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The Real World

Kevin Drum — Fri, 04 Dec 2009 06:25:42 +0000

In a column about how to deal with asset bubbles, Tim Duy says:

I am sympathetic with the view that interest rates were not necessarily too low during the build up of the housing bubble. Indeed, relatively low rates of investment (equipment and software) growth suggests that real rates were actually too high. But capital flowed to housing instead of more productive investment activities because that was the path of least resistance.

But why did capital fail to flow to productive investments? Saying that housing was the "path of least resistance" doesn't explain anything. In some sense, housing (or property in general) has always been the path of least resistance for investment dollars.

The real difference seems to lie not in housing becoming a better target for investment, but in real goods and services becoming less attractive ones. Why? Surely this is something that deserves considerably greater scrutiny than it's gotten. Why did investors no longer think that the returns from investing in the real world portion of the American economy looked very compelling? Why was demand for real world goods and services not high enough to provide ample investment opportunity? This seems like a core question of the past decade that hasn't gotten enough attention.

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All Power to the Fed?

Kevin Drum — Fri, 04 Dec 2009 00:40:18 +0000

Ben Bernanke thinks it's important for the Fed to hold onto its bank regulation and consumer protection functions. "Because of our role in making monetary policy," he said in an op-ed this weekend, "the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests."

But is this really true? Today, Vincent Reinhart, former director of the Fed’s monetary affairs division, says Bernanke is peddling hokum:

Apparently, the argument runs, there are hidden synergies that make expertise in examining banks and writing consumer protection regulations useful in setting monetary policy. In fact, collecting diverse responsibilities in one institution fundamentally violates the principle of comparative advantage, akin to asking a plumber to check the wiring in your basement.

There is an easily verifiable test. The arm of the Fed that sets monetary policy, the Federal Open Market Committee (FOMC), has scrupulously kept transcripts of its meetings over the decades. (I should know, as I was the FOMC secretary for a time.) After a lag of five years, this record is released to the public. If the FOMC made materially better decisions because of the Fed's role in supervision, there should be instances of informed discussion of the linkages. Anyone making the case for beneficial spillovers should be asked to produce numerous relevant excerpts from that historical resource. I don't think they will be able to do so.

An easily verifiable test! I hope somebody does this. Like Reinhart, I don't think they'll find any linkage either. A separate bank regulator might or might not do any better than the Fed, but the Fed certainly doesn't bring any magic to the job. (Via Real Time Economics.)

And in other Fed news, Bernanke's testimony today during his confirmation hearing didn't do much inspire confidence in his policy judgment either. Bernanke, it turns out, is opposed to just about everything except cutting middle class entitlements. Dave Dayen summarizes:

So let’s tally that up. No second stimulus, no jobs bill, no public investment to deal with the worst hiring crisis since the Depression, no relief for a jobless recovery, but yes to cutting people’s meager Social Security benefit and their health care in their old age.

That's the economic consensus among the Washington elite, so it's hardly surprising that Bernanke agrees with it. It's also why I wish Obama had had the guts to nominate someone else.

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Quote of the Day: Plutocrats!

Kevin Drum — Thu, 03 Dec 2009 22:37:53 +0000

From Felix Salmon:

When you have a progressive tax system, especially when there are surcharges on people making seven-figure incomes, you also have a system where for any given level of national income, the greater the inequality, the greater the government's tax revenues. And indeed federal revenues have been rising faster than median wages for decades now, thanks to the rich getting ever richer.

Given the government's insatiable appetite for cash, it's only natural that it would prefer to tax plutocrats, spending some of that money on poorer Americans, rather than move to a world where poorer Americans earn more (but still don't pay that much in taxes), and the plutocrats earn less, depriving the national fisc of untold billions in revenue.

The government's interests, then, are naturally aligned with those of the plutocrats — and when that happens, the chances of change naturally drop to zero.

This is true. But it's not very true. To see why, take a look at how progressive the federal tax system is. The chart on the right is from a 2004 paper by Piketty and Saez, and it shows the total federal tax rate (income tax, payroll tax, etc.) for various income groups.¹ As you can see, it's progressive, but it's not that progressive. And that makes a difference.

Here's why: although the top 1% (the four richest groups in the chart) has a lot of income, the 60-80th percentile has about the same amount. That's because although their incomes are a lot lower, there are a lot more of them. So what happens if that group loses, say, 10% of its income and it goes instead to the very tippy-top earners? Answer: total revenue to the government goes up about 1%. The same is roughly true for the other income groups as well.

In other words, the federal government doesn't have much of an incentive to maintain lots of income inequality. Not much fiscal incentive anyway. For the most part, the political incentives swamp the fiscal ones, and unfortunately they aren't very closely balanced. Pursue policies that raise middle class wages, and the effect is so diffuse and so slow that hardly anyone notices. Pursue policies that benefit the rich and you get immediately showered with oceans of campaign contributions. That's mostly what motivates our political economy, I think, not tiny changes in the total tax take based on changes in income inequality.²

¹The chart starts at the 60th percentile because, basically, there's hardly any income to tax below that. This is mostly an argument about the middle class vs. the rich.

²Plus, of course, the fact that the rich basically control the country and have an entire political party dedicated to their interests. But that's a whole different post.

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What's the Plan for Afghanistan?

Kevin Drum — Thu, 03 Dec 2009 18:29:40 +0000

One of my frustrations with Barack Obama's Afghanistan speech was that he didn't explain what the strategy for deploying all those new troops was going to be. Luckily, Joe Klein asked him that question:

I asked him what instructions he had given the military to make the next 30,000 troops more effective than the 21,000 troops he sent last March, whose presence didn't seem to improve the situation on the ground at all. "Look, the fact that there were increased casualties this year I think is to be expected from increased engagement by our forces." True enough, but the NATO coalition lost ground to the Taliban this year, by Obama's own admission. And the President could only come up with speed of deployment and a clearer sense of mission as strategic game changers. Later, when I asked him about what changes he had ordered for the training of the Afghan army and police — a frustrating proposition, so far — he deferred to his commanders in the field but said the new order of battle would include "a partnering situation, a one-to-one match between Afghan troops and U.S. troops" in combat, which "produces much stronger results."

That's pretty discouraging, especially since Klein says that (unsurprisingly) Obama was well briefed and obviously understood the problems at hand. But Klein's question is clearly the central question, and surely one that Obama must have anticipated. If, after months of planning, he still couldn't come up with a decent answer, that's bad news.

It's not clear that the surge in Iraq is a good model for success in Afghanistan in the first place, but to the extent that it is, you have to at least understand the model. Petraeus didn't just send in a bunch of extra troops. He had a plan for how to use them in an inventive way. The vast bulk were sent to Baghdad, where they represented a doubling of the American presence. Separation walls were constructed all over the city. Counterinsurgency tactics were implemented up and down the line. Sunni tribes were ~~bribed~~ coopted into supporting us. Even at that the jury is still out on whether it will ultimately succeed, but at least it provided some additional security and gave the Maliki government a shot at making things work.

But I still haven't heard anything like this for Afghanistan. There are plenty of people out there with ideas, but I have no idea which of those ideas Gen. McChrystal is planning to try out. Unfortunately, it looks an awful lot like Obama doesn't know either.

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Why They Hate Us

Thu, 03 Dec 2009 17:58:41 +0000

Stephen Walt pushes back on Tom Friedman's view that Muslims ought to realize that over the past couple of decades "U.S. foreign policy has been largely dedicated to rescuing Muslims or trying to help free them from tyranny." After estimating the fatalities in various conflicts, he figures that since 1983 Muslims have killed about 10,000 Americans while Americans have killed about 300,000 Muslims:

I have deliberately selected "low-end" estimates for Muslim fatalities, so these figures present the "best case" for the United States. Even so, the United States has killed nearly 30 Muslims for every American lost. The real ratio is probably much higher, and a reasonable upper bound for Muslim fatalities (based mostly on higher estimates of "excess deaths" in Iraq due to the sanctions regime and the post-2003 occupation) is well over one million, equivalent to over 100 Muslim fatalities for every American lost.

[Several paragraphs of caveats.]

....If you really want to know "why they hate us," the numbers presented above cannot be ignored. Even if we view these figures with skepticism and discount the numbers a lot, the fact remains that the United States has killed a very large number of Arab or Muslim individuals over the past three decades. Even though we had just cause and the right intentions in some cases (as in the first Gulf War), our actions were indefensible (maybe even criminal) in others.

....Some degree of anti-Americanism may reflect ideology, distorted history, or a foreign government's attempt to shift blame onto others (a practice that all governments indulge in), but a lot of it is the inevitable result of policies that the American people have supported in the past. When you kill tens of thousands of people in other countries — and sometimes for no good reason — you shouldn't be surprised when people in those countries are enraged by this behavior and interested in revenge. After all, how did we react after September 11?

Raw numbers like this obviously aren't the whole story. On the other hand, when you get beyond the raw numbers it's not as if the scales suddenly tip overwhelmingly in our favor. So whole story or not, it's a data point worth keeping sharply in mind. Click the link for Walt's entire list.

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Cheap Oil!

Kevin Drum — Thu, 03 Dec 2009 17:35:00 +0000

A headline today from CNN Money:

Why cheap oil is here to stay

Bruce Bartlett says this must mean that oil prices are due for a runup. Sounds right to me.

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Just Another Day in the Senate

Kevin Drum — Thu, 03 Dec 2009 16:59:28 +0000

The LA Times reports on Ben Bernake's confirmation hearings for a second term as Fed chairman:

Reflecting the antagonism Bernanke faces in Congress, Sen. Bernie Sanders of Vermont placed a hold on the Fed chief's nomination late Wednesday.

The move by Sanders, an independent who caucuses with the Senate's Democrats, isn't expected to derail Bernanke's confirmation.

Aside from my general dislike of the whole hold process, this is a pretty good example of a big specific problem with it: namely that I don't think Sanders has even the slightest hope that his hold is genuinely going to keep Bernanke from being confirmed. I mean, Paul Krugman and Dean Baker both favor his reappointment, for God's sake. So all this does is gum up the gears and force the Senate to spend time on Bernanke instead of the million other things it should be spending time on.

Alternatively, I suppose maybe Sanders is just using this to get leverage for something he wants. I still think holds are a lousy way to do this, but I suppose some good could come out of it if it raises public awareness of the fact that the Fed is supposed to bear some responsibility for maintaining full employment, not just controlling inflation. Unfortunately, it's more likely to raise public awareness of cranky Ron Paul-esque Fed bashing, which doesn't do anyone any good. (Except for Ron Paul, of course.) All in all, just another day in the Senate, the world's worst legislative body.

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The Political Ecosphere

Kevin Drum — Thu, 03 Dec 2009 16:45:02 +0000

Glenn Greenwald on Jane Hamsher:

I think Jane’s success in a prior career has made her immune to the rewards of access — and fear of punishment — which keep most younger inside-the-Beltway progressives obediently in line,” he said. “She’s not 26 years old and desperate to work for a DC think tank, a Democratic politician or a progressive institution. She doesn’t care in the slightest which powerful people dislike her, but rather sees that reaction as vindication for what she’s doing.”

Matt Yglesias objects to this because he's 28 years old and works for a DC think tank. Fair enough. But the bigger problem with this quote, I think, is that it misapprehends the incentive structure at work in political activism. Implictly, the idea here is that Jane sits outside that structure completely, but that's really not true. Just as beltway types have incentives that generally lead them to compromise in a centrist direction, base activists have incentives that push them in exactly the opposite direction. They can get ostracized for being too accomodating exactly the same way that think tank folks can get ostracized for being too shrill.

In any case, I really think temperament drives most of this stuff in the first place. After all, I'm in pretty much the same situation as Jane. Maybe more so, in fact, since I live 3,000 miles away from DC and rarely even socialize with other bloggers. And yet, obviously, I have a pretty moderate, accommodating blogging style. But that's more because of who I am than because of who I work for.

Anyway, I generally like both the activists and the beltway types and figure they have symbiotic roles in the political ecosphere. So more power to both of them as long as they're roughly on my side. How's that for accommodating?

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Where are the Jobs?

Kevin Drum — Thu, 03 Dec 2009 06:52:55 +0000

Here's the end of Robert Samuelson's column today:

Obama can't be fairly blamed for most job losses, which stemmed from a crisis predating his election. But he has made a bad situation somewhat worse. His unwillingness to advance trade agreements (notably, with Colombia and South Korea) has hurt exports. The hostility to oil and gas drilling penalizes one source of domestic investment spending. More important, the decision to press controversial proposals (health care, climate change) was bound to increase uncertainty and undermine confidence. Some firms are postponing spending projects "until there is more clarity," Zandi notes. Others are put off by anti-business rhetoric. The recovery's vigor will determine whether unemployment declines rapidly or stays stubbornly high, and the recovery's vigor depends heavily on private business. Obama declines to recognize conflicts among goals. Choices were made — and jobs weren't always Job One.

Is he serious? Unemployment is high because we don't have a trade agreement with South Korea and new oil fields haven't been opened up? To say that's tissue thin is to insult tissues everywhere. And suggesting that healthcare reform and "anti-business rhetoric" are slowing down the recovery hardly passes the laugh test either. Surely Samuelson could have invented something better than this if he was really that desperate to hang something on Obama?

If Samuelson really cared about job growth, he might have spared a word or three for Republicans in Congress, who have steadfastly refused to consider the kind of serious stimulus measures that might actually promote employment. But they stay oddly out of the picture. I wonder why?

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Housekeeping Update

Kevin Drum — Thu, 03 Dec 2009 06:14:08 +0000

Ok, let's see if everything works.....

Hooray, it works! Normal blogging to commence shortly.

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Housekeeping Note

Kevin Drum — Wed, 02 Dec 2009 18:55:50 +0000

We're upgrading our site today to newer, faster, better, and more reliable software. Hooray! That also means the site will be shut down for the next few hours. Boo! You'll still be able to read everything, but comments will be shut down and there will be no new posting for the rest of the afternoon.

I'll be back later tonight if everything goes well. We may encounters a few hiccups as we settle in (did I mention that this is a software upgrade?), but after that everything should be much smoother around here. Keep your fingers crossed.

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New Frontiers in Obstructionism

Kevin Drum — Wed, 02 Dec 2009 18:49:05 +0000

The filibuster is far from the only delaying tactic available to Republicans as they try to hold off healthcare reform. Taegan Goddard glosses an article from Roll Call for us:

For instance, instead of offering a conventional amendment to the bill this week, Republicans used "an esoteric procedural tactic" that would send the bill back to committee with instructions to eliminate certain cuts. If successful, Republicans would force Democrats to "hold another filibuster-killing vote on whether to restart debate on the bill."

"Republicans said they are likely to use the procedural tactic repeatedly during debate this month as they seek to make the point that the Senate should go back to the drawing board on the health care bill."

This is going to be fun couple of months, isn't it?

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Chevy Volt Near Release

Kevin Drum — Wed, 02 Dec 2009 18:37:37 +0000

Atrios writes about the new Chevy Volt:

Plug-in hybrid car goes on sale next year. I don't think "pure" electric vehicles will really be viable until the range goes up a bit and fast charging stations are more widely available, though an exception would be for certain government and business fleets. Obviously some people might want one!

Atrios gets this right: the Volt is basically a hybrid, though not of the same type as a Prius. I'm not sure why I care about this, but for some reason an awful lot of people think the Volt is a "pure" electric vehicle. It's not. It's got a gasoline engine that kicks in when the battery gets low, charging the battery as you drive. It's true that the drivetrain is pure electric (the gasoline engine is there purely to charge the battery), but the range of the Volt is far more than the 40 miles you usually hear about. Basically, if you do, say, 90% of your driving around town, there's a good chance that 90% of your driving will be purely electric. When you take longer trips, though, the gasoline engine will kick in to keep you going for as long as you want. That makes it a pretty versatile car.

Of course, it still costs $40,000. That's probably a bigger drawback than the technology. Still, if you do most of your driving locally, and then add in a government subsidy that you might get, the Volt could end up being a decent deal in the long run.

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Leaving Afghanistan

Kevin Drum — Wed, 02 Dec 2009 17:30:09 +0000

So are we really planning to leave Afghanistan in 2011? Michael Crowley rounds up some reasons to be skeptical:

I wonder how many Americans who may be paying only cursory attention appreciate the thinness of Obama's pledge to start withdrawing troops from Afghanistan in 2011. Subsequent commentary from administration officials has made this point clearer than Obama did last night.

First, there was Michèle A. Flournoy, under secretary of defense for policy, who told the New York Times this morning that "The pace, the nature and the duration of that transition are to be determined down the road by the president based on the conditions on the ground."

Next there was Centcom commander David Petraeus....When it comes to expectations about a near-term withdrawal, he added: "Conditions-based [are] very important words that need to be focused on."

And then there was Secretary of State Hillary Clinton...."I do not believe we have locked ourselves in to leaving," Clinton responded, before repeating the core administration talking point: "By July 2011 there can be the beginning of a responsible transition that will of course be based on conditions."

This was something struck me pretty starkly too. All Obama promised to do was to begin withdrawals in 2011. He didn't say how many troops would be withdrawn, how fast they'd be withdrawn, when he expected the withdrawal to be complete, or whether he intended to keep some number of troops there forever. In other words, he really didn't promise much of anything.

At the same time, I still think it was an important promise. Vague as it was, it set some very public expectations that we don't plan to stay in Afghanistan forever. This is good for the Afghans, who now have a clearer incentive to take control of their own security. It's good for the troops, who now have a specific goal and don't feel like they're stuck in an endless quagmire. It's good for our allies, who might be better able to sell their own publics on the war if it's seen as a time-limited commitment. It's good for Muslim public opinion, since it reduces fears of a permanent American empire in the Middle East and central Asia. And for the Taliban, which already hopes to stay around forever regardless, it really doesn't make any difference.

So it's a positive step, setting expectations and aligning incentives in the right way. At the same time, Crowley is right: there's a helluva lot of wiggle room in this promise, and even in the best case Obama plans to keep us in Afghanistan in force for at least four more years. Maybe longer. That's a pretty thin promise.

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Senate Healthcare Followup

Kevin Drum — Wed, 02 Dec 2009 16:56:11 +0000

I made this point briefly in comments on Monday, but after reading coverage yesterday of the CBO report on the Senate healthcare plan, it probably deserves a quick front page post of its own.

The CBO report says that the average cost of an individual policy will go up under the Senate plan. (The cost of group coverage goes down slightly.) However, this is because CBO expects that people will be attracted, on average, to policies that are more generous. Roughly speaking, CBO expects the average policy to get 30 percent better but cost only about 10 more. Subsidies will then lower this cost further for most families.

That's a pretty good deal, and it doesn't mean that the Senate bill raises the cost of individual health insurance. It means that people are buying better insurance. In fact, if you compare similar policies with similar coverage, they cost less under the Senate bill. This is the comparison that Jonathan Gruber was trying to make in my original post. He figures that costs will go down about 5%, while the CBO report itself figures 7-10%.

Bottom line: premium costs will go up for some people, but not for most. And if you choose to buy a policy similar to the one you have today, your cost will almost certainly go down.

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A Technocratic Speech

Kevin Drum — Wed, 02 Dec 2009 05:34:20 +0000

I didn't hear Obama's Afghanistan speech in real time, but I did read the transcript and then catch a replay on CSPAN. Overall, I was pretty underwhelmed.

Partly that was just the tone of the speech itself, which was much clunkier than his usual efforts. Take this, for example:

I must weigh all of the challenges that our nation faces. I do not have the luxury of committing to just one. Indeed, I am mindful of the words of President Eisenhower, who — in discussing our national security — said, "Each proposal must be weighed in the light of a broader consideration: the need to maintain balance in and among national programs.”

If you've never heard this Eisenhower quote before, there's a reason for that. Why would you have? It's about the dryest, least memorable passage you could think of from any president anywhere. It's positively soporific. Why would you dig up something like this for use in an address designed to rally support for a troop surge?¹

Two other problems leaped out as well. First, there was really no discussion of new tactics at all. I didn't expect much on this score, but at least there should have been something to help convince us that months and months of planning had produced something genuinely new and different. Instead, all we got was this: "I have determined that it is in our vital national interest to send an additional 30,000 U.S. troops to Afghanistan." That's pretty lame. There were a few additional words about a civilian surge and a better partnership with Pakistan, but it was brief and pro forma and it's hard to imagine anyone being persuaded by any of this. Obama really owed it to us to provide at least a sense of why the planning process took so long and how our new strategy will be more effective than the one that hasn't worked for the past eight years.

Second, most of the speech wasn't even devoted to the war at all. By my count, only about a third of the address was really about his plan for the war, with the rest meandering around about the danger of al-Qaeda, a potted history of post-9/11 military efforts, and paeans to America's place in the world. A little bit of that stuff is fine, but this was supposed to be a speech about Afghanistan.

On the substantive side, the good news was Obama's clear declaration that this would be limited effort and he plans to begin withdrawing the surge troops within 18 months. Conservatives are outraged by this, of course, but look: we've been in Afghanistan for eight years. If 100,000+ NATO troops can't start to turn the tide by 2011, then it's time to leave. The alternative is to commit to staying forever, and that's insane. Obama has now given the military everything it needs to succeed, and if they still can't do it, then they just can't do it.

Now, whether Obama has the spine to stick to his timeline when 2011 rolls around is a whole 'nother question. But at least it's out there. The details are deliberately vague, but it's out there. The military knows what it has to do; Karzai knows what he has to do; and the country knows what we've signed up to do. And the Taliban knows perfectly well that we're going to leave eventually, so this is hardly news to them.

Overall, I liked Adam Serwer's take:

It was perhaps his least inspiring speech ever — Obama has been at his most inspiring when he reconciles lofty American aspirations with the reality of American accomplishments and American failures. This speech was Bush-like in its embrace of platitudes and vagueries, it was often the least convincing where once it might have been the most inspiring. It was a speech that reflected the president deciding on what is maybe the least crappy of a number of crappy options — without convincingly explaining how it would work.

There are two possible reasons for the speech being so unconvincing: either Obama doesn't know how to deliver a good speech or else Obama isn't really convinced himself. But we know the former isn't true, don't we? You can fill in the rest yourself.

¹On the other hand, it was apparently Dan Drezner's favorite part of the speech. Go figure.

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Moving the Troops

Kevin Drum — Wed, 02 Dec 2009 02:10:37 +0000

This is a small thing, but I'm glad that Obama made this point in his Afghanistan speech tonight:

Let me be clear: there has never been an option before me that called for troop deployments before 2010, so there has been no delay or denial of resources necessary for the conduct of the war. Instead, the review has allowed me ask the hard questions, and to explore all of the different options along with my national security team, our military and civilian leadership in Afghanistan, and with our key partners. Given the stakes involved, I owed the American people — and our troops — no less.

Yes, Obama took a long time to decide on a strategy. Maybe a little too long. But since additional troops couldn't be sent over sooner than 2010 anyway, it was never going to make any difference at all to events on the ground. I'm pretty sure that most of the people who have spent the past couple of months baying about Obama's "dithering" knew this perfectly well — and if they didn't then they have no business even having an opinion in the first place — but they kept baying away regardless. Pretty reprehensible stuff.

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Quote of the Day: The GOP's Love Affair with Medicare

Kevin Drum — Tue, 01 Dec 2009 18:46:00 +0000

From John McCain, explaining his undying opposition to proposed reductions in the growth of Medicare spending:

All of these are cuts in the obligations that we have assumed and are the rightful benefits that people have earned... I will eagerly look forward to hearing from the authors of this legislation as to how they can possibly achieve half a trillion dollars in cuts without impacting existing Medicare programs negatively and eventually lead to rationing of health care in this country.

On the big list of political sins, I generally think hypocrisy is overrated. It's great gotcha material for Sunday morning talk shows, but in the end it's usually pretty trivial stuff.

But the Republican switcheroo on Medicare is really in a league of its own. Here's a party that opposed Medicare viciously in the first place, routinely spoke out against it in the years that followed, was dedicated to gutting it in the 1990s, voted for major cuts in 1997, and has been using it as a cudgel ever since to get its base riled up over the future bankruptcy of America. McCain himself proposed over a trillion dollars in Medicare cuts just 12 months ago. But now? Well, now it's 2003 all over again and there are elections to think of. So now they're righteously opposed to cutting so much of a nickel out of Medicare spending, even if the cuts are aimed at waste, fraud, inefficient programs, and bad incentives. It's just jaw droppingly mendacious. More at the link.

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Credit Card Hell

Kevin Drum — Tue, 01 Dec 2009 18:17:19 +0000

Why are credit card companies so unwilling to transfer obviously distressed customers into programs that cancel their accounts and provide them a fixed period of time to pay off their balance? Mike Konczal crunches the numbers and comes up with the answer: banks don't really care if you pay off your entire balance. They can make more money by squeezing late fees and high interest rates out of you for even a short period than they can by having you pay off your whole balance at a moderate interest rate. Details here.

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A New WPA?

Kevin Drum — Tue, 01 Dec 2009 17:40:43 +0000

Megan McArdle writes about why a WPA-style jobs program would be unlikely to work in 21st century America:

My father was the head of a trade association for the heavy construction industry, and most of my closest relatives either work for the government, or have done so in the past. As you can imagine, over my lifetime I've had a lot of conversations about government procedure and government projects. Every so often I'll read some description of a project out of the olden days — the battle against malaria in Panama, the handling of the Great Mississippi Flood, or the creation of the WPA — and just marvel at how fast everything used to be. The WPA was authorized in April of 1935. By December, it was employing 3.5 million people. The Hoover Dam took 16 years from the time it was first proposed, to completion; eight years, if you start counting from the time it passed Congress.

Contrast this with a current, comparatively trivial project: it has been seventeen years since the Southeast High Speed Rail Corridor was established by USDOT, and we should have a Record of Decision on the Tier II environmental impact statement no later than 2010. This for something that runs along existing rail rights of way, and in fact, uses currently operating track in many places.

....Many of the procedural hurdles involve court rulings, concerning law which Congress cannot overturn in some cases (due process), or isn't going to (civil rights legislation, civil service protections). The obstacles arise out of things that individually, people, specifically Democrats, like: transparency, due process, environmental care, civil rights, unionism. Cumulatively, they are devastating to federal productivity. But it's hard to get much support for repealing or altering them individually — which is what you would have to do.

I think there's a lot of truth to this. In fact, the last time I wrote on this subject, I got into an email exchange with a guy who thought I was wrong and explained in detail exactly how big infrastructure projects could be ramped up more quickly. But it was one of those "assume a can opener" moments. Sure, there are ways that projects could be speeded up, but first you'd have to pass a whole bunch of laws preempting current regulations and then win a bunch of court fights over them. Even if you could do it, it would take years.

But anyway, here's a question: where can we find a reasonably trustworthy list of "shovel ready" infrastructure projects? At a bare minimum this means projects that have been approved by local authorities and have already gone through the environmental impact process. Is there such a thing?

Alternatively, how about non-construction jobs? Building jobs are sort of a talisman in these kinds of programs, but there's no reason that has to be the case. So what other areas can you think of that could absorb, say, a million unskilled and semiskilled workers quickly and without impossible political pushback from a hundred different interest groups? Let's hear it.

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Playing Chicken With Republicans

Kevin Drum — Tue, 01 Dec 2009 17:23:05 +0000

I'm as intrigued by an unusual bit of contrarianism as the next guy, but Tyler Cowen seriously jumps the shark here:

Another example of misleading good vs. evil thinking stems from the budget. Many people believe:

3. "If the Republicans win, they will irresponsibly cut taxes and do nothing real to control spending." You may have even seen this view in the blogosphere.

One response to this is 4. "We should ensure that the Republicans do not win and criticize them every chance possible."

An alternative response is 5. "Sooner or later the Republicans will in fact win and I cannot prevent that. Right now the Democrats should spend less money, given the truth of #3. In this regard the Republicans, although evil, are in fact correct in asking the Democrats to spend less money, if only to counterbalance their own depravity."

I do not see many people entertaining #5.

No, I suppose not. "I think we should rein in social spending in order to create some budget room for more tax cuts for the rich in 2017" really doesn't seem like a very politically savvy suggestion.

Anyway, this is hardly something that we liberals haven't thought about. Just the opposite, actually: liberals are very keenly aware of Republican efforts to wreck the budget in order to prevent Democrats from ever spending money on their own priorities. In fact, "keenly" understates things. So this time around we've quite consciously decided not to let this stand in our way. We'll do our best to keep things like healthcare reform deficit neutral, and we'll try to honor PAYGO rules, but beyond that we're at least going to try to enact some liberal social policies. The days of scrimping on food because Dad is threatening to blow a wad in Vegas the first time we let him out of our sight are over.

And if America eventually elects Dad to the White House anyway even though he hasn't yet cleaned up his act? Then America's in big trouble. But at least America will have better healthcare.

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Chart of the Day: Active Mutual Funds Still Suck

Kevin Drum — Tue, 01 Dec 2009 16:20:39 +0000

You probably already know this, but here's yet another paper that demonstrates the foolishness of putting money into actively managed mutual funds. The authors used historical data and simulations to figure out if actively managed funds performed better than passive investments, and the chart on the right shows the answer: the blue line represents active funds and the red line represents the average distribution of passive investments. The zero point on the x-axis represents average performance.

Along the entire curve, the authors found that a higher percentage of funds performed worse than passive investments. For example, about 70% of active funds perform at zero or worse, compared to only 50% of passive invesetments. 90% perform under +1.0 compared to only 80% of passive investments.

If you drop out fees, active funds do slightly better: there are still more big losers than with passive investments but there are also a few more big winners. When you add in fees, though, this small effect is completely swamped and active funds are lousy investments all the way around. Don't waste your money.

Next up: could somebody please do with hedge funds? I suspect the results would be about the same. Via Felix Salmon.

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The Inevitability of Afghanistan

Kevin Drum — Mon, 30 Nov 2009 22:14:12 +0000

Like me, Fred Kaplan is glad he's not president right now. Why? Because he can't figure out what he thinks we ought to do in Afghanistan:

As with confronting most messes in life, the initial impulse is to flee. But if we simply pulled out, it's a near-certain bet that the Taliban would march into Kabul, and most other Afghan towns they'd care to, in a matter of weeks....Another problem with withdrawing is that it would signal, correctly or not, a huge victory for anti-American forces generally. If we left Afghanistan to the Taliban (and, by extension, al-Qaida), especially after such a prolonged commitment (at least rhetorically), what other embattled people would trust the United States (or the other putative allies in this war) to come in and protect them from insurgents? None, and they could hardly be blamed.

....I am uncomfortable making this case for two reasons. First, it's reminiscent of the bankrupt rationales, involving "credibility" and the "domino theory," for staying in Vietnam long after that war was widely viewed as a horrible mistake. But Afghanistan is different. The Taliban are not the Viet Cong, and Osama Bin Laden is not Ho Chi Minh; there is no case, this time, that the enemy has a just claim to power. And the stakes are much higher: Communists ruling South Vietnam was never a serious threat to our security;¹ al-Qaida controlling a huge swath of South Asia is.

The second reason I'm uncomfortable about even saying this is that the argument can, and almost certainly will, be used to justify staying in Afghanistan if it turns out that this war is futile, too. It's easy to hear the generals saying, a year from now, "Three more brigades should do the trick, Mr. President" and "If we pull out now, Mr. President, our credibility will be severely compromised."

It's pretty hard to see how this ends well. But I think what it demonstrates most strongly is the fantastic political nightmare involved in ever pulling out of a war that hasn't been decisively won. Vietnam is the big-ticket example here, of course, but there are better ones. Take Somalia. After the Black Hawk Down incident in 1993, conservatives demanded that Bill Clinton pull out immediately. Not another American life was worth risking for a barren patch of dirt on the Horn of Africa. Clinton refused, insisting that we "finish the work we set out to do," and kept troops in country for another six months before withdrawing in an orderly way.

And what happened? Conservatives turned around and immediately started building up a mythology that Clinton had lacked spine and immediately ran for the exits at the first sign of trouble. Just like a Democrat to be so weak-kneed! What's more, it's now received wisdom on the right that it was this panicky withdrawal that first convinced Muslim fanatics that America was weak and could be attacked with impunity. In the end, Clinton took a hit for withdrawal even though he was the one who insisted on not cutting and running.

If that's what happens to a Democratic president who played a hawkish role in a small, unimportant war, what would happen to a Democratic president who played a dovish role in a big, important war? Nothing good. Pulling out of Afghanistan would have all the actual effects Kaplan talks about, but it would also be a political disaster.

I still plan to wait for Obama's speech tomorrow before I decide if his Afghanistan strategy is smart or not. But even if it is, it was probably sadly inevitable. The institutional support for war among the American chattering classes is just too powerful.

¹Hoo boy. That's easy to say now, but at the time it sure seemed every bit as important as al-Qaeda controlling a big chunk of Afghanistan seems to us.

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Protectionism

Kevin Drum — Mon, 30 Nov 2009 19:49:29 +0000

I think Matt Yglesias makes a pretty good political point here about trade policy:

If you convince people that it’s not possible for monetary authorities to boost employment, and that it’s unwise to use fiscal policy to boost employment, then it starts to look irresponsible for politicians not to use trade restrictions to protect the jobs of people in their state/district. When an economy is near full employment you can say trade makes the pie bigger and people who lose their jobs will get new jobs. But [if] we’re years away from full employment — which both the Fed and the White House seem to think — then getting laid-off is catastrophic.

The Fed is obviously more concerned about inflation than it is about unemployment right now, and Congress likewise seems unwilling to do very much more to help create jobs. In an environment like that, public pressure for trade restrictions becomes hard to resist. So if free traders really want to keep protectionist sentiment tamped down, they'd be well advised to start supporting domestic policies that create jobs, bring down unemployment, and reduce the kind of financial fear that drives protectonist sentiment in the first place.

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ClimateGate

Kevin Drum — Mon, 30 Nov 2009 18:15:53 +0000

As near as I can tell, ClimateGate is almost entirely a tempest in a teacup. Among the stash of emails recently hacked from computers at the Climatic Research Unit (CRU) at the University of East Anglia, one mentioned a "trick" for producing a nice looking graph, but the word "trick" was plainly used in the sense of "technique," not chicanery. There's nothing questionable there. Another bunch of emails shows that when scientists are communicating privately they can be as catty and nasty as anyone else. It's good gossip fodder, but nothing more. Another set of emails deals with outraged reaction to a particular journal article, but this isn't news. It was an entirely public incident when it happened a few years ago, and half the board of the journal resigned in protest. The emailers were determined not to have shoddy science published in peer-reviewed journals, and there's nothing wrong with that.

Then there are some emails about which research should and shouldn't be included in the next IPCC report, which, again, is entirely normal. Every scientist who worked on the IPCC report surely had opinions about which research was on point and which was shoddy. Finally, there's the revelation that CRU has destroyed some raw temperature data, but this happened back in the 1980s, before global warming was even on anyone's radar screen, and was obviously motivated by space considerations (they were paper records), not any kind of coverup. What's more, the raw data is still available from the original sources that provided it to CRU anyway.

Unfortunately, there are also a couple of messages that suggest an effort to destroy emails that might have been subject to a Freedom of Information request. That's a genuine problem, though it's not clear to me just how big a problem it is.

So on a substantive level, there's really very little to this. Certainly nothing that changes the actual science of climate change even a little. The earth is still warming and disaster is still highly likely if we sit around and do nothing. But George Monbiot thinks we lefties have our heads in the sand if we think that makes any difference:

I have seldom felt so alone. Confronted with crisis, most of the environmentalists I know have gone into denial. The emails hacked from the Climatic Research Unit (CRU) at the University of East Anglia, they say, are a storm in a tea cup, no big deal, exaggerated out of all recognition. It is true that climate change deniers have made wild claims which the material can't possibly support (the end of global warming, the death of climate science). But it is also true that the emails are very damaging.

....The crisis has been exacerbated by the university's handling of it, which has been a total trainwreck: a textbook example of how not to respond....When the emails hit the news on Friday morning, the university appeared completely unprepared. There was no statement, no position, no one to interview. Reporters kept being fobbed off while CRU's opponents landed blow upon blow on it. When a journalist I know finally managed to track down Phil Jones, he snapped "no comment" and put down the phone. This response is generally taken by the media to mean "guilty as charged".

....The handling of this crisis suggests that nothing has been learnt by climate scientists in this country from 20 years of assaults on their discipline. They appear to have no idea what they're up against or how to confront it. Their opponents might be scumbags, but their media strategy is exemplary.

It's hard to argue with this. Climate change skeptics have gotten fantastic mileage out of this affair, but that's only partly because technical explanations of facially damaging statements are never very convincing to the general public. An even bigger part of the problem is that a lot of the scientists involved haven't even been providing the technical explanations, leaving that up to others who are trying to get a handle on what's going on. From a PR standpoint, it's been a disaster so far.

For years the CRU has resisted public release of its underlying datasets, partly for the understandable reason that they're tired of dealing with amateurs who comb though raw data looking for ways to pretend that warming isn't really happening, and partly because they don't have the authority to release it all. Still, science is all about transparency, and annoying or not, the data should be available. Now it probably will be, and under the worst possible circumstances. It's going to be rough sledding for the next couple of years against the fever swamp crowd, aided and abetted by the coal industry. Buckle up.

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