Category Economy

Senate Democrats Unnecessarily Force Summers Out

Danny Vinik Leave a comment

Larry Summers is out of the running for chairman of the Federal Reserve after he notified the President yesterday “that any possible confirmation process for me would be acrimonious and would not serve the interests of the Federal Reserve, the Administration, or ultimately, the interests of the nation’s ongoing economic recovery.” Summers is right here. After Jon Tester (D-MT) announced Friday that he would vote against Summers in the Senate Banking Committee, it became clear that his confirmation process would be extremely difficult. His decision to bow out saves an ugly intraparty fight between the Administration and Senate Democrats. It was a fight that the President should’ve won, but wasn’t going to and Summers knew it.

To start, Obama should’ve nominated current Fed Vice-Chair Janet Yellen from the beginning. It should’ve been an easy decision. But the President loves Summers and was seemingly set on choosing him from the start. It wasn’t the optimal choice, but Summers would still have made an excellent Fed Chair. This is what makes it so absurd that Tester and other liberal Democrats were going to vote against him.

Larry Summers withdraws from the Fed Chair search.

Larry Summers withdraws from the Fed Chair search.

Summers is, by all accounts, a brilliant economist. However, many liberals were wary of his prominent role in the repeal of Glass-Steagall and the deregulation of the derivatives market in the late ’90s. There’s no question that Summers was a leader in making those decisions, but Summers has also learned from them. He supports banks holding greater levels of capital, one of the focal points of Dodd-Frank. In addition, there’s not much information on Yellen’s regulatory beliefs. She’s an economist by trade, not a regulator. But skeptics of Summers inherently believe that she would be a tougher regulator than him. As Josh Barro pointed out on Twitter last night though, if Republicans thought that was true of Summers, they would’ve supported him as well. But that hasn’t happened either. The fact is that Summer would in all likelihood have implemented Dodd-Frank in a similar manner to how Yellen would.

Other arguments against Summers is that the nomination of an elite Democrat would politicize the Fed too much. But this argument is overblown. The Fed is already a politicized institution and nominating Yellen over Summers wouldn’t change that.

One of the least covered areas of this debate has been Yellen and Summers views on monetary policy. Yellen is considered more of a dove, but only slightly more. Markets perceive a larger difference between the two than may actually exist.

Finally, Yellen’s proponents argue that Obama has done a poor job appointing women to economic positions. This is true, but it’s not a strong enough reason to oppose Summers.

For all those reasons, Yellen is a better choice. But she’s only slightly better. Summers would still likely do an excellent job as Federal Reserve chairman. Both candidates should have had no problem receiving Democratic support. Instead, liberal Democrats jumped on this as a chance to fight the President. But why? This really does weaken Obama: he can’t even get his own party to support an extremely strong candidate in Summers. Does he have any sway on Capitol Hill at all? It’s increasingly looking like he doesn’t. This perceived weakness hurts not just Obama, but Democrats as a whole in trying to pass other legislation. A weak President is bad news the Democratic party.

This is why it was absurd for Democrats to vote against Summers. They may get a slightly better Fed Chair in Yellen (or maybe a worse one, if Obama nominates someone else) in return for showing that the President doesn’t even have sway in his own party. Does that sound like a smart move for Democratic senators and the Democratic party? It sure doesn’t to me.

The Question We Should Ask About Wisconsin Teacher Unions

Danny Vinik Leave a comment

Under Governor Scott Walker’s Act 10, passed in 2010, unions in Wisconsin must be recertified every year. They do this by conducting a vote of the workers and at least 50% must vote in the affirmative for the union to receive recertification. Before Walker, Wisconsin was one of many states that required union membership for employees to work. They didn’t have a choice. If they wanted to work in an industry with a union, they had to join the union. Walker eliminated that law with Act 10 (known as a right-to-work law).

Requiring workers to join a union may seem ridiculous at first, but it solves a very difficult problem: free riding. Without such a law, many workers would choose not to join a union, but would still benefit from its representation. The union would negotiate for everyone, but not everyone would pay dues. This incentives workers to forego membership and reap the benefits. But as more and more people rationally choose to free ride, the union becomes weaker and weaker. Eventually it has no power and the workers all lose. That’s why big business is such a big proponent of right-to-work laws. They destroy unions.

So it’s not surprising to find out that in the aftermath of Act 10, teachers unions are falling apart in Wisconsin:

Today, teachers in Kenosha, Wis., voted to decertify their union, the Kenosha Education Association, by a margin of nearly two to one. Only 37 percent of the teachers opted to retain the union in an election made possible by the labor reforms enacted under Gov. Scott Walker (R). The result goes to show that when workers have a choice on whether to join a union instead of being forced into one by law, they often choose to vote down the union.

That’s from the Competitive Enterprise Institute (CEI), a conservative organization focused on limited government, but it misses the most important question: did workers vote to decertify because they didn’t want a union or because they wanted to free ride off others? It’s not a surprise at all that unions are falling part. That was guaranteed to happen. The question is whether it’s because of free riding or not. Town Hall’s Mary Katherine Ham runs through a bunch of stories celebrating the fall of Wisconsin unions, but none poses this important question either.

I’m more sympathetic to the right-to-work argument than most liberals I know. I cringe at the idea that in order to be a teacher in many states, you must join the union. But I also understand that such rules solve the practical problem of free riding. The evidence is pretty solid that right-to-work laws weaken unions, but if workers would rather that be the case, then I certainly respect their freedom to choose that. But if most workers value unions and are not joining just so that they can free ride, then laws requiring union membership make a lot of sense. That’s what we need to figure out in Wisconsin, but no one is asking the right question.

Delaying the Individual Mandate Isn’t A Real Possibility

Danny Vinik 1 Comment

One thing that Republicans have been clamoring about recently is for a one-year delay in the individual mandate in response to the Administration’s (unlawful) decision to delay the employer mandate a year. This morning, National Journal and Public Notice hosted an event at the Newseum titled “Fiscal Fallout: What is ‘Responsible’ in Today’s Fiscal Reality” with keynote addresses from Sen. Orrin Hatch (R-UT) and Center on Budget and Policy Priorities’s Robert Greenstein as well as a panel discussion on our fiscal situation. Near the end of the panel,  Bill Hoagland, the Senior Vice President at the Bipartisan Policy Center, discussed the possibility of delaying the individual mandate for a year:

You can’t defund Obamacare on a continuing resolution because 90% of Obamacare is entitlements so it doesn’t make any sense, but I do think Bob [CBPP’s Robert Greenstein] passed over one small thing. He mentioned that a delay would increase the number of uninsured by 11 million. Yet he did not mention that the CBO’s cost estimate on that was that it would save $35 billion too. I’m not here to propose a delay, but for the average person listening to this debate outside, [they may say,] ‘Wait a minute. You delayed the employer mandate. Why can’t we delay the individual mandate?” And I worked with some insurance companies also so I know that the argument will be that this will drive up premiums immediately. Quite frankly, premiums have been set here for the exchanges starting in a few weeks and the companies don’t know what the experience is going to be anyway. So I don’t find a delay necessarily to be bad. In fact, I would almost think the Administration would want a delay to get the exchanges ready [while] other provisions of the law remain in effect – no [rejecting people with] pre-existing conditions, [allowing young people to stay on their parents’ insurance] up until age 26. So I think one of the outcomes here will be that you hear more about a delay. And I’m not proposing it. I’m just suggesting you’ll hear more about a delay.

First of all, under no circumstance is the Obama Administration going to delay the individual mandate for a year. They’ve fought off challenge after challenge for the law to get to this point and they believe (as I do) that once it officially begins, it will be here to stay. Based on their desperate, stubborn refusal of House Republicans to fund the government unless the Administration agrees to defund the law, they seem to agree as well.

Second, just delaying the individual mandate would be a disaster. Hoagland says he understands the counter argument to such a delay, but he doesn’t seem to. The problem is that if you delay the individual mandate, but still require insurance companies to cover everyone with pre-existing conditions then the death spiral ensues. Only unhealthy people sign up for the law while healthy people forego insurance. Without the offset of those healthy people paying into the system, these insurers must raise premiums to cover the unhealthy ones. Hoagland notes this, but uses a bit of hand-waving to say that insurance prices are locked in and thus insurers won’t be able to raise premiums. Well if that’s the case, then insurance companies will go bankrupt. The companies came up with insurance premiums assuming that young, healthy individuals would purchase insurance. Their business model falls apart if those individuals aren’t required to sign up, but the firms are not allowed to revises their premiums.

Thus, if Hoagland wants to delay the individual mandate (which he never says he wants to do – he’s just suggesting it’s going to come up), then we must delay the pre-existing condition requirement as well. This would effectively delay the entire law and give Republicans another year to figure out how to repeal and undermine it. They can even try to delay it until the midterm elections where they will hope to win back the Senate and repeal it altogether (of course, the President would veto such a bill).

So, contrary to Hoagland’s suggestion, this isn’t something you’re going to hear more about. It would be an epic disaster policy-wise and the Administration isn’t going to consider it. Obamacare is the law of the land and that’s not changing.