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Elizabeth Warren and Her Discontents

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Somebody really, really doesn't want Elizabeth Warren to run the new Consumer Protection Financial Bureau, or "CFPB," which she first envisioned and proposed. Who? The big banks, for sure, as well as others who don't want their misbehavior brought to light. And Tim Geithner, whose vision of Wall Street and its problems is fundamentally different from Warren's. There are others, too -- ideologues like Megan McArdle of the Atlantic, who has made something of a cottage industry out of attacking Warren on specious grounds.

The President's attempting to split the baby when it comes to appointing Ms. Warren, but the facts and public perception are aligned and present him with a stark reality: He must choose between appointing Ms. Warren or placating the big banks. There is no Third Way. Unfortunately for the President, Elizabeth Warren is a yes or no question.

The ideological opposition to Warren's appointment is usually grounded in the false notion that the relationship between, say, a bank and a lender, is a symmetrical exchange between equals taking place in a mythical "free market." They've failed to heed the lesson taught by Freud in Civilization and its Discontents: "Civilization ... obtains mastery over the individual's dangerous desire for aggression by weakening and disarming it and by setting up an agency within him to watch over it, like a garrison in a conquered city."

An agency outside the individual is necessary to a well-functioning civilization, too, especially when confronting an oligopolistic banking system with a history of fraud and predation.

There have been at least two empty and ineffective lines of attack against Elizabeth Warren: The first is that she's opposed to "financial innovation," and the second is that she lacks the necessary "managerial experience." Ms. McArdle attempts to open a third: That Prof. Warren is a bad scholar. McArdle fails miserably, misquoting or misunderstanding other academic papers and Warren's own work while failing some basic analytical challenges. She does succeed, however, in showing the lengths to which some will go to block this appointment.

Despite the fact that McArdle is " the business and economics editor for The Atlantic," numbers don't seem to be her thing. She infamously miscalculated the effect of repealing Bush's tax cuts for each American by a factor of 10, arriving at $25 instead of $250 per person, and then blithely explained: "The calculator on my computer won't go into the billions, and I truncated incorrectly. The main point stands; even a very optimistic set of assumptions doesn't yield huge net benefit." Actually, $250 for every man, woman, and child in the US -- and that's only for the next two years -- is serious money. And as for that calculator problem, Ms. McArdle, there's only one word for that: spreadsheets. You've heard of them, I trust.

Spreadsheets are particularly handy when you're making statements like this: "Does it matter if we have a regulator that can use data consistently?" In this piece McArdle leans on an old Wall Street Journal anti-tax screed by Todd Zywicki. "More weird metrics for Elizabeth Warren," her headline quavers. McArdle eagerly repeats Zywicki's suggestion that family living expenses are actually less than they were in the 1970s. But Zywicki's stacking the deck (and making a completely different point) by using pre-tax rather than after-tax figures. Warren's point is that two-earner families have less disposable income today than one-earner families did in the seventies, even with both adults working.

She's right. I used a spreadsheet (highly recommended) to look at the increases in expenses, using the figures Zywicki (and then McArdle) cites. Here's what I found: Mortgage costs increased from 18% to nearly 20% of after-tax income. Health insurance premiums increased from 3.5% to 3.63%. (That doesn't include increases in out of pocket expenses like copays and deductibles.) And there was a whopping new expense of nearly 20% for day care, which wasn't needed with a one-earner family. Add in car payments and the expenses Wysocki cites went from 39% of after-tax income to 62.3% -- which pretty effectively underscores Prof. Warren's point, don't you think?

McArdle saves her real "firepower," such as it is, for a piece she calls "Considering Elizabeth Warren, the Scholar." It's a blend of deception, misdirection, and poor analysis, chock full of comments like this one about Warren's book on two-earner families: "... Warren simply fails to grapple with what her thesis suggests ... Admittedly, I don't quite know what to say, but at least I can acknowledge that it's a pretty powerful problem for the current family model. Warren kind of waves her hands and mumbles about social programs and more supportive work environments. There is no possible solution outside of a more left-wing government."

Got it? McArdle says Warren's book is a failure because a) Warren fails to solve one of the problems she identifies, b) not that McArdle knows what the answer is, but c) "Warren kind of waves her hands" (get me a rewrite!) and "d) mumbles about social programs etc." -- which means she does propose solutions, but they're ones that involve e) "more left-wing government." Which McArdle doesn't think is the solution, even though she acknowledges that she doesn't have a solution.

Does it matter if we have a "business and economics editor" who can use data ... and logic ... consistently?

McArdle then suggests that Warren doesn't understand numbers because Warren asserts that (says McArdle) "housing consumption hasn't increased much ... by less than a room per house." McArdle conclues that this is a "twenty percent" increase, given a starting size of five rooms per house, although if consumption's gone up by less than a room per house it's less than twenty percent per house (no calculator needed for that one!) And that's with two people working full-time instead of one.

"The square footage of new homes has increased dramatically since 1960," writes McArdle. But how much of that is McMansions and other high-end homes? She doesn't say, presumably because she doesn't know. Since we're talking about housing consumption among middle- and lower-income working families, a basic understanding of "mean," "median," and "average" would make that kind of information critical to McArdle's argument.

But McArdle's main line of attack is on the papers that Warren has co-authored on medical bankruptcy. Yet at times she's not criticizing the paper itself, but what Warren's co-authors may or may not have told the press. As for the article itself, it's entitled "Illness And Injury As Contributors To Bankruptcy," and comes replete with appropriate cautions like these: " We cannot presume that eliminating the medical antecedents of bankruptcy would have prevented all of the filings we classified as 'medical bankruptcies.'" Yet McArdle repeatedly claims Warren et al. suggested medical bills were the sole cause of these bankruptcies, then beating this nonexistent claim to death.

McArdle also makes the analyst's most basic mistake -- fallacy based on anecdote -- by repeatedly saying that by definition "Patty Barreiro" is a "medical bankruptcy" case. Barreiro is the wife of Edmund Andrews, the financial writer who wrote about their own bankruptcy. She's become a bete noir for all of those who believe that bankruptcy is most commonly a character defect, not an unfortunate combination of circumstances. McArdle's fixation on her isn't just bizarre. It's also bad analysis. The definition Warren et al. use for "medical bankruptcy" is $5,000 or 10% of income, and those are appropriately high figures for anyone familiar with the real world.

(McArdle also grossly mis-states the contents of another academic paper, but fortunately this piece does the heavy lifting on that misrepresentation - hat tip Atrios.)

For those who argue that Warren lacks managerial experience, I have three words: "Chief Administrative Officer." Warren understands the mission better than anyone, and she'll be able to hire someone to handle the logistics. And, as for her alleged hostility to "financial innovation," there's no sign of that. Some "financial innovations" destroyed the economy, and she's right to be a little "hostile" to them.

Elizabeth Warren's view of what needs to be done to fix Wall Street is fundamentally different from Tim Geithner's or Larry Summers'. Her view is correct -- and it's also more popular politically. The President's attempt at a "nuanced" solution -- that Elizabeth Warren will "play a role" even if she's not appointed to lead CFPB - is a nonstarter. The banks, and the public, would see that decision for what it is: A surrender to financial interests at the expense of the American consumer.

The Megan McArdles of this world will wail and gnash their teeth If Elizabeth Warren is appointed, but that doesn't matter. What does matter is that if Warren doesn't run CFPB, the same regulators who mismanaged the economy in general - and consumer protection in particular - will still have the upper hand. Any answer but "yes" to the Warren question would be a disaster, both on its merits and politically. You don't need a spreadsheet to figure that out.

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Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light.

He can be reached at "rjeskow@ourfuture.org."

Website: Eskow and Associates

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