In Defense of Progressive Economic Policy

To be clear, I dislike the framing of a valid policy prescription as a Defense. If a good idea is being argued on its merits, it would seem off-focus to spend time primarily defending it against opponents. But there is such a well-funded and multifaceted range of attacks against economic progressivism that I think it is worthwhile to reason with and counter some of the most common detractions.

1. Social welfare programs sap motivation to work

Like many conservative economic principles, there is a logic to this idea. If someone can get paid to not work, they will choose to do so. It makes perfect sense and has truth to it. Some mitigating factors are: increased poverty in the absence of our (relatively meager on a peer-country comparison) income security programs would make the economy more vulnerable than it already is; the economic recovery being as weak as it has been in job creation makes it harder for those who truly want to work; and a large percent of those receiving income security don’t receive nearly enough to incentivize dropping out of the labor force. Further, the programs are temporary with some exceptions like Medicaid and food stamps. Let’s also keep in mind that unemployment insurance, not to mention Social Security, Disability, and Medicare, are funded by the workers’ payroll tax (and their company’s) contributions throughout their career.
But all of these mitigating factors are backward-looking. For a policy initiative, we need to scale back, rather than cut entirely, welfare and food stamps if someone gets a job (or two or three). While Unemployment benefits do this, they do it on a dollar for dollar basis. For the most part, each dollar of work counts equally against your benefit and then you quickly lose all the benefit as most work wages exceed the benefit entirely. All of these programs need to have a sliding scale of the percent of work income they will deduct, starting from, say, 20% of the first $5,000 in income earned, with the percent deduction from benefits slowly sliding up until the benefit is entirely eliminated because they actually do earn too much money to receive it.

2. Keynesian Policy is Proven not to Work

It’s tough to fully address such a wide-ranging, ubiquitous Manichaeism. Perhaps it is best to start with the most recent historical points of controversy and work our way backward. The economic recovery has been weak. Usually they are weak for an extended time after Financial Crisis; they normally are clearly worse than normal recessions. And the (non-Financial Crisis) 2001 recession was followed by an equally, and in terms of lag in job growth pickup, actually more drawn-out wait for real recovery that finally arrived in the summer of 2003. In every previous recovery in recent years, government job growth has increased. In this recovery, (the combination of federal, state and local) government has shrunk in their number of employees. The stimulus was about one-third tax cuts, which economists from Moody’s to the CBO have long said are less effective than direct spending, especially on infrastructure. Due to the size and the structure of the 2009 stimulus relative to the enormity of the crashing economy contracting at a 10% annualized rate, it has been likened to jumping five feet to try and cross a ten-foot chasm.
Since then there have been just about zero forms of fiscal stimulus. There has only been fiscal restraint, in the form of the budget sequester cuts and severe state and local cuts due to strangling pro-cyclical state-level balanced budget requirements. The Fed admonishes Congress regularly that monetary policy and QE are powerless to create jobs compared to the expansionary fiscal policy that has taken place in (and at least helped drive) every modern recovery except this one with its do-nothing legislative branch.
FDR oversaw the US going from about 30% for the official unemployment rate to 1% in 1945. The many New Deal programs put millions of people directly to work, and the military-Keynesianism of World War II employed still more. There is a textbook case of historical revisionism going around in the writings of author Amity Shlaes who maintains that FDR worsened the recession and conservative economics would have been better. To paraphrase economics nobelist Joseph Stiglitz (on the meteoric rise of South Korea leading anti-industrial policy conservatives to say they would have done better by embracing pure market neoliberalism): that is a particularly difficult counterfactual case to make.
There was sentiment among the left that the Financial Crisis would prove deregulation and market purism were detrimental and set the stage for a Keynesian resurgence. The continued conflict between the two ideologies seems reflective of the two diametrically opposed views and narratives on the origin of the housing crises.

3. Government Involvement Caused the Subprime Mortgage Meltdown, the Financial Crisis, and the Great Recession.

One thing is right – the Subprime Mortgage Meltdown, the Financial Crisis, and the Great Recession are inextricably intertwined in just that sequence of causation. The premise that the GSEs (Government Sponsored Enterprises) Fannie Mae and Freddie Mac were the key (or even a key) cause of the crisis is a great deal less axiomatic. I go into more detail on this in an entire chapter in my book Real World Macroeconomics. Fannie Mae has been doing what they do since 1933. Only after the deregulations of 1999 and 2000 dismantled the Glass-Steagall Act and deregulated derivatives did we have the explosion in private-label MBS (mortgage backed securities), CDOs (collateralized debt obligations) and the poisonous insurance contract the CDS (credit default swaps). It seems much easier to link a problematic subprime market from 2003 to its collapse in 2007 (when the MBS market became illiquid in August of that year) to major changes in 1999 and 2000 than to a law from 1933.

4. But Fannie and Freddie had to be bailed out. Doesn’t that prove they were bankrupt?

Bankrupt and causing the crisis are two very different designations. In what may be the definitive bible of the Financial Crisis, Bethany McClain and Joe Nocera go to great lengths in their research and details to ascribe exacting blame to a wide array of culprits in their seminal book, “All the Devils are Here.” In their section on the GSE’s, the authors clarify that Fannie and Freddie were late in following the private banks into subprime lending and securitization. GSEs had an almost nonexistent presence early in the subprime bubble and a minority stake much later. They piled in so late in fact that and so near the very end of the bubble that I would almost be tempted to argue their support of the housing market in that brief time frame was meant more as a public service than a profit avenue. However, knowing they were both turned into private sector, publicly traded companies decades ago (and the public arguments of GSE leadership and advocates for expanding their portfolio) could preclude such a conclusion.
GSEs have been like a big giant MBS since their founding. But only when private investment banks got in the game did we have a crisis soon thereafter.
Finally, any mortgage that the GSEs bought or insured came with a “mortgage-putback clause.” This means that if any part of the mortgage was obtained fraudulently, that private issuer had to buy the mortgage back from the GSEs if the GSE had bought it or cover the GSE for losses if the GSE had insured the loan. So it is largely a question of whether our legal system is going to function and make the banks buy back all the junk mortgages they cut-and pasted at Ameriquist and all the undocumented loans they made at CountryWide and numerous other lenders. The closest analog to that ideal manifesting in reality is the roughly $100 Billion in settlement costs that banks have already agreed to. Sure, firms may settle to avoid frivolous lawsuits, but 100 Billion dollars is starting to talk about some real money. Clearly the banks thought they would be worse off if they went to court and had to really be swayed by the evidence of their culpability to settle for such a large and increasing amount.
By the way, if mortgage brokers had a fiduciary duty to get the borrower the best loan for which the customer qualified rather than being paid a legalized kickback bribe known as the yield-spread premium by investment banks for putting the borrower into a far worse loan than that for which they qualified, about 33% to 55% of the borrowers would have avoided difficulty repaying according to various studies cited in my book.

5. The profit motive ensures that Private Sector firms perform better than Public Sector government agencies and departments.


http://www.businessweek.com/articles/2014-07-02/why-the-government-is-struggling-to-shut-down-corinthian-colleges#r=nav-r-story

The above article is a microcosm of the privatization debate. Conventional theory says private sector firms should do a lot of things better than the government due to the profit motive. Why does that so often fail to materialize? In the for-profit education industry, the outcomes are dismal compared to public sector higher education. Half of their students drop out in the first year. They are 13% of all students and account for half of the debt. Nearly all (90%) of their revenue is from government loans. This last part reminds me of the broader extrapolation: we allow profit-making colleges, and end up supporting them with billions of taxpayer dollars that are completely lost forever. We deregulated housing in 1999 and 2000 with the Financial Services Modernization Act and the Commodity Futures Modernization Act, opening the door to the massive explosion of private-label mortgage securities and almost immediately inducing the banking sector’s dire need for multi-trillion dollar bailouts. We were not willing to fund the 1 billion dollars that the Army Corps of Engineers said was needed to prevent levee failure pre-Hurricane Katrina, and ended up incurring 150 billion dollars of economic damage as a result. We coddle to the unnecessary middleman of private health insurers despite decades of their spending 30% of revenues on non-health related overhead and other dispensations, while Medicare and Medicaid spend 1-3% on overhead. All these situations demonstrate that when we turn classic public goods over to the private sector, the situation is so worsened that the government ends up spending much more than before to avert total meltdown. Just look at all the other industrialized countries, who are not in thrall to the idea of preserving profit-making health insurers, and how their total spending on health care as a percent of GDP is less than just our government ends up spending on health. We have hundreds of thousands of military contractors, and the armed ones are paid ten times what they were making when they did the same job working for the US military, after we invested heavily in their training. If anyone can explain why paying ten times as much for the same thing is an efficient improvement compared to keeping this service strictly inside the public sector, I am very curious to know what that argument is.
From prison privatization http://www.corpwatch.org/article.php?id=868, to road/highway privateers http://www.motherjones.com/politics/2007/01/highwaymen, to firefighting privatization http://harpers.org/redirect301/?q=archive/2009/10/0082671, to private immigration detention centers, the litany of industries where the privatization experiment has led to worse (usually disastrously worse) outcomes seems never-ending. So how should we reconcile this abundance of evidence with the concept that the profit motive should always lead to greater efficiency?
To return to the for-profit colleges, should we just propose closure of all community colleges and public universities and turn the whole thing over to the for-profit colleges? After reading the college education privatization article, you might agree with me that the role they have already had in damaging students’ futures has already been far too large. One thing I did learn from this article is that, contrary to my previous viewpoint that the trades-focused for-profits like WyoTech and Heald seemed better than other for-profits, in fact they are just as bad as all the rest.
It is time to rethink the assumptions about privatization.

6. The Economy does better under Republicans

On almost every indicator, this is overwhelmingly false. See this point by point, stat by stat analysis of the research on this comparison: http://crooksandliars.com/jon-perr/gop-economy-does-better-under-dems
The economy does far better during democratic administrations in modern history on just about every conceivable measure. Job creation and unemployment rate are better, GDP growth both absolute and per-capita are better. Stock market gains are far better and even corporate profits are larger.

Conclusions: these are but a sampling of the primary counters one hears against progressive economics. There are more that I hope to address at a later time here at ProgressiveEconomist.com, along with ideal policies in both their broad strokes and specific details.