie throws at them. Their key points they raised early over the past two years – that the Senate would become obstructionist not just at a bill level but in a “running down the clock” manner and that would have major consequences (Ezra), that the GOP would not pay a price for their obstruction as people look at their checkbooks when they vote (both) and that the Federal Reserve is a major battlefield for the recovery and progressives/liberals aren’t ready to move, even intellectually, on how to fight for it (Matt) are all major things that happened from the past two years. Ezra in particular has covered the day-to-day amazingly well with a large quantity of work meant to be accessible to a wide range of readers (I write 2 posts every other day and feel like Charles Dickens), and if Freddie’s real critique is that liberals don’t likes unions Ezra has written a lot about how the Obama administration is overlooking them.
As for Matt’s neoliberalism stuff, I read it is coming from his engagement with land use. But to make it clear, I’m in favor of a hella robust regulatory state, but I agree with large parts of his critique. If you worry about why work associated with women is denigrated to second-class work and why women are underpaid relative to men you have to look at why dental hygenists do the same work as dentists for less pay and prestige. If you worry about the carceral state, our policy of putting the maximum number of people within the criminal disciplinary net and high recidivism and subsequent lack of mobility, you have to look at that fact that it can be illegal to hire ex-cons as low-level service employees; illegal to give licenses, and thus hire, ex-cons for things like “barbering, nail technicians, cosmetology and dead animal removal.”
The Dish has always tried to remain friendly to outsider voices and distance itself from the Inside the Beltway closed conversation. In that sense, the most glaring lack in Freddie’s post is a list of who exactly we ought to be reading and engaging but aren’t. Isn’t that the obvious solution? If we’re missing worthy far-left blogospheric voices, who are they?
For two centuries, America’s free market has not only been the source of dazzling ideas and path-breaking products, it has also been the greatest force for prosperity the world has ever known. That vibrant entrepreneurialism is the key to our continued global leadership and the success of our people.
But throughout our history, one of the reasons the free market has worked is that we have sought the proper balance. We have preserved freedom of commerce while applying those rules and regulations necessary to protect the public against threats to our health and safety and to safeguard people and businesses from abuse.
From child labor laws to the Clean Air Act to our most recent strictures against hidden fees and penalties by credit card companies, we have, from time to time, embraced common sense rules of the road that strengthen our country without unduly interfering with the pursuit of progress and the growth of our economy.
Sometimes, those rules have gotten out of balance, placing unreasonable burdens on business—burdens that have stifled innovation and have had a chilling effect on growth and jobs. At other times, we have failed to meet our basic responsibility to protect the public interest, leading to disastrous consequences. Such was the case in the run-up to the financial crisis from which we are still recovering. There, a lack of proper oversight and transparency nearly led to the collapse of the financial markets and a full-scale Depression.
Over the past two years, the goal of my administration has been to strike the right balance. And today, I am signing an executive order that makes clear that this is the operating principle of our government.
This order requires that federal agencies ensure that regulations protect our safety, health and environment while promoting economic growth. And it orders a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive. It’s a review that will help bring order to regulations that have become a patchwork of overlapping rules, the result of tinkering by administrations and legislators of both parties and the influence of special interests in Washington over decades.
The business community is praising President Obama’s new regulatory initiative, while retaining a degree of skepticism that meaningful change will come.
Obama rolled out a plan this morning to minimize the burdens of regulation on businesses, introducing it in a Wall Street Journal op-ed. Obama said the administration will seek input from businesses, and he issued a memo and executive order requiring executive agencies to review existing regulations and make compliance info searchable online.
“We welcome President Obama’s intention to issue an executive order today restoring balance to government regulations,” said Thomas Donohue, president and CEO of the U.S. Chamber of Commerce, the nation’s most prominent business group.
“While a positive first step, a robust and globally competitive economy requires fundamental reform of our broken regulatory system. Congress should reclaim some of the authority it has delegated to the agencies and implement effective checks and balances on agency power,” Donohue continued, in a statement issued by the group.
Health care and financial reform should be examined as well, Donohue said: “No major rule or regulation should be exempted from the review, including the recently enacted health care and financial reform laws.”
It remains to be seen what will come out of this new roll-out. Obama has held a tricky relationship with business as president: Business coalitions like the Chamber supported his stimulus plan at the outset of his presidency, but the pushes to reform energy, health care, and Wall Street didn’t thrill them as much.
It reaffirms the basic principles outlined in President Clinton’s Executive Order 12866, issued in September 1993, and continues to require agencies to conduct cost-benefit analyses of proposed rules. As noted in the President’s op-ed, it also requires agencies to engage in “retrospective analysis” of existing rules so as to accelerate the pace at which outdated regulations are revoked. Specifically, it requires all agencies to develop a plan for such retrospective review within 120 days. If the White House Office of Information and Regulatory Affairs ensures such reviews are meaningful, this could be a significant and positive step.
While the Sherlock Homes of 1600 Pennsylvania sleuths around in search of “the right balance” that they’ve skewed catastrophically over the last two years, the mother of all job creation-stifling regulations — Obamacare — awaits repeal.
Of course on the other side of that are those saying “since when is it a function of government to decide what gas mileage a car must get?” The entire premise that it is a function of government is built on belief in a “justified” level of intrusion far beyond that which any Constitutional scholar would or could objectively support (that’s assuming he is a scholar and an honest one). In fact the example perfectly states the obvious difference between big government advocates and small government advocates. BGA’s think it is government’s job to dictate such things – that it is a function of government to do so. SGAs believe it is the market’s job to dictate such things and that government shouldn’t be involved in these sorts of things.
So in essence, while the Obama op/ed has all the proper buzz words to attempt to sell it as a pro-business, small government move, it is in fact simply a restatement of an old premise that essentially says “government belongs in the areas it is now, we just need to clean it up a little”.
This really isn’t about backing off, it’s about cleaning up. It isn’t about letting the market work, it’s about hopefully making government work better. And while Obama claims to want to inform us about our choices rather than restricting them, I’ll still be unable to buy a car that doesn’t meet government standards on gas mileage even if I want one.
Now that may not seem like something most of us would want – few if any of us want bad gas mileage and the cost it brings – but it does illustrate the point that government regulation really isn’t about providing choice at all, it is and always will be about limiting them. And all the smooth talking in the world doesn’t change that. It’s the nature of the beast.
The president’s last executive order was signed between Christmas and New Year’s. It codified the bias in hiring towards college graduates (and more and more in America, those without college degrees will never have access to decent work!), but at least demanded the creation of entry level positions in the government for recent college graduates and veterans. The Wall Street Journalextends a statement from the president today, promoting his new executive order, which we shall call Operation Untangling. The plan apparently means that every government agency must identify which of their regulations are stupidest, and make them go away, supposedly. For instance, Obama trumpets that they just changed the EPA regulations that ensured saccharine was treated as a toxic chemical. American, onward and upward, very, very slowly. Anyway there’s lots of dog whistle noises in here about business and regulation that are designed to appeal to particular people but judging from the reaction, it’s just another chance for everyone to complain from various opposing viewpoints about how America is broken.
It’s fine as far as it goes. Here’s where it would be helpful if Obama picked some fights and put out some reform markers, because I can’t tell if this is just cover to go after proxy access rules as a way of making peace with the business community. It’s worth noting that, as far as I read it, we’d have the same exact financial crisis, the same criminal securitization chain, the same uncapitalized derivatives positions, the same shadow banking panic if we regulated the financial sector with these guidelines.
And the things that actually acted on these principals in the past two years – the CFPB which has consolidated regulatory burdens across agencies in order to make regulations more clear, interchange reform which created a market between credit cards and debit cards to de facto create a market rate of credit at the individual merchant level – were bitterly opposed by the industries in question.
More generally I don’t like the notion that regulation is conceptually some sort of brakes on markets, a dial that can be turned up or down until some sort of optimal space is hit. I think of regulation as a means of handling the consequences of a specific market, both by setting up the terms on which the market plays as well as the mechanisms for handling conflicts and the way things collapse. How does a firm fail? How do other firms compete, and under what terms is information disclosed to the market? In some ways this is obvious: the nuclear energy market would not exist in its current form without the government. I’d be more likely to support for crazy loans if our bankruptcy courts were designed to modify primary household debt and also if we reformed the bizarre way we deal with junior liens, a conflict people knew about at the beginning of the housing bubble.
And here‘s the underlying Wall Street Journal op-ed by Barack Obama, which features an illustration of a man — not Obama… he looks a bit like Don Imus — in a gray business suit, running with scissors — running with scissors! — cutting his way through an abstract field of red tape. In the op-ed, Obama is all about carefully and thoughtfully weighing the value of particular regulations in relation to the burdens they impose, so the picture is amusingly inapt.
[…] All that said, income inequality does matter—for both politics and the economy. To see how, we must distinguish between inequality itself and what causes it. But first let’s review the trends in more detail.
The numbers are clear: Income inequality has been rising in the United States, especially at the very top. The data show a big difference between two quite separate issues, namely income growth at the very top of the distribution and greater inequality throughout the distribution. The first trend is much more pronounced than the second, although the two are often confused.
When it comes to the first trend, the share of pre-tax income earned by the richest 1 percent of earners has increased from about 8 percent in 1974 to more than 18 percent in 2007. Furthermore, the richest 0.01 percent (the 15,000 or so richest families) had a share of less than 1 percent in 1974 but more than 6 percent of national income in 2007. As noted, those figures are from pre-tax income, so don’t look to the George W. Bush tax cuts to explain the pattern. Furthermore, these gains have been sustained and have evolved over many years, rather than coming in one or two small bursts between 1974 and today.1
These numbers have been challenged on the grounds that, since various tax reforms have kicked in, individuals now receive their incomes in different and harder to measure ways, namely through corporate forms, stock options and fringe benefits. Caution is in order, but the overall trend seems robust. Similar broad patterns are indicated by different sources, such as studies of executive compensation. Anecdotal observation suggests extreme and unprecedented returns earned by investment bankers, fired CEOs, J.K. Rowling and Tiger Woods.
At the same time, wage growth for the median earner has slowed since 1973. But that slower wage growth has afflicted large numbers of Americans, and it is conceptually distinct from the higher relative share of top income earners. For instance, if you take the 1979–2005 period, the average incomes of the bottom fifth of households increased only 6 percent while the incomes of the middle quintile rose by 21 percent. That’s a widening of the spread of incomes, but it’s not so drastic compared to the explosive gains at the very top.
The broader change in income distribution, the one occurring beneath the very top earners, can be deconstructed in a manner that makes nearly all of it look harmless. For instance, there is usually greater inequality of income among both older people and the more highly educated, if only because there is more time and more room for fortunes to vary. Since America is becoming both older and more highly educated, our measured income inequality will increase pretty much by demographic fiat. Economist Thomas Lemieux at the University of British Columbia estimates that these demographic effects explain three-quarters of the observed rise in income inequality for men, and even more for women.2
Attacking the problem from a different angle, other economists are challenging whether there is much growth in inequality at all below the super-rich. For instance, real incomes are measured using a common price index, yet poorer people are more likely to shop at discount outlets like Wal-Mart, which have seen big price drops over the past twenty years.3 Once we take this behavior into account, it is unclear whether the real income gaps between the poor and middle class have been widening much at all. Robert J. Gordon, an economist from Northwestern University who is hardly known as a right-wing apologist, wrote in a recent paper that “there was no increase of inequality after 1993 in the bottom 99 percent of the population”, and that whatever overall change there was “can be entirely explained by the behavior of income in the top 1 percent.”4
And so we come again to the gains of the top earners, clearly the big story told by the data. It’s worth noting that over this same period of time, inequality of work hours increased too. The top earners worked a lot more and most other Americans worked somewhat less. That’s another reason why high earners don’t occasion more resentment: Many people understand how hard they have to work to get there. It also seems that most of the income gains of the top earners were related to performance pay—bonuses, in other words—and not wildly out-of-whack yearly salaries.5
It is also the case that any society with a lot of “threshold earners” is likely to experience growing income inequality. A threshold earner is someone who seeks to earn a certain amount of money and no more. If wages go up, that person will respond by seeking less work or by working less hard or less often. That person simply wants to “get by” in terms of absolute earning power in order to experience other gains in the form of leisure—whether spending time with friends and family, walking in the woods and so on. Luck aside, that person’s income will never rise much above the threshold.
It’s not obvious what causes the percentage of threshold earners to rise or fall, but it seems reasonable to suppose that the more single-occupancy households there are, the more threshold earners there will be, since a major incentive for earning money is to use it to take care of other people with whom one lives. For a variety of reasons, single-occupancy households in the United States are at an all-time high. There are also a growing number of late odyssey years graduate students who try to cover their own expenses but otherwise devote their time to study. If the percentage of threshold earners rises for whatever reasons, however, the aggregate gap between them and the more financially ambitious will widen. There is nothing morally or practically wrong with an increase in inequality from a source such as that.
[…]
If we are looking for objectionable problems in the top 1 percent of income earners, much of it boils down to finance and activities related to financial markets. And to be sure, the high incomes in finance should give us all pause.
The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices. Most of the time investors will do well by this strategy, since big, unexpected moves are outliers by definition. Traders will earn above-average returns in good times. In bad times they won’t suffer fully when catastrophic returns come in, as sooner or later is bound to happen, because the downside of these bets is partly socialized onto the Treasury, the Federal Reserve and, of course, the taxpayers and the unemployed.
To understand how this strategy works, consider an example from sports betting. The NBA’s Washington Wizards are a perennially hapless team that rarely gets beyond the first round of the playoffs, if they make the playoffs at all. This year the odds of the Wizards winning the NBA title will likely clock in at longer than a hundred to one. I could, as a gambling strategy, bet against the Wizards and other low-quality teams each year. Most years I would earn a decent profit, and it would feel like I was earning money for virtually nothing. The Los Angeles Lakers or Boston Celtics or some other quality team would win the title again and I would collect some surplus from my bets. For many years I would earn excess returns relative to the market as a whole.
Yet such bets are not wise over the long run. Every now and then a surprise team does win the title and in those years I would lose a huge amount of money. Even the Washington Wizards (under their previous name, the Capital Bullets) won the title in 1977–78 despite compiling a so-so 44–38 record during the regular season, by marching through the playoffs in spectacular fashion. So if you bet against unlikely events, most of the time you will look smart and have the money to validate the appearance. Periodically, however, you will look very bad. Does that kind of pattern sound familiar? It happens in finance, too. Betting against a big decline in home prices is analogous to betting against the Wizards. Every now and then such a bet will blow up in your face, though in most years that trading activity will generate above-average profits and big bonuses for the traders and CEOs.
To this mix we can add the fact that many money managers are investing other people’s money. If you plan to stay with an investment bank for ten years or less, most of the people playing this investing strategy will make out very well most of the time. Everyone’s time horizon is a bit limited and you will bring in some nice years of extra returns and reap nice bonuses. And let’s say the whole thing does blow up in your face? What’s the worst that can happen? Your bosses fire you, but you will still have millions in the bank and that MBA from Harvard or Wharton. For the people actually investing the money, there’s barely any downside risk other than having to quit the party early. Furthermore, if everyone else made more or less the same mistake (very surprising major events, such as a busted housing market, affect virtually everybody), you’re hardly disgraced. You might even get rehired at another investment bank, or maybe a hedge fund, within months or even weeks.
Moreover, smart shareholders will acquiesce to or even encourage these gambles. They gain on the upside, while the downside, past the point of bankruptcy, is borne by the firm’s creditors. And will the bondholders object? Well, they might have a difficult time monitoring the internal trading operations of financial institutions. Of course, the firm’s trading book cannot be open to competitors, and that means it cannot be open to bondholders (or even most shareholders) either. So what, exactly, will they have in hand to object to?
Perhaps more important, government bailouts minimize the damage to creditors on the downside. Neither the Treasury nor the Fed allowed creditors to take any losses from the collapse of the major banks during the financial crisis. The U.S. government guaranteed these loans, either explicitly or implicitly.
Guaranteeing the debt also encourages equity holders to take more risk. While current bailouts have not in general maintained equity values, and while share prices have often fallen to near zero following the bust of a major bank, the bailouts still give the bank a lifeline. Instead of the bank being destroyed, sometimes those equity prices do climb back out of the hole. This is true of the major surviving banks in the United States, and even AIG is paying back its bailout. For better or worse, we’re handing out free options on recovery, and that encourages banks to take more risk in the first place.
In short, there is an unholy dynamic of short-term trading and investing, backed up by bailouts and risk reduction from the government and the Federal Reserve. This is not good. “Going short on volatility” is a dangerous strategy from a social point of view. For one thing, in so-called normal times, the finance sector attracts a big chunk of the smartest, most hard-working and most talented individuals. That represents a huge human capital opportunity cost to society and the economy at large. But more immediate and more important, it means that banks take far too many risks and go way out on a limb, often in correlated fashion. When their bets turn sour, as they did in 2007–09, everyone else pays the price.
But it’s interesting to read it in tandem with Cowen’s earlier piece critiquing the “break up the banks” argument advanced by Simon Johnson and James Kwak, and embraced by the progressive left (along with a few libertarians and conservatives). There, Cowen argued that shrinking the banks would treat the symptoms of the bailout culture, rather than the disease:
There’s a different way to think about the bailouts, namely that the U.S. government stands at the center of a giant nexus of money raising, most of all to finance the U.S. government budget deficit and keep the whole show up and running. The perception at least is that our country requires the dollar as a reserve currency, requires New York City as a major banking center with major banks, and requires fully credible governmental guarantees behind every Treasury auction and requires liquid financial markets more generally. Furthermore the international trade presence of the United States (supposedly) requires the federal government to strongly ally with major commercial interests, just as our government sides with Hollywood in trade and intellectual property disputes. To abandon banks is to send a broader message that we are in commercial and political decline and disarray, and that is hardly an acceptable way to proceed, at least not according to the standards of the real Washington consensus.
… This analysis bears on one of the main policy recommendations of Johnson and Kwak, namely to break up the big banks so they cannot soil Washington with such powerful lobbying and privileges. I believe this recommendation will not achieve its stated ends and that Washington would find another way to assemble privileged financial institutions — no matter what their exact form — within its ruling coalition. Breaking up the large banks would be striking at symptoms rather than at root causes, namely the ongoing growth of political power and the reliance of that power upon an ongoing inflow of capital.
If you do wish to break or limit the power of the major banks, running a balanced budget is probably the most important step we could take. It would mean that our government no longer needs to worry so much about financing its activities.
This, too, seems plausible to me. But what if you wove both a balanced budget and the Johnson-Kwak bank break-up into the same agenda (as, arguably, Tom Coburn tried to do this year), simultaneously downsizing the national debt and downsizing the too-big-to-fail banks that effectively fund it? I understand that this is not the most politically realistic conceit, since it would require some sort of progressive-conservative alliance in the service of policies that (as Cowen notes) most voters reject in favor of the more appealing combination of “high government spending and relatively low taxes.” But it seems like the approach that’s implied by his arguments. And I wonder if it’s better to advance politically unrealistic solutions, in the hopes of making them more realistic, than to give up and accept a system that’s all-too-likely, in Cowen’s words, to “again bring our economy to its knees” as “the price of modern society.”
I’ve long had the sense that folks in finance are getting spectacularly rich by somehow gaming the system, but the nature of the system is too inscrutable for me to formulate a sufficiently informed hypothesis on my own. But it’s not so inscrutable to Mr Cowen. He offers what sounds to me a quite plausible story about the way the financial-regulatory-political system has been, and continues to be exploited and destabilized. “It’s as if the major banks have tapped a hole in the social till and they are drinking from it with a straw,” Mr Cowen writes. His account of the way strategies of “going short on volatility” both increase inequality and threaten the stability of our entire market system is too detailed to summarise here, but merits close attention. I strongly sense that some story like this one largely explains the top 1%’s dramatic separation from the rest of the income distribution. Here’s Mr Cowen’s bottom line:
For the time being, we need to accept the possibility that the financial sector has learned how to game the American (and UK-based) system of state capitalism. It’s no longer obvious that the system is stable at a macro level, and extreme income inequality at the top has been one result of that imbalance. Income inequality is a symptom, however, rather than a cause of the real problem. The root cause of income inequality, viewed in the most general terms, is extreme human ingenuity, albeit of a perverse kind. That is why it is so hard to control.
Surely there is some kind of structural injustice here. But it’s just terrifically hard to say where precisely it lurks and what ought to be done about it. We can easily treat symptomatic inequality through progressive redistribution, but this won’t cure our deeper institutional malady. The deeper problem is that Wall Street can and continues todrink our milkshake—that there is a draining hole in the social till that has already caused our economy to collapse once—not that the banker’s portions of milkshake are growing faster than ours.
Tyler Cowen has written an article for the American Interest titled The Inequality That Matters. It’s about inequality, the financial sector and the possibility of reform. I really enjoyed the essay and recommend you check it out; I’m going to write a few critical comments.
1. The essay doesn’t tackle what I think is, in one sense, the most important question – how much did a broken financial system inflate the housing bubble, especially in the United States? It’s one thing if the financial sector drinks our milkshake a bit; it’s another if they are creating bubbles to profit on the way up and on the way down, either by choice or by accident.
The Magnetar Trade (given musical treatment above) is instructive here, where you can take informational asymmetries in the private securitization market combined with opaque pricing of CDS to pump hot money into housing that you profit on if it collapses. The analogy used, a correct one, is to the movie The Producers, but this is at the scale of hundreds of billions of dollars.
Research by Adam Levitin and Susan Wachter in their paper Explaining the Housing Bubble finds that mortgage debt prices were dropping in 2004-2006 as volume was rising, which is consistent with a shift of the supply curve outward. But this supply was through private mortgage-backed securities which were both difficult to price on fundamentals and difficult to cross-compare to other instruments; the private-financial market for these MBS are thus created as complex, heterogeneity and without regulatory standards. So it’s not just that finance sits at the center of some profitable things; it reorganizes the space to its own advantage, and the disadvantage of all other players.
2. The essay talks about how the financial sector goes “short on volatility”, which is a bet that things won’t go crazy in the short term, or a bet that takes on tail risk. As Kevin Drum mentions someone is on the other side of that bet. And what do we call a product that pays out in times of high volatility, in times when an event out of the ordinary happens? One thing to call it is “insurance.”
Speaking at a conceptual level, I think it is fair to say that we regulate the #$@% out of people who hang the sign “insurance” on their door, and do not for those, like AIG did, that provide insurance without hanging the sign. As a result actual insurance agents who hang the sign are kind of how we idealize the boring bankers of times gone past.
There’s good reason we regulate insurance – it needs to pay out exactly at the moment when it is the least likely to get paid. I wrote a post for the Atlantic Business section that asked how should you think of zombie insurance? How would you price a contract that paid $100 if the world turned into The Walking Dead, where cities were overrun with armies of zombies?
The short answer is that you wouldn’t pay anything, since when you need to collect it the person on the other end is probably a zombie. This “who can credibly commit to backstopping bad events” goes towards a notion of the role the government can play in financial markets.
Tyler Cowen has a big piece about income inequality in The American Interest that’s well worth reading. However, it’s not really about the growth of inequality. It’s about Wall Street. In particular, it’s about this question: why do financial professionals make so damn much money?
The answer, of course, is that they work in an industry that’s become ungodly profitable. But how? Tyler attributes it to the practice of “going short on volatility.” That is, modern finance professionals mostly gamble that what happened in the past will keep happening in the future, and disasters will never happen. In most years this makes them a lot of money (because, in fact, disasters rarely happen).
But this is mysterious. After all, not everyone is going short on volatility. In fact, by definition, only half of the punters on Wall Street are doing it. The other half are taking the other side of the bet. Tyler explains this with an analogy to a bet that the Washington Wizards, one of the worst teams in basketball, won’t win the NBA championship. If you make that bet year after year, you’ll keep making money year after year.
This is a useful analogy precisely because it wouldn’t work. After all, to make that bet, you have to find someone willing to take the other side and bet that disaster will strike and the Wizards will win. But they know just how unlikely that is, so they’re going to require very long odds. On a hundred dollar bet, they’ll want $100 if they win but will only be willing to pay off one dollar if you win. That won’t make you rich.
So how can you make money doing this? Answer: find someone who doesn’t know much about basketball and pays off two dollars on this bet instead of one. Additionally, you need to borrow money so you can make lots of bets. So instead of placing a $100 bet and making a dollar, you borrow a million dollars, make lots of bets on lots of teams, and make $20,000. It’s the road to riches.
The questions this raises should be obvious. First, why would anyone be dumb enough to offer you such mistaken odds? Second, shouldn’t the interest on the loan wipe out the profit from such a tiny betting margin? Third, why would anyone loan you this money in the first place, knowing that you have no chance of paying it back if disaster strikes, one of your teams wins, and you lose your entire stake?
As near as I can tell, the answer to #1 is that Wall Street traders are bad at pricing tail risk. The answer to #2 is that Wall Street hedge funds, using techniques pioneered in the mid-90s by Long Term Capital Management, have figured out ways to borrow large sums of money at virtually no cost. And the answer to #3 is that Wall Street lenders are also bad at pricing tail risk.
Or are they? Tyler argues that, in fact, both sides are betting that as long as everyone is doing this, the occasional disasters will be so epically disastrous that central banks will bail them out. They have no choice, after all, if the alternative is the destruction of the global economic system. So the tail risk is smaller than you think. Borrowers will make money in good years and default in bad years. Lenders, meanwhile, will also make money in good years, secure in the knowledge that on the rare occasions when everything goes pear shaped and borrowers can’t pay back their loans, the government will make them whole. As Tyler reminds us, “Neither the Treasury nor the Fed allowed creditors to take any losses from the collapse of the major banks during the financial crisis.”
But I don’t find this persuasive as a behavioral explanation. The problem is that there’s simply no evidence I’m aware of that Wall Street executives ever thought about this or priced it into their models. Sure, they may have been reckless or stupid. However, they weren’t setting prices for financial instruments based on the idea that, yes, they were taking a genuine risk of going bust, but they could price that away because they’d get bailed out by Uncle Sugar when it happened. Rather, they really, truly, believed that they weren’t exposed to very much risk. As near as I can tell, this was true on both the buy side and the sell side.
To answer Kevin, finance is incredibly profitable because the finance sector has a greater information asymmetry between buyers and the sellers than almost any other sector on Earth. Even today most customers more or less take it on faith that the people selling them financial instruments are dealing on good faith. They do it because from FDR until the 70’s or so that was true. Financial instruments were less complicated and oversight was much stronger. That is to say that it was harder to cheat and more cheaters got caught. They also do it because they have to; if you don’t want to take your bank’s word for it then you can either keep a lawyer on retainer, or else live in a cave on public land. Too bad for us that assumption is no longer remotely true. Computers became a commodity and investors started making more bets on other people’s bets. That is to say, cheating got a lot easier because most people could no longer understand what their banks were up to. At the same time deregulation made it that much harder to catch cheaters and also opened vast new opportunities for semi-legal schemes as well as the nakedly illegal kind.
The lack of any real risk premium (after all, we’re all hostages if they fail) certainly pads the bottom line, but the meat and potatoes for Goldman and BofA is the vast gulf between how well they understand what they’re doing versus how well their customers understand it. They don’t even need to understand their own business that well. The sizable fortune that they made and kept over mortgage derivatives just emphasizes how important it is to know more than your customers, who largely had no idea about the flyblown shit that Goldman and company shoveled into each AAA-rated MBS.
These days Goldman has a supercomputer that sits on the main trading network and jumps everyone else’s bid by milliseconds. Nobody seems to care. If that isn’t a straw comfortably stuck in the social till then I don’t know what is.
Yesterday, Tyler, myself and a handful of other economics bloggers had a chance to discuss the economy with Treasury Secretary Geithner and other treasury officials. Here are a few random notes.
There was deep skepticism about the financial industry and about reform from some of the bloggers. More let’s say “radical” approaches such as Treasury taking an equity stake in underwater homes or giving everyone a guaranteed income were brought up. I was surprised to find myself on the side of the more conservative Treasury officials who cogently argued that such reforms were neither politically viable nor likely to work. Treasury gave a good argument that reform had been deep and meaningful.
A few good lines from a senior treasury official as I recall the gist:
“Markets believe we can borrow. The public doesn’t. We need both to move forward on the fiscal front.”
“Businesses are investing in a way that shows more confidence than they are talking.” (graph here, see the last year or so AT)
There was a recognition that the Fed could do “dramatic” things but a sense that the theory here was uncertain and untested.
The best question of the day came from Tyler. The discussion was on the financial reform bill and how it changed the incentives of players in the financial industry by creating more risk for them. Tyler interrupted with “What I really want to know is how your incentives have been changed! What is to say that next time the decision will not be made to again bailout the bondholders?”
I half understand why Treasury makes the distinction between the two types of bloggers, but Ezra and I both felt a little jealous that we had to compete with Mike Allen asking about politics when we could have listened to a detailed and wonky discussion between Steve Waldman and Tim Geithner on the subject of bailout incentives.
The discussion was all held on deep background, so I can’t quote anybody. I can tell you that Geithner looked healthier than the past couple of times I’ve seen him: I daresay he’s actually getting some sleep these days, which has got to be a good thing. I also learned a fair amount about how Treasury views the world.
The big picture, at least as I grokked it, is that although the recovery started off stronger than Treasury had hoped, the broad economy is still in a pretty weak position. The Fed is doing its part to try to keep a certain amount of momentum going, but fiscal policy is harder, because it needs the cooperation of Congress. And it’s far from clear what kind of fiscal legislation can be passed at this point.
On housing, the main message from the big conference on Fannie and Freddie is that there’s a broad-based consensus, Rick Santelli rants notwithstanding, that large-scale government participation in the housing market is necessary to prevent further house-price declines. And yes, Treasury would very much like to make sure that house prices don’t fall any more than they have already. There’s no Bush-style policy of trying to maximize homeownership, or anything like that, and indeed Treasury now seems pretty resigned to the fact that its much-vaunted loan-modification program is going to have only a pretty marginal effect, doing more to delay foreclosures than to prevent them. But the very powerful government guarantee on Frannie’s bonds is here to stay, you won’t be surprised to hear. And even delaying foreclosures can be a good thing if it helps to give the broader economy a bit of time to recover.
Readers may wonder why I haven’t written about my visit on Monday to the Treasury, but truth be told, I headed out afterward with Mike Konczal and Steve Waldman to get a drink, and we all looked at each other quizzically. I said something along the lines of “I’m not certain there is anything to write about,” and they nodded in agreement. I had less than a half page of notes.
That isn’t to say we didn’t spend nearly 2 1/2 hours in a high-ceilinged conference room, and that we didn’t engage with Treasury officials, including Timothy Geithner, in what looked like conversation. But the assumptions of both sides re process as well as substance were so far apart that it often felt like we were talking past each other.
One part of the dynamic was the home court advantage the Treasury enjoys. This is their drill, their offices, they no doubt used their spiel on others and have it pretty well debugged, and more important, they play well off each other (they give the impression of having good rapport with each other; there was some banter on their side). So they have message discipline and stay unified and still manage to look relaxed and informal. By contrast, we seven bloggers (the others were Tyler Cowen, Alex Tabarrok, Phil Davis, and John Lounsbury) were on hold in the very large corridor till the conference room cleared up, which meant we didn’t even have the chance to ask each other, “And what do you want to ask about?” Our interests were likely to be (and were) somewhat divergent, but it would have been nice to know to what degree.
Despite our heterogeniety, we all took a skeptical posture towards the Treasury team. One has to think they anticipate that, which then begs the question of what they expect to accomplish with these meetings. We aren’t journalists, so the access card does not work; the infrequency and format of these sessions means they don’t build personal rapport (and there are good reasons why not; from our end, it costs time and money to go to DC; from their end, we aren’t important enough to warrant more frequent contact).
So they may have other motivations, but a safe assumption is that they regard this as marketing, and a famous cliche is “50% of what I spend on advertising is wasted, I just don’t know which 50%.” We probably look like part of the wasted 50%, but they can’t be certain, and the costs to them of having this sort of meeting are low, so they might as well keep the experiment going.
—ADMINISTRATION MINDMELD: The virtue of action on Social Security is that it demonstrates the ability to begin to affect the long-run deficits. Social Security isn’t the biggest contributor to the problem – that’s still health-care costs. But ti could help a little bit, buy time, and strengthens the odds of a political consensus behind other spending cuts or tax increases. Most importantly, it would establish more CREDIBILITY with the MARKETS. The mood of the world at the moment (slightly excessive, from the administration’s point of view) is that if you don’t do anything with spending cuts, it doesn’t get you credibility.
Sure makes it seem like the administration wants to cut Social Security, doesn’t it? By chance, I was at the same deep-background briefing where Allen had his “mindmeld,” and I have to say, I don’t think he’s got it right. After reviewing my notes and a recording of the conversation, here’s my take. (The rules for this conversation were no direct quotes and no identifying the senior administration official in question.)
Allen references a part of the conversation that concerned the Deficit Commission and what the official might know about its agenda. The official believed that the largest consensus was forming around an undefined plan to support the long-term solvency of Social Security and was discussing why that hypothetical plan might help bolster political will for other deficit-reduction ideas. The official would note that Social Security is already solvent for decades.
The most important omission from Allen’s item is that the official concluded the conversation by noting that Social Security is not a generous benefit compared to other public pensions around the world and that cutting benefits, even years in advance, would be difficult to justify. More symbolically, Allen doesn’t mention that the official cited Paul Krugman when talking about Social Security’s contributions to the deficit. Finally, the reason the administration official was interested in credibility before the markets is so the government could borrow more money for temporary fiscal stimulus.
Brad DeLong glosses this as part of why “Friends Don’t Let Friends Read Politico.” And certainly it is a case study in why you can’t go run and panic after reading a thinly sourced item in a traffic-hungry publication. But part of the issue here, it seems to me, is that DC officialdom ought to realize that its obsession with off the recordy-ness has some serious downsides. Treasury did two meetings this week, one that was with professional blogger types and one that was more with professional economists who also blog, and most of the attendees seem to have come away quite impressed. If that’s the case, wouldn’t people able to listen to a recording of the full session likely also be impressed? And wouldn’t it be easier to clear up misconceptions that Allen’s writeup may have created?
Structural shifts in the media industry away from the “three TV networks and a bunch of local newspaper monopolies” model have shifted the balance of power away from journalists and toward flacks. Consequently, if people want to hold off the record briefings with “senior officials” plenty of writers are going to show up. But merely because people can get away with that kind of thing doesn’t necessarily make it a good idea.
There’s been some meta-discussion over a recent meeting between reporters, bloggers, pundits and Treasury officials. The meeting existed under the worst of all media rules: Background.
On-the-record is, well, on the record. Somebody tells me something and I tell you. Off-the-record is just the opposite: Somebody tells me something and I can’t tell you that I was told this. I can be informed by it, but no one knows how I got the information. The disadvantages of this are obvious. But the advantage is a much more honest and free-flowing conversation.
Background has neither the transparency of being on-the-record or the freedom of being off-the-record. It means I can tell you that someone told me this (“a senior Treasury official”). I really don’t understand why people use it.
But use it they do, and all the time. My favorite background offer from this administration came in an e-mail the night before HealthCare.gov launched. It was a lot of standard information on the new site that I could attribute to an “administration official” if I so chose. Why they wanted anonymity to say things like “HealthCare.gov is a new, easy to use website that helps consumers take control of their health care and make the choices that are right for them by putting the power of information at their fingertips,” I’ll never know. Was Gibbs seriously going to chew someone out for going on-the-record with that?
First off, here’s a picture of me with Robert Rubin’s portrait:
Second, have you ever seen Miracle on 34th Street? Remember at the end when that guy legally is Santa Claus because he has all that mail delivered to him? I felt a little like that seeing “Mike Konczal, Rortybomb” on paper that had Treasury’s seal:
Heh.
It was a pretty casual meet and greet. There weren’t any presentations, nothing to be sold on. We went to questions immediately. Geithner is very smart and personable, and it was very useful to chat with Treasury officials on background over the strengths and weaknesses of the financial reform bill.
[…]
HAMP
– They are sticking by HAMP. The narrative seemed to change from helping homeowners to spacing out the foreclosures. I asked them to repeat it, because the idea that billions of taxpayer dollars are being spent to smooth out foreclosures for banks struck me as new narrative – it’s explicitly extend-and-pretend, and also fairly cynical.
– There was talk about how fiscal policy can’t move through Congress. I asked them about only 0.5% of HAMP being spent and how that could be used without Congress’ permission. Before I suggested that the remainder of the $50bn be divided into two funds, the Digging Holes Across States (DHAS) fund and the Filling Holes Across States (FHAS) fund, two far more socially productive means of spending the HAMP money than what is currently being done with it, I was told that the entire $50bn is expected to be spent by the time the program is over. I didn’t believe it; we will see.
– Overall, there seemed to be a sense of “we are done here” from the meeting. Maybe it was the fact that it is August, the informal manner of the meeting and a news cycle is driven by insane things, but there was a sense with the financial reform bill passed, deadlock in Congress and a Federal Reserve tip-toeing around its mandate things were going to slow down and options are more or less removed from the table. Which is a very scary thought with the economy the way it is.
Really fucking unbelievable. As I think I said to Mike at Netroots Nation, if HAMP is actually a program designed to boost the housing market and funnel money several billion more dollars to banks, it’s also a really fucking horrible and stupid and inefficient way to do that even without the “screwing people over” part.
The way I’ve been getting my hair cut for the past six months or so is that I bought a pair of hair clippers and I do it myself. I normally trim about twice a week, and this lets me keep the hair short at an acceptable cost. Once I screwed it up, then my hair looked funny for like a day until I figured out how to fix it.Meanwhile, meet the District of Columbia Board of Barber and Cosmetology:
The DC Board of Barber and Cosmetology (Board) regulates the practice of barbering and cosmetology while working diligently to raise the standards of practice; ensure quality service; establish accepted codes of ethical behavior, and protects the health, safety and welfare of the citizens and visitors of the District of Columbia by upholding the city’s Barber and Cosmetology laws and regulations. The Barber and Cosmetology license law (pdf) is defined in the Barber and Cosmetology Municipal Regulations, which took effect on May 2001.
The Board consists of eleven members appointed by the Mayor. The Board consist of three (3) barbers, three (3) cosmetologists, threes (3) specialists, all license and practicing for at least three (3) years. There are two (2) members (non-license) representing consumers. Six members of the Board constitute a quorum.
Regulation of this sort seems totally unnecessary. People don’t die of bad haircuts, and since hairstyle is a quintessential matter of taste there’s absolutely no reason to think consumers can’t figure out for themselves who has a decent reputation as a cutter of hair. You can cut your own hair perfectly safely in your own house, and if you screw it up all that happens is you need to find a real professional to fix it. But what’s more, even if regulation were somehow a good idea, the composition of the board couldn’t possibly serve a legitimate consumer protection function. It’s overwhelmingly composed of people from the industry whose incentive is to limit competition and raise prices.
Congratulations, Matthew Yglesias, you have just discovered what my economics professors used to call Barriers To Entry, in much the same way Charlton Heston discovered the secret ingredient for soylent green.
All those business lobbyists in Washington? They are not there to stop legislation. They are there to write legislation. Of course BP endorsed tougher regulations on oil drilling. It helps their side businesses in alternative energy and keeps wildcatters from drilling for oil.
Those tough regulations on Wall Street? Goldman Sachs wrote them. Hey, it paid Obama a million bucks for that seat at the table.
When I get time, I will explain why Bill Gates and other billionaire liberals create tax-free — er, non-profit — foundations. A hint: John D. Rockefeller V was born a millionaire.
Matt Yglesias figures that, since he’s able to cut his own hair, it’s silly to license barbers.
His commenters point out to him, fairly rudely, that people who handle straight razors probably ought to have some training and prospect of inspection from the authorities for health reasons. And that beauticians, who handle dyes and other chemicals, really need to be regulated. Apparently, they’ve explained this to him once or twice before, and hence their irritation.
Mostly, I think the commenters are right. While the free market would probably regulate simple barber shops — as opposed to beauty shops — with reasonable efficiency, we’d hate to have barbers routinely cutting people with infected implements. Let’s just say that the signaling mechanisms for that sort of thing are too slow for comfort.
Further, in terms of arguing by analogy, if Matt is an unlicensed barber, I’m an unlicensed taxi driver and restaurateur. The idea that because people can be trusted to do something for themselves, they should therefore be allowed to do the same things for the public on a professional basis is rather thin.
You’ll be unsurprised to know that I don’t have a lot to add on this subject. But I did get into a conversation about this with my haircutter once, and she pointed out that there’s more to this business than you might think. It’s true that clipping hair — which is the only side of the business that Matt and I ever see — isn’t especially dangerous. But for more complicated jobs, hair professionals handle a lot of dangerous chemicals and they need to know how to use these properly to insure that they don’t do some serious damage to their customers. That, apparently, is part of what they teach you at cosmetology school.
That’s what she said, anyway. Alternatively, maybe it’s all just a big scam. After all, plenty of women give themselves home perms and seem to survive the experience. Hair professionals should feel free to school us in comments.
Matt’s critics say that anyone using sharp objects or chemicals such as peroxide needs to be regulated and inspected. This, my friends, is a reminder that the American mania for credentialism (cf journalism) frequently travels well into the realm of the absurd.
Happily, this sceptered isle is a freer place entirely. No surprise then that the British Hairdressing Council is not happy. From their FAQ:
But surely everyone must be qualified before being allowed to practise?
Alas, not so; in fact, quite the opposite. Here in Britain, anyone is free to practise as a hairdresser without registration, without qualification, even without proper training. In short, hairdressing is totally unregulated.So is there no yardstick by which to judge hairdressers?
Yes, there is. In 1964, Parliament passed the Hairdressers Registration Act to give status to hairdressers and assurance to consumers. Under the Act, the Hairdressing Council (HC) was created to establish and maintain a register of qualified hairdressers. Hence, every State Registered Hairdresser (SRH) is officially recognised as qualified to practise hairdressing on the public.
Are most hairdressers registered?
Sadly, they are not. The 1964 law left registration a voluntary option. Only about ten per cent of hairdressers have ever exercised their right to a place on the official register. At the same time, with the industry unregulated, many unregistered operators might not be eligible for inclusion on the register.
Where does this leave the consumer?
In a far from ideal position. Choosing a practitioner in any unregulated industry is tricky; in an industry where part of the human person is being treated, it truly can be a lottery. While many consumers no doubt chance upon good stylists, others stray into the hands of incompetent operators and have experiences ranging from overpriced and unsatisfactory services to damaged hair and even injured scalp and facial tissue.
Surely all hairdressers are accountable for their professional actions? Isn’t this the role of the Hairdressing Council?
Had registration been mandatory, the Hairdressing Council would indeed regulate hairdressing much as the Medical and Dental Councils, for instance, regulate their sectors. However, so long as the Act remains voluntary, the HC has jurisdiction over SRHs only – complaints against whom are very few and far between.
Something must be done! To be sure…
If it can, why won’t Parliament take action?
Action by government ministers, rather than back bench MPs, is what’s needed. For the record, ministers are requested, regularly, to amend the Act. This campaign for a tightening of the law, spearheaded by the Hairdressing Council, is supported by the industry trade bodies, consumer groups, much of the media and, not least, consumers. A great many individual MPs also support the regulation of hairdressing.
And where does government stand on the regulation of hairdressing?
To begin, a few facts: First, no government is going to commit parliamentary time to bringing in legislation it feels to be unnecessary*. Second, no government is going to introduce what it regards as unnecessary regulation. Third, regulation, of pretty well any sort, is increasingly viewed at best with suspicion and at worst with contempt by business interests, including many salon owners. Fourth, governments tend to be wary of introducing laws viewed unfavourably by large or significant sections of the community. As to the stances adopted by recent governments on hairdressing regulation, when in power the Conservatives refused, consistently, to contemplate action. Their argument, repeated many times, was that “market forces are a sufficient regulator”. The current Labour government has listened to and acknowledged the merits of the case for regulation but has, at least so far, declined to act on the matter.
Have other measures been tried, through ordinary MPs in Parliament to bring in regulation?
Since the voluntary registration law was introduced in 1964, initiatives such as Early Day Motions, Ten Minute Rule Bills, Ministerial Questions and Private Members’ Bills have all been tried by helpful and supportive MPs. But lacking government support, none of these has succeeded. However, be sure efforts will continue.
I’m sure they shall! Somehow, however, the country has survived an unregulated hairdressing and barber-shop industry all these years and may yet, with god’s providence, do so in the future.Mind you, Sweeney Todd was a Londoner…
A number of people, including many commenters here and even alleged conservative James Joyner think you should need a professional license to become a barber because you might hurt someone with a straight razor. Uh huh. At best this would be an argument for regulating people who do shaves with a straight razor, which would be considerably narrower than current comprehensive regulation of hair stylists.
Meanwhile, though “torts and the free market will take care of it” isn’t the answer to everything, it’s surely the answer to some things. Getting some kind of training before you shave a dude with a straight razor is obviously desirable in terms of strict self-interest. If you screw it up in a serious way, you’ll face serious personal consequences and the only way to make money doing it—and we’re talking about a very modest sum of money—is to do it properly. People also ought to try to think twice about whether their views are being driven by pure status quo bias. Barbers are totally unregulated in the United Kingdom, is there some social crisis resulting from this? Barber regulations differ from state to state, are the stricter states experiencing some kind of important public health gains?
Last you really do need to look at how these things play out in practice. If you just assume optimal implementation of regulation, then regulation always looks good. But as I noted in the initial post the way this works in practice is the boards are dominated by incumbent practitioners looking to limit supply. One result is that in Michigan (and perhaps elsewhere) it’s hard for ex-convicts to get barber licenses which harms the public interest not only by raising the cost of haircuts, but by preventing people from making a legitimate living. States generally don’t grant reciprocity to other states’ licensing boards, which limits supply even though no rational person worries about state-to-state variance in barber licensing when they move to a New Place. In New Jersey, you need to take the straight razor shaving test to cut women’s hair because they’re thinking up arbitrary ways to incrementally raise the barrier to entry.
It’s worth noting that Barack Obama, back when he was a state senator in Illinois, pushed against some of this when it came to jail sentences and prohibitions on getting regulatory licenses:
Town Hall Meetings: On August 15 and 16, 2003 the North Lawndale Employment Network sponsored the annual Town Hall meeting for Congressman Danny Davis at Malcolm X College in Chicago. Brenda Palms Barber was one of the distinguished speakers for the Congressman’s opening address. Ms. Barber and Anthony Burton participated on a panel with State Senator Barack Obama and State Representative Constance Howard to discuss the federally funded Going Home program and several new laws that were passed by the state lawmakers. The lawmakers introduced to the audience several bills that had been passed, including one that would change some of the expungement laws in the State of Illinois and one bill that would allow formerly incarcerated individuals to seek regulatory licenses in several fields including barbering, nail technicians, cosmetology and dead animal removal. Under this bill, the formerly incarcerated individual would have the opportunity to seek a license once they have served their time in prison and have been given a certificate of good standing by the State of Illinois. NLEN also set up a booth at the Town Hall meeting to highlight its program and accomplishments.
Back then if you had a jail record you couldn’t receive most regulatory licenses. So if you were trying to escape from a life of crime, or even if you were tagged with a minor crime during a wayward period in your life, you would automatically have a wide variety of occupations immediately shut off from you. You couldn’t be a barber for instance. (You also probably couldn’t be a licensed fortune teller.) Whatever the idea behind this, in practice it’s going to take people at the edges and shut off a number of crucial options to them. I don’t know if this exists in most states, but it’s an obvious way to begin to push back against the worst excesses of license overkill.
So beyond just being a hassle these licenses can be a major form of explicit job segregation and can have major distributional problems associated with them.
Annualized interest rates of two hundred percent a year?
I read someone, somewhere arguing that Elizabeth Warren was the nominee to shut them down. I am curious about the modern liberal take on autonomy and credit. Let’s say that two gay men, of unknown health status, want to have informed, consensual, unprotected sex. Should the law prohibit this? I believe the answer is no. Furthermore it is not just a matter of enforcement difficulty, it is a question of autonomy. If you don’t think so, modify the example so that two heterosexual people want to have consensual but unprotected sex. And so on.
The unprotected sex is riskier and less prudent than borrowing money at an annualized rate of two hundred percent. Why prohibit one and not the other? Many of the borrowers are being fooled, but others have legitimate reasons to seek the money, such as wanting to buy a birthday present for a visit to one’s child, living with a separated spouse.
Is it that sex is sacred but borrowing money is not? What if you’re borrowing money to catch a plane to go have sex? Isn’t sex a big reason why people might borrow money at high annualized rates? Aren’t “sex decisions” some of the least rational we make and the most prone to error?
When I use the ATM, often I am outside the network and thus I am paying annualized interest rates of over two hundred percent a year. Should someone (other than Natasha) stop me? Should they only stop me when I am younger and poorer than is the current Tyler? What about equality before the law?
How many of you would support this same woman — with enthusiasm — if she wanted to ban risky but consensual sex?
The progressives seem to have made Elizabeth Warren their cause-du-jour. I have a long and complicated history with Elizabeth Warren, so allow me a moment to offer my long and complicated thoughts on her. Really long. So long that I had to break it into two parts–scholarship and public life–in order to prevent the nausea, daytime sleepyness, and intracranial bleeding that might otherwise result. Consider yourselves warned.
I first encountered Elizabeth Warren in the early part of the decade, when I read her book, The Two Income Trap. The thesis is innovative and, I think, at least partly correct: that in many ways, two income families have made households less financially stable, not more so. Among higher income families, much of the extra income has simply been poured into a bidding war with other higher income families for homes in good school districts. Among lower income families, much of the extra income has gone to replacing home production with market production: convenience meals, work clothes, second cars, child care, and so forth.
Because the extra income is being fully consumed, the result is that if one partner loses their job, the family is not more insulated from economic shock, but less so. In the 1950s, if Dad lost his job, Mom could pick up extra work to make up at least some of the loss. In the Mean Teens, Mom’s already got a full time job.
But while I found the thesis compelling, there were some problems with the book. The first is that Warren simply fails to grapple with what her thesis suggests about the net benefits of the two-earner family. Admittedly, I don’t quite know what to say either, but at least I can acknowledge that it’s a pretty powerful problem for the current family model; Warren kind of waves her hands and mumbles about social programs and more supportive work environments. There is no possible solution outside of a more left-wing government.
But the deeper problem is that some of her evidence doesn’t really support her thesis, and can be made to appear to support her thesis only by making some very weird choices about what metrics to use.
[…]
Does this persistent tendency to choose odd metrics that inflate the case for some left wing cause matter? If Warren worked at a think tank, you’d say, “Ah, well, that’s the genre.” On the other hand, you’d also tend to regard her stuff with a rather beady eye. It’s unlikely to have been splashed across the headline of every newspaper in the United States. Her work gets so much attention because it comes from a Harvard professor. And this isn’t Harvard caliber material–not even Harvard undergraduate.
So I think it matters on two levels. One, it matters how we evaluate the work–and I’ve been disappointed at how uncritically some people I really respect have been willing to accept the 2001 and 2007 findings. Not because I don’t think that there are medical bankruptcies in the United States; I do! I think medical bills are certainly the primary cause of some of those filings, though I don’t know how many, and I’ve also been writing about bankruptcy long enough to know that assigning any one cause to the ultimate financial meltdown is, in many cases, impossible. (If you have nice consumer goods and no health insurance, does a car accident count as a “medical bankruptcy” or a budgeting deficiency? If you lived right up to the edge of your income, was a job loss, or your spending pattern, to blame? How you answer these questions depends on a large number of prior value judgments that are hotly contested in our society.)
It matters that we get this stuff right. I am among the majority who would like to see bankruptcies reduced in this country, and we’re not going to be very effective at that if we run around thinking we can cure 2/3 of them by putting a national health care system in place, when in reality a third or less have any strong causal relationship with medical bills. Obviously, this was also held out as an argument for PPACA, making an implicit promise to the American people which I believe to be false.
But it also matters because a large part of Warren’s prominence comes from the fact that she’s an academic. If she came from . . . well, the sort of think tank that publishes this sort of advocacy science . . . she would have considerably less glamor, and power.
And perhaps it mattes most of all because this woman is now under consideration to head a powerful new agency. If this is how she evaluates data, then isn’t that going to hamper her in making good policy? If we’re going to have a consumer financial protection agency, I want one that has a keen eye to the empirical evidence on consumer welfare–not one that makes progressives most happy by reinforcing their prior beliefs.
The old joke* about Richard Nixon asked “How can you tell when he’s lying?”
The answer: ”When his lips move.”
I’ve finally come to the conclusion that something similar must be said about Megan McArdle. Perhaps lying is too harsh a word — but the serial errors that all fall on the side that supports her initial claims and that recur again and again in her work suggest to me that something other than mere intellectual sloth and sloppiness is the driver.
Ordinarily, such a record wouldn’t matter much, especially in journalism. In theory, a series of clips as riddled with error as McArdle’s would end most careers in high prestige journalism. Hot Air might still find a use for you, but The Atlantic?
[…]
But it is one that does real damage to the republic, as the post that aroused this latest bout of McArdle-bashing demonstrates. In it, McArdle seeks to discredit Elizabeth Warren as a potential leader of the new Consumer Finance Protection Agency to be set up under the just-passed financial reform bill.
To do so she tries to impugn both the quality and integrity of Warren’s scholarship, and she does so by a mix of her usual tricks — among them simple falsehoods;** highly redacted descriptions of what Warren and her (never mentioned) colleagues actually said;*** and descriptions of Warren’s work that are inflammatory — and clearly wrong, in ways she seems to hope no one will bother to check.****
You can see the footnotes for quick examples of these sins. Here, I’ll confine myself to pointing out that in this post you find McArdle doing the respectable-society version of the same approach to argument that Andy Breitbart has just showed us can have such potent effect.
To see what I mean, you have to follow through two steps: how McArdle constructs her picture of a feckless, partisan and dishonest Warren — and then how she generalizes from it.
Partly, McArdle relies on the strength of her platorm. As “Business and Economics editor of The Atlantic” she routinely writes in assertions that we are to accept on her say -so.
(As an aside — this argument from authority is never that strong, and, as McArdle demonstrated very recently, can descend to pure, if unintended, comedy (go to Aimai’s comment at the bottom of Susan of Texas’s post), its flip side is that different. Everytime someone gets something thing wrong in a consequential way, the loss of trust should advance, ratcheting up with each such error detected, to the point where it becomes the safest default position to assume that someone — McArdle, for example — is always wrong till proven otherwise.)
But back to the anatomy of McArdle’s campaign. I’m going to focus on just one example where McArdle asks us to believe that her argument is strong and supported by the literature — without quite fessing up to what her supporting material actually says. As part of her sustained campaign to deny the significance of medical bankruptcy in the US, she writes,
A pretty convincing paper argues that the single best predictor of bankruptcy is simply how much debt you’ve accumulated–not income, job loss, divorce, or what have you. People who declare bankruptcy tend to have nicer stuff than others at the same income level.
The problem here is that the paper does not actually say quite what McArdle implies it does. She’s mastered here the trick Sally Field played in Absence of Malice — she’s managed to come up with a sentence that is accurate…but not truthful.
In fact, should you actually take the trouble to read the cited study (by UC Davis finance prof, Ning Zhu) you will find material like this: ”households with medical conditions are twice more likely to file for bankruptcy (33.5 percent) than households that do not have medical conditions (14.8 percent)…;”
And this: “Having medical problems increases the households’ filing probability by 7.6 percent and one standard deviation of increase in employment tenure is associated with an increase of 9.2 percent in the filing probability. Such changes represent 48.40 and 58.60 percent deviation from the baseline probability….;”
And this “our results provide qualitative support for both the adverse event and the over-consumption/strategic filing explanations.”
To be fair Zhu concludes that overconsumption — spending too much on housing, cars and credit cards account for more of the total burden of bankruptcy than medical events, divorce or unemployment, as McArdle wrote.
But as McArdle completely failed to acknowledge, Zhu does so while using somewhat more stringent standard for counting medical expenses as a factor in bankruptcy than other scholars employed — as he explicitly acknowledges. He concedes the continuing significance of medically -induced bankruptcy. He acknowledges what he believes to be a weak underweighting of that factor (because some people pay for medical expenses on credit cards). And he notes that a number of other studies, not limited to those co-authored by Warren, come to different conclusions.
In other words: McArdle correctly describes one conclusion of this paper in a way that yields for its readers a false conclusion about what the paper itself actually says. And look what that false impression implies: if medical bankruptcy is a trivial problem, society-wide, then Warren can be shown to be both a sloppy scholar and, as McArdle more or less explicitly says, a dishonest one as well.
So . . . McArdle correctly gives the paper’s statistically valid conclusion but fails to acknowledge that the paper’s author — who devised the methodology — noted that his methodology was rigorous? And this is evidence of McArdle’s sleazy manipulation?
Seriously, the quoted portion of McArdle’s essay is essentially a paraphrase of the article’s abstract. And even a cursory look at the article itself indicates that the authors conclude that overspending is the key factor in bankruptcy. See this, from page 5:
A closer look at the bankrupt households reveals that they consume in a surprisingly similar fashion to the control groups. Bankrupt households take out more mortgage liabilities (mean=$66,731), automobile loans (mean=$10,160), and credit card debts (mean=25,101), in absolute dollar value, than the control groups (mean is $56,141, $9,000, and $2,488, respectively). This is somewhat surprising given that they make less than one half of what the control households do.
Reading further into the paper, the main public policy conclusion is that the pre-2005 reform bankruptcy laws created incentives toward overconsumption. So the author not only provides data that supports McArdle’s views but comes to the same policy conclusion!
The contrary “evidence” in the paper is that, in the obligatory Literature Review, it cites other papers on the topic that showed that medical expenses were a key factor in bankruptcy. But the purpose of this paper was to show that, controlling for medical expenses and other important social variables, that household spending malpractice was a decisive factor.
Despite the fact that McArdle is ” the business and economics editor for The Atlantic,” numbers don’t seem to be her thing. She infamously miscalculated the effect of repealing Bush’s tax cuts for each American by a factor of 10, arriving at $25 instead of $250 per person, and then blithely explained: “The calculator on my computer won’t go into the billions, and I truncated incorrectly. The main point stands; even a very optimistic set of assumptions doesn’t yield huge net benefit.” Actually, $250 for every man, woman, and child in the US — and that’s only for the next two years — is serious money. And as for that calculator problem, Ms. McArdle, there’s only one word for that: spreadsheets. You’ve heard of them, I trust.
Spreadsheets are particularly handy when you’re making statements like this: “Does it matter if we have a regulator that can use data consistently?” In this piece McArdle leans on an old Wall Street Journal anti-tax screed by Todd Wysocki. “More weird metrics for Elizabeth Warren,” her headline quavers. McArdle eagerly repeats Wysocki’s suggestion that family living expenses are actually less than they were in the 1970s. But Wysocki’s stacking the deck (and making a completely different point) by using pre-tax rather than after-tax figures. Warren’s point is that two-earner families have less disposable income today than one-earner families did in the seventies, even with both adults working.
She’s right. I used a spreadsheet (highly recommended) to look at the increases in expenses, using the figures Wysocki (and the McArdle) cites. Here’s what I found: Mortgage costs increased from 18% to nearly 20% of after-tax income. Health insurance premiums increased from 3.5% to 3.63%. (That doesn’t include increases in out of pocket expenses like copays and deductibles.) And there was a whopping new expense of nearly 20% for day care, which wasn’t needed with a one-earner family. Add in car payments and the expenses Wysocki cites went from 39% of after-tax income to 62.3% — which pretty effectively underscores Prof. Warren’s point, don’t you think?
McArdle saves her real “firepower,” such as it is, for a piece she calls “Considering Elizabeth Warren, the Scholar.” It’s a blend of deception, misdirection, and poor analysis, chock full of comments like this one about Warren’s book on two-earner families: “… Warren simply fails to grapple with what her thesis suggests … Admittedly, I don’t quite know what to say, but at least I can acknowledge that it’s a pretty powerful problem for the current family model. Warren kind of waves her hands and mumbles about social programs and more supportive work environments. There is no possible solution outside of a more left-wing government.”
Got it? McArdle says Warren’s book is a failure because a) Warren fails to solve one of the problems she identifies, b) not that McArdle knows what the answer is, but c) “Warren kind of waves her hands” (get me a rewrite!) and “d) mumbles about social programs etc.” — which means she does propose solutions, but they’re ones that involve e) “more left-wing government.” Which McArdle doesn’t think is the solution, even though she acknowledges that she doesn’t have a solution.
Does it matter if we have a “business and economics editor” who can use data … and logic … consistently?
McArdle then suggests that Warren doesn’t understand numbers because Warren asserts that (says McArdle) “housing consumption hasn’t increased much … by less than a room per house.” McArdle conclues that this is a “twenty percent” increase, given a starting size of five rooms per house, although if consumption’s gone up by less than a room per house it’s less than twenty percent per house (no calculator needed for that one!) And that’s with two people working full-time instead of one.
“The square footage of new homes has increased dramatically since 1960,” writes McArdle. But how much of that is McMansions and other high-end homes? She doesn’t say, presumably because she doesn’t know. Since we’re talking about housing consumption among middle- and lower-income working families, a basic understanding of “mean,” “median,” and “average” would make that kind of information critical to McArdle’s argument.
So Megan McArdle wrote a long post attacking Elizabeth Warren as a scholar. What’s surprising is how little “there-there” there is to her critique. I would love to see nomination hearings based around how expansive of a definition to use for medical bankruptcies and watching Warren rip the face off of Senators when it comes to empirical methods. I doubt it is going to come to this, but I’ll go ahead and respond. (I’ve been waiting for part two to respond, which I assume may not show up.)
Because that isn’t what this is about. It’s about giving the impression that Warren is a weak scholar. Given that Warren is considered “the leading authority in the country on bankruptcy law,” being called a hack by McArdle, of all people, is something. Especially when we get a gem of a major screwup like this right out the door in the post:
Megan McArdle, blog post: 2. The response rate on their survey was only 20%. Given the deep shame surrounding bankruptcy, you have to worry that they got an unrepresentative sample. And how is that sample most likely to be unrepresentative? Well, one pretty likely way is that people who went bankrupt through no fault of their own–folks who got whacked by large and unpayable medical bills or a business closure–were more likely to respond than the people with drug or alcohol problems, profound depression that left them unable to work, compulsive gambling issues, and so forth….
Katie Porter, comments: Also, I would like to correct the misstatement, I believe of a commentator, that Ms. McCardle reproduces in her article above, that the response rate to the survey was 20%. The response rate was right at 50%, or just under that, depending on the exact metric for response rate used. More detail on the response rate for the written survey, as well as on the bias checks that were performed for sample selection bias, is also available in the above articles.
Megan McArdle, comments: They had a 50% response rate on the questionnaires, but by the time you got to the interviews, they were down to 20%. It’s in the article.
I have no idea what to make of this. Megan opens her critique by saying that there’s a massive bias in the data sample implied by the low response rate of 20%. A commenter politely responds that the response rate is 50%. She is very polite as the 50% is on the front page of the 2009 study. Megan then says she meant the interview rate.
Nobody is perfect, especially on the blogs. I’ve messed up data on this blog before, I’ve confused terms that I knew but didn’t catch in a proofread, and I’ve used data and terms that I thought meant one thing that turned out to mean another thing. Anytime someone points this out I correct it, or pause and double-check what I thought, or quietly ditch using that information. Humility is usually the best antidote to being a hack.
But notice how Megan just keeps on going. This is one of the major planks of her argument, that the sample is corrupted, and when someone points out that what she stated was factually incorrect she just changing the terms and keeps on going as if she what she wrote wasn’t wrong. How is a reader supposed to read this? Did she mean to say interview rate in the beginning? Does she think that a 50% response rate is too low? Useless without a 50% interview rate? Did she know at the time of writing the difference between the two terms? Does she want to reconsider her argument?
(It’s pretty similar to the classic McArdle instance of “It wasn’t a statistic–it was a hypothetical” when it came to US profits of pharma.)
Which is a shame. Like the hypothetical case there’s no pause, no reflection, so as a reader I just want to assume bad faith and move along.
But I won’t. Let’s continue.
Causes, Contributes
“4. Their methodology is quite explicitly designed to capture every case where medical bills, or medical loss of income, coexist with some other causal factor–but the medical issues are then always designated as causal in their discussion…If you’re a plumber who has a stroke, you may well end up in bankruptcy simply because you lose income while you can’t work (the medical bills may or may not play a large causal role).”
Another problem Megan has with Warren’s research is that Megan believes it says medical debt is the cause of bankruptcies instead of something that contributes to bankruptcies. Instead of simply being a contributor among many multi-causal problems Megan states that Warren believes that medical debts are the sole cause (“always designated as causal”) instead of a contributor among a multi-causal set of items.
Is that true? Let’s look at the title of the paper that kicks off this line of research: “Illness And Injury As Contributors To Bankruptcy.” (my bold, italics, and underline.) It’s in the #@$%@# title that it’s a contributor and not the sole cause!
From the abstract of the 2007 paper Megan hates: “Our 2001 study in 5 states found that medical problems contributed to at least 46.2% of all bankruptcies…CONCLUSIONS: Illness and medical bills contribute to a large and increasing share of US bankruptcies.” (my bold, italics, and underline.)
This may look like a little nitpick but it is important: bankruptcies are multi-causal, and as far as I can tell Warren’s research has always emphasized this. Certainly the titles and conclusions of her paper place emphasis on this. Megan is trying to imply a con job, that Warren is an ideologue who manipulates her results and her conclusions to be stronger than they deserve. That’s not true.
Data Data Everywhere
There’s a lot of this: “The authors have an odd tendency to ignore what the respondents themselves say. 32% of those surveyed about their 2007 bankruptcies–not 62%–reported that ‘medical problem of self or spouse was reason for bankruptcy.’”
Notice what is going on here. Warren and her co-authors realize that there are a lot of ways to interpret the data and, ethically, put the data out there so others can disagree and make counter-arguments. All the data results are there. Megan does make these counter-arguments but gives off the impression that something is being hidden, or a sneaky move is being made.
Which gets to the bigger complaint Megan has about the paper: “As I discussed at the time, early 2007 is a terrible, horrible, no good, very bad time to do any sort of study on bankruptcy… Bringing me to my next point: the paper thoroughly obscures the point that by their own calculations, the number of medical bankruptcies fell quite dramatically between 2001 and 2007.”
I still don’t get this complaint. There was an absolute overhaul in the way bankruptcy is carried out in 2005. Comparing the absolute numbers before and after wouldn’t be an apple-to-apples comparison. You can argue that no valid research could possibly done and that any empirical statistics should never be carried out on post-2005 data, which is what I think Megan argues, or that you acknowledge the data limitations, do your best to compensate and provide additional information, which Warren and the rest do under the section “Changes in the Law”, and carry on. I’m in the second camp.
A senior research economist with the Federal Reserve Bank of Richmond, Mr. Kartik Athreya, recently penned an essay “to open-minded consumers of the economics blogosphere” in which he argued that bloggers, and other economics writers, who portray macro-economic policy as simple matters are doing us all a disservice. In short (with apologies to Douglas Adams), Athreya asserts that “Economics is hard. Really hard. You just won’t believe how vastly hugely mindboggingly hard it is. I mean you may think doing the Sunday Times crossword is difficult, but that’s just peanuts to economics. And because it is so hard, people shouldn’t blithely go shooting their mouths off about it, and pretending like it’s so easy. In fact, we would all be better off if we just ignored these clowns.”
Or at least, that’s what I took from it anyway.
As examples, he specifically cites not only Matt Yglesias, John Stossel, Robert Samuelson and Robert Reich, but also the hugely popular Paul Krugman and Brad DeLong. For the most part, these are leading lights of the politically liberal point of view, but Athreya’s critique does not appear to be aimed at either left or right commentators. Instead, he questions why we should listen to anyone who assumes complicated economic matters can be so easily dispensed with:
But why should it be otherwise? Why should anyone accept uncritically that Economics, or any field of human endeavor, for that matter, should be easy either to process or contribute to? To some extent, people don’t. Would anyone tolerate the equivalent level of public discussion on cancer research? Most of us readily accept the proposition that Oncology requires training, and rarely give time over to non-medical-professionals’ musings. Do we expect advances in cell-biology to be immediately accessible to anyone with even a college degree? Science journalists routinely cite specific studies that have appeared in specific journals. They generally do not engage in passing their own untrained speculations off as insights. But economic blogging and much journalism largely does not operate this way. Naifs write books, and sell many of them too. People as varied as Matt Ridley and William Greider make book-length statements about economics. I’ve never done that, and this is my job. This is, to say the very least, bizarre.
Although there is a bit of a “don’t cast pearls before swine” attitude to his essay, as someone who likes to write about and analyze economics, I think Athreya has a good point. It certainly isn’t uncommon for writers such as myself (not to mention those with vastly more expertise than I) to opine about economic policy in a way that assumes certain underlying premises are unassailable fact, rather than difficult and sometimes contentious theory. Whether it’s a discussion of how the Community Reinvestment Act is responsible for the collapse of Wall Street, or why universal health care would boost our GDP in the long-term, bloggers/writers of both left and right are surely guilty of assuming too much at times.
By the same token, I think Mr. Athreya is missing an important distinction. Although economics lies at the heart of what many of these writers discuss, it is in fact politics that is the real subject. As opposed to laymen arguing the finer points about advances in cell-biology, Yglesias, et al., are making political policy arguments and supporting them with economic reasoning. Even when writers such as Krugman or Delong tackle macro-economic subjects head on, they are typically doing so in order to advance a specific policy position that they prefer, rather than seeking to refine our knowledge about economics itself.
In other words, while the economic principles may be oversimplified to an extent, the same came be said about computer science when arguing the pros and cons of owning an Apple or PC. You don’t need to be a computer expert to make a choice.
Let me start by noting that the essay is not even digitized in a convenient form — it is a pdf — and to me that says a lot about the writers knowledge of how the digital world works. Why not make it available in a convenient form (unless the goal is to overcome the fact that federal reserve work cannot be copyrighted by making it difficult to reproduce)? (This is an irritation more generally, and the Kansas City Fed is the worst. Even the president’s speeches are offered only as pdfs — and they are locked to prevent copying — rather than in a more convenient digital form. Are they trying to discourage this information from more general circulation? If so, why?) [Update: I added a few follow up comments on pdfs at the end of the post.]
That’s right; no need to pay attention to Gary Becker, John Taylor, Paul Krugman, and all the other quacks who lack Athreya’s sophisticated understanding of the “science” of economics. BTW, any time someone wields the term ’science’ as a weapon, you pretty much know they are an intellectual philistine. Am I being defensive yet?
To get serious for a moment, in this essay Athreya is confusing a bunch of unrelated issues:
1. The style of bloggers; are they polite or not?
2. The ideology of bloggers
3. The views of bloggers on methodological issues
4. Are bloggers competent to opine on important public policy issues?
I don’t recall ever reading a Greg Mankiw post that I didn’t feel knowledgeable enough to write. On the other hand I’ve read lots of Mankiw posts that I didn’t feel clever enough to write. That’s an important distinction. Mankiw is a great economist in the “scientific” tradition, and he’s a great blogger—but for completely different reasons. He’s a great blogger for the same reason he is a great textbook writer. There are other bloggers who are also very clever; Krugman, Tyler Cowen, Robin Hanson, Steve Landsburg, Nick Rowe, etc, etc. Several on that list also wrote textbooks.
I don’t know if Krugman has done a lot of recent research on macro, but he knows enough about the literature to offer an informed opinion. I often disagree with the views of Krugman, DeLong, Thoma, et al, on fiscal policy, but they can cite highly “scientific” papers by people like Woodford and Eggertsson for all of their fiscal policy views. There must be dozens of economics bloggers who either teach at elite schools, or have a PhD from elite schools, and who are qualified to comment on current policy issues.
He is suggesting that bloggers supply more noise than signal on economic topics. I understand his point, but I disagree with it.
It is a fair point that it is tempting when writing for an audience that includes non-professionals to try to oversimplify, to make your views sound more well-grounded than they are, and to make others’ views sound sillier than they are. If you read just one economics blogger, you will get that blogger’s prejudices and blind spots along with whatever insights might be on offer.
It is possible, however, for the collective efforts of many bloggers to produce more signal and less noise. That would be the case if the competitive market serves as a check on the more unsound ideas. I am not saying that it works that way, but it might.
Athreya takes the view that the academic process of refereed journals is more rigorous and works well. I do not fully share that view. The peer-reviewed journal process may be the better than anything else someone has come up with, but it is a deeply flawed process. It rewards ritual over substance, and trend-following over originality. The process failed badly in the area of macroeconomics over the past thirty years, an era which I believe Paul Krugman is justified in describing as a Dark Age.
Athreya draws an interesting contrast between reactions to the economic crisis and reactions to natural disasters. He points out that the tsunami in East Asia and the earthquake in Haiti combined to kill hundreds of thousands and to impose hardships on many others that are far worse than what has been inflicted by the recession. Yet neither of those disasters was met by a denunciation of seismology for failing to predict them nor an outpouring of ill-informed speculation about what happened. He may be forgetting the “God’s revenge” explanation proposed for the Haiti earthquake, but his point is well taken.
My pushback would be that economists have claimed to know more about the process of recessions than seismologists have claimed to know about earthquakes and tsunamis. No seismologist has ever said that we have “conquered” such events the way that economists have in the past claim to have conquered the business cycle.
I agree with Athreya that non-economists should express opinions about macroeconomics only with great humility. Where I disagree is that I think that economists, too, need to show humility.
I’m going to duck out of this one, and leave it to Federal Reserve Bank of Minneapolis President Narayana Kocherlakota.
He will explain to Kartik Athreya that someone who has taken a year of Ph.D. coursework in a decent economics department (and passed their Ph.D. qualifying exams) is unlikely to be able to say anything coherent about our current macroeconomic policy dilemmas:
Why do we have business cycles? Why do asset prices move around so much? At this stage, macroeconomics has little to offer by way of answer to these questions. The difficulty in macroeconomics is that virtually every variable is endogenous – but the macro-economy has to be hit by some kind of exogenously specified shocks if the endogenous variables are to move. The sources of disturbances in macroeconomic models are (to my taste) patently unrealistic. Perhaps most famously, most models in macroeconomics rely on some form of large quarterly movements in the technological frontier. Some have collective shocks to the marginal utility of leisure. Other models have large quarterly shocks to the depreciation rate in the capital stock (in order to generate high asset price volatilities). None of these disturbances seem compelling, to put it mildly. Macroeconomists use them only as convenient short-cuts to generate the requisite levels of volatility in endogenous variables…
If Narayana is right, Kartik is wrong. I’m betting on Narayana.
I think there’s a lot that’s wrong about Athreya’s essay, much of it explained by Scott Sumner, but most of all I think his argument hinges on two category errors, one about what I’m doing and one about what he’s doing.
First me. Do I have anything interesting to say about economics? Well, “interesting” is relevant to audience. I should hope that PhD economists working in central banking systems aren’t learning about economics from my blog! That’s what grad school, conferences, the circulation of academic papers, etc. is for. But perhaps you’re a citizen of a liberal democracy who speaks English and tries to keep abreast of political controversies. Well you’ve probably heard politicians talking a lot about jobs and the economy. You’ve probably noticed that voters keep telling pollsters that jobs and the economy matter to them. Jobs and the economy may matter to you! You may have seen that political scientists have found that presidential re-election is closely linked to economic performance, and thus deduced that the fate of a whole range of national policy issues hinges on economic growth. Well then I bet you are probably interested in the fact that a wide range of credible experts (with PhDs, even) believe the world’s central banks could be doing more to boost employment. Is Athreya interested in this? Well, I hope he would know it whether or not he reads my blog—he’s working at a central bank somewhere and probably knows a lot more about this than most people.
But now to Athreya. His essay seems to partake of the conceit that what economic policymakers do is just economics and that for political pundits to second-guess their decisions would be on a par with me trying to second-guess someone doing particle physics. Completely apart from the fact that the “science” of economics is a good deal less developed than what you see in real sciences, the fact is that economic policy is economics plus politics. For example, according to Ben Bernanke, the Fed could reduce unemployment by raising its inflation target but this would be a bad idea because it runs the risk of causing inflation expectations to become un-anchored. That’s a judgment that contains some “economics” content but it’s largely a political judgment. It’s part of his job to make those judgments, but it’s the job of citizens to question them.
At any rate, the next time anyone finds me claiming to have broken original ground in macroeconomic theory I hope someone will call the expertise police. But you don’t need a PhD in sociology to see how it might be the case that the Federal Reserve Board of Governors would be unduly attuned to the interests of college educated Americans to the exclusion of the working class, or that the European Central Bank might be unduly attuned to the needs of Germans to the exclusion of Spaniards and Italians.
My view is a little different than Brad’s. I would say that economics is really, really, really, really, really, really, really hard. And that’s leaving out a few of the “reallys.”
It’s so hard that experts don’t always do it well. The experts are constantly prone to correction by non-experts, by practitioners, by people who are self-educated economic experts but not professional economists, and by people who know some economics and a lot about some other field(s). It is very often that we — at least some of us — are wrong and at least some of those other people are right. Furthermore those other people are often more meta-rational than a lot of professional economists.
Even very simple problems can be quite hard, such as why nominal wages are sometimes sticky or why particular markets don’t always clear, in the absence of legal impediment. Why doesn’t the restaurant charge more on a Saturday night? You can imagine how hard the hard problems are, such as what level of public expenditure is consistent with an ongoing and workable democratic equilibrium.
Putting aside agreement and ideology, and just focusing on how one understands an issue, I’ll take my favorite non-Ph.d. bloggers over most professional economists, six out of seven days a week. Not to estimate a coefficient, but to judge public policy, thereby integrating and evaluating broad bodies of knowledge? It’s not even close.
I got bored pretty quickly with that essay, a poorly written combination of “people I agree with are smart, people I disagree with are stupid” and “elites know what they’re doing so shut up Shut Up SHUT UP SHUT UP SHUT UP SHUT UP.”
There’s little reason to believe the high priests at the Fed had any clue what they were doing as the housing bubble was happening. More than that, there’s plenty of reason to believe that they are much more concerned with inflation than unemployment, and millions will continue to suffer because of it.
Economics provides a framework for thinking about certain problems, but there’s rarely any one “right” answer. Too often the existence of tradeoffs are unacknowledged or completely ignored. If the priests knew what they were doing we wouldn’t have 9.7% unemployment. They, uh, failed.
Never, and I mean never, during the financial crisis, where we’d leave work on Friday and wonder whether or not the world would collapse during that weekend or what kind of market we’d walk into on Monday, did I think “man I wish there were more academic economists around.” Academic economists had very little language with which to describe the crisis. Most of our narratives come straight from journalism or sociology. There are no “toxic assets” in economics, that evocative description comes to us from business world and journalism. Same with the culture and pitfalls of high mathematical finance, math predicated on the efficient markets hypothesis. Even now it feels kind of sad to see them try and shoehorn the entire financial crisis into agency problems. The last time we had one of these it changed economics completely with the Keynesian revolution. I am really rooting for INET to change some paradigms, but it’s going to be an uphill battle. You can barely move old-school Keynesian thought into academia, and I can easily see the journals publishing as if this crisis was just us “forgetting” some technology.
I think he took down the essay, but he mentioned how bloggers who haven’t taken the first year of Economics PhD coursework, and passed the prelim exam, shouldn’t be writing. I think I’ve pieced together the first year between some coursework and self-study, and here are my thoughts: My very first economics class ever was auditing a graduate macroeconomics class where we went through the Lucas/Stokey “Recursive Methods in Economic Dynamics” and Ljungqvist and Sargent “Recursive Macroeconomic Theory.” I still remember asking my classmates “no seriously, this isn’t what macroeconomics is, is it?” It was like they were training to be electrical engineers, but could do no actual engineering. I still am terrified of what macro graduate students are cooking.
And speaking as someone who has taken graduate coursework in “continental philosophy”, and been walked through the big hits of structural anthropology, Hegelian marxism and Freudian feminism, that graduate macroeconomics class was by far the most ideologically indoctrinating class I’ve ever seen. By a mile. There was like two weeks where the class just copied equations that said, if you speak math, “unemployment insurance makes people weak and slothful” over and over again. Hijacking poor Richard Bellman, the defining metaphor was that observation that if something is on an optimal path any subsection is also an optimal path, so government just needs to get out of the way as the macroeconomy is optimal absent absurdly defined shocks and our 9.6% unemployment is clearly optimal. (An unfair description perhaps, but I wasn’t an actual student. This is a better, though mathy, take on the problems.)
While I agree with Athreya that economics is very hard, it is not so hard to understand why it is so hard. His argument for why it is so hard –economics is full of phenomena ”pathologically riddled by dynamic considerations and feedback effects”– sounds to my ear like an argument for the unreliability of pathologically oversimplified economic models, and for the proposition that economists will more often than not fail to converge on a consensus position on which the rest of us can rely.
Economics is a grab bag of theories, just like psychology, sociology, biology, and so on. Any intelligent person with a taste for abstraction and some degree of critical acuity can perfectly well grasp, explain, even cogently criticize most scientific theories. When it comes to formal training, I find that the rigorous standards of argumentation taught in good philosophy programs are useful generally, and certainly have enabled me to detect and explain defects in the arguments of even highly esteemed economists. More specifically, a solid background in the philosophy of science is especially useful when it comes to explaining why many economic theories fail to meet the basic standards of adequate science. Most economists, sad to say, have a woefully poor grasp of the ways the idealized assumptions of their models affect the relevance of those models to the explanation of the real economy and the evaluation of economic policy. And here we arrive at the real the issue: economic policy and who governs.
It seems to have escaped Athreya that this here country is a liberal democracy, and not some kind of bloated Singapore. His response to worries about the rule of experts seems to be that there is no reason to worry because of peer review. Yet as far as I can tell, there is no reason at all to believe that academic peer review in economics favors work relevant to policymaking in the real, embodied political economy as opposed to clever mathematical accounts of phenomena in fictional worlds that bear at best some tenuous structural similarities to this world. I guess it’s not all that surprising when someone who labors inside a technocratic institution with limited democratic accountability fails to wonder whether technocracy on average delivers better policy than democracy. (I don’t know, but I wonder!) And it’s not all that surprising that he would assume that free and open public discussion of economic policy by amateurs threatens to undermine the authority of quiet experts who, as we all know, have a stellar track record of wrangling professional consensus and truth from topics “pathologically riddled by dynamic considerations and feedback effects.”
The stupidest part of Athreya’s essay is its title: “Economics is Hard,” which automatically summons up the memory of Teen Talk Barbie’s “Math class is tough” utterance. (Sadly, Wikipedia tells me that Barbie never actually said “math is hard,” and call me a crazy mob-trusting fool, but I’m going to go with the group mind fact check on this one.) The reason why many women were upset with Teen Talk Barbie was obvious: It played into stereotypes that assumed women just couldn’t do the math. So why even bother try?
I will be the first to acknowledge that I stumble flat on my face when I hit the math sections included in cutting-edge economic theory. But that doesn’t mean I am discouraged from trying to learn more, an important part of which means learning who to trust in the cacophony of econoblogospheric debate. Whose articulations of the problem more closely resemble reality, and resonate with history? Who is best able to take the economic data of the day and slot it into a narrative that makes sense? Who is obviously a cynical, ideologically shuttered fool? I marvel every day at the power of the Internet to put me in the middle of conversations between trained economists and a vast universe of interpreters and filters. I once called the econoblogosphere an ongoing graduate-level seminar in economics, open to everyone, and see no reason to back off on that now. Sure, the democratization of information means that there is a lot of silliness out there — Sturgeon’s 90 percent of everything is crap law undoubtedly applies to Internet discussions of economics.
But pay enough attention, do your homework, and you will find yourself more able to educate your more thoroughly on topics relevant to the pressing matters of the moment than ever before.
The good stuff floats to the top. That, I fear, is not likely to be the fate of “Economics is Hard.”
Bank of America Corp. and other banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules, in a push that is expected to spell an end to free checking accounts for many Americans.
Free checking accounts, which have been widely available for more than a decade, have been a boon to middle-class consumers and attracted low-income customers to the banking system for the first time.
Customers will likely be required to pay new monthly maintenance fees on the most basic accounts that don’t generate a lot of activity. To avoid a fee, customers will have to maintain certain account balances or frequently use other banking services, such as credit and debit cards, automated teller machines and online accounts.
“If you put $1,000 in a checking account and don’t do anything with it, it will be hard to get that for free,” says Sherief Meleis, a managing director at Novantas LLC, a consulting firm that advises banks.
Why do most people hate their bank? Because their relationship is based on the lie of “free checking”, and a relationship based on a lie is always going to be a dysfunctional relationship. Checking is never free, but in recent years banks have been able to conjure the illusion of free through a system of regressive cross-subsidies, where the poor pay massive overdraft fees and thereby allow the rich to pay nothing.Interchange fees are a cross-subsidy too: this time it’s merchants who help pay for the checking accounts of the rich. In fact, they do more than pay for their checking accounts, they pay them a nice tax-free income, when the rich people accept debit rewards cards.
With the federal government finally cracking down on overdraft fees, and with the Durbin amendment threatening interchange fees to boot, the fiction of free checking looks as though it’s reaching the end of its natural life:
More than half of all checking accounts are currently unprofitable, according to a report issued last month by Celent, a unit of Marsh & McLennan Cos. It costs most banks between $250 and $300 a year to maintain one of the roughly 200 million checking accounts, according to industry estimates.
Checking accounts pay zero interest these days, but even being able to borrow money for free from depositors isn’t worth $300 per year to a bank. If a checking account has $1,000 in it on average, and the bank can lend that money out at 7%, net of defaults, then it’s making $70 a year on the account, which isn’t enough to cover its costs.
The natural answer, here, is to restart charging monthly fees on modest-balance checking accounts — and to shed few tears when your low-balance customers leave:
The offers of free checking without any minimum balance requirements attracted a new wave of low-income customers, who previously went to check-cashing stores. Some consumer advocates have warned that the elimination of free checking could drive some of those customers out of the banking system.
From the banks’ perspective, though, many of those customers aren’t profitable.
All of which provides some important background in understanding the stance of Patrick Adams, the CEO of St Louis Community Credit Union. Adams’s customers are relatively poor: his credit union is designated a Community Development Financial Institution, which targets the African-American community in St Louis. And he’s dead-set against any regulation of interchange fees, which provide an important source of income for his institution; he’s written three blogs on the subject, here, here, and here.
Adams, unlike Harriet May, was willing to provide me with concrete numbers:
We have 25,000 debit card holders with a 50/50 split on debit vs signature. We had 3.2 million debit card transactions in 2009 totaling $892,490 in debit interchange income or an average per transaction of just under 28 cents per. At an average interchange rate of 1.3%, our average member debit transaction is for 21.40. Our all in expense (including fraud) is $521,000.
We project that a 50% reduction in interchange would cost us $446,000 of top-line revenue. Something has to give if we lose that revenue. A $20 per year annual fee works, but we don’t want to fee our members.
Essentially, St Louis Community CU is getting about $35 of top-line revenue per year, per debit card. If that revenue disappears, it hurts the credit union’s finances. And so Adams is railing against interchange regulation:
Here’s another surefire lock of a bet. You will be more frustrated than ever. Your costs at the bank will be up. Your costs at the retailer will be up. You will be confused as to which retailers accept your debit card and which ones don’t. You will have no clue what the minimums and maximums of your debit card activity will be because there will be no consistency among retailers.
As a result, you will carry more cash and more checks… And, what about this double-dip possibility? You’ll use more checks at the check-out counter and the retailer will charge you a processing fee for doing it. (See, their handling of checks and cash are more expensive than debit cards.) You’ll pay for that, as well.
If this legislation is passed, I will mark my calendar to re-visit this issue a year after enactment. If I am wrong, I will eat the biggest piece of humble pie ever, including a public apology to everyone – starting with Senator Durbin. I must tell you that I’m extremely confident that an apology won’t be forthcoming.
I’ll take Adams’s bet. Yes, the costs of a checking account will be more transparent and visible to consumers. But costs at the retailer will not rise, since the retailer’s costs will have fallen. There will be no confusion about which retailers accept which debit cards, and debit-card minimums and maximums will be a non-issue. People will not carry more cash, and they certainly won’t carry more checks. And Adams will owe a public apology to Durbin.
The old model: Banks use high fees on avoidable behaviors that are nevertheless common among the financially inept, such as account overdrafts, to subsidize free checking accounts and other reward programs for customers who use their accounts responsibly.
The new model: Liberals argue that overdraft fees are abusive and should be banned. Democrats enact new restrictions on overdraft fees. Banks end free checking accounts and other reward programs for responsible customers.
And we haven’t seen anything yet. Just wait until the new Consumer Financial Protection Bureau gets to work.
It was just terrible that the fine print of free-checking accounts included language saying “We will charge you for overdrafting your account, loser,” a sad fact easily divined by, for instance, overdrafting your account. So, consumer advocates, noble regulators, and other champions of the little guy came up with a genius solution: require banks to obtain letters from customers saying “Please charge me a lot of money when I write a bad check.” The result?
Bank of America Corp. and other banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules, in a push that is expected to spell an end to free checking accounts for many Americans.
This is fundamentally my problem with overdraft and interchange fees: they’re basically surreptitious ways for the poor to subsidize the rich. There’s no law against that, of course, but the practice is so grotesque that in this case I’m perfectly willing to make one.
Basically, what banks have learned is this: it’s mostly poor people who pay overdraft fees. That makes sense, of course: they’re the ones most likely to run out of money, aren’t they? The thing is, it’s easy to fool unsophisticated consumers into not noticing these fees, or into thinking that they’ll never have to take advantage of them. But banks know better. They know to three decimal places how often low-income customers are likely to screw up slightly and overdraw their account by twenty bucks. And when they do, they’re charged obscenely more than the actual cost of servicing the overdraft. So who benefits? I do. I always have plenty of money in my checking account and I’ve never overdrawn it. So the entire debit card system is, for me, free.
The same is true for interchange fees. Banks charge merchants far more in interchange fees than it costs to actually run their payment networks, and merchants pay because they have no choice. Visa and Mastercard are functional monopolies, so if you want to do business with them — and what merchant can afford not to? — you have to pay whatever they tell you to pay. This cost gets passed on to consumers, of course, and the poor and working class pay it. The middle class and the rich, however, don’t: they basically get the fees rebated in the form of reward cards.
So you have two cases here of a system that costs money to operate, and in which the costs are largely borne by the poor in order to make them free (or cheap) to the better off. If you can sleep easily at night even after you understand how this works, you have a heart of stone.
So what’s the alternative? Simple: fees that are fair and transparent. Overdraft fees should cover the average actual cost of overdrafts plus a small amount. Interchange fees should cover the actual cost of operating an electronic payment network. Credit card interest rates should cover the risk-adjusted cost of actually loaning out money.
And to those interchanges, Reihan Salam in Forbes:
As trousers grow skinnier, our mobile phones are following suit, as evidenced by the ultraslim iPhone 4. But the U.S. Treasury, alas, has no intention of altering the design of its coins to accommodate America’s evolving fashion sense. At home my coins accumulate in jars and paper cups and drawers, perhaps to serve as raw material for some future magnetic art project. And as for bills, I only use them when absolutely necessary.
Generally speaking merchants will accept debit cards for even very small transactions. But as we all know, they don’t like it. In New York City, where cab drivers are required to accept electronic payment, many drivers will plead with you to use cash, citing the onerous fees collected by the banks.
These swipe or interchange fees are the target of a new regulation proposed by Sen. Dick Durbin of Illinois, a liberal stalwart keen to pick a fight with the financial sector. Merchants have been urging Congress to take action on swipe fees for years, but it’s only now, when esteem for the financial sector is at a low ebb, that there’s been any hope of a tough regulatory response.
My gut instinct is to distrust sweeping regulatory efforts. When the interests of one set of businesses are pitted against another set of businesses, I’m inclined to let consumers decide who should come out ahead. Yet swipe fees pose a number of interesting puzzles.
In January Andrew Martin of The New York Times published a scathing exposé of how Visa and MasterCard squeeze retailers. The two big payment networks dominate the marketplace by making their offerings attractive to banks and credit unions that, in turn, issue debit and credit cards. Visa and MasterCard set fees for every debit card transaction, fees which vary by type of card, among other things. But the banks collect the fees and, all other things being equal, they like making more money rather than less.
Visa and MasterCard are serving their customers extremely well. The trouble is that their customers are banks–not consumers, who face higher prices as merchants pass on higher fees in the form of higher prices. Indeed Visa was, according to Martin, the first to pursue the high-fee strategy. MasterCard found that it was losing market share to Visa by continuing to offer lower fees, and so it quickly matched its rival. It’s hard to see how Visa and MasterCard might break out of this very stable dynamic; last fall the Government Accountability Office issued a report describing how swipe fees have steadily increased.
One argument, raised by scholars Todd Zywicki and Geoffrey Manne, is that swipe fees are a way to pass on credit losses to merchants. Yet as financial blogger Felix Salmon of Reuters observes, merchants don’t also benefit from the much larger credit profits derived from fees and interest payments enjoyed by banks.
Swipe fees could be increasing due to rising levels of fraud and identity theft. That, however, would represent a case for shifting away from signature debit and towards PIN credit. But signature debit is more profitable for card issuers, which is presumably why there hasn’t been aggressive movement in this direction. In Salmon’s view, rising swipe fees represent pure rents for the effective duopoly of Visa and MasterCard, and the Durbin amendment would help shift the balance of power towards merchants and consumers.
The case for regulation does seem fairly strong. To me that suggests that there’s been a serious failure on the part of entrepreneurs. One wonders how the Visa-MasterCard duopoly has become so robust. In the absence of new swipe fee regulations, it’s possible that merchants will band together to find a superior alternative. The trouble is that the retail sector remains fairly fragmented, and cooperation on this scale would be very difficult to achieve. The past decade has seen a number of innovative payment systems emerge, from PayPal to Square.
Remember this debate is about reward cards versus debit cards. Merchants love debit cards, they are easier than cash. They don’t want to subsidize the airline industry by having to pay for rich people’s frequent flyer miles reward card for free, without anything in exchange for providing an additional good or service.
But they can’t give incentives for debit cards under current law. They can’t offer you a free loaf of bread with your groceries for typing in your pin, or give you your very own pin express checkout lane, for using debit. That is valuable local information and retail innovation that is lost. So watch for interchange rates being juked between high rewards credit cards, generic credit cards, the abomination that is “signature debit”, and pin debit.
I am not certain whether or not Hill staffers are currently being bombarded with financial lobbyists with vested interests claiming all kinds of decreases in interchange over the past decade. This data is very hard to find, as the credit card companies guard it vicious. Now, I’m just a dude with a matlab license and a free blog, so let me tell you what other credible people have researched and found recently.
Most of the commentary on interchange fees have focused on the rate paid by merchants, but this is the wrong number to focus on. Rather, we should care about the net of merchant fees minus cardholder benefits. If credit card fees rise but benefits rise by an equal amount, the result is a wash as far as the customer is concerned. I’m not aware of any precise data on cardholder benefits, but judging from the fact that companies used to charge an annual fee to issue credit cards and they now frequently offer generous cash back, I think it’s safe to say that benefits have gotten more generous over time. So looking only at interchange fees gives us a distorted picture.
Now maybe you don’t believe that banks will continue to pass increased fee revenues on to their customers. But notice that this is a symmetrical situation. If you doubt that competition among banks will shift most of the benefits of higher fees to consumers, then you should be equally skeptical of claims that competition among merchants will translate lower credit card fees into lower retail prices.
Konczal writes derisively about cardholder benefits, arguing that merchants “don’t want to subsidize the airline industry by having to pay for rich people’s frequent flyer miles reward card for free, without anything in exchange for providing an additional good or service.” But this misses the point in a couple of important ways. First, the benefits are limited neither to frequent flyer miles nor to rich people. But more fundamentally, what merchants want is irrelevant, because there’s no reason to think consumers’ interests are more aligned with merchants than with banks. Indeed, you could view the credit-card-issuing banks as agents for cardholders, negotiating for discounts that are passed along to their customers.
Advocates of regulation like to tell a populist story of consumers against rapacious banks. But there are wealthy corporations on both sides of the bank-merchant relationship. There’s no reason for regulators to side with Wal-Mart over Wells Fargo. Policymakers should focus on ensuring that both sides of the market (card-issuing banks and card-accepting merchants) are robustly competitive. Then consumers will reap most of the benefits whether interchange fees go up or down.
This argument is predicated on the idea that all people in the United States have access to the high-end consumer credit market. In general, the “two-sided markets” argument assumes a single representative consumer and a single representative business in a closed loop, where value can’t really be transfered in or out. That’s not the real world, where there are multiple payment systems, including cash, debit and credit cards with different prices, and multiple people with different access to credit.
Rich is a loaded term, but let’s throw some numbers out there. Here is an estimate that 13.2% of American households don’t own a checking account and about 9.5% of American households hold no bank account at all. They’ll pay the same price for goods and services as Tim, but not receive 1% back in cash. There’s a move to try and get the unbanked decent prepaid debit cards. They’ll definitely not get a good rewards problem out of it.
Is there inequality within the credit market for those who have access to it? From Adam Levitin’s Priceless? The Social Costs of Credit Card Merchant Restraints (19), which gives a history of the “merchant restraints” on distinguishing between debit and credit, we know that: “Visa Signature cards, which carry a high level of rewards and are marketed specifically to affluent consumers, comprise only 3.5% of all Visa cards but have accounted in recent quarters for 22.2% of all Visa purchases.” That’s a high volume of purchases with high rewards going to just a few people. Many people have rewards cards, but the very best ones are reserved for the high end, and those at the high end spend more than those not at the high-end. And everybody pays the same price.
We also know that around 45% of interchange goes to fund rewards. These high interchange rates drive up prices. Tim’s 1% back requires a merchant to pay an estimated 2.22% interchange for that feature alone. People who get less back, or who use debit, or who pay with cash, are paying higher prices to transfer money to Tim.
Want to get even more regressive? The people with poor access to high-end credit are paying higher prices to transfer tax-free income to Tim. Tax-free! It’s true many people have access to rewards cards, but some use them significantly more, and with much nicer, rewards than others. Those few are not scattered randomly among the population.
Mike Konczal has a sharp response to my post on interchange fees. He’s been following this issue more closely than me, so there’s a lot of good information there. But one part of his argument that doesn’t seem quite right is this:
Is there inequality within the credit market for those who have access to it? From Adam Levitin’s Priceless? The Social Costs of Credit Card Merchant Restraints (19), which gives a history of the “merchant restraints” on distinguishing between debit and credit, we know that: “Visa Signature cards, which carry a high level of rewards and are marketed specifically to affluent consumers, comprise only 3.5% of all Visa cards but have accounted in recent quarters for 22.2% of all Visa purchases.” That’s a high volume of purchases with high rewards going to just a few people. Many people have rewards cards, but the very best ones are reserved for the high end, and those at the high end spend more than those not at the high-end. And everybody pays the same price.
We also know that around 45% of interchange goes to fund rewards. These high interchange rates drive up prices. Tim’s 1% back requires a merchant to pay an estimated 2.22% interchange for that feature alone. People who get less back, or who use debit, or who pay with cash, are paying higher prices to transfer money to Tim.
I’m not sure I follow Mike’s math here. The fact that 44 percent of interchange fees get passed through as rewards doesn’t mean that a dollar of rewards “requires” a fee of $2.22. Offering a credit card at all costs money; you have to do things like printing statements, processing checks, staffing help lines, and the like. For less affluent customers, the revenue from interchange fees may barely cover these fixed costs, leaving little revenue for benefits. For more affluent customers, in contrast, the fixed costs will be a small fraction of interchange fee revenues, and so the company can afford generous benefits. This isn’t a transfer of wealth from poor to rich, it’s just a reflection of the fact that wealthier customers are more lucrative.
If regulatory measures push down interchange fees, it will likely mean that affluent customers get less generous benefits. But it may also mean that the least affluent credit card holders have to start paying annual fees again (or won’t get cards at all) because interchange revenues no longer cover the cost of providing the card. This isn’t an outcome we should cheer if we’re concerned about those at the margins of the banking system.
Consumer Protections with Authority and Independence: Creates a new independent watchdog, housed at the Federal Reserve, with the authority to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices.
Ends Too Big to Fail: Ends the possibility that taxpayers will be asked to write a check to bail out financial firms that threaten the economy by: creating a safe way to liquidate failed financial firms; imposing tough new capital and leverage requirements that make it undesirable to get too big; updating the Fed’s authority to allow system-wide support but no longer prop up individual firms; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.
Advanced Warning System: Creates a council to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the economy.
Transparency & Accountability for Exotic Instruments: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated – including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders.
Federal Bank Supervision: Streamlines bank supervision to create clarity and accountability. Protects the dual banking system that supports community banks.
Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation.
Protects Investors: Provides tough new rules for transparency and accountability for credit rating agencies to protect investors and businesses.
Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefit special interests at the expense of American families and businesses.
Elizabeth Warren, the lead advocate for the proposed Consumer Financial Protection Agency, seems to like—or, at least, not dislike—the financial reform package (finally) released on Monday by Sen. Chris Dodd, the Democratic chairman of the Senate banking committee. In the summary of the legislation, Dodd notes that his bill would create the CFPA as an independent bureau within the Federal Reserve—which could pose problems—but that it will have the power to write and enforce rules governing the sale of various financial products, including credit cards and mortgages. Yet its enforcement powers would not extend to banks with less than $10 billion in assets. In a statement, Warren notes:
Since bringing our economy to the brink of collapse, Wall Street has spent more than a year and hundreds of millions of dollars in an all-out effort to block financial reform. Despite the banks’ ferocious lobbying for business as usual, Chairman Dodd took an important step today by advancing new laws to prevent the next crisis. We’re now heading toward a series of votes in which the choice will be clear: families or banks.
Spreading the Fed’s authority risks making this problem of market homogenization even worse. Hedge funds and insurance companies escaped the financial crisis intact, largely because they weren’t subject to the same regulators whose views on prudence so damaged the banks. Subjecting a broader range of financial firms to the Fed’s market views will create more systemic risk, leaving more firms in vulnerable if the Fed gets it wrong again.
The new powers being proposed for the Fed would allow it to order financial firms to “reduce risk.” Which is to say, the Fed’s view of risk will even more directly control the financial system. The Fed will be able to impose its views of risk on a broader range of financial firms. But that is exactly what regulators thought they were doing when they incentivized banks to buy up mortgage backed securities through sliding-scale capital requirements.
In short, the regulators’ views of prudent banking got us into this mess. Allowing the Fed to fail upward is just a recipe for another—likely worse—crisis.
The next stop as I continue to go through Senate Banking Committee Chairman Christopher Dodd’s (D-CT) new financial reform proposal (.pdf) is how he intends to resolve too big to fail firms. As with most other sub-proposals I’ve discussed thus far, this one largely resembles what’s found in the House bill. The big differences have to do with the creation of a “Orderly Liquidation Authority Panel” of bankruptcy judges to bless the resolution and the size of the fund to pay for it.
Both proposals call for firms to create resolution plans. In each proposal, the Treasury Secretary, Federal Reserve Chairman, relevant regulator or the firm itself requests resolution. The firm’s failure must pose a systemic risk to the U.S. economy in order to utilize this process instead of the bankruptcy code. The Federal Reserve Board and the relevant regulator’s board or commission vote on whether or not to proceed. A two-thirds vote is required. All of this is essentially identical for both Dodd’s and the House’s versions.
Orderly Liquidation Authority Panel
Next, the House version turns the process over to the FDIC, who completes the resolution process. Dodd’s proposal, however, takes a quick detour. He wishes to establish a panel of three bankruptcy judges who must first approve. If they agree that the firm in question is, indeed, in default or in danger of default, then the FDIC takes over.
This is an interesting deviation, and I suspect that Senate Republicans may have had a hand in this provision, based on reports during the compromise process. I’m a little mixed on whether it’s a good idea or not. I don’t know that it would hurt much — the judges must decide within 24-hours, so it would still be pretty quick. But then, a lot can happen in the world of finance in a day’s time.
For more than 150 years, state law has governed the director nomination and election process for corporations and their shareholders. In states such as Delaware and Nevada, where many companies are incorporated, any shareholder can nominate a candidate for the board, but that candidate has to pay for the campaign out of his or her own pocket. Under Dodd’s bill, the federal government would force the companies and other shareholders to subsidize the campaigns of dissident shareholders and include their candidates in a company’s own proxy materials.
But as I have written in BigGovernment.com, subsidizing certain shareholders to let them run director candidates on the cheap opens the floodgates to special interest agendas that hurt the bottom line for ordinary shareholders. “Groups from unions to animal rights groups could run their own candidate for corporate directors and promote their special interest agendas at the company’s (and ultimately other shareholders) expense,” I wrote.
And leaders of 17 groups representing a broad spectrum of the center-right coalition — from my Competitive Enterprise Institute and Americans for Tax Reform to the Christian Coalition of America – recently sent a letter to members of the Senate Banking Committee pointing out that with proxy access: “Everything on the anti-market political wish list from cap-and-trade carbon restrictions, to animal rights activism, to interfering with defense contractors to advance foreign policy objectives would be possible. These initiatives, whatever their merits, belong in the political arena, not in corporate boardrooms where the focus should be on maximizing shareholder value.”
The bill also takes the unwise step of coercing companies into cookie-cutter corporate governance procedures such as separating the chairman and CEO. Some corporate governance activists have flagged this as a bad practice, but there is no empirical evidence that it harms shareholder returns. In fact, shareholders of Google and Berkshire Hathaway seem quite pleased with their CEOs – Eric Schimidt and Warren Buffett, respectively (both of whom supported Obama) – also serving as chairmen, and would be quite angry if the government were to penalize this practice that had been so effective for these companies’ growth and profitability.
In the meantime, as I have noted in the New York Daily News, Citigroup’s having a separate chairman and CEO throughout most of the last decade did nothing to prevent that firm’s financial implosion that resulted in taxpayer bailouts. Different governance structures may work better for different firms, as an entrepreneurial startup may opt for a close-knit board and a more established company may want to separate these positions. Regardless, shareholders are perfectly capable of deciding on things like whether the chairman and CEO should be separate, and that these matters shouldn’t be dictated to them by the government
Finally, the one-size fits all corporate governance procedures would greatly reduce the competitiveness of Delaware and Nevada in attracting firms from all over the world incorporating their because of the variety of corporate structures the states allow that work both for entrepreneurs and investors.
OK, I’m still evaluating the Dodd proposal for financial reform. But here’s my puzzle: the bill, as I understand it, calls for an independent Consumer Protection Agency, with a director directly appointed by the president, but one that is “housed” at the Fed.
What, exactly, does that mean? Physical location is presumably not the issue; I don’t know if all Fed staffers are currently in the main complex, but there have certainly been times when some departments spilled over into other locations. (Back in 1977, when I was an intern at the International Finance Section, we were located in the Watergate!)
Does it mean that the staff will all be long-term Fed employees? Then that would, to at least some degree, compromise the agency’s independence. Or is it purely a cosmetic issue? If so, who exactly is being diverted?
I’m not prejudging this — there’s a lot to look at. But I’m puzzled.
That is, it’s written up to include loopholes to allow hedge funds to continue whatever risky or abusive practices they’ve engaged in previously. The key loophole is that there is no real common definition of a hedge fund. The only concrete distinguishing feature of a hedge fund is that it has under 100 owners. Usually a hedge fund entails some combination of a long/short strategy and leverage, but not necessarily. There is no bright line dividing what are referred to as hedge funds, private equity funds, and venture capital funds — they are legally similar firms distinguished mostly by different business models . Yet Dodd would attempt to “close loopholes” on hedge funds without affecting private equity or venture capital firms. How? From the text (pages 377-378, pdf):
Not later than 6 months after the date of enactment of this subsection, the Commission shall issue final rules to define the term ‘venture capital fund’ for purposes of this subsection…. Not later than 6 months after the date of enactment of this subsection, the Commission shall issue final rules… to define the term ‘private equity fund’ for purposes of this subsection.’
In other words, the Democrats would pass the bill, satisfying the left-wing’s resentment of Wall Street fat cats, and then give hedge fund managers six months either to lobby for very wide definitions of venture capital and private equity or to make whatever small organizational changes are necessary to get away with calling their firms venture capital or private equity instead of hedge funds.
So what happened to the much-lauded Volcker rule, which would limit the size and scope of bank activities, in Sen. Chris Dodd’s latest financial reform bill? It’s a bit complicated, but essentially the rule is gone.Regular readers will recall that the key distinction between the Volcker rule, as proposed by the Obama administration, and similar provisions in the House bill, was that the Volcker rule was mandatory: It required regulators to ban proprietary trading, hedge and private-equity funds from commercial banks, and would offer specific limits on the size of a bank’s liabilities. The House bill, on the other hand, would simply give regulators the authority to limit a firm’s size and scope however they pleased if they determined it was necessary. While the House authorities were more powerful, they are also less likely to be implemented; the Volcker rule provides definitive, hard and fast lines.
Well, no more. The new method is that the Systemic Risk Council will have six months to study how and why to implement the size and scope rules, and then recommend how to write those rules, or even if they should be written at all. Basically, it’s regulatory discretion with a time limit: The council has six months to do the research and nine months after that to write rules that could be either totally cosmetic or, less likely in my view, actually effective.
In a CNN/Opinion Research Poll conducted in January (results at PollingReport.com), Wall Street reforms ranked behind the economy, unemployment, terrorism, the deficit, health care, education, Afghanistan, Iraq, and taxes–in that order–as an issue that President Obama and Congress must deal with. 64% said it was important; 36% said it wasn’t.
Polling has indicated that many Americans think the federal government helped Wall Street too much in its response to the financial crisis, and Obama has said, many times, that no one wanted to undertake the financial bailout initiated under the Bush administration and then stewarded by the Obama administration–that helping the banks was a distasteful necessity.
It would stand to reason that financial reform is the counterweight, politically, to the unpopular bailout; that if the public is angry that banks got saved, an ensuing regulatory crackdown is the political move that would placate that sense of unjustness–the price the banks must pay to the taxpayer, so to speak.
But if it isn’t high in voters’ minds right now, will it have much political effect?
UPDATE: Kevin Drum collecting reactions. His collection:
Around The Sphere 