Monday, 5 August 2013

Some thoughts on Libertarian-Populism

In the ongoing debate about how to re-orient the GOP, a new idea has garnered a lot of internet discussion--libertarian-populism. The idea--originally championed by Tim Carney of the Washington Examiner--is for the GOP to focus its policy and rhetoric on areas where the government enriches wealthy, connected "insiders", at the expense of everyone else.

I think Jonathan Chait's critique is, basically, correct:
A second mistaken premise of Republican populism is a confusion over what causes inequality in the United States. Republican populists are obsessed with the role of elites using the government to reinforce their privilege. Certainly examples of this exist. But the main driver of inequality today is the marketplace, and the main bulwark against that inequality is the federal government. The federal government disproportionately taxes the rich, and it disproportionately spends on the poor. Our government redistributes less from rich to poor than do most other advanced countries, but it does redistribute
The U.S.  government taxes in a progressive manner and mostly spends that money on retirement programs, health care for poor people, and the U.S. military*.

As a result, there isn't very much policy room for libertarian-populist initiatives. For the same reason, Paul Ryan's budget proposals would massively increase the after-tax/after-spending resources of wealthy people and decrease the after-tax/after-spending resources of poor people. Shrinking the U.S. government in a meaningful way will result in an upward redistribution of wealth.

To the extent that there is a "insider" vs. "populist" battle going on, its that Washington "insiders" tend to favor cutting entitlement programs that are massively popular with the rest of the country.

Conservatives generally dislike the federal government, and prefer federalism and local control. But the truth is, the best place for libertarian-populists to focus their attention is at the local level.

Large cities tend to be dominated by a single party (usually Democrats). The lack of partisanship empowers rent-seekers and discourages good governance. At the local level, revenue is usually collected via regressive sales and property taxes, placing heavier burdens on poor and middle-class families. It is not uncommon for cities to offer lucrative tax breaks to large companies to entice them into locating within their taxing jurisdiction. Cities will often help fund sports stadiums, and other unnecessary development projects. The average American's only encounter with the state's "monopoly on the legitimate use of force", is with their local police department.  

When I began writing this post, I intended to simply demonstrate the contradiction between libertarian populists' preference for local governance, and the prevalence of "cronyism" and intrusive government that occurs at the local level. But the more I thought about it, the more I would genuinely be interested to see if a "libertarian-populist" party could be successful in big American cities.

David Schliecher does some really interesting work on the problems associated with single-party dominance in local government. (See some comments by Matt Yglesias here) And has proposed that Michael Bloomberg start a "Bloomberg Party", in order to foster partisan competition through the formation of a local government party based on the policy preferences of Michael Bloomberg.

Another way to structure partisanship at the local level, would be through the creation of a Libertarian-Populist party, that focused exclusively on local elections in big cities.

The Libertarian-Populist party could have the following platform:

1) opposition to tax-payer funded convention centers, stadiums, etc.

2) opposition to tax-increment financing, urban redevelopment, and eminent domain

3) opposition to restrictive zoning and occupational licencing

4) support for school choice and charter schools

5) opposition to the use of police and judicial resources to prosecute non-violent, drug offenses, combined with support for needle-exchange programs and possibly safe-injection sites. 

6) greater police oversight and opposition to more aggressive policing tactics like stop-and-frisk

It would be interesting to see if a platform like this could be successful in a major city.

*I think there is a decent case to be made that a lot of defense spending is "crony capitalism", but since most of the debate has not been focused on military priorities, i'm going to put it to the side for the purpose of this blog post.

Friday, 31 May 2013

Reform conservatives are reforming conservative commentary, not conservatism

There has been some interesting discussion in the blogosphere about the "reform conservatives". Ryan Cooper got it started a few weeks ago. Mike Konzcal was fairly dismissive of the idea. Reihan Salaam responded. So did Douthat. Jonathan Chait wrote a profile of Josh Barro and another blog post on the subject. I wrote about this a few weeks back.

Thinking more about the subject, the most striking feature of the reform conservatives isn't their policy preferences. Instead, reform conservatives have redefined their roles as commentators, vis-a-vis their relationship with the Republican party and greater conservative movement.

A few weeks back, Alex Pareene had a great post on Media Matters' effort to promote a series of anti-scandal talking points for liberal pundits to use. The greater conservative movement walks in lock-step--with journalists, party members, and activists working together to promote the conservative agenda. Talking points feature prominently within the movement, with bloggers, pundits, activists, politicians and activists coordinating on message. The liberal coalition doesn't exhibit the same level of coordination. Actual democratic party operatives--Stephanie Cutter, Paul Begala, etc.--would be willing to use a series of talking points to defend the party, but liberal journalists would be too embarrassed to do so. Liberal journalists see themselves as independent of their political party, in a way that conservative journalists do not. Kevin Drum has coined the term "Hack Gap" to describe this disparity.

The unifying principle of the reform conservatives is a tendency to act more like liberal commentators and less like conservative ones, in this regard. Unlike the conservative media in general, they don't really discuss Benghazi and don't think the Obama administration has spent the last four years telling the IRS to prosecute conservatives. These subjects don't interest them. And I bet if you asked them in private, they would say the conservative obsession with these scandals is a little silly. In contrast, most of the non-reformish content at the National Review Online follows the basic Republican talking points on these scandals.

The actual relationship of the reformists to the Republican party is more complicated. Frum and Barro have staked out positions as explicit critics, outside the party. While Salaam and Douthat are still best viewed as critics from within. Here is how Salaam described his relationship with the party to Chait:
When I interviewed Salam for my Barro profile, he was admirably candid about the political delicacy of his mission, which he described as being “part of a team” and “politically engaged.” What’s more, I’m not sure he’s wrong, either.
Regardless of these constraints, the reform conservatives do seem to be exercising an independent voice. That is why liberal commentators actually debate with, and respond to, them. The reformists are engaging in the exercise of policy debate and discussion, rather than partisan hackery.

The reform conservatives don't have a coherent set of views that they all share, so it is unlikely they will be able to coalesce around a "reform conservative agenda". Rather, they share a certain degree of independence from the Republican party. Whether this posture is sustainable within the current conservative movement is the big question.

The conservative echo chamber is a destructive force in American politics. Hopefully the reformers can weaken it and provide a breath of fresh air for the conservative movement.

Tuesday, 21 May 2013

Impeachment will happen because it doesn't do anything

I remember as a child being confused, that, after Bill Clinton's impeachment, he got to remain President. Since everyone was making a big fuss about it, I had just sort of assumed that impeachment meant he would get kicked out of office, and maybe even thrown in jail. The fact that he needed to be tried for removal by the Senate, and everyone knew that wasn't going to happen, made me question why impeachment was such a big deal in the first place.

This is why, I believe, Obama will get impeached. Impeachment doesn't do anything. The House of Representatives get to have a big show for a couple of days, subpoena some witnesses, raise some campaign cash, and then we all get to go back to regular business once the Senate refuses to convict.

The other reason I think Obama will be impeached, is the inability of the current Republican party, and the conservative noise machine behind it, to let things go. Here is how political scandals should work: Step 1) you find out something potentially politically embarrassing about your opponent; Step 2) you make a big deal about it on TV to embarrass them, and claim that this is just the tip of the iceberg; Step 3) once it becomes apparent that there isn't much more to find, you move move on. But the Republicans have a different strategy: Step 1) you find out something potentially politically embarrassing about your opponent; Step 2) you make a big deal about it on TV to embarrass them, and claim that this is just the tip of the iceberg; Step 3) keep doing this, forever.

I thought that the emergence of the "AP" and "IRS" scandals would give Republicans a chance to transition away from Benghazi allegations that weren't really panning out. But instead, they have doubled down on the allegations. If Republicans can't transition away from any scandal, the end game is likely to be impeachment proceedings.

Making predictions is always a bad idea. But I am relatively confident that Obama will get impeached at some point.

Monday, 20 May 2013

What's with all the Austerity?

Paul Krugman has a new piece in the NYRB discussing austerity. His thesis is that austerity is appealing for two reasons. First, austerity appeals to those who see economics through a moral frame, for which belt-tightening is needed to offset the high-living that went on during the economic boom. Second, austerity serves the class interests of the creditors and the wealthy.

Its a good essay. But I don't think one can adequately discuss austerity politics in the United States without acknowledging the partisan nature of the conflict, and the way the "centrist" press creates narratives to sort out the conflict.

In 2008, Bush and Pelosi came to an agreement on a, mostly forgotten, $150 billion stimulus package. The negotiations were focused around what the stimulus should contain, rather than whether or not there should be one. Likewise, during the 2008 presidential primaries, Republican candidates ran on platforms that included fiscal stimulus. While Obama was constructing the ARRA, both the Republican House and Senate put together fiscal stimulus plans. It is fair to say that, at that point, their existed a bipartisan consensus in favor of fiscal stimulus.

Once the ARRA passed, with the support of only three Republicans, it became an obvious target for partisan attack. The financial collapse turned out to be far worse than initially understood, so administration predictions about the ARRA's impact on the labor market looked naive in retrospect.

Of course, Republicans were never really interested in austerity. They wanted to cut spending for its own sake. That's why, during the 2010 debt ceiling standoff, they refused to raise taxes under any circumstances. (During the presidential primary debates, every single Republican candidate said they would turn down a 10-to-1 spending-cut-to-tax-increase compromise). At the same time, Democrats in congress were opposed to the idea of cutting spending in the middle of a recession.

Out of this partisan conflict, a beltway consensus emerged. The beltway press couldn't just say "Republican partisans are highjacking the economy in a disingenuous attempt to advance their policy goals." Instead, the narrative became that the Republicans were right to worry about the deficit, but were too inflexible on taxes, while Democrats weren't serious enough about deficit reduction. The centrist dialectic yielded the austerity position we have come to know and hate: "everyone knows" the deficit should be tackled with a combination of tax increases and spending cuts. That reporters cited Rogoff and Reinhart to provide economic gravitas to their newly found conventional wisdom, makes complete sense.

I don't understand Europe as well, so I'm going to avoid commenting on the sources of austerity there. But I think the morality tales that Krugman is discussing are the product of a Washington D.C. press corp searching for a political narrative that placed both parties in the wrong.

Friday, 17 May 2013

Narayana Kocherlakota Speaks

I like Minneapolis Fed Chair Narayana Kocherlakota. He used to be one of the "hawks" on the FOMC, but recently did a "180" and now primarily argues that monetary policy has been too tight. A public official changing their mind in response to evidence showing that they were initially wrong is the correct thing to do, but it doesn't happen very often. I saw him speak last year, and thought his comments reflected clear thinking.

He commented today on the relationship between monetary policy and financial stability. A topic I have written about before. What he says makes me a little nervous about the possibility of fed tightening, but I think his analysis is correct:
One challenge with this kind of policy environment—and this is closely linked to the overarching theme of this panel—is that low real interest rates are often associated with financial market phenomena that signify instability. There are many examples of such phenomena, but let me focus on a particularly important one: increased asset price volatility. When the real interest rate is unusually low, investors don’t discount the future by as much. Hence, an asset’s price becomes sensitive to information about dividends or risk premiums in what might usually have seemed like the distant future. These new sources of relevant information can lead to increased volatility, in the form of unusually large upward or downward movements in asset prices.
These kinds of financial market phenomena could pose macroeconomic risks. These potentialities are best addressed, I believe, by using effective supervision and regulation of the financial sector. It is possible, though, that these tools may fail to mitigate the relevant macroeconomic risks. The FOMC could respond to any residual risk by tightening monetary policy. However, it should only do so if the certain loss in terms of the associated fall in employment and prices is outweighed by the possible benefit of reducing the risk of an even larger fall in employment and prices caused by a financial crisis. Hence, the FOMC’s decision about how to react to signs of financial instability—now and in the years to come—will necessarily depend on a delicate probabilistic cost-benefit calculation.
As he notes, monetary tightening will certainly make things worse right away, and it should only be considered if we have exhausted all other better options, and we think the probability of a much worse financial crisis is so large that we need to just take our lumps now.

I'm skeptical that we should ever use monetary policy in this way, and believe that an aggressive macro-prudential response should be sufficient, in almost any circumstance, to alleviate this risk.

Tuesday, 14 May 2013

When does structural reform occur?

Noahpinion has an interesting post on the ideology of austerity. His main thesis is that austerity proponents believe that their respective countries require structural reform, and a demand driven recovery, unaccompanied by structural reform, would lead people to believe that structural reform isn't necessary. This would cause the political will required to accomplish the structural reform would dissipate.

This thesis makes sense. And was, sort of, confirmed by this WaPo piece. But I wanted to respond to Noah's last paragraph:
In other words, maybe people like the idea of austerity because they think an economic stagnation is our best chance to address what they perceive to be our long-term challenges. Allowing a crisis might be less terrible than wasting it.
Now, when stated that way, the idea sounds kind of silly - why don't we just periodically bomb our own cities, in the hope that governance will improve during the rebuilding? But I find it very difficult to state with any confidence that the idea is wrong. When economists discuss the costs of stabilization policy, they limit their discussion to distortionary taxation, unexpected inflation, and things like that. They almost never bring politics or institutions into the picture. The fact is, we just don't know how institutions really work. So I can't dismiss the idea that anti-recessionary macro policy might, in fact, rob us of our best chances to make needed reforms. (italics his)
I don't know that much about the political economy of southern Europe or Japan, but austerity advocates in the U.S. are wrong to think it is their best chance for structural reform.

Most advocates of austerity in the U.S. fall on the right side of the political spectrum. They generally favor lower marginal tax rates, reduced government spending, free trade, balanced budgets, less regulation, and "tax reform" (closing loopholes and lowering rates). With the exception of lower tax rates (which Republicans enact whenever they are in power), the major victories for these policies have generally come during periods of strong growth. Despite having a divided government for six years (and a Democrat in the white house), the strong growth of Clinton-era formed the backdrop for NAFTA, welfare reform, a bunch of deregulatory initiatives, and a balanced budget. Reagan's 1986 tax reform also came in the wake of three years of strong growth.

Their is a narrative on the right that the stagflation of the Jimmy Carter years helped usher in the Reagan revolution. There are aspects of truth to this, and certain Reagan political victories--the Kemp-Roth tax cut, the high-profile defeat of PATCO--occurred in the aftermath of the 1980 election. But the broader liberalization and deregulation of the U.S. economy took place duringthe great moderation period. A time of steady growth and low unemployment.

I would argue that this is to be expected. During periods of strong growth, supply side constraints become much more relevant and actually serve as an impediment to growth. (Matt Yglesias wrote about this a few months back.) And even though I personally think welfare reform wasn't good policy, the arguments in favor of it become much stronger--economically and politically--when jobs are readily available. For similar reasons, protectionism is much more popular during economic downturns, whereas, people are much more comfortable letting the market do its thing when the economy is booming. It really shouldn't be a surprise that strong growth in a capitalist economy is a good way to make the case for more capitalism.

Conversely, I think there is a decent argument to make that economic depressions produce structural changes preferred by people on the left. The welfare state was born in the great depression, and the recent recession has resulted in universal healthcare, the subsidization of "green technology" in the stimulus, and Dodd-Frank. Admittedly, Johnson's second term doesn't really fit this model, and seems to have been the product of unique political circumstances.

Maybe the austerians should rethink things.

Monday, 13 May 2013

Don't end the Fed, split it in two

One of my favorite thinkers on monetary policy is soon-to-be-former Deputy Director of the Riksbank Lars Svensson. Sweden was fortunate enough to have not been part of the euro in 2008, and was able to use expansionary monetary policy to avoid the worst of the 2009 recession. Their success was due, in part, to their willingness to pioneer new policy tools, like negative interest rates.

Since 2010, Svensson has regularly dissented from the Riksbank's decisions to tighten policy. His argument for looser policy is simple: unemployment is below the target rate, and long-term inflation expectations remain anchored, therefore, policy is too tight. If the central bank projects that looser policy would reduce unemployment, without raising long-term inflation expectations, they should loosen policy.

His views, and disagreements with other members of the Riksbank, are nicely explicated in this speech he gave last year. The other members of the Riksbank are concerned that looser monetary policy will lead households to take out larger mortgages, increase household debt, create a housing bubble, and cause financial instability. Svensson argues that these aren't concerns in Sweden right now. But his more important argument is that even if these were problems, monetary policy would not be the appropriate tool for dealing with them.

First, monetary policy isn't very effective at preventing housing bubbles. Second, other policy tools--mortgage-lending rules, capital requirements, etc.--would be more effective and more appropriate for maintaining financial stability. Svennson refers to these tools as "macroprudential policy", but it is what most of us think of as financial regulation. Matt Yglesias makes a similar point in a recent post, noting that: "If full employment exists and inflation is low and stable, then you should not deliberately engineer a recession for the sake of financial stability."

Even though monetary policy and financial stabilization have separate policy goals--the managing of risk within the financial system and macroeconomic stabilization, respectively--they are often conflated in discussions about policy. One of the sources of confusion is that both monetary policy and financial regulation are associated with a single institution--the Federal Reserve.

The conflation of the two policy goals has lead to reduced accountability, and a non-optimal use of expertise at the Fed. Because Fed officials are considered responsible for both tasks, the public has a difficult time determining how well they performed at each one separately. The best example of this is Alan Greenspan, who, for the most part, kept both unemployment and inflation low (signs of successful monetary policy), but also oversaw a withering away of lending standards and a large buildup of systemic risk (signs of failed macroprudential policy). Though his reputation has suffered since the crisis, the criticism of him is often of a general nature, with a failure to distinguish his real (and substantial) failings, from the aspects of his job that he performed well at. I am not trying to make a point about Greenspan being treated unfairly, but rather the way confusion about this topic reduces accountability. The current structure of the Fed also gives officials responsibilities for which they are not ideally suited. Some members of the Federal Reserve Board of Governors, for instance, Daniel Tarullo, are experts in financial regulation and macroprudential policy, but have no real background in monetary policy. Other members, such as Janet Yellen, are primarily monetary policy experts. It is not optimal to have these specialists spending time focusing on areas of policy over which they have no expertise.

In many instances, the proper coordination of financial regulation and monetary policy requires the regimes to work at, what superficially appears to be, cross-purposes. For example, if regulatory authorities felt that major financial institutions were overleveraged and at risk, they would need to require these institutions to raise equity ratios. This would usually cause a reduction in lending by these institutions, which would slow down economic activity. Monetary policy authorities should respond to these developments by loosening monetary policy, in order to prevent the slow down. This is counter-intuitive, but keeping the two policy goals separate helps clarify the correct policy action. Because we conflate these two goals, we often hear policy makers arguing that the Fed needs to tighten monetary policy to increase financial stability.

I haven't ironed out exactly how this should all work. Certain tasks, like operating the discount window, probably fall within the purview of both policy areas. I would love to hear other peoples thoughts on this subject.

P.S. Read Lords of Finance if you are interested in how similar confusion helped lead to the great depression. Also, read Jeremy Stein's recent speech if you want the opposing argument.