Why the Republicans Won't Change

There has been a lot of discussion in the wake of the 2012 election of the need for the Republican party to alter. The general thesis has been that the Republican party needs to do more to appeal to non-white, young, and female voters. This is a correct analysis of the electoral challenge facing Republicans, but I think it overlooks the nature of political parties.

The press generally has a very candidate-centered view of political parties, and has focused on the degree to which various candidates--Bobby Jindal, Marco Rubio, Jeb Bush--can move the Republican party in a direction is more appealing to voters. This narrative represents an incorrect view of parties.

In "The Party Decides", a quartet of political scientists make the argument that parties are actually coalitions of policy demanding groups with narrow interests. These interest groups negotiate amongst themselves and decide on a presidential nominee who is generally acceptable to all members of the party coalition. From this perspective, the Republican party can be thought of as an alliance between the social conservatives, small government conservatives, Neocons, anti-environmentalist business organizations, nativists, etc.

In the recent election cycles, nominally moderate candidates--Romney, McCain--have shifted their positions to the right on a number of issues, in order to be acceptable to these groups.

For the party to really change there would have to be a largescale realignment, effectively destroying the party as we know it, or all of the policy demanding groups would have to simultaneously ease their demands for fealty from candidates. I see no evidence of a realignment happening, and policy groups are unlikely to ease demands for two reasons. First, these groups exist for the very purpose of demanding certain policies. Second, if one group eases its demands it will effectively cede some of it's power to other groups, this creates a collective action problem within the coalition, with each group fearing that by easing its demands, the others will take advantage to gain more power within the party.

What we will see instead is a series of candidates trying to appear moderate and electable, while convincing each of the groups that makes up the Republican party that he or she (probably he) won't sell out their cause once they are in office. The potential nominees don't actually have the power to pull the party in a different direction--because they aren't the party, they are just the politicians.

Deficits and Full Employment

Joe Wiesenthal has a great piece at Business Insider showing that our deficit problem is really a growth and unemployment problem.

The basic point is that short term deficits are driven by recessions, which cause tax revenues to fall and spending to increase relative to GDP.

He goes on to note that inequality has been steadily increasing: "If this inequality is something that's of concern, and something worth addressing, then taxes should be one part of the discussion in addressing them." He is correct that taxes should be one part of the discussion, but I wish he had spent some time noting that one of the ways to help reduce inequality is to demand more aggressive counter-cyclical policies from the Federal Reserve and Congress--policies that would simultaneously reduce budget deficits.

I think one of the tragedies of the politics of the "99%" is that it focuses too heavily on taxing the wealthiest, while ignoring the importance of full employment.

Bipartisanship

A few weeks ago, Charles Krauthammer argued that Obama's original fiscal cliff offer--where he refused to concede anything--wasn't about deficit reduction, but was rather a cynical effort to fracture the Republican House majority:

Such nonsense abounds because Obama’s objective in these negotiations is not economic but political: not to solve the debt crisis but to fracture the Republican majority in the House. Get Boehner to cave, pass the tax hike with Democratic votes provided by Minority Leader Nancy Pelosi, and let the Republican civil war begin.

Since then, Obama has moderated his position substantially, reducing revenue demands and increasing the amount of spending he is offering to cut. Nonetheless, Krauthammer went on Hannity and repeated his claim:

He’s been using this, and I must say with great skill–-and ruthless skill and success–to fracture and basically shatter the Republican opposition… His objective from the very beginning was to break the will of the Republicans in the House, and to create an internal civil war. And he’s done that.

I think Krauthammer was completely wrong the first time, but basically correct the second time.

There isn't a single Republican in congress who would have been willing to support Obama's initial offer, as a result it would have been a terrible vehicle for creating splits in the Republican ranks. Republicans were able to unite in opposition to that offer, denouncing Obama as negotiating in bad faith.

Since that first offer, Obama has tried to be more realistic, proposing plans that some Republicans would vote for, but would still be acceptable to most Democrats. Krauthammer is right that the goal is to split Republicans. But with such wide political differences between the most conservative Republicans and the Democratic leadership, any Bipartisan solution requires this.

Push Back the Fiscal Cliff

With the Republicans in a state of confusion, I think Obama should attempt to push the Fiscal Cliff back a year or two. This strategy isn't being discussed much, but I think it would lead to a good outcome for Democrats in both the short and long term.

First, Democrats should have a long-term goal of returning all taxes to Clinton-era levels. Funding government programs that liberals favor requires this amount of revenue. Pushing back the fiscal cliff preserves the option for Obama to unilaterally return tax rates to those levels in a few years. At the point the economy will likely be stronger and hopefully the market trusts the new, more aggressive, federal reserve to sustain nominal spending in the face of a tax increase.

Second, the sequester mechanism makes no sense at any point. But the spending cuts less devastating in a year or two, for the reasons stated above.

I know Obama promised to raise taxes on the rich, but one or two years of additional revenue from those making over 250,000 isn't that helpful to the U.S.'s fiscal position. The Republicans will probably claim it as a political victory--taxes didn't go up on the rich--but it will be a substantive victory for Democrats. Obama will have achieved both his short term goal (avoid the fiscal cliff) and will have paved the way for what should be the Democrats long term goal (clinton-era revenue levels). The current aim of permanently extending tax cuts for those making under 250,000, while letting tax cuts expires for those above that amount, prioritizes the political over the substantive, and makes future cuts to government programs more likely.

Hindsight is 20/20, but I think liberals should have used the attention being paid to income inequality as an argument for shoring up and expanding government programs, not as a call to tax the rich.

Bizzare Ideas from the NRA

The NRA held a press conference this morning where they advocated the placement of armed cops in schools, in order to prevent future tragedies like the one in Newtown. This idea strikes me as a weird abdication of what seems to be their purpose as an organization. The NRA and fellow second amendment advocates usually promote an ideology and policies that support an armed citizenry; the idea being that we cant rely on the government or its agents to protect us or loved ones. This type of suggestion cuts against that purpose; with more cops there really isn't any reason to own a gun, unless you are worried about the cops--in which case you shouldnt be arguing for them to be placed in schools in the first place.

Svennson Strikes Back

Lars Svennson, deputy director of the Riksbank, has been publicly disagreeing with his colleagues over the proper role monetary policy. The other day he gave a speech at the the BIS trying to clarify the differences in opinion.

I recommend reading the entire speech, but, broadly he believes conditions in Sweden (high unemployment, low inflation) warrant looser monetary policy. His colleagues are concerned that looser monetary policy will 1) encourage households to take on too much debt; 2) the debt will be used to buy houses; and 3) housing prices will rise too much. Their concern is that this creates instability in the financial system and leaves it vulnerable to drops in housing prices.

Svennson notes that currently household debt and housing prices are at stable levels, while unemployment is high, and thus, even within their framework, they should still be advocating looser policy. However, his larger point is that monetary policy isn't a very effective tool for dealing with these problems. He argues that these problems are better remedied by "Macroprudential Policy" initiatives like rules on mortgage lending.

I think this is an important point. It seems like monetary policy officials throughout the world are trying to juggle too many balls; the ECB is really concerned about the fiscal policy of some of its constituent countries. Narrowing monetary policy makers' focus to unemployment and inflation makes it more clear where and when they are failing to provide sufficient demand.

Secession Won't Solve all Your Problems

Dave Weigel posted this funny article about the man who started the Alabama petition to secede on the White House's misguided "We The People" site. The man, Derrick Belcher, used to own a topless car wash before it got shut down by government officials for being in violation of obscenity laws. After Obama got reelected Belcher decided enough was enough and started the petition to secede.

What's interesting is that his, supposedly profitable, topless car wash business was actually shut down for being in violation of an Alabama state law. He really shouldn't have any beef with the feds at all! In fact, starting a car wash business requires navigating a series of state and local regulations. Car washes can't be placed in most locations because of local land use laws. Furthermore, you would likely need a state permit to open a car wash because of laws about discharging wastewater. There are, of course, applicable federal regulations, I'm sure the EPA says something about how you dispose of your wastewater and there are federal employment laws and such. But, in general, a lot of laws and regulations are state and local. At the same time its easier to just say "big government", blame Obama, and petition to secede.

A Problem in the Fed's Structure

There are a number of problems with Federal Reserve decision making. But one that I think has been overlooked is the problem created by having the Fed serve two somewhat unrelated roles; monetary policy and financial stabilization. This seems to have lead to a problem in its institutional structure.

Broadly, financial stabilization encompasses the regulatory aspects of the Fed that seek to ensure a stable banking system. Monetary policy, on the other hand, involves macroeconomic stabilization through demand management. As Lars Svensson has pointed out, these are different roles, with different goals, and should be managed by different public officials.

In the Federal Reserve system the monetary policy role is conducted by the Federal Open Markets Committee (FOMC). This committee is made up of the Board of Governors of the Fed (appointed by the President and confirmed by the Senate) and a rotating group of regional presidents (selected by private banks in the region).

The regional presidents tend to be more hawkish in their approach to monetary policy, reflecting the views of  local banks within their regions. Appointing more dovish members to the Board of Governors should balance this out, however, in trying to negotiate the Fed's two roles, the President will often appoint regulatory and financial experts, with little experience in monetary policy. For example, currently the only two members of the Board with clear backgrounds in macroeconomics are Ben Bernanke and Janet Yellen. The rest seem to have been chosen because of their backgrounds in regulation and financial markets. (Note: Jeremy Stein gave a very good speech on Monetary Policy at Brookings recently, so maybe he knows more than his resume suggests) The regional presidents tend to generally be economists. This presumably tilts FOMC debate away from more dovish/expansionary policies, as fewer voices in the room are both economic experts and appointed by Washington.

Creating a separate Board for regulatory supervision or reserving additional seats for macro-economists could help remedy this problem.

Fact Checkers

Without getting into the weeds of Candy Crowley's mid-debate "fact check" last night, I wanted to post a quick thought on "fact checking."

Fact checkers are needed because most members of the media prefer to cover the horse race. It's easier to cover. Most readers prefer it. However, that leaves a big gap in the coverage of the substantive claims made the candidates.

Fact checkers shouldn't try to hard to evaluate if a claim is true, rather, they should provide readers with the background information and context from which they, themselves, can evaluate the truth of what a candidate said.

Giving out a certain number of Pinochio's with their pants-on-fire is gimmicky, and it takes away from they are needed for; providing the background information required for examination of the factual assertions made on the campaign trail.

How to Reduce Inequality

The Economist recently had an article on inequality that I found annoying. They claim to have put forth a "radical centrist" proposal to reduce inequality. Unfortunately, their proposal reads more like a lame centrist proposal, with the usual centrist talking points: school reform, eliminate deductions in the tax code, reform entitlements, etc. Their advice for third world countries is basically to discontinue poor government policies (the Chinese Hokou system, fuel subsidies).

The problem with these reforms is that they don't really have much to do with inequality. Or at least they aren't ways to attack inequality directly. Here are three ideas:

1) Let people from poor countries move to rich countries. This is the best way to reduce global inequality. When people move to the U.S. from a third world country their real income will almost always go up.

2) Use our tax system to redistribute money from rich people to poor people.

3) Use monetary and fiscal policy to reduce unemployment. When unemployment is low more people have jobs, and those who have jobs can more easily bargain for a raise.

It's fine if you don't like these ideas, or are concerned about secondary effectss. But this is how you attack inequality. The Economist just took a bunch of policies they already favor and then claimed enacting those policies is the way to reduce inequality. It's really disingenuous.

Fiscal Cliff and the Upcoming Election

Jonathan Chait has a good post on the importance of the upcoming presidential election. His argument is basically that if Romney wins and the Republicans get 50 senators they will be able to use "budget reconciliation" procedures to pass the Ryan budget. Whereas, if Obama wins, because the Bush tax cuts automatically expire at the end of the year, he will plenty of leverage.

What's interesting is that it is sort of unclear at this point what Obama will use this leverage for. It would seem that the top progressive priority would be some form of cap-and-trade/carbon tax legislation. Obama could try to pair a renewal of the Bush tax cuts with a carbon tax. However, this hasn't really been discussed by the administration. My prediction is that he renews the middle class tax cuts, lets the cuts for those making over 250,000 expire, oversees the implementation of Dodd-Frank and Obamacare, and hopes that the economy is in better shape in two years and the Dems can take back the house. Environmental advocates should see this as an opportunity for Obama to push for carbon legislation.

Dual Mandate

There is a lot I disagree with in Senator Corker's FT op-ed calling for an elimination of the dual mandate, but I found the part where he valorizes the Bank of England and ECB to be the most wrongheaded. The Eurozone and Great Britain are both doing terribly economically. In both cases this is largely due to their inadequate monetary policies. If we want to look to other central bank's as a way to improve our own we should be looking to those in countries that have for the most part avoided the worst of the recession--Canada, Sweden, and Israel.

Ryan is a fine VP pick

There has been some excitement from Democrats about the Ryan pick. Some feel like his budget will sink the Romney campaign because the medicare cuts are unpopular, etc. I don't think this is the case for two reasons. First, the VP pick doesn't really matter. Second, Ryan is above all a good politician. Despite voting for all the Bush spending he has been able to reposition himself as a small government conservative with conviction. I have no doubt that he will be able to explain to voters that his budget plan may have been too aggressive but he wanted to get people talking and thinking about serious entitlement reform. On 60 minutes last night him and Romney got a lot of softballs but Ryan showed that he has a real knack for answering questions slightly different from those posed to him by interviewers with a lot of detail and specifics, making it seem like he answered the question posed. He also talks fast so he seems really smart (the Sorkin effect). I might be wrong but I think its a fine pick by Romney.

Loyalty Cards

Kevin Drum has a new post as part of a back and forth with Matt Yglesias and a few other economist types about price discrimination and loyalty cards.

Drum began by making the point that those of us who are savvy enough to be getting a better price are doing so at the expense of those who are getting a worse price. Yglesias counters by arguing that everyone pays the normal price and loyalty card owners trade off the use of their consumption information for a lower price. Furthermore, any non-loyalty card price gouging is the result of a supermarket having a local monopoly--something that occurs even without loyalty cards.

I tend to side with Yglesias but I think Drum needs to focus his argument more. He doesn't really seem opposed to price discrimination in the abstract, rather he doesn't like loyalty cards specifically. His arguments seem to be 1) they don't help poor people--as the poor (and elderly) aren't necessarily the savvy consumers who take advantage of cloyalty cards; and 2) poor people can't afford to pass up loyalty card prices--so they are forced to give up personal information.

These two arguments seem somewhat contradictory but I think the bigger point is that Drum needs to make the case as to why loyalty cards should be eliminated as part of public policy. As a society we don't favor economic efficiency over all else (prostitution is illegal) and we have various consumer protection laws. If Drum made the case that these loyalty cards really are either 1) shifting costs from wealthy consumers to poorer ones; or 2) coercing people into revealing information that corporations were using in an insidious manner, then I think Yglesias and co. would agree that they should be eliminated. But he needs to actually make that case because there doesn't seem to be anything inherently wrong with the loyalty card price discrimination scheme.

In Defense of Multi-Decade budget planning horizons

Earlier today Matt Yglesias tweeted this:

"Ryan specifics aside, the DC wonk fetish for multi-decade budget planning horizons is inherently ridiculous."

This is something he has discussed before. Broadly his point is that if we enacted the Ryan budget there is nothing preventing politicians 10 years from now from restoring medicare commitments to what they are currently.

This is true, but I think it misses a larger issue that there is a strong status quo bias in the American political system, and large changes usually persist for many decades. If the Bush tax cuts werent expiring it is hard to imagine Obama making the case to raise tax levels for those making over 250k. Medicare and Medicaid persist. So does social security. Government makes commitments, citizens plan around those commitments, those commitments become popular. This creates a path dependency that makes large changes in government commitments semi-permanent.

I do think that large cuts to medicare now would be important in 30 years. And for Ryan, reducing medicare funding would change the 30 year fiscal outlook.

A Simplified Tax Code Isn't a Good Thing

A certain set of political writers and politicians advocate for "tax simplification". The idea is that by eliminating tax exemptions we can reduce overall rates and this would be a good thing. This is often held up as the type of bipartisan reform that would happen if congress could get it's act together.

The problem is that nobody really believes the government should be neutral towards all activities. As Matt K. Lewis points out the tax code favors activities like having children and home ownership. The tax code also discourages activities like consuming tobacco and cigarettes. In order to raise revenue, federal, state, and local governments need to enact taxes. An ideal tax code would be one that focuses these taxes on activities with negatives externalities and reduces the tax burden on activities with positive externalities. This would not be a simple tax code.

The real arguments over taxes is whether and how much the government should redistribute wealth away from the wealthy towards the poor and which activities have negative (carbon? alcohol? gasoline consumption?) and positive (having children? building a church? charitable giving? building affordable housing? "green" technology development?) externalities. These are political arguments that reflect real disagreements between the right and the left.

There are definitely issues with the corporate tax code that reflect political economy problems and should be resolved through simplification but in general a simplified tax code isn't necessarily a good thing. And there are very few tax reforms that can be done in a nonpartisan way.

Towards a theory of FOMC inaction

As most people know Ben Bernanke was a major critic of the timidity of the Bank of Japan. That's why its been strange to see the FOMC unwilling to take further accommodating action despite this economic forecast:

The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

I think the reason for this is the quasi-unanimous nature of Fed policy making. For a number of reasons (some probably legitimate) the FOMC seems to feel like it needs to act under appearance of near unanimity.

Every single FOMC statement so far in 2012 has had a single dissenter in Richmond Fed Chair Jeffrey Lacker, who usually didn't support the commitment to near-zero rates through 2014.

In 2011, all FOMC statements were unanimous, except for 3 where Chicago Fed Chair Charles Evans called for additional accommodation, and 2 meetings where 3 of the regional heads (Fisher, Plosser, and Kocherlakota) dissented.

In 2010, Hoenig was the sole dissenter on every statement calling for tighter policy.

In 2009, the decisions were unanimous except for a single dissent by Lacker.

In 2008, you see similar patterns including an absurd call by Fisher to raise rates on August 5.

In the last few years we see zero dissents from members of the board of governors, very few dissents generally, and almost all of them in the direction of tighter policy.

The FOMC's website describes their decision making procedure as: "the Committee must reach a consensus regarding the appropriate course for policy" (Note: the actual rules of procedure don't seem to require this)

I will try to dig through some of the minutes of old meetings to investigate this further, but generally my thesis is that; 1) the FOMC has adopted an informal rule that decisions will only be made through quasi-consensus; 2) none of the members of the board of governors is willing to dissent; and 3) by stressing consensus the FOMC is unable and unwilling to take bolder action which would necessitate revealing broader disagreement within the FOMC.

Base Broadening

The Tax Policy Center released a great study today (pdf) on the distributional effects of a generic, Romney/Ryan style, revenue neutral, base broadening plan. This type of plan cuts income taxes for those in the highest tax brackets and eliminates many tax deductions that favor low and middle income households. As you can see below this type of base broadening will reduce after tax income for Americans making less than 200,000 a year (around 95% of the population).

I think it's important to note that this kind of plan probably wont happen. The tax deductions that need to be eliminated to make the income tax cuts revenue neutral are very popular with the middle class. These include the mortgage interest deduction, EITC, child tax credit, exclusion for employer-provided health insurance, and the deduction for charitable contributions. Most politicians benefit from the charitable contributions deduction and the Home Builders Association likes the mortgage interest deduction. I think if Romney wins we will end up seeing a permanent extension/reenactment of the Bush tax cuts, but no offsetting elimination of deductions.