Archive for December, 2013

Functionally Irrational

Tuesday, December 17th, 2013

Before we dig into the respective political positions on unemployment, let’s revisit this concept of moral intuitionism.

This is the condition experienced when people confront something that they consider objectionable from an emotional point of view. Their primitive emotional brain passes judgment and then hands that decision off to the rational brain. The rational brain then constructs a logical argument to defend what otherwise was an emotional decision.

Here’s an example drawn from social psychologist Johnathan Haidt’s book “Righteous Mind”.

The person conducting the experiment places a paper in front of the subject. The paper says, “I the undersigned, agree to sell my soul to the individual designated as the buyer for the sum of (blank) dollars.” Next to the paper is a crisp $100 bill. The question is will you sign it?

For those who say no, the person conducting the experiment adds several additional clauses. One says that this agreement is strictly for experimental purposes and is not binding in any theological sense. Will you sign now?

Then they also add that once the agreement is signed and the money paid, the signer can have the agreement back. They can keep the money and do whatever they want with the agreement. Will you sign now?

Do you have a dollar amount that would change your mind?

What about if the agreement includes a similar amount of money donated to the signer’s church? Would you sign then?

There are some (roughly 17%) who simply refuse under all circumstances. That’s because their emotional brain has already decided that this is wrong and under no circumstances are they going to participate. It doesn’t matter what anyone else says.

We are dealing with a similar circumstance in the Republican Party with regard to long term unemployment insurance.

Before some reader suggests that I only pick on conservatives, yes it is true that EVERYONE has some sort of social taboo that can trigger an attack of moral intuition. Conservatives, however, appear more susceptible than liberals because conservatives care more about rules while liberals care more about people.

The challenge in today’s political climate is that we have to make sound financial decisions to deal with issues like debt, unemployment, and economic growth. Because of moral intuition, conservative Republicans continue to find themselves on the wrong side of the data when it comes to their emotional responses to these issues.

Unemployment insurance is just one example. Republicans believe that unemployment insurance INCREASES unemployment because it removes the incentive to go find a job.

In their defense, there is some research that suggests during times of high EMPLOYMENT, unemployment insurance does increase the unemployment rate slightly.

Unfortunately that’s not the case right now.

There are still three times more people looking for work than there are available jobs.

As researchers at the Federal Reserve Bank of San Francisco recently concluded, “Our estimates suggest that extending unemployment insurance benefits in weak labor markets has virtually no effect on the rate of job finding.”

But let’s go ahead, just like with the soul-selling experiment, and discuss some of the other reasons Republican rational brains have come up with to support this emotional position.

There is the free market argument. That one suggests that intensifying the competition for the available jobs will drive down the cost of labor. Driving down the cost of labor will encourage businesses to hire more, which will result in a virtuous economic recovery.

The problem is that in at least this economy, growth is driven by consumption. If we drive down the cost of labor, that affects both the employed as well as the unemployed. When wages stagnate, consumption stagnates, and growth slows. That’s because businesses don’t hire because labor costs are low. They hire because demand for their goods exceeds their ability to supply those goods/services.

The only groups who benefit in this scenario of flat demand and decreasing labor costs are businesses, their investors, and their CEO’s. That’s because they are able to cut costs, demand higher productivity, and keep the profits for themselves.

The economic truth is that long term unemployment benefits act as an economic stimulus. They keep people in their homes, keep families together, and pump money into the consumer economy. Unemployment benefits PRESERVE jobs by propping up consumption during times of economic downturn. Moody’s estimates that every dollar of unemployment benefits delivers $1.55 dollars in economic benefit. Cutting $25B in benefits results in an estimated $39B economic loss. Next year when another 3.9M unemployed will qualify for long term unemployment benefits that are no longer there, the economic loss will be closer to $100B. The CBO recently estimated that extending the benefits through the end of 2014 would increase GBP by .2% and DECREASE unemployment by the same amount. In other words, long term unemployment benefits CREATE jobs.

The problem is that when you mention unemployment benefits to a conservative Republican, their moral intuition goes directly to the scenario of the government paying people NOT to work. That leads to the moral outrage of conservatives over any form of government assistance because it creates a culture of dependency.

It doesn’t matter that statistics show that of the 4.1M long term unemployed, only 1.3M are still receiving benefits. So for those 2.8M unemployed who have already lost benefits, that loss doesn’t appear to have made any difference in their ability to find a job.

Also 20% of the long term unemployed had at least a bachelor’s degree and 40% had household incomes between $30K and $75K. These are clearly not people whose previous history suggests dependency. What it does suggest is that the longer you are unemployed, the harder it is to re-enter the workforce.

From a political perspective, we then find ourselves in the position where moral intuitionism can’t be argued. The facts honestly don’t matter. All that matters is that we as a country refrain from doing whatever set of things causes the moral intuition of a conservative to fire off. That’s what is important in today’s politics. That’s the political challenge that we face as a country. How can a democracy function effectively when 30% of the voters are fundamentally irrational?

Merry Christmas

The Road Not Taken

Friday, December 6th, 2013

We’ve just gone through how the Great Recession caused a predictable populist uprising and how that uprising was hijacked by conservative Republicans and became the Tea Party.

In the interests of full disclosure, the Democrats had something to do with this too.

Here’s a short summary of how the Democrats missed the opportunity of a lifetime to make the case for government as the protector of the working man and the middle class. By failing to engage in a vigorous defense of the New Deal, Democrats lost an opportunity to re-educate another generation of voters on why free markets can’t be trusted to regulate themselves.

Background

After 8 years of Bush’s version of trickle-down economics, two wars, Halliburton, Black Water, Abu Grebe, an unfunded expansion of Medicare, Enron, torture, wiretapping, outing of CIA agents, a politically motivated purge of the justice department, Katrina, the housing bubble, and the inevitable burst of that bubble, ballooning deficits, dramatic job loss, the resultant rash of foreclosures, the collapse of the housing market, and the collapse of the domestic auto industry; the country was ready for a change. The collapse of the global financial markets only put an exclamation point to the cry for CHANGE!

The country selected a young bright Ivy League-educated African American who promised change. He promised to end the wars in Iraq and Afghanistan. He promised to expand healthcare. He promised immigration reform. He promised a new era of political cooperation and focus on rebuilding the middle class. More than anything else, he promised that a vote for him was a vote AGAINST everything that the Bush administration stood for. Shortly after his election, however, he was handed a global financial crisis.

Bad Optics

His reaction was to retain many of the people that Bush had put in place to deal with the crisis and pass the basic recovery package that had been crafted by that team. From a financial point of view, you can’t argue with the results. The plan worked. The global financial system stabilized. Bad financial institutions were consumed by good ones. The domestic auto industry was restructured. Five years later the stock market is setting records and job growth is finally hitting numbers that will reliably reduce unemployment.

The optics, however, were bad. You had Larry Summers and Tim Geithner leading the charge. Summers was the guy under Clinton who had championed the repeal of the Depression-era Glass-Steagall law which prohibited financial institutions from mixing securities trading and FDIC-insured banking. Geithner was a disciple of Alan Greenspan who had famously believed that the captains of Wall Street could regulate themselves. The focus of this team was on restoring confidence in the markets.

The collapse of the mortgage derivative market had left many financial institutions holding assets of questionable value as collateral for loans that they weren’t sure were collectible. In self-defense most banks stopped lending and started hoarding cash to protect against having their own loans called. That caused the economy to essentially seize-up as we transformed overnight from a credit economy to a cash economy. Getting the credit economy going again while avoiding the panic bank runs we’ve seen in the past was a masterful accomplishment.

The team completely ignored the need to also restore voters’ confidence. This opened the door for movement conservatism to put their own spin on events.

The AIG Moment

The stage was set when the news broke that AIG planned to pay out $165M in exec bonuses, and company-wide bonuses that could exceed $1.2B. This after the government provided AIG a huge bailout (a credit line from the Fed and Treasury of up to $182B). The President and Congress expressed outrage, but the die was already cast.

It didn’t matter that the AIG bailout turned out to be a ridiculously good deal for taxpayers netting almost $23B dollars in two years.

It also didn’t matter that AIG was the lynch-pin in the financial structure supporting the derivative trading market that was at the core of this collapse. If AIG was allowed to collapse, the financial meltdown could have easily become a depression. That’s because virtually every financial institution holding mortgage-backed derivatives in their portfolio also had an insurance policy from AIG to hedge against the performance of those derivatives. If AIG failed to pay their insurance claims, ALL of those institutions would be forced to unravel the value of their holdings to determine what they were worth. In the meantime, no one would lend to them; and they wouldn’t lend to anyone else.

While the Obama team of financial all-stars worked feverishly behind the scenes to keep the fragile interconnected network of international financial institutions from collapsing, the public saw something very different. They didn’t see all of the deals and personal promises required to keep the all the leaks in the dike from becoming a flood that would drown the world. Instead they saw what appeared to be obvious evidence that those who had caused the financial meltdown had successfully gamed the bailout too. They saw a system that was still rigged to benefit the wealthy at the expense of everyone else.

What mattered to them was not that President Obama and his team of Wall Street insiders had masterfully kept the whole system afloat by propping up AIG. They saw a “crony” deal that ALLOWED AIG to reward themselves when they should have been punished.

The right were able to capture this sense of anger with “let it burn” irrationalism.

The Democrats were caught flat footed because they had lost their ability to speak to or empathize with the working man.

President Obama in Audacity of Hope describes the “modern” Democrats that he has met on the fund-raising trail.

As a rule they were smart, interesting people, knowledgeable about public policy, liberal in their politics, expecting nothing more than a hearing . . . in exchange for their checks. But they reflected, almost uniformly, the perspectives of their class. . . . They believed in the free market and an educational meritocracy. . . . They had no patience with protectionism, found unions troublesome and were not particularly sympathetic to those whose lives were upended by the movements of global capital. Most were adamantly pro-choice and anti-gun and were vaguely suspicious of deep religious sentiment.

The financial meltdown frightened these people too, but they did not lose their jobs or their homes. They had a deep and sophisticated understanding of the financial markets because they are generally well educated and well off. They knew why you couldn’t simply “let it burn”. They could probably even empathize with those who were losing their jobs and their homes, but they could not appreciate the abject terror, vulnerability, and rage that comes from having your future stolen. These Democrats simply could not understand why so many people were obsessed with finding and punishing the criminals when first priority had to be stabilizing the financial system.

Herbert Hoover or FDR

History has lost track of the fact that Herbert Hoover used bailouts extensively to try to jump start the economy after the 1929 stock market crash. They were massively unpopular because of blatant cronyism. FDR won the presidency in 1932 because he campaigned against them. It was FDR’s genius that he understood the plight of the working man even though he himself never experienced it. He was able to gain their confidence because he laid the blame for the Great Depression squarely on the shoulders of greedy business men and the unregulated free market.

His actions supported his words.

He used government to get money flowing again rather than working through financial institutions. He closed corrupt banks and regulated the rest. He created new investment regulations and imposed wage and cost controls. He supported the growth of unions. When that wasn’t enough to put everyone back to work, he printed money and hired the unemployed himself to build roads, develop parks, write books, record songs, and create public art. He was able to create the grand New Deal bargain between business and the workers because workers believed in him.

Instead, Obama and his team trusted their own expertise and intelligence. Their message to the public was that we’ve got the best economic minds in the world engaged in the managing this recovery. The recovery plan is based on solid Keynesian economic principles, so trust us. It’s going to work. It may take some time, but it’s going to work.

They were right. It did work.

They were wrong in assuming that people who were terrified, would feel better knowing that smart people were in charge. For many it was exactly the opposite.

What people were hungry for was a leader who not only told them that everything was going to be OK, but who also demonstrated by his actions that he understood their righteous wrath. They needed someone to take out after Wall Street, punish those who misbehaved, regulate the industries that couldn’t regulate themselves, and place the blame squarely on the failed philosophy of unregulated free markets. Democrats should have been promoting the role that government plays in times like this. Instead they found themselves protecting Wall Street from a larger collapse that could have plunged the world into depression. The recovery plan required cooperation from the insiders who helped cause the problem. The Obama administration secured that cooperation by reassuring insiders that the government’s primary concern was recovery rather than prosecution.

Instead of FDR, Obama became Hoover.

Elites

Movement conservatism took advantage of the opportunity that they helped create. Just as a segment of the population in the 1930’s turned to communism as the utopian alternative to capitalism, movement conservatism began promoting utopian market populism as the cure of our economic ills today. Market populism is the answer for everything and a potent defense against relativism. Whatever shortcoming conservatives confront, whether it be math, or science, or political reality can be explained away through the fiction of a “Randian” free economy.

The challenge that this presents for Democrats is, just as Republicans are becoming more fictional and conservative, Democrats have become more professional and pragmatic. Democrats live in the world of facts. Republicans live in the world of ideology. The world of ideology will trump the world of facts every day because ideology is about religion. You can’t argue religion.

The emergence of the cult of utopian market populism also made it much easier for Democrats to dismiss right wing zealotry as hysterical and illogical. That’s because Democrats themselves were becoming the equivalent of political atheists. Democratic political positions were grounded in fact rather than belief. Democrats trust and self-identify with academia and subject matter experts because that’s where facts come from.

Republicans identify with the conservative meme of revolting against the ruling elite class who are imposing an ideology (the world of facts) on them. They see themselves as heroic revolutionaries storming the barricades of conventional wisdom.

It doesn’t matter that overturning the status quo, as represented by the scientific method, is a the heart of virtually all academic research.

It also doesn’t matter that holding up the free market as the example of a revolt against the ruling class is completely backwards. The free market CREATES the ruling class. The ruling class use their wealth and power to warp the free market and preserve their position. The dramatic growth in a fabulously wealthy ruling class in this country is only the most obvious result of our willingness to give them free reign. The fact that Republicans chose a poster child for the ruling class as their nominee in 2012 was no accident. The religion of the right, however, tramples these facts with the free market fantasy that EVERY man could achieve the wealth of Mitt Romney if the market were simply allowed to function without limit.

What matters to movement conservatives is that there is an elite in this country who dare to question their religious beliefs in a free market utopia. They ASSOCIATE this elitism with academia. In a fit of moral intuitionism, they reject science and research that contradicts their views as part of a vast conspiracy to hide the truth and brainwash the unconverted. They attribute cronyism and self-serving classism to any political influence gained by those who live a fact-based life. They infer from that that the great ills in the economy today flow from the attempts by the elite to control and manipulate the otherwise pure and dependable free market to their own ends. These elites engage in this behavior because they fear what would happen to them in a truly free market utopia.

Healthcare Reform

Obama made a fateful choice when he decided to pivot from financial recovery to healthcare reform. Rather than engage in a battle to promote fundamental Democratic beliefs about the role of government to protect the little guy against the excesses of the market, Obama chose to fulfill his campaign promise of universal healthcare. Unfortunately this played right into the hands of movement conservatism. The government that was already guilty of cronyism on a massive scale, and racking up debt of historic proportion in the process, was now planning to take over the largest segment of the economy. What started as a populist backlash to the financial meltdown turned into a political movement called the Tea Party. That movement recaptured the House in 2010.

If healthcare reform does come close to its enrollment targets, significantly reduce the rolls of the uninsured, and sign up enough young healthy people to support its business model – the politics in this country will change again.

That political change will weaken Republicans, strengthen Democrats, and relegate the Tea Party into a fringe opposition group. That’s because a majority of voters will realize that just as the Republicans were wrong about the free market’s ability to regulate itself, they were wrong about healthcare reform. It did not kill people. It did not destroy jobs. It did not add to the debt. The Republicans, because they have invested so much into Obamacare opposition, will get punished at the polls until they find another issue. The Tea Party because they are likely to continue in their obsessive opposition to a program that they are not going to be able to repeal, will lose their ability to influence the Republican Party.

While the Tea Party figures out how to move forward, Republicans and Democrats will engage in the next big ideological fight. That will be the unfinished business from Obama’s first term – Economic Justice and Income Inequality.