Kevin Drum

Good News, Bad News

| Fri Dec. 19, 2008 1:33 PM EST

GOOD NEWS, BAD NEWS....Today brings yet another parting gift from George Bush: several thousand megawatts of new coal-fired power plants. Breathe deep, America. On the brighter side, Joe Romm is pretty excited over the appointment of John Holdren as the president's science advisor:

I have known Holdren for over a decade and have discussed energy/climate issues with him many times. He probably has more combined expertise on both climate science and clean energy technology than any other person who could plausibly have been named science adviser. You can see a video of an excellent talk he gave here (along with talks by Chu and me). For a more recent BBC interview, see "The Climate Quote of the Week."

I would say that if Holdren is named (on Saturday), it is an even stronger signal than the terrific choice of Steven Chu for Energy Secretary that Obama is dead serious about the strongest possible action on global warming....Holdren ain't in the "do something but not enough to avoid catastrophe" crowd.

If Holdren is OK with Joe Romm, he's OK with me. As I said yesterday, I think there's only just so much you can conclude based on appointments by themselves, but so far Obama's picks in the area of science and energy certainly suggest in the strongest possible terms that he plans to take a very serious, very activist approach to global warming.

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Yet More Bailout

| Fri Dec. 19, 2008 12:39 PM EST

YET MORE BAILOUT....As expected, President Bush today announced a bailout of Detroit's automakers. But it wasn't the prepackaged bankruptcy option that everyone was talking about yesterday. In fact, it was nearly identical to the congressional deal that collapsed last week but with one big difference:

The loan deal [] requires the companies to quickly reduce their debt by two-thirds, mostly through debt-for-equity swaps, and to reach an agreement with the United Auto Workers union to cut wages and benefits so they are competitive with those of employees of foreign-based automakers working in the United States.

The debt reduction and the cuts in wages were central components of proposal by Senator Bob Corker, Republican of Tennessee, who tried to salvage the bailout legislation.

Those talks had deadlocked on a demand by Republicans that the wage cuts take effect by a set date in 2009, while the union had pressed for a deadline in 2011 after its current contract expires.

The plan announced on Friday by Mr. Bush offered a compromise between those positions, by making the requirements non-binding, allowing the automakers to reach different arrangements with the union, provided that they explain how those alternative plans will keep them on a path toward financial viability.

Republican senators apparently had a chance last week to make binding requirements on the auto unions if they'd only been willing to compromise a bit on the date. But they wouldn't, so instead they supposedly got the date they wanted but only as part of a "non-binding" deal. Sounds like a bad tradeoff to me. They should have taken the binding offer when it was on the table.

UPDATE: More here from Jonathan Cohn.

New Credit Card Rules

| Fri Dec. 19, 2008 12:08 PM EST

NEW CREDIT CARD RULES....New regulations designed to stop some of the most egregious credit card abuses were adopted yesterday. That's the good news. Here's the not-so-good news:

The regulations, which take effect in July 2010, would block card companies from applying higher interest rates on existing balances. Late fees could not be charged without giving consumers at least 21 days to make a payment.

You know, some regulatory changes need a substantial amount of lead time because they're fairly complex to implement. These aren't those kind. They don't require 18 months of preparation. They barely require one month of preparation. They could have taken effect January 1st if regulators had been inclined to make a statement. Another opportunity missed.

Capital Gains

| Fri Dec. 19, 2008 11:53 AM EST

CAPITAL GAINS....Today, the New York Times reports that the housing bubble was partly fueled by tax changes in 1997 that eliminated capital gains taxes on home sales:

The different tax treatments gave people a new incentive to plow ever more money into real estate, and they did so....By itself, the change in the tax law did not cause the housing bubble, economists say. Several other factors — a relaxation of lending standards, a failure by regulators to intervene, a sharp decline in interest rates and a collective belief that house prices could never fall — probably played larger roles.

But many economists say that the law had a noticeable impact, allowing home sales to become tax-free windfalls. A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.

Of course, that's not the only thing the 1997 law did. It also reduced the general capital gains rate from 28% to 20% just as the dotcom boom was taking off, helping turn that into a monstrous bubble too. Nice work, Washington!

Closing Gitmo

| Fri Dec. 19, 2008 2:27 AM EST

CLOSING GITMO....This is more a contingency plan than a firm commitment, but it's still good to hear that Gitmo may be on its way to the dustbin of history:

The Defense Department is drawing up plans to close the Guantanamo Bay military prison in anticipation that one of President-elect Barack Obama's first acts will be ordering the closure of the detention center associated with the abuse of terror suspects.

....The prison, built to hold suspected terrorists after the 2001 U.S.-led military intervention in Afghanistan, now houses about 250 detainees, including Khalid Sheikh Mohammad and others accused in connection with the Sept. 11, 2001, terrorist attacks.

...."If this is one of the president-elect's first orders of business, the secretary wants to be prepared to help him as soon as possible," Morrell said. "The request (for a closure plan) has been made, his team is working on it so that he can be prepared to assist the president-elect should he wish to address this very early in his tenure."

It's worth reiterating that closing Guantanamo doesn't address the fundamental issue of what to do with all the detainees. There are still some very difficult issues to settle on that score. But it would be a helluva good start.

The President Speaks

| Thu Dec. 18, 2008 10:03 PM EST

THE PRESIDENT SPEAKS....George Bush is leaving office in style, isn't he? In his farewell interviews so far, he's said this:

Bush: One of the major theaters against al Qaeda turns out to have been Iraq. This is where al Qaeda said they were going to take their stand. This is where al Qaeda was hoping to take ...

Raddatz: But not until after the U.S. invaded.

Bush: Yeah, that's right. So what?

Then he explained his approach to economic management:

I've abandoned free-market principles to save the free-market system.

And finally there was this, after Ben and Henry gave him some bad economic news:

So I analyzed that and decided I didn't want to be the President during a depression greater than the Great Depression, or the beginning of a depression greater than the Great Depression.

That's some analysis. He's really decided to go out with a bang, hasn't he?

In related news, Pew has a new poll out in which they asked people to describe Bush in a single word. The biggest gainers since 2004 were incompetent, idiot, and ignorant. You're shocked, aren't you?

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Was Keynes Right?

| Thu Dec. 18, 2008 8:37 PM EST

WAS KEYNES RIGHT?....Tyler Cowen is skeptical that a massive spending-driven stimulus plan will bring the economy back to life. For various reasons he discounts the usual Depression-era examples (the New Deal, Nazi rearmament, WWII) and then says:

My point is simple: it is very hard to find examples of successful fiscal stimulus driving an economic recovery. Ever. This should be a sobering fact....The bottom line is this: we are being asked to believe that a big, trillion or even multi-trillion fiscal stimulus can boost the current macroeconomy. If you look at history, there isn't good reason to believe that. Any single example, such as the Nazis, can be knocked down for lack of relevance or lack of correspondence to current conditions. Fair enough. But the burden of proof isn't on the skeptics. It's up to the advocates of the trillion dollar expenditure to come up with the convincing examples of a fiscal-led recovery. Right now we're mostly at "It wasn't really tried." And then a mental retreat back into the notion that surely good public sector project opportunities are out there.

But do we need examples? I'd argue that we're basically in terra incognita today. In the postwar era, we've virtually never seen an industrialized country, let alone the whole world, stuck in a liquidity trap before. The only example that comes to mind is Japan in the 90s, and their experience with fiscal stimulus was pretty mixed. Depending on your preconceptions, you could take the Japanese experience either as proof that massive stimulus doesn't work or as evidence that not enough was done. And either way, it's only one example, so it would hardly be proof enough for skeptics anyway.

That leaves us with theory, which suggests that government spending when monetary policy has lost traction helps to stimulate the economy. But even if doesn't, my question to Tyler is this: what harm does it do to try? Assuming that stimulus spending is implemented even modestly well, it will, at a minimum, help out a bunch of people with continued employment and produce a bunch of infrastructure improvements that will enhance our future welfare. The downside is more debt, and I'm open to the argument that this is a bad thing to the extent that this debt is funded from overseas and produces further deterioration in our current account balance. But is that the argument against spending? Or is it something else?

Hilda Solis

| Thu Dec. 18, 2008 6:44 PM EST

HILDA SOLIS....Rick Warren may have left a bad taste in the leftosphere's mouth, but we're all thrilled with his choice of Rep. Hilda Solis as Labor Secretary. Here's Jonathan Stein:

Quit yur bellyaching! Obama's pick for Secretary of Labor is reportedly California Rep. Hilda Solis, the proud daughter of a union mom and union dad. In addition to a background as a management analyst at the Office of Management and Budget and a 100 percent rating from the AFL-CIO in 2007, Solis brings a reputation as one of Washington's leading proponents of green jobs....If you were to sketch an ideal Labor Secretary, you could hardly do much better.

Solis sounds great, and her one-minute tribute to the Employee Free Choice Act (above) is terrific. If I have any cautionary note to add, though, it's this: what did you expect? Of all the senior-level appointments Obama had to make, this was the only one that was virtually assured from the beginning of being a gift to the left. And it was. So I wouldn't take this as any slam dunk indication of how seriously he's going to take labor issues.

Don't get me wrong: I'm not trying to throw cold water on Obama's choice of Solis. It's just that his overall cabinet picks have been mainstream enough that it's probably not wise to take anything big away from any one of them. Hopefully Solis will help prod Obama to appoint some good NLRB members and put some serious political capital behind the push for passage of EFCA, and that's what I'll be watching for. A labor-friendly pick for Secretary of Labor is just a start.

Yum Yum

| Thu Dec. 18, 2008 4:36 PM EST

YUM YUM....Entertaining news from the gnomes of Zurich:

Credit Suisse Group said Thursday it will use up to $5 billion of its own illiquid assets such as mortgage securities to pay senior staff year-end bonuses at its investment bank, a move meant to spread risk more evenly between the bank and its employees.

The Zurich-based bank plans to pool commercial mortgage-backed securities and leveraged loans it can't sell because demand has seized up, then dole out units in the entity to managing directors and directors as part of this year's pay, according to a memo made available by a spokesman.

There's certainly an appeal to this, isn't there? Eating their own dog food, so to speak. Or their own toxic waste, as the case may be. I wonder if this idea will spread to Wall Street?

Bailout Update

| Thu Dec. 18, 2008 3:57 PM EST

BAILOUT UPDATE....The latest on the auto front:

The White House said on Thursday that an "orderly" bankruptcy was one option being considered to try to rescue General Motors and Chrysler, which are seeking billions of dollars to avoid a shutdown.

....Under one possibility that has been discussed, the government would give G.M. and Chrysler enough financing to operate for several months. Then a government-selected overseer would bring together company executives and other representatives to map out steps that would be taken once the two companies file for Chapter 11 protection.

This is the "prepackaged bankruptcy" option that's been mooted a few times before. It actually sounds like a decent compromise to me: it keeps the companies from imploding in the middle of a huge recession, but at the same time it gives a bankruptcy court considerable leeway to impose serious restructuring of the kind that a political process probably can't. The end result — if it's done right — is a pair of companies that will end up smaller but still viable in the long term, and an economy that takes only a moderate hit instead of a killing blow. Call me tentatively in favor of this approach.