Analysis and Commentary by Roosevelt Fellow Mike Konczal

It’s worth taking a break from watching the implosion of the Republican Party to pay attention to intra-Democratic fighting. Liberal economics has had a pretty great run in the 2016 primary, and I’m optimistic about its chances going forward. I’m even more optimistic after reading this thrown-together op-ed from Jon Cowan, president of the centrist

Marco Rubio and Jeb Bush have been fighting for months in the GOP primaries to be the candidate representing Wall Street, hedge funds and the financial sector. Headlines like “Bush and Rubio race for Wall Street cash” dominated the fall coverage of their campaign, right next to headlines like “Donald Trump terrifies Wall Street” with

There are three points to keep in mind about policy debates: Policy specifics are only one of many considerations voters have when evaluating a candidate, and they’re unlikely to mobilize the base in a polarized age; ideological constraints often determine policy positions; and wonk policy “discussions” can easily become a barrier to exclude people and ideas from the conversation. This has become relevant in the Clinton versus Sanders race, which, as Matt Yglesias notes, is an ideological battle like “Ronald Reagan’s battle with Gerald Ford,” one in which wonks have less of a role to play.

That said, I will defend the wonk. I think the wonk analysis is an essential part of the ideological work currently being done and is capable of advancing the progressive project in crucial ways. Working the numbers and the specifics creates clarity, and it forces people to put their cards on the table.

In this specific moment, the work of the wonk forces one to justify constraints, lets you know if you are looking in the correct places, gives you a sense of whether the scope and scale of your changes is sufficient, and lets you know the obstacles and enemies you’ll face. And it can be fun! Or fun enough.

Let’s go through each of these points with specific examples. We’ll begin with the letter from former CEA chairs attacking economist Gerald Friedman’s estimates of the impact of Sanders’s plan, and then look at some cases where wonk analysis would help the Sanders campaign.



I have a new Score column at The Nation: Bernie Sanders should just adopt Hillary Clinton’s plan, and go further than it. Making these priorities doesn’t distract from his core message on focusing on the largest players. If anything, it completes the left agenda on finance, as any such agenda needs to look at the activities of finance itself, as opposed to just the institutions, as well as the effects of finance on who the corporation works for. Record stockholder payouts while investment funding starves are just as much of the problem of finance as Too Big To Fail. Clinton makes a good first step; Sanders could take the important second and third steps if he wanted.

Intro: “In advance of the Iowa primary, Hillary Clinton and Bernie Sanders have duked it out over who would tackle Wall Street best. Clinton’s reform package aims wide, extending scrutiny from the banks to smaller players who played an outsized role in the financial crisis. Sanders—who, unlike Clinton, has rejected Wall Street money—actually takes a narrower approach that favors a popular but insufficient strategy to “break up the banks.” If Sanders wants to challenge modern finance, he should incorporate and surpass Clinton’s plan.”

Hope you check it out!

Is Ted Cruz right about the Great Recession and the Federal Reserve? From a November debate, Cruz argued that “in the third quarter of 2008, the Fed tightened the money and crashed those asset prices, which caused a cascading collapse.”

Fleshing that argument out in the New York Times is David Beckworth and Ramesh Ponnuru, backing and expanding Cruz’s theory that “the Federal Reserve caused the crisis by tightening monetary policy in 2008.”

But wait, didn’t the Federal Reserve lower rates during that time? Their argument is that the Federal Reserve didn’t lower them fast enough. “Through acts and omissions, the Fed kept interest rates and expected interest rates higher than appropriate, depressing the economy.” This is passive tightening, where the Federal Reserve didn’t act throughout the summer of 2008 to the gathering storm. Without it, “[w]e could have had a decline in housing without a Great Recession.”

Beckworth has discussed this at length in his blog. If it becomes more central to the economic debate in 2016, there’s four things to keep in mind.


Checking the Internet, I’m learning from David Dayen at The Fiscal Times that I’m part of “Clinton and her minions,” “trying on contradictory criticisms to make a political point” to deliver “a mortal wound to the cause of [Senator Elizabeth] Warren’s life.” [1] Zach Carter, Jason Linkins, Shahien Nasiripour at The Huffington Post notes that I’m part of a crew “peddling a myth about how the financial crisis happened” and it’s a “sad new world when respected liberals start echoing the arguments” of financial lobbyists.

Two weeks before a contested primary is probably not the time for subtlety and details, but I want to contest the arguments in these pieces. Though Dayen tries to catch me in a contradiction, I’ve long thought that the project of combating shadow banking was to extend banking regulations to financial activities rather than silo them. So there’s no inconsistency there. Though I’m supportive, I also think that “breaking up the banks” is being overplayed as a financial crisis issue, doing more work as a problem and a solution than its proponents say it does. It’s also a useful check how my mind has and hasn’t changed since 2010.

Human capital contracts continue to be all the rage in higher education funding. Beth Akers of Brookings writes that they can tackle “the growing risk associated with investing in higher education.” They are also playing a role in the presidential debate over higher education. Greg Mankiw, discussing higher education costs, is excited that Marco Rubio “wants to establish a legal framework in which private investors help pay for a student’s education in exchange for a share of the student’s earnings after college. In essence, the student would finance college less with debt and more with equity.”

One thing never mentioned in these discussions is the way these kinds of financial instruments would exacerbate inequality. As we’ll see, even a preliminary financial model of these instruments shows that, when it comes to the percentage of income, women would pay 8–22 percent more relative to men, and a poor woman of color would easily pay 40 percent more relative to a rich white male, in order to attend college..

As normal, it’s tough to model an imaginary market that won’t exist at scale without extensive government intervention because of profound adverse selection problems. But let’s give it our financial engineering best. I’m following the format of “income-share agreements” (ISA) funded by private, profit-seeking markets, where tuition is paid upfront in exchange for a percentage of future earnings.

One of the most important parts of private ISAs to their advocates is that the percentage of future earnings you have to pay isn’t fixed, but instead is set depending on your school and predicted earnings. Many proponents say that this will drive people to better schools with higher graduation rates as well as in-demand majors. Why? Because, since students will end up making more money this way, the private ISA lender can charge them a lower rate.

It’s not clear if the consequences would be what proponents expect. A quick model I ran shows that there’s no reason to believe it would lead students to schools with higher graduation rates, because at reasonably high discount rates this instrument would prefer the smaller payments upfront that one would get from a dropout. More generally, it’s tough to model small changes in future payments from things you could discern at the age of 18. But there are three things you know at 18 that are correlated with future income: gender, race, and parental income.

Imagine there was no financial crisis. Lehman Brothers went into bankruptcy and the only sound was crickets chirping. No panic, no bailouts, no TARP. There’d be nothing to be mad about, right?

Actually there’s everything to be mad about. We’d still have six million foreclosures destroying communities and people’s lives. The Great Recession would have happened almost exactly as it did, throwing millions of people out of work and scarring their productive lives. And there still would have been a wave of individuals who profited enormously through bad mortgage instruments, leaving everyone else on the hook.



One of the many things I like about the new movie The Big Short is that it doesn’t focus on the financial crisis, which normally dominates all the stories about what happened. Instead it focuses on how the housing bubble was created and sustained while previewing the destruction it would take on the people whose homes were in those mortgages bonds.

Most of the review from the finance and economics community of The Big Short have a “yes, but” quality, where they like the movie but then go on at length how it doesn’t cover their particular financial bugaboos. But we are now getting the counter-narratives, arguing that the film is entirely wrong with its message. First came the crazytown bananapants stuff from the American Enterprise Institute, arguing that the whole film is a lie. [1]

But now we have Michael Grunwald at Politico, arguing that the movie “whiffs on the big message of the crisis.” The crisis is just a story about a general housing mania, which all the attention the movie pays to the complicated mess of mortgage-backed securities and collateralized debt obligations (MBS, CDOs) needlessly complicates. The real problem was short-term leverage and the panics that ensued in the financial crisis. However those problems were handled well enough during the bailouts, and Dodd-Frank has made significant strides in fixing the problems the movie brings up.

I think these are all wrong, full-stop. And they are all wrong in a way that limits our ability to really understand the crisis, and where we are now. (Mild spoilers ahead.)

Liberals have spent the last eight years learning the limitations of presidential rhetoric, while conservatives have romanticized its possibilities. Beyond getting Obama to say “radical Islam” as a foreign policy objective, conservative anti-poverty programs have come to focus on cultural campaigns to promote marriage.

Take Jeb Bush’s new anti-poverty plan. Beyond block-granting anti-poverty programs in a way designed to weaken them, Bush will “promote marriage as the most reliable route to family stability and resources. As president, he will join with other political leaders, educators and civic leaders in being clear and direct about how hard it is to raise children without a committed co-parent.” This is a new focus for conservatives: professionals need to lead in promoting marriage. Since professionals themselves get married at higher rates, why shouldn’t they preach what they practice? [1]

But there’s an intellectual contradiction here that makes this whole project unworkable. According to this, professionals need to advocate for marriage to convince poor people to get married. Yet if you read deeper into the conservative literature, you find that one of their main diagnoses of why poor people don’t get married is because of the dominance of professional views of marriage over society. As we’ll see, they need this theory because the actual evidence shows that poor people already have a very positive view of being married. What’s stopping them from actually marrying is this professional “capstone” model of marriage, one appropriate for people for whom the economy works, but (supposedly) devastating for everyone else. [2]

How you diagnose a policy problem is often just as important as the solutions you propose. This is certainly true when it comes to financial reform, as competing theories of what is wrong with the financial sector tend to be more important than the technical solutions proposed. This has become even more relevant with a recent speech by Bernie Sanders that laid out his financial reform agenda in advance of the Democratic primaries, contrasting his approach even more strongly with Hillary Clinton’s.