"Misapplying the theory I mislearned in college."

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Economism: Special Holiday Offer

Mon, 12/05/2016 - 17:34

By James Kwak

As you may have noticed by now, I have a new book coming out. It could be a perfect holiday gift for, well, maybe a handful of people out there—the father-in-law who wonders why our country’s economic policies are so screwed up, or the annoying libertarian niece who insists that we should get rid of public schools and privatize the police force, or the progressive friend who studied anthropology and is unnecessarily intimidated by economics. But even if you pre-order it, you won’t get it until around January 10.

So, here’s the offer: If you pre-order a copy of Economism as a gift for someone, I will mail you a signed card with the image of the book jacket on the front and, on the inside, an explanation of what the recipient is getting (i.e., a book that will arrive in January). That way you can give the person the card instead of the book. If you want a card, send me an email at james.kwak@uconn.edu with your name and address and the name of the person I should inscribe it to. I am planning to mail the cards out by first class mail on Saturday, December 17 (from Massachusetts), which will give them a full week to get to you before Christmas. If you need one sooner for a different holiday, let me know and I’ll do what I can.

If you send me an email by Sunday (December 11), I expect to be able to send you a card. After that point I can probably do it, but I can’t guarantee it because it depends on how many extras I order in advance.

Have a happy holiday season.

More on the Deduction Fairy

Fri, 12/02/2016 - 14:50

By James Kwak

[Updated with Mnuchin’s position on charitable contribution deduction.]

I wrote two days ago about the fairy tale that you can lower tax rates for the very rich yet avoid lowering their actual taxes by eliminating those mythical beasts, loopholes and deductions. The basic problem with this story is that, at the very high end of the distribution, deductions and exclusions (with the possible exception of the deduction for charitable contributions) just don’t amount to very much as a percentage of income. Therefore, eliminating those deductions may increase rich people’s taxes by tens of thousands of dollars, but that is only a tiny proportion of their overall tax burden, and not enough to offset any significant rate decrease.

Unlike me, Daniel Hemel and Kyle Rozema are actual tax scholars (Hemel has a blog on Medium), and their detailed research largely tells the same story. They have a forthcoming paper that analyzes the mortgage interest deduction (MID) and shows that, while it is worth more dollars to rich people than poor people (for all the well-known reasons—bigger houses, higher marginal rates, itemizing), the MID causes people in the top 1% to pay a larger share of the overall tax burden. Therefore, eliminating the MID and using the increased tax revenue to reduce tax rates for everyone (what Mnuchin proposed in concept) would be a large windfall for the top 0.1% and a small windfall for the rest of the 1%.

The numbers are in the last column of this table:

The Proportionate column shows the distributional effects of repealing the MID and using the money to reduce everyone’s taxes in equal proportion, which are even worse. (The only good outcome is the Per Household column, which uses the revenue from eliminating the MID to give every household a flat $558 tax rebate, but no one is talking about that.)

Hemel and Rozema do a similar analysis of the deduction for state and local taxes, which I didn’t mention in my post (and which many rich families can’t take because of the AMT). The basic story is the same: repealing the deduction to lower rates is, again, a windfall for very rich families.

The only deduction that turns out to increase inequality under this approach is the one for charitable contributions, because there is no practical limit to the possible size of such donations. (And guess what? Mnuchin doesn’t want to touch this one!) Eliminating this deduction could cause the rich to pay more in taxes, but they could easily maintain the same level of disposable income simply by donating less to charity. In other words, tax revenues would go up, but the money would effectively be coming from charities, not from rich people.

So, there is no deduction fairy. You can’t cut tax rates in anything like the way the Trump administration proposes without vastly increasing inequality. Once again, it’s a conceptually plausible idea that is providing air cover for a massive raid on government services to benefit the very rich.


Economics 101, Economism, and Our New Gilded Age

Fri, 12/02/2016 - 09:40

By James Kwak

My new book—Economism: Bad Economics and the Rise of Inequality—is coming out on January 10 (although, of course, you can pre-order it from your local monopoly now). If you’d like more information about the book, the book website is now up at economism.net. (I used Medium instead of WordPress.com this time.) The post below, which is also the top story on the book website, summarizes the main themes of the book.

Income inequality is at levels not seen for a century. Many working families are struggling to get by, only kept afloat by Medicaid and food stamps. The federal minimum wage is just $7.25 per hour—below the poverty line even for a family of two. The bright outlook for corporate profits has driven the S&P 500 to record levels. Surely it makes sense to raise the minimum wage, forcing companies to dip into those profits to pay their workers a bit more.

But that’s not what you learn in Economics 101. The impact of a minimum wage is blissfully easy to model using the supply-and-demand diagram that dominates first-year economics courses.

A price floor in the labor market—that’s what a minimum wage is—causes demand to exceed supply. The difference is unemployment, and the reduction in the employment level represents value lost by society. People who want the minimum wage are well-meaning but muddle-headed do-gooders who don’t understand economics. As Milton Friedman wrote in Capitalism and Freedom, “minimum wage laws are about as clear a case as one can find of a measure the effects of which are precisely the opposite of those intended by the men of good will who support it.”

That’s what Economics 101 teaches you—but it’s not what many economists actually think.

Economists polled by the Chicago Booth School of Business are evenly split on whether an increase in the minimum wage to $9—or even $15—would significantly increase unemployment. Professional opinion is divided exists because detailed empirical research is inconclusive, with several recent studies (e.g., Dube, Lester, and Reich 2010 and 2014) and meta-studies (Doucouliagos and Stanley, Belman and Wolfson) showing no significant impact on employment.

In policy debates and public relations campaigns, however, what you are more likely to hear is that a minimum wage must increase unemployment—because that’s what the model says. This conviction that the world must behave the way it does on the blackboard is what I call economism. This style of thinking is influential because it is clear and logical, reducing complex issues to simple, pseudo-mathematical axioms. But it is not simply an innocent mistake made by inattentive undergraduates. Economism is Economics 101 transformed into an ideology—an ideology that is particularly persuasive because it poses as a neutral means of understanding the world.

In the case of low-skilled labor, it’s clear who benefits from a low minimum wage: the restaurant and hotel industries. In their PR campaigns, however, these corporations can hardly come out and say they like their labor as cheap as possible. Instead, armed with the logic of supply and demand, they argue that raising the minimum wage will only increase unemployment and poverty. Similarly, megabanks argue that regulating derivatives will starve the real economy of capital; multinational manufacturing companies argue that new trade agreements will benefit everyone; and the wealthy argue that lower taxes will increase savings and investment, unleashing economic growth.

In each case, economism allows a private interest to pretend that its preferred policies will really benefit society as a whole. The usual result is to increase inequality or to legitimize the widening gulf between rich and poor in contemporary society.

I became aware of the subtle power of economism during the 2009–2010 financial reform debate, when bank lobbyists invoked economic logic to protect their clients’ profits from new regulations. As far as I can recall, I first wrote about it in a 2011 blog post titled “The Smugness of Unintended Consequences.” My new book, Economism: Bad Economics and the Rise of Inequality, offers an intellectual history of the rise of economism in the late twentieth century, case studies of its impact in several different policy domains, and—I hope—the tools to enable readers to understand both the merits and the limitations of arguments based on Economics 101. Because the first step in overcoming an ideology is understanding how it works.

The Deduction Fairy

Wed, 11/30/2016 - 16:18

By James Kwak

Incoming Treasury Secretary Steven Mnuchin promised a big tax cut for corporations and the “middle class,” but not for the rich. “Any tax cuts for the upper class will be offset by less deductions that pay for it,” he said on CNBC.

This is impossible.

The tax cutting mantra comes in two forms. The more extreme one claims that reducing the overall tax burden on the rich will turbocharge the economy because they will save more, increasing investment, and will also work more, starting companies and doing all those other wonderful things that rich people do. The less extreme version is that we should lower tax rates to reduce distortions in the tax code, but we can maintain the current level of taxes paid by the rich by eliminating those famous “loopholes and deductions.” Donald Trump the candidate stuck with the former: his tax proposal, as scored by the Tax Policy Center, gave 47% of its total tax cuts to the top 1%, who also enjoyed by far the largest reduction in their average tax rate.

Mnuchin’s comment implies that he favors the latter version: lowering rates but making it up by “broadening the base.” This math might work for the merely rich—say, families making $200,000–400,000 per year. Take away the mortgage interest tax deduction, the deduction for retirement plan contributions, and the exclusion for employer-provided health care—which together can easily shield $50–75,000 in income—and you could probably fund several percentage points of rate decreases. (Of course, it would be politically impossible to completely eliminate those tax breaks, but that’s another story.)

When it comes to the truly rich, however, there just aren’t enough deductions out there to eliminate. You can only deduct interest on a mortgage up to $1 million. The fanciest employer-provided family health plan isn’t worth more than $30,000 or so. The aggregate limit for employer retirement plan contributions is around $50,000. At the top end of the wealth hierarchy, where people make millions or tens of millions of dollars per year, these are rounding errors; eliminating these deductions wouldn’t even make up for a reduction in tax rates of a single percentage point.

There are some tax breaks that matter for very rich families. Only one is technically a deduction: the deduction for charitable contributions. But obviously that only affects (to a significant degree) a small number of wealthy people in any given year, and those people can work around any limits in this deduction by simply cutting back on donations. (By contrast, if you get rid of the exclusion for employer-provided health care, employees won’t respond by foregoing health care altogether.)

The biggest tax breaks for the very rich (as I’ve written about before) are the preferential tax rate for capital gains, the deferral of taxes on those gains until you sell the assets, and the step-up in basis at death (which means that, if you pass on assets to your children, no one ever pays tax on the appreciation during your lifetime). Given that Republicans have been trying to reduce capital gains tax rates for decades (with Paul Ryan occasionally saying they should be zero), we can be sure that preferential rates aren’t going away. Taxing gains in assets when accrued is also certain not to happen. Trump has in the past supported a version of eliminating step-up in basis at death, but that was along with slashing tax rates and getting rid of the estate tax, which would be a net win for the wealthy.

In short, the idea that you can reduce tax rates without reducing the tax burden at the top end of the income distribution is a fantasy on par with the idea that you can increase tax revenue by raising rates—plausible in theory but impossible given current reality. That Mnuchin is taking this line is simply evidence that the Trump administration will try to reconcile a massive tax cut for the rich with their fake-populist rhetoric for as long as possible. In the end, we know which one will win out.

What You Can Do

Thu, 11/17/2016 - 08:00

By James Kwak

Several of my friends, some of whom I haven’t spoken with in a long time, have reached out to me over the past week to discuss what to make of last week’s election. I imagine this is happening with a lot of people.

Although I don’t have any simple answers, I do have some thoughts on what we can do in response to the prospect of Donald Trump and the Republicans controlling the entire federal government, as well as a large majority of states. But first, we need a short detour—for a bit of perspective.

Maurice Walker is a fifty-five-year-old man with schizophrenia whose only income is $530 per month in Social Security disability payments. On September 3, 2015, he was arrested by police in Calhoun, Georgia for being a “pedestrian under the influence”—something many of us have been guilty of at one time or another. If Walker had been able to come up with $160 (something most people reading this blog could do in seconds), he would have walked free. Instead, he was locked up in jail, without his medication.

The City of Calhoun has a fixed bail schedule, in which the amount of bail is set for each offense, without regard for ability to pay. People arrested for misdemeanors cannot see a judge until the next Monday court session (which would have been eleven days for Walker, because the next Monday was Labor Day). This means that, among those arrested on the same charges, poor people are locked up for several days while rich people walk out of jail. This violates the Constitution. In Tate v. Short, 401 U.S. 395 (1971), and Bearden v. Georgia, 461 U.S. 660 (1983), the Supreme Court has held that the Constitution prohibits policies that systematically result in the incarceration of indigent defendants while allowing those with money to go free.

And yet it happens. Of the more than 600,000 people in jail in this country (not counting those in state or federal prison), 70% have not been convicted of anything and hence are legally innocent. Many of them are behind bars solely because they cannot afford to buy their pretrial release.

Being locked up before trial doesn’t just mean you lose a few days of freedom. Will Dobbie, Jacob Goldin, and Crystal Yang are studying the impact of pretrial incarceration on trial results and long-term economic outcomes. They find that people who are released are 27% less likely to be convicted and 28% less likely to plead guilty than people who stay in jail—which makes perfect sense, since you are more likely to plead if it’s your only way to go home and see your family. These effects are even larger for defendants charged with misdemeanors and those with no prior offenses in the previous year. In the long term, pretrial release increases by 27% the likelihood that people will be working three to four years later, with a larger effect for those who were working at the time of arrest. Again, this is obvious: If you miss work because you’re in jail, you could lose your job; and if you plead guilty to get out of jail, the conviction makes it harder for you to find work.

(For those worried about sample selection issues—that is, people who make bail are different from those who don’t—this study takes advantage of the fact that bail judges are quasi-randomly assigned in Philadelphia and Miami. The relative harshness of the judge is the instrument for pre-trial release.)

Maurice Walker was lucky. He got a lawyer. In fact, he got some of the best: Sarah Geraghty and Ryan Primerano of the Southern Center for Human Rights, and Alec Karakatsanis of Equal Justice Under Law. Walker was arrested on a Thursday evening. The next Tuesday, his lawyers filed a class action lawsuit against the City of Calhoun; Walker was released the next day. On January 28, 2016, a federal judge sided with Walker:

Any bail or bond scheme that mandates payment of pre-fixed amounts for different offenses to obtain pretrial release, without any consideration of indigence or other factors, violates the Equal Protection Clause. . . .

The bail policy under which Plaintiff was arrested clearly is unconstitutional.

The city is appealing the case to the Eleventh Circuit Court of Appeals; the Department of Justice, the American Bar Association, and the Cato Institute have all weighed in on Walker’s side.

What does Maurice Walker have to do with last week’s election?

The sad truth is that many people in the United States already had very tough lives before November 8. Besides Walker and the thousands of people in jail because they are poor, they include Cleopatra Harrison, a domestic violence victim who was threatened with jail because she could not pay a $150 “victim assessment fee” assessed by a court; A.J. and hundreds of other children who face criminal charges in juvenile court without being represented by a lawyer, in violation of the right to counsel; Aron TuffWilmart Martin, Andre Mims, Jeremiah Johnson, and other people sentenced in Georgia to life in prison without the possibility of parole for nonviolent drug offenses (all of whom are African-American); and Tim Foster, who was sentenced to death by an all-white jury after the prosecutor struck every African-American from the jury pool.

There is an ocean of injustice out there. Many of the people harmed by it are poor, minorities, immigrants, or some combination of the above. I only know about the examples above because I’m on the board of the Southern Center for Human Rights, which took all of those cases and was able to help all of those clients. There is no doubt much, much more injustice of which I am unaware.

The perspective is this: Things didn’t suddenly go from wonderful to awful on Tuesday night last week. For many people, they were already pretty bad. A Trump presidency will no doubt make things worse. There will be more hate crime; more deportations of people whose only crime is wanting to work hard and make a better life for their children; more and higher hurdles for women who want an abortion; more people without health insurance; more gun violence; and more hungry children unable to rely on food stamps.

These are all problems that our country had on the morning of November 8, and there are already organizations dedicated to helping the people who face them. As I said, I’m on the board of the Southern Center for Human Rights. We had a board meeting and benefit dinner in Washington last week. And while no one was happy about the national election, it didn’t change what the organization does; it just meant that the struggle will be that much harder for the next four years.

So if you want to “do something” about President Trump, the first thing you can do is donate money to some of the organizations that actively protect people’s civil and human rights. If you’re inspired to give money to the Southern Center, I can assure you that it won’t be wasted; we have some of the best lawyers anywhere, working as hard as they can for remarkably little money. (Today, November 17 is Georgia Gives Day, too, if you prefer to give that way.) But there are many other worthwhile groups out there: the NAACP Legal Defense Fund, the ACLU (perhaps particularly important given Trump’s attempts to intimidate the media), Planned Parenthood, or your local food bank, soup kitchen, or homeless shelter, among many others. At the end of the day, ordinary people will be the victims of the Trump administration, and they will need your help.

That’s the point I wanted to make today, but I imagine that’s not where you expected this post to end. So I’ll add a few words about the other thing that we need to do: take back at least partial control of our government(s). That is a much more difficult issue. You might say that Hillary Clinton lost by only 107,000 votes; by that measure, we only need a slightly better candidate, a slightly better message, or slightly better luck to win in 2020.

More realistically, however, with the small-state bias of the Senate (and the forbidding 2018 electoral map), gerrymandering in the House, and overwhelming Republican dominance of state governments, Clinton’s loss reveals how weak the Democrats already were. This is what I wrote back in June:

Republicans are apoplectic at the idea that Hillary Clinton could appoint the deciding justice to the Supreme Court, but the smart ones realize that she will be able to accomplish little else; even if by some miracle Democrats retake the House, Republican unity will suffice to block anything in the Senate. Democrats, by contrast, are terrified because a Republican president means that they will get virtually everything . . . : not just the Supreme Court, but a flat tax, new abortion restrictions, Medicaid block grants, repeal of Dodd-Frank, repeal of Obamacare, Medicare vouchers, and who knows what else.

The Republicans are dominant not just because of Trump, but because of the decades of work that preceded him: promoting the ideology, cultivating the funders, motivating the base, building the media empire, stocking the judiciary, weakening unions, undermining campaign finance rules, buying state elections, redrawing districts, and suppressing the vote. Yes, Trump was an unlikely leader to take them over the top. (And yes, he is popular among white supremacists.) But even if he hadn’t, the GOP would still be just one election away from a sweep of the White House and Congress.

There is a raging debate right now over the identity of the Democratic Party. I don’t to argue the specifics of that debate right now. But if we want to compete, we need more than a new, focus-grouped brand that can win 51% of the popular vote in a general election. We need an ideology that can mobilize millions of new voters and motivate thousands of people to run in races for school board, town council, state assembly, and state senate, all over the country. We need a long-term political movement, not a quadrennial scramble to demonize the other guy just enough so voters pick our guy.

I don’t know how to create that movement. So all I can recommend, on a personal level, is that you find people whom you believe in—on all levels of politics—give them money or volunteer for their campaigns, and throw your little bit of weight into pushing the party in what you think is the right direction. (Or, if you’re up for it, run for office yourself.) It’s not a great answer, but there is no magic bullet.



Thu, 11/10/2016 - 08:56

By James Kwak

[Updated to add another headline leading with “white voters.”]

Two days later, some of the world’s leading newspapers—or their headline-writers, at least—are saying it was all or largely about race:

The respective roles of race and class in this year’s election are a highly contentious issue. I’d like to add to that contentiousness as little as possible while pointing out that this race-based framing isn’t really supported by exit poll data. I want to get ahead of the vitriol by stipulating that the exit polls don’t provide conclusive evidence for either side.

OK, here’s the data:


Those are vote shares in the presidential election by racial or ethnic group. The numbers at the right show you the shift from the previous election.* In this case, the Democratic-Republican gap among white voters shifted by 8 points toward the Republican. That’s evidence that the election was about white voters, right?

Except those are the 2012 exit polls. The 8-point shift is relative to the 2008 exit polls.

Here’s the equivalent chart for 2016:

As you can see from the right-hand column, Trump did better than Romney among every racial or ethnic group. In fact, if you subtract off how he did among all voters (2 points better than Romney), his performance among whites relative to his overall performance was 1 point worse than Romney’s.

What about income? This is 2016:

There are two factual statements you can make about this picture. One is that Trump lost the “working class” (under $50,000) vote. You will hear a lot of people make that statement. The other is that he did much, much better among the working class than Romney: about 11 points better (the <$30K and $30–50K groups are roughly equal in size). The Democrat always does better among poor people, in part because Democratic policies are always better for poor people, at least as a first-order matter. (The Republican theory is that their tax cuts for the rich eventually help everyone, and I don’t want to argue about that here.) But in 2016, relative to 2012, the Republican did much better among the poor and much worse among the rich.** His gains among the poor outweighed his losses among the rich by just enough to swing the election.

Looking at these pictures alone, at first glance, the story seems to be more about class than race. In politics, change happens at the margin. Trump is still not the candidate of the working class—Clinton is—but he was able to appeal to them much more successfully than Romney or McCain. As for whites, they have voted for the Republican in every election since at least 1968, and Trump didn’t expand that advantage significantly over where it stood in 2012.

But as I said earlier, I don’t think you can necessarily infer from the exit polls that class was the dominant factor and race was less significant. The problem is that we know a larger proportion of working class people voted for Trump than for Romney, but we don’t know why they voted for Trump, at least not from the data we have. We can make some guesses, but again the exit polls provide support for both stories:

(How each of these two questions provides support for a different story is left as an exercise for the reader.)

At the end of the day, we know that the “white working class” supported Trump much more strongly than it supported Romney, but we can’t tell from polling data if that was because of their judgments about Trump’s policies, their feelings about race, or their feelings about their economic status. In practice, different people in the same demographic group make political choices based on different combinations of those (and other) factors.

I think it’s important to try to understand the relative importance and the interactions of these different motivations, and how those have shifted over time. But if there’s one thing I want you take away, it’s that you can’t answer these questions by looking at aggregate polling data—even though many people will try to do exactly that in the next few days.

* Thanks to the Times for this presentation, and for the ability to switch easily from election to election. When anyone cites a poll number, your first question should be: “Relative to what?” In this case, I think the previous election is the most obvious baseline for interpretive purposes, although it certainly isn’t perfect.

** In 2012, Romney won the >$200K group by 10 points, while Trump won it by 1–2 points; you don’t see that shift in the picture because the 2012 data don’t have a break at $250K.

The Biggest Voter Suppression Campaign of All

Tue, 11/08/2016 - 07:00

By James Kwak

This election day, spare a thought for the largest group of citizens who aren’t eligible to vote: children.

My four-year old just learned that he doesn't get to vote tomorrow and he burst into tears and I feel for him.

— Justin Wolfers (@JustinWolfers) November 8, 2016

When I was in high school, I believed strongly that there should be no voting age whatsoever. Anyone should be able to vote, no matter her age. Well, I still feel that way, particularly after watching my ten-year-old daughter knocking on doors and explaining to adults why she doesn’t want her school to be grade-reconfigured. And I feel that way even though I also have a four-year-old son whose vote could be bought for a lollipop. (Whether he would stay bought is another question.)

There are two main arguments against a voting age. The first is that any plausible justification for a minimum voting age could be better served by some other test—which would be illegal. Many people think it is obvious that children shouldn’t be allowed to vote because they are uninformed, irresponsible, lack the necessary cognitive skills, are easily swayed by their parents, or something along those lines. (Note that similar arguments were made about all the other groups that used to be unable to vote.) But if the point of a voting age is to ensure that the electorate is properly informed about the issues and the stakes, we could administer a test, which would do a better job than an arbitrary age cutoff. (Who is the vice president? Which house of Congress approves judicial nominations? Etc.) That test would violate the Voting Rights Act, just like literacy tests.

If the point is to ensure that the electorate has the ability to process information and make rational decisions, again we could come up with a test for that—which would also probably violate the Voting Rights Act. And if we think that children are too easily swayed by their parents, what do we think about the undecided voters who are swayed by the types of television ads that every politician is running right now?

In short, the minimum voting age is supposedly intended to ensure certain characteristics in the voting population. Screening for those characteristics directly would be illegal. So why is OK to use a poor proxy for them?

The second, and more fundamental, argument against a voting age is that it undermines the whole point of our system of government. The reason we have a democracy isn’t that we think everyone is equally capable of making good decisions about who our leaders should be. It’s that we want our leaders to be accountable to ordinary people. This is called government by the consent of the governed. We want our representatives to take their constituents’ interests into account when making decisions; and if they don’t, we want to be able to vote them out of office. Because we want our government to be accountable to everyone, we don’t restrict the suffrage to certain classes of people; we don’t want some types of people to have more political power than others, simply by virtue of who they are.

Except that we do restrict the suffrage. Young people bear the costs of public policy as much as anyone (and arguably more so, since they will be alive for longer), but politicians can safely ignore them because they can’t vote. (Saying their parents will represent their interests is just silly; by that logic, we could simply have one vote per family.) Children live under our government; therefore they should be able to vote. It’s as simple as that.

Politically speaking, a lower voting age would probably help Democrats, since young people tend to be more liberal than old people. (It would probably also eliminate any suspense in the Clinton-Trump contest.) But that’s not the point, just like making election day a holiday isn’t about helping Democrats or increasing turnout. It’s about making sure that everyone has an equal opportunity to hold her representatives accountable.

So I think that if you have the ability to express a preference, you should be able to vote. I recognize that most people won’t agree with that rule. But there’s no reason that states can’t start by reduce the voting age to sixteen. (I’m not a constitutional law scholar, but Nathan Persily is, and he agrees that this is possible.) And do you know what? The world won’t end. And our democracy will be just a little bit stronger.

Models of Economic Policymaking

Sun, 10/30/2016 - 09:00

By James Kwak

The evening that he won the Iowa caucus in January 2008, Barack Obama said this:

Hope is the bedrock of this nation. The belief that our destiny will not be written for us, but by us, by all those men and women who are not content to settle for the world as it is, who have the courage to remake the world as it should be… . [the belief that] brick by brick, block by block, callused hand by callused hand, … ordinary people can do extraordinary things.

That speech is at the opening of K. Sabeel Rahman’s new book, Democracy Against Domination. It invoked one of the central mobilizing themes of Obama’s 2008 campaign, which set him clearly apart from Hillary Clinton: the idea that the senator from Illinois would usher in a new kind of politics, a more democratic, more inclusive approach to government as opposed to business as usual inside the Beltway.

Well, that didn’t happen. Whatever you think of President Obama’s policy goals and accomplishments, he had little impact on how our political system works. Plenty of blame for that goes to the Republicans, who set out from Inauguration Day focused exclusively on making him a one-term president. But it’s also true that the new president did not make political reform a priority during those first two years when he had majorities in both houses of Congress.

It can be argued that Obama had other important priorities: stabilizing the financial system, the 2009 stimulus, Obamacare, and the Dodd-Frank Act. But one of the central arguments of Democracy Against Domination is that the president made a conscious choice. When it came to financial regulation, for example, “Obama’s response to the financial crisis evinced a deep-seated … faith in professional, technocratic expertise to solve social problems and transcend the controversies and messiness of ordinary democratic politics” (p. 6).

Let’s step back for a minute. Rahman’s book, on one level, is about how we regulate our economy. Throughout the twentieth century, there were two dominant models of economic policymaking. One, which characterized the New Deal, is technocratic managerialism: the idea that economic regulation is too complex to be left to democratic processes, and therefore must be entrusted to experts who are insulated from day-to-day politics. The other, which became more and more influential as the century wore on, is the ideology of free markets, which dictates that the economy should simply be left to regulate itself.

We all (should) know by now that market self-regulation can lead to catastrophic consequences, such as the financial crisis and Great Recession. But, as Rahman points out, the free marketers developed a pretty powerful critique of technocratic managerialism: the public choice approach to politics and the theory of regulatory capture. So we are left with two main factions—conservatives who want to deregulate everything and moderate Democrats who want to give more authority to to apolitical technocrats (consider the Dodd-Frank Act)—who agree that economic policy has to be insulated from politics. Then we have (some) progressives who think unregulated free markets will produce bad outcomes, but also think that technocracy, at least in areas such as financial regulation, will simply be captured by industry. Simon and I in 13 Bankers fall into that last group.

The question is, if you don’t trust markets and you don’t trust the revolving door, how can you make economic policy? Rahman’s answer is simple, although it raises plenty of other questions: you trust democracy. On a theoretical level, the argument is that if you want economic policies that are responsive to the needs of ordinary people, that will not be captured by elite interest groups, and that are perceived as legitimate, you need to involve ordinary people in the policymaking process.

In the book, Rahman talks about various ways in which democratic participation could be incorporated into the administrative state, such as citizen budgeting or community groups more aggressively engaging with regulators. (Jared Bernstein in The Reconnection Agenda also cites the work of the Center for Popular Democracy, which is trying to encourage Federal Reserve banks to pay more attention to the concerns of the working class.) At present, I would say still there needs to be a fair amount of practice to substantiate the theory. I don’t yet see a way to have non-specialists make substantive contributions to the hundreds of pages of the Volcker Rule. Of course, Paul Volcker himself said the rule should be four pages long, so maybe that’s part of the point. (That was one reason Simon and I argued for simple size caps in 13 Bankers, and why Anat Admati and Martin Hellwig argued for simple capital requirements in The Bankers’ New Clothes.)

At this point, we’re off into questions of democratic theory and political institutional design, in which I am far from an expert. But Rahman’s idea could represent a promising way forward, particularly for people who believe both that the economic playing field is tilted against ordinary people, and that our political system is increasingly deaf to their concerns.

The Last Chapter Problem

Sat, 10/29/2016 - 11:08

By James Kwak

Like many analytically minded liberals, I’m good at identifying problems and less good at coming up with solutions—a common disease sometimes called the “last chapter problem.” I recently finished reading The Reconnection Agenda by Jared Bernstein (which you can even download from his blog), which takes the opposite approach.

The problem he addresses is one that we all know about—inequality, stagnant real wages, the divergence between productivity gains and living standards, etc. Bernstein recalls a meeting with a group of insiders in 2014, when a pollster interrupted a discussion of the post-Great Recession economic recovery to say:

If you mention the word “recovery” to people, they don’t know what you’re talking about. And they conclude you don’t know what they’re talking about. It’s not just that they feel disconnected from an economy that’s supposedly growing. It’s that they don’t think anyone understands or knows what to do about their situation.

And he aptly summarizes the state of inside-the-Beltway economic policy debate between “you’re-on-your-own” Republicans and Democrats:

The YOYOs run around arguing, unconvincingly to most, that government is the problem, while most Democrats nibble at the edges with YOYO-light, maybe sprinkling in a minimum wage increase. Everyone treats the private market economy like a delicate vase that mustn’t be bumped.

(That near-consensus on the magic of market forces is also the subject of my new book.)

But Bernstein, to his credit, gets the description of the problem out of the way in the first two chapters. He devotes the rest of the book to solutions: policy tools that can not only increase growth but, just as importantly, ensure that the benefits of growth are widely shared throughout the income distribution. Some are relatively standard Democratic fare, like expanding automatic stabilizers, spending more on infrastructure, universal pre-school, and maintaining a symmetric monetary policy—that is, not pretending you have an inflation target when what you really have is an inflation ceiling.

More generally, however, Bernstein focuses on the importance of using economic policy to change the pre-tax distribution of income—bolstering the bargaining power of workers so they can demand a larger share of the gains from increases in their own productivity. Among other things, that means making it easier for workers to form unions, subsidized jobs and apprenticeship programs to help people gain skills, and ban-the-box rules that help people with “criminal records” (which can mean just an arrest with no conviction) compete fairly for jobs. These are not policies that all Democrats support. But, as Bernstein writes, turnout by Democratic constituencies “may well hinge on whether they believe a candidate will try to implement a set of policies that convincingly relinks growth and their living standards.”

As I’ve written about previously, this presidential election has become a referendum on Donald Trump. But for Democrats to have any chance of maintaining our congressional gains in 2018, we have slightly less than two years to convince the public that we care about something more than fiscal responsibility and overall economic growth.

Time to Vote; No on 5

Mon, 10/24/2016 - 10:24

By James Kwak

If you live in Massachusetts, early voting has begun. You can ask for an early ballot by mail, or just find a polling place here. This is what my town hall looks like today:

Not surprisingly, I voted for Hillary Clinton (more about why here). If you don’t live in Amherst, Massachusetts, you may want to stop reading. If you do live in Amherst, I’d like you to consider voting no on Question 5.

Technically speaking, Question 5 allows the town to override Proposition 2-1/2, which ordinarily limits property tax increases, in order to issue bonds to build a new school for all Amherst children in grades 2–6. (The bonds would be issued now, but presumably property tax increases will be necessary to back them.) I ordinarily vote for overrides as a matter of course, but this time I voted no.

The original motivation for this project was that two of our three neighborhood elementary schools for grades K–6, Wildwood and Fort River, are in poor physical condition. To make a long story short, the school district successfully applied for money from the Massachusetts School Building Authority, but that money can only be used at one physical site—hence the plan to build one large school complex instead of building two smaller schools (or renovating both Wildwood and Fort River). According to current estimates, the MSBA will contribute about $33,700,000 to the project, and the town’s share will be $32,700,000.

At the same time, the plan is to completely reconfigure elementary education in the town. The third current school, Crocker Farm, will become a K–1 school. (Crocker also has a small, not-universal pre-K program, which will remain.) The new, $66 million school complex will serve all students in grades 2–6. It will be organized as two separate “schools” with various shared facilities. This is what I am opposed to.

I am opposed for two types of reasons. First, there are several obvious problems with this plan. It significantly increases time on the school bus for both grade K–1 children in North Amherst and grade 2–6 children in South Amherst. Amherst is a tall and skinny town, and it takes a long time to get from one end to the other—considerably longer on a school bus. Our children would be better off if we were to invest the extra ten minutes in the morning and ten minutes in the afternoon in classroom time rather than bus trips.

In addition, the reconfiguration creates an extra school transition for seven-year-old kids, just two years after the wrenching transition of starting kindergarten. It also increases grade cohorts by 200% (or 50% in grades 2–6, to the extent that the two “schools” at the new site will be kept distinct).

Second, and more fundamentally—and this is what I said in last year’s survey of parents—reengineering the entire grade configuration is a solution in search of a problem. The clear problem is that Wildwood and Fort River are in bad physical shape and need to be renovated or replaced. We should solve that problem. But a school is more than a building. We have three of them. And nowhere in all the documents that I saw last year did I even see an argument for why we need to blow them up and start over from a theoretical blueprint.

I saw some claims for why consolidating entire grades in one place would be a good thing, along the lines of greater efficiency using shared resources. (For example, instead of three small libraries, you can have one big one.) I used to be a management consultant. I can make that argument, too.

But there’s a more important principle: Don’t tear apart things that work well just because, in theory, you can put them back together in an even better way. Running any kind of organization is hard enough as it is without creating complications trying to solve problems that don’t exist. There’s a reason why most school districts in the country don’t make all children switch schools between first and second grade. What research and debate there are center around when to switch from elementary to middle school—not whether to split elementary school at age seven. Are we really confident that we—including a superintendent who just resigned—know better than anyone else how to organize a school system?

My daughter goes to Crocker Farm. We think it’s a good school. We have friends who sent their kids to Wildwood. They think it’s a good school—in a bad building. I don’t want to blow up Crocker Farm (the school, not the building), and I don’t see why anyone would want to blow up Wildwood (the school, not the building). I would gladly vote for an override to fix Wildwood and Fort River, or build new buildings for them, or—if necessary—build new buildings for them right next to each other.* But I don’t think it’s right to inflict a vast, unnecessary grade configuration experiment on our children.

* Lest anyone think this is about my property taxes: If anyone can tell me what the actual increase in my property taxes would be under Question 5, and if Question 5 is defeated, I will donate that amount to the schools.

Ideas, Interests, and the Challenge for Progressives

Fri, 10/21/2016 - 12:28

By James Kwak

Updated based on feedback from Matt Stoller. See bottom.

Mike Konczal wrote an article a few days back arguing that various progressive policies aimed at helping poor people would not be able to pry the “white working class” away from Donald Trump and Trumpism. I think the article was insightful and intelligently argued. This was my quick response:

@rortybomb It took 35 years to create the economy we have. It will take 35 years to fix it and create broadly shared prosperity.

— James Kwak (@jamesykwak) October 19, 2016

In other words, it’s the long term that matters. We need policies that create broadly shared prosperity not because they will peel away Trump supporters in the short term, but because they are the right thing to do. And in the long term, if progressives prove that they can deliver the goods—a society with less inequality and less economic insecurity—that will change the political landscape.

Dani Rodrik wrote a longer, better response to Konczal. Rodrik’s perspective, which he’s presented in greater depth in the Journal of Economic Perspectives and a recent paper with Sharun Mukand, is that political outcomes result from the interaction of interests and ideas. As he writes in his recent post, “The politics of ideas is about activating identities that may otherwise remain silent, altering perceptions about how the world works, and enlarging the space of what is politically feasible.” Politicians appeal in part to voters’ interests, but also attempt to make salient identities that they share (or pretend to share) with particular segments of the electorate.

In this framework, Konczal may be correct—progressive economic policies may not appeal to white, working class Trump voters—but that’s because progressives lost the battle of ideas long ago. The implication is that progressives need better ideas, not just more effective policies. In his post, Rodrik cites Konczal’s example of people who “view the federal government as something that is helping people ‘cut in line,'” and continues:

In other words, people dislike and distrust the government. And yes of course, conditional on that belief, the progressives’ agenda of enhanced environmental regulation will not draw the support of the people it tries to help. Same with dealing with the banks, creating more jobs, or progressive taxation.

Clearly, the progressives have lost the war of ideas here – on government as a force for good. Equally clearly, they will not win it by offering detailed policy proposals on each one of these areas.

We progressives tend to be rather smug about the belief that our policies (infrastructure spending, social insurance, expanded family leave, universal pre-K, etc.) will do a better job helping poor people than typical conservative policies (cut taxes and regulations and let the invisible hand do its magic). Where we have generally failed is in convincing ordinary people, not policy wonks, that our vision will create a better society for them and their families—or perhaps that we have a vision at all.

This is hard to do, and I don’t have a simple answer for how to do it. But it is something that the right did extraordinarily well during their decades in the wilderness after World War II. It was an article of faith among Hayek, Friedman, Buckley, and the old conservative warriors that ideas mattered—that they could only gain political power by undermining the intellectual and political near-consensus around the New Deal. Part of their success lay in transforming their economic policy program—small government, low taxes, union-busting—into a powerful ideology that could appeal to people in all classes. Ronald Reagan’s message that government was the problem, and that the solution lay in unleashing the energy of the free American people, was and remains compelling even to people who have been the victims of Reaganite policies. More generally, the idea that markets are the best way to solve all problems has become so completely baked into contemporary discourse that it is no longer seen as an ideology. (This is roughly what I call “economism” in my new book.)

In the battle of ideas, progressives have been on the back foot ever since Reagan, which is probably one reason why we like to retreat to the realm of policy detail, where we can revel in our technocratic superiority. But somehow, as Rodrik points out, “they need to convince the electorate that it is their interests they have at heart – not those of bankers or of large corporations.” That could also take thirty-five years. But we have to begin somewhere.

Update: Matt Stoller responded with several tweets on Twitter. I think this one encapsulates his criticism:

@jamesykwak @ddayen You're castigating the issue as the failure to convince, not that the actual implementation had impacts.

— Matt Stoller (@matthewstoller) October 22, 2016

Stoller is rightly pointing out that you could read my post to say that the only fault of progressives has been failing to make a better case for their policies—when, in fact, Democratic administrations have inflicted plenty of lousy policies on the poor and the middle class (welfare reform, 1997 capital gains tax cut, financial deregulation, HAMP, looking the other way on foreclosures, etc.).

Now, I don’t consider either Bill Clinton or Barack Obama a progressive, but there is disagreement about what that term means. So let’s just say this: One reason Democrats have failed to win the hearts and minds of large segments of the working class is that our actual policies, when we have been in power, have not served them that well. Yes, our policies were generally better than what Republicans would have done; and yes, there were some that helped the poor, such as Medicaid expansion and the Obamacare subsidies. But on balance, the Democrats have done little to reverse the tide of the Reagan Revolution. In the future, if we want to win back the whole working class, we’ll need both better policies and a better vision than “we’re not as bad as the Republicans.”

Structure and Superstructure

Tue, 10/18/2016 - 07:30

By James Kwak

Noah Smith begins his latest Bloomberg column this way:

Stanford historian Ian Morris is fond of saying that “each age gets the thought it needs.” According to this maxim, ideas like the Enlightenment, communism or even Christianity are a product of the economic and political circumstances of their times.

This is something I’ve long believed, dating back before my days as a graduate student in intellectual history. It’s also pure Marx. In the “Contribution to the Critique of Political Economy,” the great bearded one wrote:

With the change of the economic foundation the entire immense superstructure is more or less rapidly transformed. In considering such transformations a distinction should always be made between the material transformation of the economic conditions of production . . . and the legal, political, religious, aesthetic or philosophic—in short, ideological forms in which men become conscious of this conflict and fight it out.

When I was a junior in college, I underlined that passage in my bright red copy of The Marx-Engels Reader. (As I’ve often said, Harvard social studies majors will probably be the last people on the planet still reading Marx.)

Smith’s point is to situate what he calls libertarianism in its historical context. (He uses “libertarianism” in a relatively narrow, economics-focused sense, which some libertarians might find restrictive, but I’ll stick with his terminology here.) At the end of World War II, government power had reached unprecedented heights in modern history, particular in economic affairs. “It made sense to fight these forces with a philosophy that emphasized individual liberty and limited government,” Smith writes. He continues by arguing that the abstract libertarian model misses out on the complexity of society. In particular, since power can be exercised on multiple levels between individuals and the state, “the neat and tidy universe of classic libertarianism breaks down.” What we need today, then, is a new political philosophy, or philosophies, that reflect this complexity.

I agree with all of that. I just want to add a little more depth to the idea that libertarianism “made sense.” Marx didn’t think that an age “got the thought it needs” by accident; just because ideas make sense doesn’t mean that they will become influential. (Between Occupy Wall Street and the Tea Party, which set of ideas made more sense to you?) Instead, Marx argued in the passage above, the conflict of ideas is the superstructure determined by the fundamental structure of class struggle.

For Marx, of course, class struggle meant the bourgeoisie and the proletariat. I think by now we realize that the world is considerably more complicated than that. But the underlying principle still holds: ideas gain sway because they serve important economic interest groups. That was certainly true of communism, which became the organizing ideology of the working class.

It was also true of libertarian ideas after World War II. In the United States, the political landscape was dominated by the New Deal Democratic coalition and Keynesian economic principles. Corporations that had to contend with powerful labor unions and rich people who had to pay higher taxes were on the defensive. For those interest groups, the theory that competitive markets could maximize social welfare and that government intervention could only make life worse for everyone provided exactly the ideology that they needed. Money from businessmen’s foundations and, later, large corporations that financed the think tanks and networks that cultivated and disseminated the free-market critique of New Deal policies which—to jump ahead—ultimately bore fruit in the Reagan Revolution.

I tell this story in detail in the history chapter my new book, Economism: Bad Economics and the Rise of Inequality, although not in as much detail as some of the historians I draw on, such as Kimberly Phillips-Fein and Gareth Stedman Jones. (I almost wrote “real historians” before remembering that I have a history PhD.) But the key point I want to make here about ideas, interest groups, and ideologies was actually also made by Marx, this time in The German Ideology:

Each new class which puts itself in the place of one ruling before it, is compelled, merely in order to carry through its aim, to represent its interest as the common interest of all the members of society, that is, expressed in ideal form: it has to give its ideas the form of universality, and represent them as the only rational, universally valid ones.


That’s why libertarianism “made sense” to the businessmen and wealthy families who led the postwar reaction against the New Deal—and to their descendants who continue to finance the conservative movement.

Economic Anxiety and the Limits of Data Journalism

Mon, 10/17/2016 - 07:30

By James Kwak

[Updated: see bottom of post.]

There is an ongoing battle among the liberal intelligentsia over “economic anxiety.” The basic question is whether economic factors—loss of manufacturing jobs, decline in living standards, increase in insecurity—are a valid explanation for the rise of Trump. To simplify, one side claims that economic anxiety is one reason, along with racism (and sexism, and anti-Semitism, and …), for Trump’s popularity; the other side claims that the economic argument is wrong, and the Trump phenomenon is all about racism (and sexism, and anti-Semitism, and …).

This debate has reached its cultural apogee with the genre of the economic anxiety tweet, which features a racist, sexist, anti-Semitic, or otherwise reprehensible Trump supporter, accompanied by a sarcastic comment about the supporter’s “economic anxiety.” Here are some recent examples (screenshots because WordPress doesn’t seem to display the second-level embedded tweet properly):

Why this particular debate has become so bitter has been lost to history. Probably the economic anxiety deniers think that explaining Trump in (partially) economic terms amounts to excusing or ignoring racism, while the economic anxiety believers think that the racism-only story ignores the erosion of the middle class over the past thirty years. This is why—since we’re all well-meaning liberals here—when not confined to 140 characters, the deniers take pains to say that we should help poor people, while the believers take equal pains to say that racism is bad.

The people thinking of the clever economic anxiety tweets are just doing it to annoy the other side; they know that one anecdote, or several dozen, doesn’t prove anything. But periodically there are attempts to disprove the economic anxiety hypothesis—with data! Dylan Matthews of Vox is the latest to take up the challenge, with a long, heavily documented, and very heated argument that the Trump phenomenon is about race, not economics. But it fails, for a simple reason: You just can’t prove what he wants to prove with the data we’ve got.

Matthews’s editor, unfortunately for him, gave his article this title:

It’s unfortunate because the article’s 2,000 words don’t contain a single quote by an actual Trump voter. (By contrast, two of the three articles he starts off by criticizing do quote Trump supporters.) At one point, Matthews placed a link on the suggestive text, “the statements of Trump supporters themselves”—but that link only goes to a tweet by Vox executive editor Matt Yglesias, which quotes exactly one person interviewed in a New York Times article:

This guy seems to be trying as hard as possible to clarify that it's not about economics https://t.co/Sm5EvuoDJC pic.twitter.com/iQZZdimmXb

— Matthew Yglesias (@mattyglesias) October 12, 2016

But that’s not the problem. This is Vox, the home of data journalism, and I actually beleive in their mission, for the most part: We should try to answer questions using data, not anecdote. The way to “listen to what they’re actually saying,” according to Vox, is to look at the data. The problem, as I’ll explain in perhaps excruciating length, is that the data aren’t very good.

“There is absolutely no evidence that Trump’s supporters, either in the primary or the general election, are disproportionately poor or working class,” Matthews launches in. His first source is none other than Nate Silver, who found that Trump voters “had a median household income of $72,000, a fair bit higher than the $62,000 median household income for non-Hispanic whites in America.” But Silver’s analysis doesn’t support the point that Matthews wants to make. Trump voters made more than the median family because Republican primary voters make more than the median family. Cruz voters’ median income was $73,000, while the figure for Kasich voters was $91,000. The population from which Trump voters were drawn was . . . Republican primary voters! So if Trump drew his support disproportionately from poor as opposed to rich Republicans, you would expect his voters’ median income to be lower than that of the median Republican primary voter—which is exactly what happened. Now, the effect is relatively small—Cruz voters were only slightly richer than Trump voters—so this is not strong evidence for the economic anxiety thesis. But nor is it good evidence against that thesis, especially because of the averaging problem, which I’ll come back to in a bit.

Matthews’s second source is a “major study” by Jonathan Rothwell of Gallup. I’m not sure what makes it major, except perhaps that Rothwell had a lot of data. Here’s how Matthews describes Rothwell’s findings:

Trump support was correlated with higher, not lower, income, both among the population as a whole and among white people. Trump supporters were less likely to be unemployed or to have dropped out of the labor force. Areas with more manufacturing, or higher exposure to imports from China, were less likely to think favorably of Trump.

That sounds convincing—until you actually read Rothwell’s paper, which says this:

Higher household income predicts a greater likelihood of Trump support overall and among whites, though not among white non-Hispanic Republicans. In other words, compared to all non-supporters or even other whites, Trump supporters earn more than non-supporters, conditional on these factors, but this is partly because Republicans, in general, earn higher incomes, and the difference is no longer significant when restricted to this group. …

On the other hand, workers in blue collar occupations (defined as production, construction, installation, maintenance, and repair, or transportation) are far more likely to support Trump, as are those with less education. … Since blue collar and less educated workers have faced greater economic distress in recent years, this provides some evidence that economic hardship and lower-socio- economic status boost Trump’s popularity.

In short, Rothwell provides evidence for both sides, and Matthews only tells half the story—this time. Actually, Matthews’s original writeup of the paper cited both sets of findings, because then he wasn’t trying to destroy the economic anxiety theory.

The other problem with the Rothwell paper, which I discuss at length here, is multicollinearity. It is true that Rothwell found that income was a positive and significant predictor of Trump support, at least in the full sample. But his “controls” included employment status, “works in blue collar occupation,” union member, highest degree, share of college graduates in the region, and median income in the region, all of which are correlated with household income. For example, if blue-collar workers make less money and are more likely to support Trump, that effect could be attached to the blue-collar variable (which it was) and not to the income variable (which it wasn’t). Multicollinearity doesn’t bias your results, but it makes them much more fragile.

The general problem with arguments of the form Trump-supporters-are-actually-rich is this: compared to what? If you want to answer the question of how well Trump is doing with working-class voters, you need a baseline. You can’t expect him to poll evenly with Clinton among any group of poor people: as Matthews acknowledges, “Lower-income whites are always likelier to support Democrats than other whites.” So saying that Trump supporters are richer than Clinton supporters, or that some group of poor people favors Clinton, doesn’t prove much. And as we’ve seen, Trump voters are not rich compared to other Republican primary voters.

The most obvious baseline, although it has its problems, is Mitt Romney’s vote shares in 2012. According to exit polls of the actual election, Romney lost to Obama by about 2 percentage points overall (he actually lost by more than 3 points). Among families making less than $50,000, however, Romney lost by 22 points, so in that group he under-performed his overall average by 20 points.

The first recent Clinton-Trump poll that I could find with crosstabs was by Morning Consult from last week. In that poll, Trump loses to Clinton by 4 points (see Table v16g5) in a two-way race (for comparability with 2012). Among households making less than $50,000, he loses by 7 points. So Trump does 3 points worse among poor families than he does overall, while Romney did 20 points worse.

17 percentage points are a big difference. (I think this is what journalists call burying the lede.)

It’s about as strong proof that Trump’s supporters are “disproportionately poor” as you could find. Also note that if Clinton is beating Trump by only 7 points among poor people, including African-Americans and Latinos, she could very well be losing among poor whites.

Eager to get to the primaries, where his data are more interesting, Matthews presents his theory of the general election:

The story is pretty simple: What’s driving support for Trump is that he is the Republican nominee, a little fewer than half of voters always vote for Republicans, and Trump is getting most of those voters.

But we can actually learn more from the data than this. Sure, Romney and Trump each get 40-something percent of the vote. But there’s a big difference in the composition of that 40-something percent. Compared to Romney, Trump does much better among poor people and much worse among families making more than $50,000.

That seems like pretty strong evidence for the economic anxiety hypothesis. But I wouldn’t get too excited about that, either.

The deeper flaw with all of this entrail- crosstab-reading is what I referred to earlier as the averaging problem. Donald Trump is going to get tens of millions of votes on November 8. Some of those voters will be racists. Some will be poor people concerned about their economic future. Some will be poor racists concerned about their economic future. When we look at aggregate statistics about those voters, we can get a sense for the average preferences of Trump voters, but that average mixes together a wide range of motivations.

I don’t mean to throw up my hands like a statistical nihilist and say we have to go back to interviewing people on the street. There are plenty of problems that statistics can solve reasonably well. Indeed, if we could go back in time four years and substitute this year’s Donald Trump for that year’s Mitt Romney, and run Trump against the 2012 Barack Obama, we could learn a lot about the differences between Romney supporters and Trump supporters.

But the problem with presidential elections is the same one that exists in macroeconomics: lots of things change over the same timeframe. As I said above, Trump is doing 17 points better among low-income families than you would expect based solely on Romney’s performance four years ago. On its face, that seems like strong evidence for the economic anxiety believers. But remember, Romney was a patrician who made his fortune in private equity, whom the Obama campaign successfully demonized as a ruthless job-killer, and a Mormon to boot. Almost any Republican would run better among the poor than Romney. And Obama was a child of a single mother who became a community organizer, while Clinton is the epitome of the moneyed Democratic establishment. How much of that 17 points is due to the fact that Clinton isn’t Obama, and that any generic Republican isn’t Romney? We just don’t know.

I think I could conclude here, but I want to talk about the primaries for a moment, because they illustrate another problem with this whole endeavor.

Matthews’s conclusion about the primaries (I’ll skip the sources for now, but he draws heavily on Lee Drutman and others) is this:

There is a segment of the Republican Party that is opposed to racial equality. It has increased in numbers in reaction to the election of a black president. The result was that an anti–racial equality candidate won the Republican nomination.

I’m skipping the sources because I see no reason to argue with this. Trump was the most overtly racist of the Republican candidates, and a major reason for his success was the rise in racist sentiment among the party base. This is true, and it’s bad, and it’s worrying.

But that isn’t evidence against the economic anxiety theory. It’s eminently plausible that economic dislocation makes people more receptive to racism. In fact, that’s part of the conventional historical narrative about the rise of Hitler and the Nazis, although I’m sure there are alternate theories. (It’s been more than twenty years since I studied this in graduate school, so I looked it up, and the Encyclopædia Britannica agrees.) And since the same group of people—lower-income, less-educated whites—is correlated with both poor economic outcomes and racist sentiments, it’s pretty near impossible to say from poll data whether Trump support is being driven by one and not the other.

Saying Trump is riding a wave of racism, as Matthews does, is all we need to know from an immediate practical perspective: we know we have to stop him. But it doesn’t answer the question of why racism is so popular. Racism isn’t a virus that falls out of the sky. It’s the product of historical contexts. I can’t prove that today’s heightened racism results from the Great Recession, although it seems perfectly plausible to me. But by the same token, saying “It’s racism!” doesn’t preclude the role of economic factors in making that racism attractive.

Matthews concludes his article with a moralizing critique of journalists who don’t want to call poor people racists and therefore cling to their economic anxiety narrative in the face of the evidence. Well. I think I’ve shown pretty convincingly that, insofar as the poll data say anything, they don’t say what Matthews thinks they say. (Seventeen percentage points!) But I’m not going to claim that this is incontrovertible proof of the economic anxiety hypothesis.

I think the lesson of all of this is that data journalism is a great idea, but it only works when the data are good enough, and when the journalist knows the limits of the data. But what I really want you to take away is this: Those economic anxiety tweets? It’s just a bad joke.

Update: Initially I estimated the $0–50K vote shares in 2012 by combining the $0–30K and $30–50K categories. Later I noticed that the exit polls also show the $0-50K totals. Because of rounding error, I calculated that Romney lost by 21 points, when in fact he lost by 22. So Trump’s over-performance in the $0–50K segment, relative to Romney, is actually 17 points, not 16.

The Problem with Personality Contests

Sat, 10/15/2016 - 10:45

By James Kwak

This presidential election has come down to a referendum on Donald Trump, the man muppet whatever he is. Tactically speaking, that’s probably a good thing. Trump is an absolutely horrendous life form, and as long as he can’t get more than 43% of the vote, he almost certainly can’t be president. (Gary Johnson just isn’t that appealing.) Of course, focusing on personal attributes has been the Hillary Clinton strategy all along, even dating back to the primaries, when she focused on her experience and seriousness in the face of Sanders’s popular proposals (single payer, free college, etc.). It’s been even more true of the general election, in which Clinton has gone out of her way to portray Trump as a unique, rather than as the culmination of the evolution of the Republican Party.

Ordinarily we bemoan the focus on personalities rather than issues. (How many millions of times have Democrats complained about voters who chose George W. Bush because they would rather have a beer with him than Al Gore or John Kerry?) This time around, we seem happy enough with the personality contest, either because it increases Clinton’s chances of winning, or because Trump is so toxic that, this time, personality really does matter.

Still, there is a cost to the fixation on personal foibles and failings, even when they are relevant. The affair of Trump’s taxes is a perfect example. Trump’s taxes are relevant: his shifting, flimsy excuses for not releasing them show him to be a liar with something to hide; the $916 million loss illustrates the colossal failure of his real estate ventures in the early 1990s, and perhaps an aggressive approach to taking deductions for paper losses. From that point, however, the fact that he carried forward that loss to avoid paying federal income tax for years is no more his fault than Mitt Romney’s low average tax rate: it simply illustrates an existing problem with the tax code that Trump is well within his rights to exploit. (If you don’t like Mitt Romney, consider Warren Buffett, everyone’s favorite multi-billionaire: Buffett is a darling of the left because he favors higher tax rates on multi-millionaires, but in the meantime he pays the same low rate as Romney.)

The real problem with Trump, when it comes to taxes, is not what he pays or doesn’t pay, but how his tax plan would affect everyone’s tax burden. And there the numbers are not pretty. From the Tax Policy Center:

This is a classic, massive tax cut for the top 1%, similar to those proposed by Herman Cain, Marco Rubio, Ted Cruz, and every other Republican presidential candidate in recent memory. And this is on top of an existing tax code that already contains enormous loopholes for the ultra-rich. As I discuss in my latest Atlantic column, income tax is basically optional for the wealthiest families. (So is the estate tax, for the most part.) That’s the real problem we need to fix. Trump’s taxes will help Clinton get elected, which is a good thing. But the focus on Trump also distracts from the more serious problems with our tax code, which we really should should be talking about.

The Absolutely Best Debate

Sat, 10/08/2016 - 10:14

By James Kwak

Judging from my Twitter feed, there is one thing that we all agree on after the first two debates (including Kaine-Pence): the moderators are useless. They ask dumb questions, they don’t ask important questions, they can’t get the candidates to answer the questions anyway, they don’t call out the candidates when they lie (OK, this mainly applies to one of the candidates), etc.

So … let’s get rid of the moderators!

Here’s my idea. No moderator. Each candidate gets a lectern, a microphone, and a computer. (More about the computer later.) Each microphone has an on/off switch. You can turn on your microphone whenever you want, but it can only be on for a total of 45 minutes, with the following rules.

  1. If neither microphone is on, and you turn yours on, you are the Talker. When you are the Talker, time counts against you second-for-second: If you talk for 30 seconds, your counter goes down by 30 seconds.
  2. If your opponent is the Talker, and you turn your microphone on to talk at the same time, you are the Interruptor. When you are the Interruptor, your time counts against you two-for-one: If you interrupt for 30 seconds, your counter goes down by 1 minute. During that time, your opponent’s counter goes down only 30 seconds, if she continues talking. If your opponent turns off her microphone, you become the Talker.
  3. Your microphone cannot be on continuously for more than 3 minutes. When you turn it off (or when it shuts off automatically after 3 minutes), you cannot turn it on for 10 seconds. This is to eliminate the trick of quickly turning your microphone off and on to reclaim the status of Talker.
  4. Rules 1 and 2 give an advantage to whoever turns her microphone on first. To avoid a race, the debate is divided into 15-minute segments, and the candidates alternate who gets to begin each segment. The other candidate can interrupt immediately, but would then be the Interruptor (and lose time at twice the rate of the Talker).
  5. At any time, either candidate can press an override button that disables the other person’s microphone. You can hold down the override button for up to 1 minute, after which it becomes unusable for 1 minute. While you are holding the override button down, your time counts against you three-for-one: If you override for 1 minute, your counter goes down by 3 minutes. (You can use the override button to extend your microphone’s life beyond the ordinary 3-minute limit.)

So what would happen? There is an advantage to being the Talker, but you can only be the Talker for up to 3 minutes. During that time, the other person can Interrupt, but pays a big penalty on the clock. So ordinarily the Talker should control the floor for up to 3 minutes, with the other person making only short interruptions. When the Talker stops, the other person has 10 seconds to turn her microphone on and become the new Talker. At any time, if you really, really need to make a point directly to the American people, you can press the override button to do it. But if you get so infuriated that you need to constantly Interrupt your opponent, you’ll run out of time and she will get the last 20 minutes all to herself.

What about the computer? The computer is for fact-checking.

The debate will be televised in split-screen, with half the screen for each candidate. At any time, each candidate can choose whether to use her half for a traditional video image of her, or for the screen of her computer. The computer will only have a web browser on it, which the candidate can use to display whatever she wants from the Internet. The domain name will be magnified, so viewers can clearly see the source of whatever is in the browser. The browser will not have bookmarks, to make it harder to create fake versions of the New York Times and show those during the debate. (That is, candidates will have to use a search engine to find their sources, unless they have prodigious memories.)

What do you think?


Is Inequality Rising or Falling?

Tue, 09/27/2016 - 16:06

By James Kwak

Last week, Council of Economic Advisers chair Jason Furman took to the Washington Post to announce that President Obama has “narrowed the inequality gap.” Furman’s argument, bolstered by charts and data from a recent CEA report, has won over some of the more perceptive commentators on the Internet, including Derek Thompson, who concludes that Obama “did more to combat [income inequality] than any president in at least 50 years.” In 538, the headline on Ben Casselman’s summary reads, “The Income Gap Began to Narrow Under Obama.”

But is it true?

I already wrote about the key misdirection in Furman’s argument: his measures of reduced inequality compare the current world not against the world of eight years ago, but against a parallel universe in which, essentially, the policies of George W. Bush remained in place. (This is not something either Thompson or Casselman fell for; they both realized what Furman was actually arguing.) Today I want to address the larger question of whether inequality is actually getting worse or better.

First, let’s orient ourselves. At a high level, there are two sets of forces that affect income inequality. The first set is underlying economic factors that determine inequality of pre-tax income: skills gap, globalization, bargaining power of labor, and so on. The second set is government policies that affect the distribution of income, often referred to as taxes and transfers; these policies take pre-tax income inequality as an input and produce after-tax income inequality as an output. (This isn’t a perfect distinction, since tax and transfer policies also affect the distribution of pre-tax income, but I think it’s good enough for explanatory purposes.)

Furman’s argument is that Obama has improved that second set of policies. That’s what this chart really shows; remember, it’s comparing the effect of taxes and transfers next year against the effect of taxes and transfers under George W. Bush policies.

I think that’s unequivocally a good thing, although (as I pointed out before) a lot of that redistribution was simply the product of letting the top-end Bush tax cuts expire.

But what about the first set of underlying economic factors? We have all seen Piketty and Saez’s charts showing the 1% income share as a measure of pre-tax inequality. Here, however, I’m mainly going to use CBO data so that I can compare pre-tax and after-tax income shares from a single source.

This is the 1%’s share of what the CBO calls before-tax income, which includes government transfers but does not reflect taxes. The big peaks in the second half of the chart are 2000 and 2007; the little peak near the end is 2012.

To read this chart, you have to understand that the 1% income share changes on three different timescales:

  1. Over the period as a whole, it’s clearly increasing, because of those underlying factors (skills gap, globalization, unions, whatever).
  2. But inequality also fluctuates with the business cycle. Expansion periods tend to increase income inequality, particularly if they are accompanied by increases in asset prices; a large share of the income of the very rich is profits from capital gains, which obviously rise and fall with asset prices. Subsequent recessions reduce inequality, because those asset prices fall rapidly. So the 1% income share grew from 1993 to 2000, fell with the collapse of the stock bubble, grew until 2007, fell with the financial crisis, and started growing again with the current economic expansion.
  3. Finally, the 1% income share also changes in response to tax policy. There is a spike in 1986 because rich people sold assets before the higher rates set by the Tax Reform Act of 1986 would take effect; that was followed by a fall in 1987, because those same rich people essentially moved their 1987 sales into 1986.

The first conclusion you should now draw is that, with the exception of 2013 (the last year of data), little appears to have changed. The 1% income share has been growing during the recovery, even as median income remained stagnant (until 2015, that is). I’ll come back to 2013 in a minute.

But, Furman would argue, and I would agree, it’s not pre-tax income that matters; it’s income after accounting for taxes. (Transfers are already included in the measure of pre-tax income shown here.) So here’s the complete chart:

The primary conclusion you should draw, which is easy to see, is that after-tax inequality unsurprisingly moves more or less in parallel with pre-tax inequality. What’s hard to see is that the gap between the pre- and after-tax income shares of the 1% did go up significantly in 2013. From the Clinton tax increase of 1993 through 2012, the gap fluctuated between 1.8 and 2.2 percentage points; in 2013, it shot up to 2.6 percentage points. That’s because the Bush tax cuts for the very rich—including the 15% rate on capital gains and dividends—finally expired, and the 3.8% Medicare tax on investment income took effect. That is one of Obama’s major achievements on the inequality front, and he deserves credit for it.

In 2013, the fall in the pre-tax income share of the 1% and the increase in the gap between the pre- and after-tax income shares reduced their after-tax share to the comparatively low level of 12.4%, which, Furman pointed out in the Post, was “roughly equal to its share in 1997.” This is true. It’s also true that 12.4% was roughly the after-tax share in 2011, sometime between 2009 and 2010, 2003, and 2001—that’s how series that go up and down work.

The bigger question is whether that lovely dip in 2013 is the start of a trend of falling inequality, or whether it’s an aberration. Furman obviously believes the former, claiming “success to date” in the battle against inequality. In his article, Casselman says it’s too soon to say, but then concludes with this:

Even if progress has been limited, the trend line has shifted. That’s significant. The incessant increase in the income gap in recent decades often made it seem like inequality could go in only one direction: up. The recent trend suggests that’s not the case.

I think this is too optimistic. Again, the 2013 decline in the after-tax income share of the 1% was primarily due to a drop in their pre-tax income share. (The total decrease was 2.7 percentage points: 2.3 percentage points due to lower pre-tax income, and 0.4 percentage points due to changes in tax policy.) And we already know what happened to pre-tax income after 2013: it went up.

This last chart adds (green line) the top 1% income share from the World Wealth and Income Database, which has data through 2015. The green line is above the blue line, largely because it does not take transfers into account. But you can see that the two lines move together. So we can infer that in 2014 and 2015 the blue line continued climbing up and to the right.

We can also infer that the red line also climbed up and to the right. The tax changes in 2013 were a one-time event. The gap between the blue and red lines may remain larger indefinitely, which is good. But there’s no force causing that gap to increase over time. So when the CBO releases its report on household income in 2015, we’ll see that the after-tax income share of the 1% has climbed back to something like its 2005 or 2006 levels.

Most importantly, the overall pattern hasn’t changed: inequality rises during periods of economic expansion, and seems to reach a new peak during each cycle. Now that we know what happened in 2014–15, we can also explain the spike in 2012 and drop in 2013. It’s the same thing that happened in 1986 and 1987: Investors anticipating an increase in the capital gains tax rate sold their assets early to lock in a lower tax rate in 2012, and therefore took fewer gains in 2013. Smooth out 2012 and 2013 and the trend is even more clear, and conforms to the overall pattern of the past twenty-five years.

So what should we conclude from all of this? There are two questions. The less important one is how much credit the president deserves for reducing inequality. I’d say the tax “increases” of 2013 were definitely a good thing, but they largely amounted to simply not extending the Bush tax cuts. Obamacare is also a good thing. But these fall into the category of tax and transfer policy. It’s hard to point to anything he did that affected the underlying economic factors producing the increase in inequality—the general trend up and to the right you see in all of these charts. In his defense, maybe there wasn’t that much he could do. I’ll leave it at that.

The more important question is whether the trend really has shifted. I think there is little if any evidence for this hypothesis. The simplest interpretation of the last chart is that after-tax income inequality continued marching up and to the right during the current economic expansion. As Furman amply documented, changes in tax and transfer policy have widened the gap between pre-tax and after-tax inequality. But there’s no policy reason for that gap to continue widening in the future. Yes, 2015 was a good year for middle-class families, but it didn’t come close to making up for several bad years during the current expansion. There’s no obvious reason why the pre-tax income share of the 1% will stop rising anytime soon—except for the next recession, after which it will most likely continue its long-term ascent.

In summary, inequality is every bit the problem we’ve always thought it was. It’s not as bad today as it would be if John McCain had been elected eight years ago. But we’re no closer to addressing its fundamental causes.

This Chart Does Not Say What You Think It Says

Tue, 09/27/2016 - 07:30

By James Kwak

[Note: Usually I post things here first, then on Medium. This time I did the opposite.]

Jason Furman, chair of the Council of Economic Advisers, is in a celebratory mood:

Everyone talks about income inequality these days. President Obama has actually done something about it. pic.twitter.com/QfIjMxi2ms

— Jason Furman (@CEAChair) September 23, 2016

Looking at that chart, and at Furman’s triumphant tweet, you would think inequality had declined during the Obama administration.

Not so fast.

The first thing to understand is what that chart actually says. It does not say that the top 0.1 percent’s share of national income has gone down by almost one percentage point (rightmost column) since Barack Obama took office, nor does it say that the bottom 20 percent’s income share has gone up by more than half a percentage point (leftmost column).

Unless you’re the kind of person who spends a lot of time with Tax Policy Center tables, this chart requires a bit of mental reorientation. “Change in share of after-tax income” does not mean what it sounds like—change over time. It means the difference between our universe and another, parallel universe. In that alternate universe, the “changes in tax policy since 2009 and ACA coverage provisions” did not take place. Therefore, the rightmost column in the chart measures the difference between the income shares of the top 0.1 percent in these two universes—according to forecasts of 2017. (Hey, if we’re going to estimate income distribution in an alternate reality, estimating it one year in the future is child’s play.)

So what the chart really shows is that our universe is a little less unequal than that parallel universe. But for this to mean anything, we have to know how bizarro-world is defined. According to the full report by the Council of Economic Advisers (p. 26), the parallel universe is one in which the tax policies of 2008 remain in place indefinitely—that is, the Bush tax cuts were made permanent.

But remember, when President Obama took office, those tax cuts were already scheduled to expire at the end of 2010. So a large part of Furman’s “decline in inequality” would have happened anyway if the president had done absolutely nothing. In fact, Obama extended the Bush tax cuts once in 2010, and then made most of them permanent in 2013—but, to his credit, let the tax cuts for the very rich expire.

It is true that a Republican president probably would have made all of the Bush tax cuts permanent, so Obama deserves credit for not being a Republican. But essentially his accomplishment—the thing he did—was the bare minimum anyone would expect of a Democrat.

In summary, what the chart says is this: Given the current state of the economy, the tax code we have results in slightly less inequality than the tax code we had under George W. Bush, which was scheduled to go away on its own.

The same is true of this tweet by Furman:

Across many measures, reduction in inequality is clear. Ratio of average after-tax income in top 1% to bottom fifth is down by over 20%. pic.twitter.com/tMyqbmk9aw

— Jason Furman (@CEAChair) September 23, 2016

Again, when he says “ratio of average after-tax income . . . is down by over 20%,” he’s not saying what it sounds like he’s saying—that it’s 20% lower than in 2009. He means it’s 20% lower than in the alternate universe, given the current state of the economy.

That’s a good thing. But if you really want to know if “President Obama has done something about [inequality],” the bigger question is how the economy has evolved during his tenure; you can’t just take the current state as a given.

This is a much more complicated question. It’s not clear what your historical baseline should be: 2009 was obviously an unusual year. It’s less clear what your counterfactual should be: what hypothetical president do you compare Obama’s performance to?

We can look at the bottom line, however. In his accompanying Washington Post op-ed, Furman claims,

the top 1 percent’s share of income after taxes was 12 percent in 2013 (the most recent year for which data are available), well below its 2007 peak and roughly equal to its share in 1997.

Yes, this is true. But look carefully at the complete series, from theCongressional Budget Office:

The income, and hence the income share, of the top 1% fluctuates wildly. It fell precipitously in 2008 and 2009 because the worldwide market collapse vastly reduced capital gains from sales of stock and other assets. So income inequality was relatively low when Obama took office, and started increasing as the economy recovered. Furman’s point is true about 2013; about 2012, not so much. Which year is a more accurate representation of the current trend?

On the one hand, tax rates on the rich did go up in 2013. So you might think that the drop in after-tax income was the result of higher taxes, which still apply today.

On the other hand, look at this:

That’s the top 1% pre-tax income share, from the World Wealth and Income Database. Note that it goes through 2015, while the CBO chart ended in 2013. As you can see, the 2013 drop in after-tax income (in the CBO chart) was due to a drop in pre-tax income (in the last chart)—which was then reversed in 2014 and 2015. This makes complete sense. In 2012, rich people knew that tax rates on capital gains would probably go up the next year, so they sold assets to take advantage of the low rate; having taken their gains in 2012, they sold fewer assets in 2013, so their income was down. Since then, however, as the stock and real estate markets have continued to rise, the pre-tax income of the top 1% has climbed back close to its record levels. And as their pre-tax income share has increased, we can be pretty sure their after-tax income share has increased as well.

In summary, the economic factors that produce higher pre-tax income inequality—stagnant middle-class wages, high corporate profits, and booming asset markets—are alive and well, and it doesn’t seem the Obama administration has done much about them. The administration did pass the Affordable Care Act and let the Bush tax cuts expire for the rich, both of which helped mitigate the pre-tax inequality produced by contemporary American capitalism. But even if Barack Obama called inequality the “defining challenge of our time,” he has done little to tackle its fundamental causes. Let’s hope the next president does better.

Wells Fargo and the Cult of the Customer

Thu, 09/22/2016 - 16:04

By James Kwak

“An unwavering focus on the customer.” Those words grace the cover of Wells Fargo’s 2014 annual report:

The 2015 annual report features this:

One can only wonder what the bank’s public relations whizzes will think of for the 2016 version.

We know now that, over the past five years, more than five thousand Wells Fargo employees illegally opened more than 1 million bank accounts and applied for hundreds of thousands of credit cards on behalf of existing customers—all to meet aggressive “cross-selling” targets set by bank executives. At the moment, we’re not exactly sure who knew what and when they knew it. But as with the rest of the once-shocking-but-now-mundane banking scandals of the past decade—the London Whale, fixing LIBOR, manipulating foreign exchange markets, money laundering, and so on—either the bank’s top executives were unaware of what was going on, which is recklessly incompetent, or they were aware of it, which is worse.

The mantra of “the customer” is standard corporate PR fare, of course, but Wells Fargo takes it to absurd and now apparently Orwellian extremes. The bank’s “strategy” highlights the following sentence:

We start with what the customer needs — not with what we want to sell them.

This is exactly the opposite of how the bank actually behaved.

Even when caught ripping its customers off, the bank responded by saying:

Wells Fargo is committed to putting our customers’ interests first 100 percent of the time.

Now, there actually are businesses that do put their customers’ interests first, at least almost all of the time. I used to work at one. At Guidewire Software, our primary goal in everything we did was to make our customers successful using our software. If we did that , we believed that everything else would take care of itself.

This was a sensible strategy, for a few reasons. We were selling big, expensive software systems to large property and casualty insurers—a relatively small world in which everybody knows everybody else. One failed project and our reputation would be seriously harmed, perhaps fatally. The industry had seen a long succession of large and costly software project failures, in which companies spent tens of millions of dollars and had little or nothing to show for it. Promising that we would move heaven and earth to make our customers successful—and actually doing it—was a way of differentiating ourselves from the competition. Finally, we knew that each customer relationship would last for years and years, through upgrades and additional sales of new products. For us, “the customer” was, in each case, a group of real people with whom we had real relationships. And when you know people personally, you genuinely want them to succeed.

Wells Fargo is not that kind of business.

For Wells Fargo, as for any megabank, “the customer” is not a person—it’s a dataset, with means, medians, correlations, and metrics, like “cost of acquisition” and “churn rate” and “marginal profitability of product X.” Yes, customers matter, but in the generic sense that applies to all businesses: customers are where the money comes from.

There is another, more specific reason why customers matter to Wells Fargo: they play an important role in the bank’s pitch to investors. It’s cheaper to market to your existing customers than to people who aren’t your customers. You can put ads in their credit card bills, on your online banking web pages, on signs in your branches, and in the scripts that your tellers and call center operators repeat no matter what the question is. You can (supposedly) mine your customers’ purchasing data to figure out when they are going to need a mortgage or a home equity loan, and you can pounce before they have a chance to look at their other options. You can bait them with a loss-leader free checking account and reel in a mortgage with big up-front fees and a steady stream of servicing revenue, or an Individual Retirement Account invested in a crappy, high-fee mutual fund.

This is what those magical words cross-selling mean to bank executives. And the idea that you can continuously increase profits by pushing more and more overpriced junk onto the same set of suckers is music to the ears of investors. But if your story is based on cross-selling, you need to provide numbers to back it up—like the number of products per customer, the number of customers with more than one product, the percentage of deposit account customers with a credit card, and so on. To get those numbers, you set targets for tens of thousands of frontline employees . . . and we know how that story ends.

The irony of the cross-selling story is that it isn’t actually good for customers. There are business models that are good for a company and its customers. In fact, that’s the usual state of affairs: you pay $5 for a taco that your local taco truck made at a marginal cost of $2 and is so delicious that you would have paid $8 for it. Everyone wins.

But if you buy all your financial products from the same bank, the only winner is your bank. Wells Fargo probably has perfectly good checking accounts, with big ATM networks, online systems, and fancy smartphone apps. But you should get your credit card from whoever charges the lowest interest rate or offers the best rewards; you should get your mortgage from whoever charges the lowest rate, without hidden fees and penalties; and you should invest your money with Vanguard (or some other fund management company that has low-cost index funds). Banks like to talk about the advantages of “one-stop shopping,” but in the age of technology there really aren’t any. You can set up automatic payments from one institution to another, and that’s that. Cross-selling is one of those strategies that generates profits not by providing better tacos to taco lovers, but by taking advantage of existing customers’ limited attention to sell them mediocre products that they wouldn’t have chosen otherwise.

So, yes, Wells Fargo is focused on its customers—but not in the sense that they care about the people who use their products. The Customer is a story to tell Wall Street in order to prop up the stock price for as long as possible.People who have Wells Fargo accounts are the ore that has to be mined for golden nuggets of data to embellish that story. That’s the only sense in which Wells Fargo puts its customers first.

Yay! We’re Almost as Rich as We Were in 1998!

Wed, 09/14/2016 - 09:20

By James Kwak

There’s been a fair amount of triumphalism about the Census Bureau’s recent report on income and poverty, which showed a 5.2% increase in median real household income from 2014 to 2015. For example:

I usually try to be restrained, but this is unambiguously the best Income, Poverty & Health Insurance report ever. https://t.co/YdN4HgtIvR

— Jason Furman (@CEAChair) September 13, 2016


But, and I don’t think Jason Furman would disagree, this is not particularly strong evidence that everything is rosy, or that “America is already great,” as some would have it. As many people have pointed out, median household income in 2015 was only back to its 1998 level. Actually, when you take into account a methodological change in 2013, it’s still 5% below its 1999 peak.

Also, if you’re going to celebrate the good years, you should acknowledge the bad years. Here is the annual change in median income for every year since 1985, ranked from best to worst:

(For some reason, FRED’s data series only goes back to 1984. Also, to get 2013’s figure, I went back to the Census Bureau’s report for that year, because of the methodological change.)

The years in red are the years of the current recovery. As you can see, this is the first time annual growth has exceeded 0.3%, despite the fact that the economy has been growing every year.

Now, it’s possible that 2015 will be the first of several good years. Maybe unemployment has finally reached the point where companies have to offer higher wages to workers, instead of telling them to apply for government benefits. On the other hand, going simply by how long recoveries usually last, we are due for a recession—which would mean another economic cycle in which ordinary households became worse off.

There’s no way to know for sure, of course, because this is macroeconomics. But on its own, one data point does not make a trend. And so far, this century has not turned out so well for the median American family.