Analysis and Commentary by Roosevelt Fellow Mike Konczal
About a month ago, I interviewed the great historian Eric Foner about his Civil War and Reconstruction MOOC, the experience of teaching those time periods to students, and his work’s relationship to the left now for The Nation. I forgot to post it here; I’m doing so now because the third and final part of the MOOC, The Unfinished Revolution: Reconstruction and After, 1865-1890, has just started and you can still sign up. (All the lectures will eventually end up on youtube. Here are links to the first class on the buildup to the Civil War and the second class on the Civil War itself.)
Foner is a great lecturer, and the lectures are his class, the final time he teaches it at Columbia, recorded and broken up into segments. It’s especially awesome to get to sit in on Foner lecturing about Reconstruction, given that he wrote the book that still defines the period. I highly recommend checking it out.
Is Expanding Medicaid an Essential Part of Reducing Mass Incarceration? An Interview with Harold Pollack
Every policy lever available was pulled in order to create our system of mass incarceration over the past 40 years. Reformers will have to be equally clever and nimble in trying to challenge and dismantle this system. And one important lever that I hadn’t thought much about in this context is the Affordable Care Act’s (ACA, or Obamacare) expansion of Medicaid. This expansion is being blocked in 22 states, which is preventing 5.1 million Americans from getting health-care.
This came up in an excellent interview between Connor Kilpatrick and the political scientist and incarceration scholar Marie Gottschalk over at Jacobin. Commenting on the limits of the current wave of bipartisan support against incarceration, Gottschalk notes that “If you care about reentry and about keeping people out of prison in the first place, there’s no public policy that you should support more strongly now than Medicaid expansion. Medicaid expansion gives states huge infusions of federal money to expand mental health services, substance abuse treatment, and medical care for many of the people who are most likely to end up in prison. It also allows states and localities to shift a significant portion of their correctional health care costs to the federal tab.” Similar concerns were raised by Elizabeth Stoker Bruenig at The New Republic.
I immediately got Gottschalk’s new book Caught, the subject of the Jacobin interview, and though I just started the book I highly recommended it as a guide to where the prison state stands in 2015. But I wanted to know more about the relationship between Medicaid and deincarceration.
So I reached out to friend-of-the-blog Harold Pollack. Pollack is the Helen Ross Professor at the School of Social Service Administration at the University of Chicago. He is also Co-Director of The University of Chicago Crime Lab at the University of Chicago. He has published widely at the interface between poverty policy and public health, and he also writes for a wide variety of online and print publications. He is also a thoughtful scholar on health care and crime policy and how they interact in communities.
Mike Konczal: How important is the Medicaid expansion for deincarceration?
Harold Pollack: I’m convinced that Medicaid expansion is essential for this problem. It’s essential for two different purposes. First, individuals in this population need health services, and there needs to be a clear way that individuals can get access to services from qualified providers. The Medicaid expansion does that.
Secondly, the entire ecosystem of care requires proper financing. And for historical reasons, mental health and substance abuse services have been put into their own silos. They are not properly financed, except through a patchwork of safety net funding streams that don’t particularly work well. They have also been poorly-integrated with standard medical care.
Let’s talk about individuals first. In what ways could Medicaid benefit people who are or are likely to get caught up in the criminal justice system?
Think about who is not eligible for Medicaid before health reform. A low-income male who is not a veteran or a custodial parent, or who doesn’t qualify for Ryan-White HIV/AIDS benefits. They may have a serious substance abuse problem, but that wouldn’t qualify them for federal disability benefits. They, with the expansion, can get access to Medicaid simply because they are poor.
The criminal justice population is quite varied, but there are a couple of key areas in which Medicaid expansion would be especially beneficial for them. With the expansion, Medicaid can now cover basic outpatient substance abuse treatment. This is true for both Medicaid and private insurance after health reform. And ACA provides these services in a way that is much more integrated with people’s regular medical care.
One basic challenge with drug and alcohol treatment is that these services are in a separate system that people don’t want to use, and don’t use. With the Medicaid expansion, you can go to a neighborhood clinic and they can help you get Methadone or Suboxone. They can also get you the psychiatric care you need within the same umbrella of your regular care. So it is much more likely that people will use it.
There’s very good evidence that alcohol and illicit drug treatment reduces criminal offending. [Editor note: Both this study and this study, obtained via follow-up email, show treament reduces violent and property crime enough to far pass a cost-benefit test.] Both It partly reduces criminal offending by reducing the need to commit property crimes to get the substances. It also reduces offending by allowing people to be more functional, and thus more likely to stay employed. Especially in the case of alcohol, people getting their substance abuse under control makes it less likely that they’ll be intoxicated, and thus less likely to commit crimes or be victims of crime.
What about those with mental illness?
When it comes to those with serious mental illness, we end up using local jails to try and manage them. It’s important that they can get access to help and mental health treatment outside of the criminal justice itself. It’s ironic that when someone with psychiatric disorders is inside the jail, they do have access to some of these services. But those services are often unavailable or totally disconnected when they leave the jail.
We don’t really know whether, or by how much, these services can be expected to reduce offending among this group. This remains a hypothesis that depends on how well we actually implement programs. Much will depend on how effectively we can implement Medicaid expansion.
How does this element of Medicaid deal with the traditional criticisms of the program?
Medicaid has many shortcomings. It doesn’t pay a market rate for important services. But for all of its faults, Medicaid recipients are grateful to have it. The satisfaction they have is quite high compared to traditional health insurance. Medicaid gives people access to the basic health care that they need to stay healthy and improve their lives. It is also genuinely designed for people who have no money, which is really important for these indigent populations. Medicaid is inferior to private insurance in terms of reimbursement to providers, but it’s better for really poor people than any private insurance I’ve seen, because it’s been road tested for a long time in meeting the needs of indigent people.
And as I mentioned, ACA is especially important, because the ACA includes very specific components in the area of mental health and substance use.
One thing I’ve noticed is that for all the talk about ending mandatory minimums, most of the real energy is about giving judges flexibility to ignore mandatory minimums. But that put a lot of pressure on keeping recidivism down, because judges, especially elected ones, won’t ignore long records.
Deincarceration requires the puzzle pieces to fit together to be sustainable and politically tenable. That requires that we deal with the real-life problems people face when they are released. It requires monitoring and people have access to services, both to improve their quality of life and to reduce the probabilities that they will reoffend.
If we just release people without support services, my fear is that it will not go well. Then it will ultimately generate political backlash. I’m very heartened that we are reducing the mandatory minimums, in particular for older offenders who tend to be less violent. It’s essential that we address the excessive sentencing. But we also have to do what we need to do to make this effective.
Even if judges can reduce sentencing, they are ultimately dependent on the available resources to help and monitor the people that come before them. And if judges don’t see those services, then they aren’t going to use their discretion to release many of these people as early as they might.
And if property crimes are being committed by people under criminal justice supervision, and they have a history of violent offending, then they are much more likely to be sent back with a pretty serious sanctions.
Tell me more about the second issue, how the ACA rationalizes the funding stream for these services.
We’ve had a messy system in the past, and we’ll ultimately rationalize it under Medicaid. Safety net providers for substance abuse and mental illness have always been paid for by a patchwork of public funding through obscure agencies and local governments. It has always been a huge challenge where access has been inadequate, with long waiting lines, and the services provided were often quite forbidding. Given this separate funding, it’s very difficult to integrate this in with people’s overall health care. When you have these silos of places to go, with one for mental health, another silo for substance abuse, and another for safety net health care, that person isn’t going to get the integrated care they really need. The ACA is trying to bring those things together.
Many of these issues will still be in play going forward, but it will be in the context of a coherent system that at-least addresses these issues within the context of broader health care.
I have a new Score column up: Why Are Liberals Resigned to Low Wages? It deals with the three key political institutions that are responsible for wages remaining low, both over the past generation and in the Great Recession. It also tries to understand “liberal nihilism”, or the weird glee that results when wages aren’t seen as also having an institutional component to them, and thus are no longer a political challenge.
I hope you check it out!
A blog post responding to a blog post responding to a blog post. Who says the blogosphere is dead?
Recently I wrote about Larry Summers demolishing an argument about robots and our weak recovery on a panel. Jim Tankersley called up Summers to further discuss the topic, and put his interview online as a response meant to correct and expand on my post. But I don’t think we disagree here, and if anything Summers’ interview shows how much the consensus has changed.
Before we continue, I should clarify what we are talking about. When people talk about “the robots,” they are really telling one of three stories:
1. Technology has played an important role in the economic malaise of the past 35 years, broadly defined as a mix of stagnating median wages, increased inequality, and weakening labor-force participation.
2. The Great Recession has led to such a weak and lackluster recovery in large part because of technology. In one version of this story, technology is simply taking all the jobs that would normally be found in a recovery. As the AP put it, “Five years after the start of the Great Recession, the toll is terrifyingly clear: Millions of middle-class jobs have been lost… They’re being obliterated by technology.” (President Obama himself often mentioned this story throughout the dark period when unemployment was much higher.)
Another, more popular, version is that workers simply don’t have the skills required for a high-technology labor force. A representative quote from the Atlanta Fed President Dennis Lockhart in 2010: “the skills people have don’t match the jobs available. Coming out of this recession there may be a more or less permanent change in the composition of jobs.”
3. We are moving to a post-work economy, one where robots substitute for human labor in massive numbers and fundamentally change society. Here’s an example. We may or may not be seeing the first hints of such a change now, depending on the story.
The story I said Summers (as well as David Autor) demolished is the second. There’s no evidence that we are having a technology renaissance right now, or that technology has contributed in a major way to the weak recovery, or that a skills gap or other educational factor is holding back employment, or that highly skilled workers are having a great time in the labor market. The arguments against this story from the original post are pretty damning, and Summers either reiterates them or doesn’t walk them back in the Washington Post column. (Let’s leave the third story to science fiction speculation for now, noting that the second story getting demolished means it isn’t happening now, and that it’s hard to imagine robot innovation when labor is so cheap and abundant.)
However, Summers does argue for the first story as well, the one in which technology has played a role in the malaise of the past 30 years. As he tells the Post, “In the 1960s, about 1 in 20 men between the age of 25 and 54 was not working. Today, the number is more like 1 in 6 or 1 in 7. So we have seen some troubling long-term trends, and they appear to be continuing trends.” Summers also notes, “to say that technology is important is not to say that technology is the only important factor, or even that it is the dominant factor.” He mentioned this as the conference as well; Brad DeLong and Marshall Steinbaum noted it in their posts.
Intellectual Portfolio Rebalancing
When we think of the economic malaise of the past 30 years, we should probably think of it as a combination of technology, globalization, sociology, and public policy. Tankersley wants to emphasize technology as a piece of this story, and I agree it should be there.
But here’s what I find interesting. Whenever we have a portfolio of ideas, some ideas get more weight than others. And what strikes me about this conversation is how much technology and skills have been deemphasized relative to other stories since the Great Recession, especially those of public policy.
This is a pretty quick and important change. Almost ten years ago, Greg Mankiw could write, “Policy choices […] have not been the main causes of increasing inequality. At least that is the consensus, as I understand it, of the professional labor economists who study the issue.” Brad Delong also said in 2006 that he “can’t see the mechanism by which changes in government policies bring about such huge swings in pre-tax income distribution.” Skill-biased technical change (SBTC) and technology were assumed to cover the entire inequality story.
That consensus is weaker now than it was then. Certainly the argument for SBTC, while always shaky, has taken a hit. You can see it with Summers himself in the Washington Post, where he notes that “changing patterns of education is unlikely to have much to do with a rising share of the top 1 percent, which is probably the most important inequality phenomenon.”
Meanwhile, more and more inequality research is focused on institutional factors, ranging from marginal tax rates to the minimum wage to the inefficiency and growth of the financial sector to deunionization. And as the Mankiw quote hints, 10 years ago you’d be less likely to hear, as Summers says at the Washington Post, that a “combination of softer labor markets and the growing importance of economic rents” are an essential part of inequality spoken with the same confidence as you see here. I read that as a major change of the consensus.
This is a major rebalancing of our intellectual portfolio of inequality stories, a change that I think is opening up a much more rich and accurate description of what has happened. I hope the research and conversation continues this way.
So excited to be launching our new Financialization Project. Check out the website here. Part of the goal of the project is to define financialization, and we’ve focused on the changes to savings, power, wealth, and society that have occured over the past 35 years. We’ll have more there soon, but for now check out the general idea here.
We’re also releasing our first paper, “Disgorge the Cash: The Disconnect Between Corporate Borrowing and Investment,” by Roosevelt fellow J.W. Mason. There’s a great writeup of the paper by Lydia DePillis – “Why companies are rewarding shareholders instead of investing in the real economy” – at the Washington Post.
There’s a ton in there, from the key intellectual, ideological, legal, and institutional changes that brought about the shareholder revolution, to reasons to doubt a credit crunch has played any kind of role in the Great Recession. But the core of it is told in these two graphs, dug out from detailed Compustat data:
The first figure shows that a firm borrowing $1 would correlate with an additional 40 cents of investment before the 1980s. Since the 1980s that has collapsed. Today, there is a strong correlation between shareholder payouts and borrowing that did not exist before the mid-1980s. Since the 1980s, shareholder payouts have nearly doubled; in the second half of 2007, aggregate payouts actually exceeded aggregate investment.
I think there’s reason for some skepticism about how fast things are actually moving. There’s a lot of aggregate data that don’t support the idea the labor market is changing or the economy is changing as rapidly as this very dramatic story. The premium to higher education has plateaued over the last 10 years. We see evidence highly skilled workers have less rapid career trajectories and are moving into less skill occupation if anything. Productivity is not growing very rapidly, and a lot of the employment growth we’ve seen in the past 15 years has been in relatively low education, in-person service occupations.
The second point I want to make, when we think about how technology interacts with labor market we think of substitution of labor with machinery. […] What is neglected is that it complements us as well. Many activities require a mixture of things. it requires a mixture of information process and creativity, motor power and dexterity. if those things need to be done together if you make one cheaper and more productive, you increase the value of the other.
On the one hand we have enormous anecdotal evidence and visual evidence that points to technology having huge and pervasive effects. Whether it is complementing workers and making them much more productive in a happy way, or whether it is substituting for them and leaving them unemployed can be debated. In either of those scenarios you would expect it to be producing a renaissance of higher productivity.So, on the one hand are convinced of the far greater pervasiveness of technology in the last few years, and, on the other hand, the productivity statistics on the last dozen years are dismal. Any fully satisfactory view has to reconcile those two observations and I have not heard it satisfactorily reconciled.
If you believe technology happens with a big lag and it’s only going to happen in the future, that’s fine. But then you can’t believe it’s already caused a large amount of inequality and disruption of employment today. […] Let’s take retailing. You can imagine you can have all kinds of spiffy technology so you no longer have to have people behind cash registers. The problem is you wouldn’t expect the people behind the cash registers would get fired before the people working the systems got the new systems working. […] I understand why it might take years for it all to have an effect. What I have a harder time understanding is how there can be substantial disemployment ahead of the effect of the productivity.That is, if you thought that it just was impossible to put in these systems and so forth, then you might think that in the short run it would be a big employment boom. You have to keep your old legacy system going and you have to have a million guys running around figuring out how to put the new computer system in.
I think the [education] policies that Aneesh is talking about are largely whistling past the graveyard. The core problem is that there aren’t enough jobs. If you help some people, you could help them get the jobs, but then someone else won’t get the jobs. Unless you’re doing things that have things that are effecting the demand for jobs, you’re helping people win a race to get a finite number of jobs. […]Folks, wage inflation in the united states is 2%. It has not gone up in five years. There are not 3% of the economy where there’s any evidence of hyper wage inflation of a kind that would go with worker shortages. The idea that you can just have better training and then there are all these jobs, all these places where there are shortages and we just need the train people is fundamentally an evasion. […]I am concerned that if we allow the idea to take hold, that all we need to do is there are all these jobs with skills and if we can just train people a bit, then they’ll be able to get into them and the whole problem will go away. I think that is fundamentally an evasion of a profound social challenge.
What we need is more demand and that goes to short run cyclical policy, more generally to how we operate macroeconomic policy, and the enormous importance of having tighter labor markets, so that firms have an incentive to reach for worker, rather than workers having to reach for firms. […]I think that the broad empowerment of labor in a world where an increasing part of the economy is generating income that has a kind of rent aspect to it, the question of who’s going to share in it becomes very large. One of the puzzles of our economy today is that on the one hand, we have record low real interest rates, that are expected to be record low for 30 years if you look at the index bond market. And on the other hand, we have record high profits. And you tend to think record high profits would mean record high returns to capital, would also mean really high interest rates. And what we actually have is really low real interest rates. The way to think about that is there’s a lot of rents in what we’re calling profits that don’t really represent a return to investment, but represent a rent.The question then is who’s going to get those rents? Which goes to the minimum wage, goes to the power of union, goes through the presence of profit sharing, goes to the length of patents and a variety of other government policies that confer rents and then when those are received, goes to the question of how progressive the tax and transfer system is. That has got to be a very, very large part of the picture.
If we had the income distribution in the United States that we did in 1979, the top 1% would have $1 trillion less today, and the bottom 80% would have $1 trillion more. That works out to about $700,000 a family for the top 1%, and about $11,000 a year for a family in the bottom 80%.That’s a trillion dollars. I don’t know what the number is, but my guess is that the total cost of the Earned Income Tax Credit is $50 billion. Nobody’s got on the policy agenda doubling the Earned Income Tax Credit. The big, aggressive agendas are probably to increase it by a third or a half. So, I’m all for it, but we are talking about 2.5% of the redistribution that has taken place. So, you have to be looking for things and there’s no one thing that is going to do it. My reading of the evidence, it’s a fairly general evidence, is that while there may be some elasticity, the elasticity around the current level of the minimum wage is very low.
We may need an increase in the income tax credit, not only for those who receive it at the present time but perhaps much further up the income scale. Measures that facilitate collective bargaining can result in a broader participation in the benefits of productivity and growth […] If we have ever rapid technological development and it is labor displacing, at some point in the future — as I say, that may be some distant point in the future — should that lead to some basic change in our lifestyles with less work, more lecture and a richer, more robust use of that leisure? […] In addition to everything that needs to be done to enhance growth, tighten labor markets and to improve the position of middle and lower income workers, should there be increased redistribution to accomplish the broad objectives of our society?
According to a new study by Marcus Hagedorn, Iourii Manovskii and Kurt Mitman (HMM), Congress failing to reauthorized the extension of unemployment insurance (UI) resulted in 1.8 million additional people getting jobs. But wait, how does that happen when only 1.3 million people had their benefits expire?
The answer is by going off the normal path of these arguments in models, techniques and data. The paper has a nice write-up by Patrick Brennan here, but it’s one that doesn’t convey how different this paper is compared to the vast majority of the research. The authors made a well-criticized splash in 2013 by arguing that most of the rise in unemployment in the Great Recession was UI-driven; this new paper is a continuation of that approach.
Gold Standard Model. Before we go further, let’s understand what the general standard in UI research looks like. The model here is that UI makes it easier for workers to pass up job offers. As a result they’ll take a longer time to find a job, which creates a larger pool of unemployed people, raising unemployment. In order to test this, researchers use longitudinal data for individuals to compare the length of job searches for individuals who receive UI with those who do not.
This is the standard in the two biggest UI studies from the Great Recession. Both essentially use individuals not receiving UI as a control group to see what getting UI does for people’s job searches over time. Jesse Rothstein (2011) found that UI raised unemployment “by only about 0.1 to 0.5 percentage point.” Using a similar approach, Farber and Valletta (2013) later found “UI increased the overall unemployment rate by only about 0.4 percentage points.” These are generally accepted estimated.
And though small, they are real numbers. The question then becomes an analysis of the trade-offs between this higher unemployment and the positive effects of unemployment insurance, including income support, increased aggregate demand and the increased efficiency of people taking enough time to get the best job for them.
This is not what HMM do in their research. Either in terms of their data, which doesn’t look at any individuals, or their model, which tells a much different story than what we traditionally understand, or their techniques, which add additional problems. Let’s start with the model.
Model Problems. The results HMM get are radically higher than these other studies. They argue that this is because they look at the “macro” effects of unemployment insurance. Instead of just people searching for a job, they argue that labor-search models show that employers must boost the wages of workers and create fewer job openings as a result of unemployment insurance tightening the labor market.
But in their study HMM only look at aggregate employment. If these labor search dynamics were the mechanism, there should be something in the paper about actual wage data or job openings moving in response to this change. There is not. Indeed, their argument hinges entirely on the idea that the labor market was too tight, with workers having too much bargaining power, in 2010-2013. The end of UI finally relaxed this. If that’s the case, then where are the wage declines and corporate profit gains in 2014?
This isn’t an esoteric discussion. They are, in effect, taking a residual and calling it the “macro” effect of UI. But we shouldn’t take it for granted that search models can confirm these predictions without a lot of different types of evidence; as Marshall Steinbaum wrote in his appreciation of these models, when it comes to business cycles and wages predictions they are “an empirical disaster.”
Technique Problems. The model’s vagueness is amplified by the control issue. One of the nice things about the standard model is that people without UI make a nice control group for contrast. Here, HMM simply compare high-UI and low-UI duration states and then counties, without looking at individuals. They argue that since the expiration was done by Congress, it is essentially a random change.
But a quick glance shows their high benefits states group had an unemployment rate of 8.4 percent in 2012, while their low benefits states had an unemployment rate of 6.5 percent. Not random. As the economy recovers, we’d naturally expect to see the states with a higher initial unemployment rate recover faster. But that would just be “recovery”, not an argument about UI, much less workers’ bargaining power.
Data Problems. Their county-by-county analysis is meant to cover for this, but this data is problematic here. As Dean Baker notes in an excellent post, the local area data they use is noisy, confusing based on whether the state is where one works versus lives, and is largely model driven. The fact that much of it is model-driven is problematic for their cross-state county comparisons.
Baker replaces their employment data with the more reliable CES employment data (the headline job creation number you hear every month) and finds the opposite headline result:
It’s not encouraging that you can get the opposite result by changing from one data source to another. Baker isn’t the first to question the robustness of these results to even minor changes in the data. The Cleveland Fed, on an earlier version of their argument, found their results collapsed with a longer timeframe and excluding outliers. The fact that the paper doesn’t have robustness tests to a variety of data sources and measures also isn’t encouraging.
So data problems, control problems, and the vague sense that this is just them finding a residual and attribute all of it to their “macro” element without enough supporting evidence. Rather than turning over the vast research already done, I think it’s best to conclude as Robert Hall of Stanford and the Hoover Institute did for their earlier paper with a similar argument: “This paper has attracted a huge amount of attention, much of it skeptical. I think it is an imaginative and potentially important contribution, but needs a lot of work to convince a fair-minded skeptic (like me).” This newest version is no different.
President Obama is going big on capital taxation in the State of the Union tonight, including a proposal to raise dividend taxes on the rich to 28 percent. The President is probably not going to frame this as a move away from the George W. Bush economy, but Bush’s radical cuts to capital taxes are part of his legacy that we are still living with. And it’s a part that the latest evidence tells us did a lot to help the rich without helping the overall economy at all.
In the response to Obama’s proposal, you are going to hear a lot about how lower dividend rates increase investment and help the real economy. Indeed, lowering capital tax rates has been a consistent goal of conservatives. As a result, one of the biggest capital taxation changes in history happened in 2003, when George W. Bush reduced the dividend tax rate from 38.6 percent to 15 percent as part of his rapid and expansive tax cut agenda.
There’s been a lot of research about the effect of this massive dividend tax cut on payouts to shareholders (kicked off by an important 2005 Chetty-Saez paper), but very little on its effect on the real economy. Did slashing the dividend tax rate boost corporate investments, perhaps because it made funding projects easier? We don’t know, and it’s not because economists aren’t interested; it’s because it’s very difficult to construct a control group with which to compare the results. Investments increased after 2003, but they likely would have to some degree independent of the dividend tax cut, as we were coming out of a recession. So did the tax cut make a difference?
This is where UC Berkeley economist Danny Yagan’s fantastic new paper, “Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut,” (pdf, slides) comes in. He uses a large amount of IRS data on corporate tax returns to compare S-corporations with C-corporations. Without getting deep into tax law, C-corporations are publicly-traded firms, while S-corporations are closely held ones without institutional investors. But they are largely comparable in the range Yagan looks at (between $1 million and $1 billion dollars in size), as they are competing in the same industries and locations.
Crucially, though, S-corporations don’t pay a dividend tax and thus didn’t benefit from the big 2003 dividend tax cut, while C-corporations do pay them and did benefit. So that allows Yagan to set up S-corporations as a control group and see what the effect of the massive dividend tax cut on C-corporations has been. Here’s what he finds:
The blue line is the C-corporations, which should diverge from the red-line if the dividend tax cut caused a real change. But there’s no statistical difference between the two paths at all. (Note how their paths are the same before the cut, so it’s a real trend in the business cycle.) There’s no difference in either investment or adjusted net investment. There’s also no difference when it comes to employee compensation. The firms that got a massive capital tax cut did not make any different choices about things that boost the real economy. This is true across a crazy-robust number of controls, measures, and coding of outliers.
The one thing that does increase for C-corporations, of course, is the disgorgement of cash to shareholders. Cutting dividend taxes leads to an increase in dividends and share buybacks. This shows that these corporations are in fact making decisions in response to the tax cut; they just happen to be decisions that benefit, well, probably not you. If right now you are worried that too much cash is leaving firms to benefit a handful of investors while the real economy stagnates, suddenly Clinton-era levels of dividend taxation don’t look so bad.
This is interesting for people interested more specifically in corporate finance theory. Because this is evidence against the theory that firms use the stock market to raise funding, and toward a “pecking order” theory that internal funds and riskless debt are far above equity in a hierarchy of corporate funding choices. In models like the latter, taxation of dividends does very little to impact the cost of capital for firms, because equity isn’t the binding constraint on marginal investment options.
President Obama will likely focus his pitch for the dividend tax increase on the future, when, in his argument, globalization and technology will cause compensation to stagnate while investor payouts skyrocket and the economy becomes more focused on the top 1 percent. But it’s worth noting that while capital taxes are a solution to that problem, the radical slashing conservatives have brought to them are also partly responsible for our current malaise.
Is it useful to clarify data and claims in the economics blogosphere? Probably not, but I’ll give it a shot, as there’s two sets of arguments that could use more light rather than heat.
What Happened in 2013? Sumner and Wren-Lewis
Scott Sumner wrote this about Simon Wren-Lewis:
“Simon Wren-Lewis also gets the GDP growth data wrong, in a way that makes austerity look worse. He claims that RGDP growth was 2.3% in 2012 and 2.2% in 2013 (the year of austerity in the US.) But that’s annual y-o-y data, and since the austerity began on January 1st 2013, you need Q4 over Q4 data. In fact, RGDP growth in 2012, Q4 over Q4, was only 1.67%, whereas growth in the austerity year of 2013 nearly doubled to 3.13%.”
There’s no getting it wrong here: there’s simply two methods. Is it better to take the average annual rates and compare them (as Wren-Lewis does) or is it better to look at strict endpoints (as Sumner does)? An important thing about looking at Q4 vs Q4 data, as Sumner does, is to make sure that you haven’t accidentally set up your endpoints to amplify a trend that isn’t there. That technique is very sensitive to where you put the endpoints.
And sure enough, the quarters before and after that range featured negative or near zero growth. What if you redo this moving the quarters back and forth one period? Well, Q1 over Q1 2014 data drops to 1.9%, while Q3 over Q3 2012 rises to 2.7% (Q1 over Q1 2012 was 2.1%). It’s not encouraging if your argument falls apart because you move the data one step. We can graph out the Q over Q data for every quarter in fact; note Sumner is points to a single quarter that obviously sticks out. There’s a reason people might want to average the data in these situations, as Lewis does.
Simon-Wren Lewis, whose blog I really enjoy, already pointed out austerity didn’t start on January 1st, 2013, of course. And it didn’t; note the more consistent growth in the graphic in late 2010. But even better, the fourth quarter of 2012 featured a massive decline in military spending. According to Alan Krueger for the White House, “A likely explanation for the sharp decline in Federal defense spending is uncertainty concerning the automatic spending cuts that were scheduled to take effect in January.” That’s an additional problem for setting up this issue this way.
What Did People Say Would Happen? Jeffrey Sachs
Jeffrey Sachs argues that people worried about additional austerity in 2013 were saying that it would cause another recession. Sachs: “Indeed, deficit cuts [especially in 2013] would court a reprise of 1937, when Franklin D. Roosevelt prematurely reduced the New Deal stimulus and thereby threw the United States back into recession.”
I paid a lot of attention to these debates, and saw three estimates of the impact of 2013 austerity on the recovery: Mark Zandi at Moody’s Economy, EPI, and the CBO. All three were close to each other in their estimates. None predicted that we’d go back into recession or have no growth.
What were they predicting? Zandi put it clearly: “Altogether, lower federal government spending and higher taxes are expected to reduce 2013 real GDP growth…With such a heavy fiscal weight on the economy, it is hard to see how growth could accelerate, at least in the first half of 2013.”
That’s consistent with what we’ve seen. A drag, preventing accelerate growth and delaying a takeoff in 2013 and into 2014. I don’t see how Sachs can obviously claim that these numbers aren’t consistent with the idea that the government has been a net drag since 2011, or point to a pickup in late 2014 as obviously disproving anything. Maybe on closer, empirical grounds you could (though the empirical literature is finding multiplers), but not at this high level.
In my original question about the Federal Reserve versus austerity in 2013, which seems to animate a lot of these debates, the issue I put forward was whether the Federal Reserve could hit the inflation target it announced with the Evans Rule shifting expectations and open-ended purchases to back that up, while government spending was a drag. It did not.
The Republicans have declared war against Dodd-Frank. But what kind of war is it, and on what fronts are they waging this war? I think there are at least three campaigns, each with its own strategic goals and tactics. Distinguishing these campaigns from each other will help us understand what Republicans are trying to do and how to keep them in check.
First, to understand the Republican campaigns, it’s useful go over what Dodd-Frank does. Dodd-Frank can be analogized to the way we regulate driving. First, there are simple rules of the road, like speed limits and stop signs, designed as outright prevention against accidents. Then there are efforts to help with stabilization if the driver gets in trouble, such as anti-lock brakes or road design. And then there are regulations for the resolution of accidents that do occur, like seat belts and airbags, designed to avoids worst-case scenarios.
These three goals map onto Dodd-Frank pretty well. Dodd-Frank also puts rules upfront to prevent certain actions, requires additional regulations to create stability within large financial firms, and lays out plans to allow for a successful resolution of a firm once it fails. Let’s graph that out:
Prevention: Dodd-Frank created a Consumer Financial Protection Bureau (CFPB), reforming consumer protection from being an “orphan mission” spread across 11 agencies by establishing one dedicated agency for it. The act also requires that derivatives trade with clearinghouses and through exchanges or else face additional capital requirements, which brought price transparency and additional capital to the market that brought down AIG. Another piece is the Volcker Rule, which separates the proprietary trading that can cause rapid losses from our commercial banking and payment systems.
Stabilization: Dodd-Frank also provides for the expansion of capital requirements across the financial sector, including higher requirements for the biggest firms relative to smaller ones, as well as higher requirements for those who use short-term funding in the “shadow” banking sector relative to traditional banks. These firms are designed by the Financial Stability Oversight Council (FSOC).
Resolution: The firms FSOC designates as systemically risky have to prepare themselves for a rapid resolution for when they do fail. They have to prove that they can survive bankruptcy without bringing down the entire system (an effort currently being fought). The FDIC has prepared a second line of defense, a special “resolution authority” (OLA) to use if bankruptcy isn’t a viable option in a crisis.
These elements of the law all flow naturally from the financial crisis of 2008. It would have been very helpful in the crisis for there to be more clarity in the derivatives market, more capital in shadow banks, and a process to resolve Lehman Brothers. Maybe these are great ways to approach the problem or maybe they aren’t, but to suggest they have no basis in the crisis, as the American Enterprise Institute comically does, is pure ideology.
But ignore the more ridiculous arguments. The actual war against Dodd-Frank is much more sophisticated, and it’s being waged on numerous fronts. Let’s make a map of the battlefield:
There are three distinct campaigns being waged:
Guerrilla Deregulation. The goal here is to undermine as much of the efforts of derivatives regulation, the Volcker Rule, and the CFPB as possible through quick, surprise attacks. This, in turn, has a chilling effect across regulators and throws the regulatory process into chaos.
The main tactic, as in any good guerrilla campaign, is to do hit-and-run ambushes of key, important targets vulnerable to raids. David Dayen had a helpful list of some key bills that must pass in 2015, bills likely to be perfect targets for a good guerrilla raid. The guerrilla campaign had a major victory in weakening the Section 716 “push-out” rule in the Cromnibus bill. And that will probably be a model going forward for these tactics, replicated in the recent attacks we’ve seen, down to counting the small handful of Democrats signing on as some sort of concession of bipartisanship.
Another guerrilla element will be the focus on victory through attrition. It’s not like the House Republicans have their own theory of how to regulate the derivatives market, or that they are making the full case against the Volcker Rule or the CFPB, or even proposing their own anything. They are winning simply through weakening both the rules and the resolve of reformers.
Administrative Siege: Aside from the guerrilla war of deregulation, the GOP is also waging war on another front, through a long-term siege of the regulatory agencies. This includes blockading them from resources like funding and personnel, consistent harassment, discrediting them in the eyes of the broader public, and weakening their power to act. This is a long-term battle, going back to the beginning of Dodd-Frank, and their terms are unconditional surrender.
The seriousness of this campaign became clear when the GOP first refused to appoint any director of the CFPB unless there was a complete overhaul to weaken it. This campaign has continued against the CFTC, and now extends to the FSOC trying to designate firms as systemically risky. The recent House bill to extend cost-benefit analysis to financial regulations, where it has little history, unclear analytical benefit, and could easily lead to worse rules, is also part of this siege.
One key argument the GOP is pushing is that the regulators are historically too powerful and out of control. As House Financial Services Committee chairman Jeb Hensarling said to the Wall Street Journal, the CFPB is “the single most unaccountable agency in the history of America.” This is just silly agitprop. The structure — independent budgets and a single director — looks exactly like their counterparts in the OCC. It’s not only subject to the same rule-making process as other regulators, but other regulators can in fact veto the CFPB, making it significantly more accountable compared to any other agency.
The same is being said about FSOC. Note that there’s always room for improvement; Americans for Financial Reform (AFR) have some ways to improve the transparency of FSOC here. But as AFR’s Marcus Stanley notes, the House’s recent FSOC bill “appears better calculated to hinder FSOC operations than to improve its transparency.” Indeed, as Better Markets notes, this FSOC battle is in large part over the regulation of money market funds, a crucial reform in fixing shadow banking. But making government work better isn’t the goal of the siege; this campaign’s goal is to break these agencies and their ability to regulate the financial system.
Reactionary Rhetoric: The goal of this ideological programming campaign is to push the argument that Dodd-Frank simply reinforces the worst part of the bailouts and does nothing productive toward reform. Instead of a series of methods to check and reduce Too Big To Fail, this campaign argues that Dodd-Frank does worse than fail. Following the rhetoric of reaction, reform simply makes the problem far worse. The point here is to remove the FDIC’s ability to put systemically risky firms into a receivership while also preparing the ground for a full repeal.
Advancing the argument that Dodd-Frank has made the bailouts of 2008-2009 permanent and serves only to benefit the biggest financial firms has become a marching order for the movement right. It was basically the entire GOP argument against Dodd-Frank in 2012 (Mitt Romney calling the act “the biggest kiss” to Wall Street), and it still dominates their talking points. If this were the case, the largest banks would receive a large Too Big To Fail subsidy, and we’d subsequently see a reduction in their borrowing costs.
Major studies tells us that the opposite is the case; since 2010 Too Big To Fail subsidies have fallen instead of stabilized or increased. This doesn’t mean the work is done – we could still see a major failure cause systemic risk, and just “avoiding catastrophic collapses” isn’t really a headline goal for a functioning financial system. There’s also little evidence that Dodd-Frank enriches the biggest banks; firms go out of their way to avoid a SIFI designation, which they wouldn’t if there were a benefit to them, and Wall Street analysts take it for granted that capital requirements and other regulations are more binding for the largest firms.
There could be a productive discussion here about finding a way to reform the bankruptcy code to help combat Too Big To Fail while keeping resolution authority as a backup option. That backup option is key though. Unlike OLA, bankruptcy is slow and deliberate, isn’t designed to preserve ongoing firm business, doesn’t have guaranteed funding available, can’t prevent runs from short-term creditors, and has trouble internationally. But again, the point for Republicans isn’t to try to come up with the best regime; it’s to discredit the effort at reform entirely so the other campaigns, and the overall campaign for repeal, can be that much easier.
Why do Republicans want all this? The answer you will normally hear is that they are in the pocket of Wall Street or in the thrall of free-market fundamentalism. And there’s truth to that. But they’ve also created a whole institutionally enforced counter-narrative where there was no real crisis and Wall Street committed no bad behavior except for when ACORN made them. This narrative is, bluntly, dumb. But it is the narrative their movement has chosen, and movements have a way of forcing well-meaning people who’d otherwise want to find good solutions to fall in line.
2015 will require reformers to wage their own campaigns to push additional reform (here’s a start), push for stronger action from regulators, and make the public understand the progress that has been made. But first we need to understand that while conservatives may look like they are running a smash-and-grab operation when it comes to Dodd-Frank, it’s actually a quite sophisticated series of campaigns, and they are already winning battles.