Steve Waldman on the futility of blogging and the monopoly of lobbyists in policy making

This is really motivated by being incredibly frustrated with what happened a couple of years ago. Obviously there was a financial crisis; that’s not what frustrated me. I am one of the naysayers who was not at all surprised there was a financial crisis. I was expecting such a thing. What I was not expecting was that the American political system would respond the way that it did… The injustice that we tolerated in that set of events was and still is beyond me. It was beyond anything I thought I would ever experience in the United States of America… It represented from my perspective a huge failure of control systems…

And then there’s us [financial bloggers], right. And I thought that we were pretty cool… I thought we would be able to hold these MFs to account… We have a lot of readers, I thought it would matter – didn’t matter… Why are we where we are? I see a problem is basically a problem we encounter a lot in economics: it’s a monopoly problem. There’s a monopoly of power. Arnold [Kling] likes to say we have a big problem in that there’s increasing concentration of political power and radical diffusion of information. I think that’s a very nice way to put it. If he’ll let me add financial power with political power, I’m 100% onboard with that perspective.

– Steve Waldman, Kaufmann Economic Bloggers Forum 2011, KC, 1 Apr 2011

I agree with Steve’s characterization of the problem. Here’s how I put it in October. I’ll bold and underline the most relevant part.

Blogs in the econoblogosphere are heavy on economic policy advocacy. Ever since the heyday of the US and European housing bubble, the majority of bloggers in the space who are unaffiliated with media sources have been recommending policy makers take specific courses of action to mitigate downside risk. That is the bread and butter of the econoblogosphere.

However, it is increasingly clear to me that policy makers in the US, the UK and elsewhere are wedded to a previously chosen set of policy remedies. I think much of this is a function of a political need for ‘policy consistency’; government is saying: "we have already scripted out a path and committed to it. We cannot change course, if only for political reasons." So, in some sense, it makes less sense to focus exclusively on ‘advocacy blogging.’ Personally, I have been increasingly focused on understanding what constraints policy makers have set for themselves to identify a more narrowed set of likely policy paths. The goal is not to advocate one option over another per se, but rather to figure out what is likely to occur and what the consequences will be for the economy, business, households and investors.

For example, when I wrote the post "The recession is over but the depression has just begun" a year ago, this was my goal. At that time, looking at the US, it had become clear to me that the Obama Administration had already done so much regarding bailouts and stimulus and the rhetoric to defend this program that it would be difficult to correct course. The question was: Given the Administration’s prior policy decisions, how would their political options be narrowed in future? And what were the likely effects of the policy options they then chose? I think understanding policy is critical now because the weakness of the developed economies puts a nascent technical recovery at stall speed – meaning that there is less room for error and policy decisions will loom that much larger as a result.

–Less Policy Advocacy and More Policy Forecasting at Credit Writedowns

It is clear to me as it is to Steve that policy makers in the United States have their own agenda. I have concluded, like Steve, that what I write doesn’t play into that agenda. However, I can offer you readers my insight on what that agenda is and how it will affect you. So that’s where I am concentrating my effort.

My sense is that there is still a lot of what Niels Jensen called tail risk in the last post today. If you are an investor, that makes this a very difficult macro environment in which to be successful. You need to constantly adjust and tweak your portfolio to protect it from tail risk. That’s not a skill many people have. This is not what you would typically see in a primary or secular bull market where buy and hold is the order of the day.  I see this as prima facie evidence that we are still in a secular bear market right now, meaning real returns in bonds and equities are likely to be low and tail risk creates the potential for large losses.

Take the municipal landscape for example. Munis have long been considered a safe environment for wealthy American retail investors looking for dependable interest income sheltered from tax. And munis have delivered. However, munis have been clobbered recently. What’s happening in munis is not just about Meredith Whitney or deteriorating fundamentals in municipal finance, what Alice Schroeder calls the ponzification of municipal finance. It is most certainly about that as recent events in DeKalb County, Georgia attest. But, this is a market with natural supply/demand imbalances created both by tax exemption and long-term funding needs.

Bond Girl explains.

Because the federal government is forgoing the opportunity to tax this particular type of income, the tax-exemption is a de facto federal subsidy on state and local government borrowing and the expensive, large-scale public projects that are typically financed with muni bonds.  (I doubt most people would find the social benefit here controversial.)  Municipal debt typically yields less than that of other kinds of credits because investors are willing to accept a lower yield in exchange for the tax benefits.  Although lower yields reduce issuers’ borrowing costs, the exemption is also a constraint on investor participation in the market, such that the market is dominated by wealthy retail investors who benefit from sheltering their income from taxation.

What’s not to like about this arrangement?  Well, state and local government borrowers tend to issue long-term bonds so that their debt burdens do not crowd out their programmatic priorities or require them to levy additional taxes (much like a homebuyer would prefer to finance a house with a loan that accommodates their cash flow constraints and reflects the long useful life of the asset, rather than with a short-term note), but wealthy retail investors would prefer not to lock up their money for a long period of time.  Although the way municipal bonds have been traditionally structured makes sense from the issuer’s (and thus the taxpayer’s) perspective, it is wrong to assume that there will always be sufficient demand for the debt.

The muni market has not had to deal with the mismatch between supply and demand to date (or at least not for an extended period) for three reasons: (1) Wall Street innovations offered solutions to the problem; (2) muni arbitrage funds absorbed a considerable amount of long-term debt; and (3), shortly after (1) and (2) collapsed during the financial crisis in 2007-08, BABs were introduced.

What has happened in the wake of the financial crisis is that these three ‘technical’ issues have re-asserted themselves at precisely the same time that the ‘ponzification’ issue was identified. This is no coincidence either. That’s what all financial crises are about: the tail risk that comes from solvency and liquidity issues from multiple sources coming together simultaneously as a result of a liquidity crisis.

I don’t expect the muni issues to be resolved except via another severe liquidity crisis. Policy makers have demonstrated time and again that they don’t get ahead of these issues. They want systemic issues to disappear. So their policy making efforts are geared to masking these problems by socialising losses. This strategy is certainly cynical and short-sighted. But politicians live in the present because of the constraints that elections place on their decision-making.

The problem I see comes from the monopoly of ‘financial power with political power’ that Steve talks about. In his presentation, he says policy is often written by lobbyists because they have the expertise and time to craft legislation (and because they control funding for the two main political parties). This leads to insiders’ exploiting information asymmetries and gaining disproportionate financial benefit. It also leads to increased tail risk and crisis. What we want is ‘policy entrepreneurs’ in competition with one another helping to move policy in a way that is not just in the interests of a select view represented by a particular lobbying group. How do we get that? Steve has some ideas in the clip below. His ideas are just a beginning because this corporatism that he points to is well-entrenched. It dominates the political economy of the U.S.  and I see it as the fundamental social problem in American society today. Solve the corporatism problem and a lot of other factors fall into place.

P.S. – Yes, I know Steve never said blogging is futile. I am just making parsing it this way to make a point.