Friday, January 29, 2016

Ceteris Paribus (All else equal)

I don't know what my friends who do empirical work would think on this question, but it seems to me that if you wondered whether you'd ever see a Black Swan in our presidential politics, then Donald Trump's campaign and his becoming the clear favorite to get the nomination qualify as a good candidate (pardon the pun). Nobody saw this coming 18 months ago and once the campaign got underway nobody thought his tactics would do anything but alienate the electorate.  The alienation has happened - in Democratic supporters for sure.  But for those likely to vote in the Republican primaries, the tactics appear a tonic.   Welcome to the not so brave new world.

Conditional on the black swan, one wonders what other maintained assumptions really need to be discarded in favor of something that actually fits the current circumstance.  This week I've read several pieces to the effect that the Democrats would be crazy to nominate Bernie Sanders.  The argument put forward both by Dana Milbank and Paul Krugman, among others, is that real politics is incremental, half a loaf if you will.  Sanders rhetoric denies that reality.  He wants the whole shebang and tells you what that is.  In this regard his rhetoric is dangerous because it inflames expectations way beyond what is possible to deliver.  Voters will ultimately become disappointed and disillusioned, as many Obama supporters did when the Affordable Care Act ended up not including a public option.  Once that happens it makes the party vulnerable in subsequent elections.   Better to make steady progress, even if that is not quite so spectacular.

I want to challenge not so much this argument itself as the assumptions that make this argument rational.  But first I also want to note that this argument is enabling another, for example as articulated by David Brooks, that each side has it fringe candidate.  Trump is fringe for the Republicans.  Sanders is fringe for the Democrats.  (They both share that they've been drawing large crowds.)   To me, this is a false equivalence that should be resisted.  Trump is a demagogue.  Sanders makes reasoned argument.  There is no equivalence there whatsoever.

Let me to turn to the underlying assumptions.  The core of these can be found in the Median Voter Model as articulated in Anthony Downs' book An Economic Theory of Democracy.  In a democracy majority rules.  If you can identify a majority coalition, they can win an election.  The next simplification is that the populace can be arrayed along a single left-right dimension.  Then there is that elections within Congress (for what legislation can be put forward) are fundamentally different from elections in the general population.  Within Congress, votes can be bought, via side deals or modification to specific lines of the legislation.  This is the so called sausage-being-made part of governing.  It is not for the faint of heart.  LBJ was supposedly the master of this game.  Ideologues won't succeed here, because they are too rigid to find the possible.  A further assumption, and the one I find most problematic, is that voter preferences don't vary too much over time, so traditional left-right characterizations inform where the sensible middle can be found.  Let me get to that in a bit.

There are three other assumptions that need to be addressed first.  The first is about voter participation.  Discouraged voters don't participate.  Impassioned voters do.  This is especially important in the primaries, as it encourages candidates to drift to the extremes, where the impassioned voters are.  In turn, this discourages participation in the general election of independents who tend to be more middle of the road.  If a centrist candidate can capture his or her party's nomination, that candidate has a good chance of winning the general election.  The second is about divided government since the Tea Party came into prominence.  The result is gridlock instead of sausage making.  The third is about the role of money in election politics since the Citizens United case.  It, along with the gerrymandering of Congressional districts, assures that Republicans will maintain control of the House in the next election.

* * * * *

One should note that if the last two assumptions are right then it matters much less whether Hillary Clinton or Bernie Sanders becomes President.  Gridlock is gridlock.  The President does have the power to issue Executive Orders, so it does still matter.  But if voters are expecting the 21st century equivalent of LBJ's Great Society, they will be mistaken and rudely disappointed, especially given that the 5-4 majority at the Supreme Court would not take kindly to that agenda.

So it may be that the assumption regarding gridlock is the one that most Hillary supporters are willing to discard.  You see this, for example, in the column by Gail Collins yesterday.  After all, Bill Clinton was able to negotiate with Newt Gingrich.  (Though I believe much of that was myth; the government did shut down then.)  That is the precedent the pundits implicitly have in mind when assuming Hillary Clinton would be able to successfully negotiate with Congress.  But if you scan through the list of accomplishments then, many of those are related to changing Welfare to Workfare, i.e., taking an essentially conservative idea and getting legislation written on it.  This was further aided by the booming economy, creating an environment where such legislation makes the most sense.  (It makes far less sense now.)  Clinton also oversaw a lot of deregulation of financial markets.

Now the economy is in slow growth mode, a tepid recovery where wages have been flat for many over the last decade and where labor force participation rates are dismal.  The desired policy prescriptions of Democratic candidates are clearly opposed by the Republicans.  Can sausage be produced in that setting, even by the most consummate wheeler-dealer who has ever occupied the White House?  I suspect not.

There are two possible other contingencies to consider when ranking Clinton and Sanders.  One is blocking the Republican candidate from winning the election.  I agree that current polls are not very informative on this question, but the assumption that Sanders couldn't survive the inevitable onslaught he would face from the Republican attack machine is an untested proposition.

The other, one that is getting essentially no attention now, is that there will be so many Independents in the not Trump (or not Ted Cruz) camp that they actually end up swinging many Congressional races as well, enough so the Democrats take back the House.  Alternatively, it is possible that Speaker Ryan, in an attempt to show fairness and a spirit of bipartisanship, abandons the Hastert Rule, making for the possibility of a middle of the road coalition in the House to create a majority.   Each of these seem like a long shot to me, but in the year of the political black swan can such possibilities be entirely ignored?

* * * * *

If I recall correctly, President Obama didn't campaign at all in 2008 on the economic stimulus plan that was the first major piece of legislation under his new administration.  The last days of the Bush Administration produced TARP, which was administered mainly after Obama had assumed office. As such it was often confounded in the public's eyes with the stimulus plan.  Most people hated TARP because it bailed out the big banks, the culprits for causing the housing bubble and the subsequent downturn.  In turn, this made the stimulus itself also unpopular.

But the stimulus was absolutely necessary.  It had to be substantial and it had to be done quickly.  The economy was tanking.  There needed to be a way to stave off the next Great Depression.  As it was things got pretty bad.  If not for the stimulus, things might have been much worse.  It was far from an ideal piece of legislation and at the time there was debate that a larger package may have been better for the economy, but the administration acceded to the package they got because it was about as large as was politically feasible.

I am recounting this history because of what happened afterward.  While there were other subsequent moves by the administration on the macroeconomics front (Bowles-Simpson was one, though that ultimately went nowhere, and then there was a second stimulus of sorts during the lame duck session in 2010, while allowing the Bush Tax cuts to expire on the very wealthy) in essence the administration moved on.  There was the agenda it campaigned for, which eventually resulted in the Affordable Care Act, and there was a need for reform of the financial sector, which came in the form of the Dodd-Frank legislation.

So there was certainly a lot of activity and legislative accomplishment, but directly on the macroeconomics there was little going on after the initial stimulus package.  (This comment needs some clarification because the Affordable Care Act had as one goal to slow the growth in health care costs and I believe it has so far been somewhat successful in that regard.  In the long run, this is a necessary change.  In the near term, however, it does nothing to boost demand for final product.)

Right now, unfortunately, it is very difficult for politicians running for high office to make a coherent public case for the macroeconomic policy that is needed.  A good description of that necessary policy is given in Thomas Edsall's most recent column, Boom or Gloom.  (The economists mentioned are Barry Eichengreen and Larry Summers.) 

Eichengreen of Berkeley puts it this way in his chapter of “Secular Stagnation”:

If the U.S. does experience secular stagnation over the next decade or two, it will be self-inflicted. The U.S. must address its infrastructure, education and training needs. Moreover, it must support aggregate demand to repair the damage caused by the Great Recession and bring the long-term unemployed back into the labor market.

Summers similarly argues in the same book that reforms should include increased public investment, reductions in structural barriers to private investment and measures to promote business confidence, a commitment to maintain basic social protections so as to maintain spending power, and measures to reduce inequality and so redistribute income towards those with a higher propensity to spend. 

Now ask yourself whether the policy recommendations being put forward by either Bernie Sanders or Hillary Clinton deliver on these things.   In my view they don't; they're not even close.  Raising the minimum wage is a good and necessary thing, putting a tax on trades of stock also may be a good thing, and likewise for making college free.  But where is the increased public investment?  Where is our National Infrastructure Bank?  And where is the long term commitment to this sort of policy, instead of viewing the needed reforms as a one time shopping list?

A minimum wage job at $15/hour pays $30K/year, with no benefits.  We need the economy to be producing lots of good jobs that pay twice that in salary and offer decent benefits on top of that.  Where will those jobs come from?  What policies would encourage the economy to produce such jobs?  Why not start with these questions rather than already assume we know the answer in the form of off the shelf policy recommendations?   (Or, in contrast, why presume that the answer on this front is doom and gloom, placing the blame on globalization and structural changes in the economy, and that no policy can deliver on producing a high volume of decent jobs?)

The so-called Reagan Democrats who now seem to be in the Tea Party fold are there because they are incredibly skeptical that effective policy can be had to address this challenge.   That much is clear.  But it is unclear whether the skepticism is at root that the system will always serve the monied interests or if, even when the system aims to promote the general interest, it is largely ineffective.  In this distinction there lies the path to a third possibility.  The system works as intended in support of the general interest.  In other words, those $60K jobs out there are possible, if only there is the will and commitment to work toward creating them.

This is what I was thinking about where in the first part of the essay I said the old left-right distinctions might not be stable over time.  A Reagan Democrat might return to the liberal fold if the liberal approach were seen as capable of producing good jobs.  The issue at root is not left or right.  It is whether one has a sense of agency about government or not.  A conservative in this dimension might be that way because the sense of agency is lacking.   Restore faith in that government can work and the same person changes the party they support.  (To be fair here, the switch might go the other way as well, where the person originally trusted government, then got burned so lost the faith.  That, in my view, explains how people regarded government after the housing bubble burst.  I'm wondering if there's been enough time and difference between the approaches of the two parties since, for the switch to happen now in the reverse direction.) 

But we are not getting the question posed about how might we generate good jobs in this economy.  There is a political explanation for why not, which is the belief that every policy must be paid for and if the policy entails additional government spending then there must be additional revenue to match that spending. Otherwise, God forbid, the deficit will go up.  The national debt serves as the scary boogie man that frightens away open discussion of what is economically necessary to do, and allows the political rhetoric to be invariant to whether we are at full employment or not.  Along these lines Sanders, in particular, has been disciplined about his policy prescriptions, making them balance budget-wise.

Alas, that is not what the economy needs now.  As long as we we limp forward in this under achieving, low growth, and underemployment way we need some good old fashioned Keynesian stimulus.  Lots of it.  And the country is desperate for physical capital infrastructure investments.  Roads are one indicator that should be visible to anyone.  They're in terrible repair right now.  Many need complete replacement.  This need is evident.  Somehow, we've gotten into the mindset that we can't afford to make such necessary investment.   The reality is that we can't afford not to.  We've lost the will to do the necessary things.  We need to recapture that capability and that sense of responsibility that goes with it.

* * * * *

Our nation is a republic, not a direct democracy.  Our representatives should be doing their best to serve the interests of those that voted them in, but in so doing they need to exercise discretion.  That discretion pertains to how they perceive the environment when they are governing (sometime after the election when the situation could be quite different) as well as to which policy actions to pursue because they are beneficial and satisfy the art of the possible.  Somehow our campaigns have moved from talking about issues in broad strokes, where you judged the candidate by the narrative produced, presumably one that guides how the candidate would exercise that discretion, to a list of policies that may or may not be a good fit for what now ails us.  This policy list announcement provided during the campaign then serves as a commitment to pursue those same policies once in office.  In other words, this new form of campaigning has made us more rigid in our politics.   We don't trust politicians to exercise discretion on our behalf.

But this has been harmful for economic policy.  It makes it seem like we know more than we do up front (ergo the list of policy solutions), so precludes taking an experimental approach to policy making.  It makes us very impatient to see results and encourages us to become disillusioned when good results don't happen right away.

The quotes from Eichengreen and Summers provided above give very broad brush desiderata for economic policy.  Let me focus on only Summers here, because unlike Eichengreen Summers has held important public policy positions in the Clinton and Obama regimes.  Further, Summers has gone through a substantial change in world view over that time.  (He might argue that his world view has remained the same, but circumstances have changed.  Even with that qualification, however, if he let his guard down a bit he might express regret at his past policy pronouncements.)  Under Clinton he became a disciple of Robert Rubin and a pretty ardent free trader, perhaps immediately beneficial in the late 1990s but subsequently sewing the seeds for some of the financial improprieties that led to the subprime crisis.   Under Obama he seemingly opposed Christina Roemer, who argued for a larger stimulus, saying the package they got was the maximum that was feasible; hence it would have to do.  But, he under estimated how severe the recession would be and he over estimated how well the economy would perform in recovery.

Summers seems suitably chagrined at his past policy positions and now, not currently in government, he seems to be talking the message that we need to hear.  Economic policy should be about curing what ails the economy.   It should not be subservient to any other agenda - political, ideological, the careers of the policy makers, or benefiting the few at the expense of the many.  Summers provides a description both of the very real and severe problems the economy is facing and of what the solutions need to do that address those problems.  For the first time in a very long time, I find myself in accord with Larry Summers about what needs to be done on the economic policy front, at this broad strokes level.

I am under the impression that it will be impossible to build a consensus for this sort of economic policy by election day, so regardless of whether one opts for Bernie or for Hillary, we should assume that consensus won't be there.  The issue then is whether that consensus might emerge after one of them becomes President and whether we can say anything now about one of them making that possibility more likely.

This is a matter of guessing as to the answer.  My guess it that it will be more likely under Hillary - for two reasons.  One is that she doesn't seem as wedded to her current list of policies.  That affords her flexibility that Bernie lacks.  The other is that this message is likely to emerge from Summers and then those indirectly connected to him (Lloyd Blankfein, for example).  In other words, the Summers message may start to be echoed by Wall Street, as odd as that may sound now.  If and when that happens, Hillary will be in a far better position to hear that message, precisely for the same reasons that appear to be only liabilities for her now - she is somewhat beholden to Wall Street; Bernie is entirely antagonistic to them.

This is pure speculation on my part.  But that what we perceive to be weakness and indications of character flaws in a candidate's makeup - the candidate sold out to the money guys - ends up turning into an asset for running the country - seems like the right sort of irony where there might end up being some truth here.  And by right I don't mean predictive.  None of what I'm saying would I bet on with confidence.  Rather, when I say right I mean that the argument is not reductive.  It allows us to be surprised because some of our assumptions prove wrong and we show some awareness in advance that not all our assumptions are hardened truths - if only we knew ahead of time which ones those were.

The reductive sort of argument that the pundits are making ends up being disrespectful - of the candidates and of the voters.

Maybe I should stop reading the Opinion page of the NY Times and cease following up on the reading recommendations my friends make in Facebook.  For now, I've had my fill of the pundits.

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