Category Public Policy

We’re Having the Wrong Conversation About Uncertainty

Danny Vinik 1 Comment

Imagine the following situation: You’re the CEO of a small business with one store and just five other employees. You survived the Great Recession and business has been slowly improving. As the economy improves, you’re thinking about expanding by opening another store with five more workers. Then you hear the President’s State of the Union Address calling for a higher minimum wage. This scares you. A higher minimum wage would raise your costs and prevent you from opening that new store (this is how a minimum wage hurts job growth). Now, it’s the beginning of August and no minimum wage bill has passed. The President isn’t pushing it particularly hard and Congress is focused on other bills. Do you open the second store?

It’s a tough call. It would just about wreck your business if you expand and then Congress passes a higher minimum wage. On the other hand, you’re leaving profits on the table for every day you don’t expand and the minimum wage stays the same. That right there is policy uncertainty and it is what Republicans have been yelling has been holding back the economy for years.

Today, Jim Tankersley at the Washington Post and Kevin Drum at Mother Jones push back and basically declare uncertainty a farce. Here’s Drum:

Republicans wanted to blame the sluggish recovery on mountains of red tape from the business-hating Obama administration, and the press played along. This means that “uncertainty” got a lot of media attention, which in turn means that if you have an “uncertainty index” based partly on media mentions, it would have shown persistent elevation during 2010-12, the heyday of the uncertainty campaign. Sure enough, that’s exactly what it showed:

….

As we knew all along—and as the media should have known all along—”uncertainty” was just an invented partisan talking point. It no longer serves any purpose, so now it’s gone. But the sluggish recovery is still with us.

Roosevelt Fellow Mike Konczal proved last year how ridiculous uncertainty indexes are. It’s more media manipulation than anything else. But this doesn’t mean that uncertainty isn’t real. The simplified example above demonstrates how it works on a theoretical level. But saying that uncertainty is holding back the recovery doesn’t imply that one party or the other has the correct policy prescription. In the above example, you can remove the uncertainty in two different ways: passing a higher minimum wage or the President declaring he is no longer interested in pushing for it. In either choice, the uncertainty disappears.

This isn’t how Republicans described uncertainty as holding back the recovery. For them, uncertainty was excessive regulations and new rules from the Obama Administration. But this is just one factor in the uncertainty debate. There is economic uncertainty. Who knows what the next jobs report will look like? There’s also fiscal uncertainty. The looming potential government shutdown may be holding firms back as well. Same with corporate tax reform which is slowly moving forward. Businesses must take all of this into account. The more threats to shut down the government, breach the debt ceiling, rewrite existing regulations and pass major policies, the more businesses are going to be hesitant to make major decisions. That’s how uncertainty affects the economy, but it’s largely not the Obama Administration’s fault. That’s where Drum is right: it became a partisan talking point in the last election.

So instead of having a smart discussion on how we can actually reduce uncertainty, Republicans fostered a partisan belief that the uncertainty that was really holding back the recovery was the Obama Administration’s regulations and nothing else. Not the economy. Not Congress. It was all on the Obama Administration.

So is it any surprise that as uncertainty has decreased (according to uncertainty indexes meh), liberals are using it to show that uncertainty wasn’t holding back the economy? Tankersley demonstrated this aptly:

The index seeks to measure the effect of policy uncertainty, including pending regulations and expiring tax provisions, on the economy. As you may have heard once or twice over the last few years, many conservatives blame uncertainty for holding back hiring and growth in this recovery. Those lawmakers love to cite this index as proof of elevated uncertainty.

According to the index, the decline of uncertainty this year is clear*.

And the hiring boom that was supposed to follow? Well…

Maybe hiring would be significantly less if uncertainty was at 2009 levels. Maybe reduced uncertainty has offset some of the effects of the payroll tax increase earlier this year and has been an important factor in our recent meager job growth. It’s tough to tell for sure. But no matter what, the facts are that uncertainty indexes show reduced uncertainty and job growth is weak. So liberals have jumped on this to show that reduced uncertainty and job growth don’t go together. This continues to obscure the debate as uncertainty is a drag on growth. But it’s not just regulatory uncertainty. It’s much more. Republicans need to admit that. Democrats need to admit uncertainty exists. And uncertainty indexes need to go away. Then maybe we can have a conversation about how to actually reduce it. Right now, it’s a partisan mud-flinging contest with hand-picked stats and a bogus index used to support them. isn’t that just great?

Accepting Political Heat

Danny Vinik 1 Comment

New York switched to the Common Core standards last year and that means tests scores for New York City are about to come in well below previous levels. With just a few months left as Mayor, Michael Bloomberg is being criticized on all sides for the low scores:

In New York City, the proportion of students deemed proficient in math and reading could decrease by as many as 30 percentage points, city officials said, threatening to hand Mr. Bloomberg a public relations problem five months before he is set to leave office.

Already, many of Mr. Bloomberg’s rivals — the teachers’ union, parent groups, and several of the Democratic candidates vying to succeed him — have begun to use the prospect of a steep drop in scores to call into question the mayor’s record on education

This just illustrates the trouble with our political system. Adopting the Common Core standards was a big decision for many states and whether you are a fan of them or not, they should not be judged based on previous test scores. That was a different test after all. But that’s how Bloomberg is going to be graded. In his final year in office, he’s going to be responsible for a mega drop in scores. That’s not a good legacy to leave. But Bloomberg accepted this risk when he bought into the new standards. He put himself out there politically to implement what he deemed to be a better test.

Undoubtedly, a tougher test would lead to lower scores – especially initially as students and teachers adapt to it. In the years that come, scores will likely rise a bit – at the very least thanks to increased familiarity with the type of questions on the exam. Whoever becomes the next Mayor can take credit for those score rises, even though they are a natural result of greater experience with the test and nothing to do with specific policies.

This reminded me a bit of Governor Romney’s claims in the campaign last year that Massachusetts was ranked No. 1 in the country in education. Politifact rated this “mostly true,” because it was basically true. But Massachusetts also claimed the nation’s top spot in education before Romney took office. So, did Romney actually lead Massachusetts as the top state in education? Or did he just take credit for previous policies that had already made Massachusetts No. 1? How much credit does Romney deserve? These are very tough questions to answer and I don’t think anyone came up with a good response to them during the campaign.

This shows how difficult evaluating different policies is. Mayor Bloomberg is going to take a lot of heat for the test score drop, even though it’s a result of a new, tougher test, not necessarily less educated or less prepared teachers. Governor Romney earned significant praise for his education record as Governor, even though Massachusetts’s terrific education record preceded his time in office. How much do we blame Mayor Bloomberg and give credit to Governor Romney? That’s a tough question to answer. At the very least, remember to give Bloomberg credit for risking his reputation and legacy. It’s not something that every Mayor is willing to do.

It’s More Than A Gender Bias Working Against Yellen

Danny Vinik Leave a comment

Ezra Klein wrote an insightful blog post yesterday outlining the hidden sexism that has permeated the coverage of who will be the next Fed Chair and how it has harmed Yellen’s candidacy. Here’s Ezra:

People get understandably defensive when you use the word “sexist.” But here’s the simple fact: There’s no male candidate Andrew Ross Sorkin could’ve named who would’ve elicited fears from Fisher that the pick was being “driven by gender.” Not Don Kohn. Not Alan Blinder. Not Roger Ferguson. It would’ve been either a laugh line or a controversy if Sorkin had asked about Tim Geithner’s chances and Fisher had brought up his gender.

When a woman is up for the job — no matter how qualified — the lurking worry is that the pick will be “driven by gender.” When a man is up for it, gender never enters into the conversation. That’s how privilege works in practice: Gender is invisible when it comes to male appointees but a constant presence when it comes to female appointees.

That gets the situation backwards.

There’s never been a female Federal Reserve chief. There’s never been a female Treasury Secretary. There’s never even been a female president of the powerful New York Federal Reserve. This isn’t an accident, and it’s not because women can’t manage those positions. It’s because gender really has played a driving role in appointment processes for a long time. It’s just done so on behalf of men.

I don’t disagree with any of this, but I want to extend it a bit. The title of Ezra’s post is “Funny how gender never am up during Bernanke’s nomination. Or Greenspan’s. Or Volcker’s.” You know what also didn’t come up in those nominations? Race. Sexual Orientation. Religion. You know why none of those things are coming up this time? Because both Yellen and Summers are white, straight and Jewish. That’s nothing new at the Fed. But a woman as Fed Chair? That’s new.

This creates two different levels of bias against Yellen. The first is the explicit and implicit sexism in whether Yellen has the necessary “gravitas” to be Fed Chairman. Of course she does! No man with Yellen’s resume would face similar questions.

There’s also a second form of bias that I’m going to term “newness bias.” This is the bias that exists because everyone is ultra concerned that the Fed choice will be “driven by gender.” After all, for a position as important as Federal Reserve Chairman, it’s vital that the President select whoever is most qualified. He shouldn’t choose an inferior candidate just to break a gender barrier. But no male nomination can ever be “driven by gender,” because every Fed chair before has been male. It’s the same reason neither Yellen or Summer’s selection could be “driven by race.” When there’s never been a female in a certain position, the immediate reaction to breaking that barrier is that the President is doing so just to nominate a woman, not because it’s the right choice.

That’s what Yellen is working against. Ezra spells this out perfectly:

And then, when a female candidate does threaten to break into that top echelon, the whispers begin that the pick is really driven by gender, that more qualified men are being passed over, that it’s all just about political correctness. But the truth is typically closer to the opposite. A woman (or an African American, etc) can only get to the point where she can hold a top position after clearing a much higher bar than the male candidates.

The President may feel that if he is going to name Yellen as the next Fed Chairman, she must be by far the best candidate for the job. Because if not, he’ll face criticism for choosing her over Summers just to install the first woman at the helm of the Fed. It’s an absurd bar that only candidates facing the “newness bias” confront. If Richard Ferguson receives further consideration for the job, expect the fact that he’d be the first African-American Fed Chairman to come up more frequently. And expect analysts to start asking whether his selection would be “driven by race.” He wouldn’t face the blatant sexism about “gravitas” that Yellen faces, but he’d still confront the “newness bias.”

So remember this whenever you hear people questioning whether Yellen’s choice is “driven by gender.” The fact her selection would break a gender barrier doesn’t mean she needs to be more qualified than other candidates to justify her selection. She’s the best candidate for the job and that’s what matters. President Obama would do well to tune out any worries about her “gravitas” or that her nomination would be “driven by gender.” Those are just not-so-subtle ways for her opponents to use her gender to tear her down. It isn’t fair and it isn’t right. I hope the President doesn’t fall into that mindset as well.