The Truth About Stella Liebeck

I've long been pissed off over the case of Stella Liebeck. You remember her, right? The woman who spilled some McDonald's coffee on herself while carelessly careening down the highway and then scored a million-dollar jackpot when her high-priced lawyer convinced a credulous jury to stick it to a deep-pocketed corporation.

Except, not quite. In fact, Liebeck's burns were extremely serious, she wasn't the first person this happened to, and when people learn the facts of the case and view the actual injuries they almost always change their minds about it. Scott Lemieux summarizes in a review of a new HBO film, Hot Coffee:

Saladoff’s film lays out the real story in lucid detail, and no matter how many times the suit was used in Jay Leno monologues there was nothing funny about it. Liebeck was not careless, but spilled the coffee when she, as a passenger in a parked car, took the lid off the cup. The spill did not cause a trivial injury, but severe burns that required multiple operations and skin grafts to treat. McDonald’s, which served its coffee at 180 degrees, had received more than 700 complaints from customers, constituting a clear warning, but it nonetheless required its franchises to serve it at that temperature without warning customers.

Nor was Liebeck greedy or especially litigious. Her initial complaint requested only about $20,000 to cover her medical bills and other related expenses, and she took McDonald’s to court only after the corporation offered a paltry $800 settlement. The headline-generating $2.7 million Liebeck was awarded in punitive damages (selected because it approximated two days worth of the revenues McDonald’s makes by selling coffee) was reduced on appeal to less than $500,000. (The case was later settled for an undisclosed amount.) The Liebeck suit was a thoughtful attempt to seek appropriate redress for a serious harm, not about a clumsy woman trying to wring millions from an innocent corporation.

I don't get HBO, but I guess one of these days I'm going to have to break down and do it. This is good stuff, and it's good to see that it's going to find a wider audience.

UPDATE: More about the making of the film here from our own Stephanie Mencimer, author of the wonderful Blocking the Courthouse Door and one of the people featured in the film. My review of her book is here.

Time to Chill on Default Fever

I know I'm beating a dead horse here, but this morning I opened my LA Times and found this:

Wall Street has tried to ignore the threat posed by Washington failing to raise the debt ceiling. No more.....Without a deal, the most feared scenario is that the U.S. will miss payments on its bonds and default — which financial experts say would be disastrous. While still considered unlikely, the prospect is popping up more in conversations.

I just don't get this. Short of a meteor strike or an alien invasion, there is zero chance that the United States will miss any bond payments. Let me repeat that: zero. Bond payments over the next few months total about $50 billion or so and can be made easily regardless of what Congress does. Other programs may suffer, but treasury bills will continue to be solid gold. Based on current bond yields, the market clearly understands this, and surely "Wall Street" understands it too.

So what are they really afraid of? Continuing directly:

The more likely scenario that investors are preparing for is that a temporary deal is struck to lift the debt ceiling. But such a makeshift plan is unlikely to allow the U.S. to maintain its AAA grade with bond rating companies. Citigroup analysts say the odds are 50-50 that the U.S. will be demoted to an AA rating for the first time ever.

Such a downgrade could lead to a temporary market panic. In the longer term it could push interest rates up for everyone from bankers down to ordinary people taking out car loans, and weaken the dollar's position as the world's reserve currency.

It makes more sense to be afraid of this, but does it make any sense for the rating agencies to be threatening a downgrade in the first place? I still don't see it. Their concern should solely be over the likelihood of bonds being defaulted, and that likelihood remains essentially zero. As bad as the debt ceiling stalemate is, it flatly does nothing to imperil the possibility of the United States making good on its debt.

There's something deeply weird going on here. Wall Street is allegedly worried over a default that's not going to happen, or else it's worried about the fiscal opinions of some rating agency analysts who don't know anything more about the financial future of the United States than anyone else. And those opinions don't even make much sense. The United States remains highly productive; the deficit of the past three years is completely justifiable; our long-term healthcare problems are exactly the same as every other advanced country in the world and exactly the same as they've been for years; and the current stalemate in Congress is — what? Six months old? They're talking about a downgrade of 30-year sovereign debt from the safest, most powerful country in the world based on a political spat that's been going on for less than a year?

This is crazy. I'm worried about who's going to suffer if the federal government closes agencies and stops cutting checks temporarily. I'm worried about stubbornly high unemployment. I'm worried about the prospect of Michele Bachmann occupying the Oval Office. But the chances of the U.S. Treasury defaulting on its bonds? Why would I be worried about that?

Al-Qaeda is Dead, Long Live al-Qaeda

The original core al-Qaeda group is on the ropes:

U.S. counterterrorism officials are increasingly convinced that the killing of Osama bin Laden and the toll of seven years of CIA drone strikes have pushed al-Qaeda to the brink of collapse.

The assessment reflects a widespread view at the CIA and other agencies that a relatively small number of additional blows could effectively extinguish the Pakistan-based organization that carried out the Sept. 11, 2001, terrorist attacks — an outcome that was seen as a distant prospect for much of the past decade.

....Defense Secretary Leon E. Panetta declared during a recent visit to Afghanistan that “we’re within reach of strategically defeating al-Qaeda.”....Senior U.S. officials from the CIA, the National Counterterrorism Center and other agencies have expressed similar views in classified intelligence reports and closed-door briefings on Capitol Hill, officials said.

Something tells me that this is a bit like Zeno's Paradox: we're going to keep getting closer and closer, but we'll never quite get to the finish line and no one will ever quite be willing to say we've won and can remove our troops from the fight.

Then again, maybe that's too cynical. Lately we've been taking a tougher line toward Pakistan, almost as if we don't care very much anymore if they kick us out of the country. Well, maybe we don't. And if we don't need Pakistan for much anymore, that's a pretty strong sign that we really do increasingly believe that al-Qaeda Central is nearly done for. Time to move on to Yemen and Somalia.

(What's that? No, I didn't say al-Qaeda was finished. Just Osama's original group in Pakistan. Don't worry, there will always be terrorists named "al-Qaeda" to fight.)

What Happens on August 2nd?

Here's the latest from the Wall Street Journal on how Main Street is reacting to the debt ceiling stalemate:

In a recent survey by the Association of Financial Professionals, which represents treasury and finance executives, half of the 305 respondents said failure to reach an agreement by the Aug. 2 deadline would have a detrimental impact on their access to capital and short-term investment strategies.

Half of the respondents planned to take defensive actions, such as a freeze on hiring, reducing capital spending and drawing on credit lines to build cash, the AFP said....A quarter of the companies surveyed that hold U.S. Treasury securities said they would sell at least some of them if Congress and the White House failed to reach a deal.

....Corporations are worried about a default because the consequences for the financial system are unknown. Treasurys serve as the basis for companies' borrowing costs, are key holdings for banks and money-market funds and are used as collateral in short-term lending markets.

I'm still flummoxed about this. If we run out of money, the federal government will stop paying some of its bills. That's bad, and it will quite likely have a negative effect on the economy. Corporations are right to be apprehensive about this.

But that's all that will happen. Treasury bonds will continue to roll over and interest payments will continue to be made. That means there's no reason to sell Treasurys; no reason they can't continue to be used as collateral; no reason that access to capital should dry up; and no reason that companies will need more cash.1

At least, that's how it seems to me. What am I missing here? I feel like I must be an idiot or something. Is the answer something so obvious that no one ever mentions it, or something so arcane that it never gets explained in lay terms? Or is everyone else crazy? Or what?

1And, by the way, no tangible reason that ratings agencies should downgrade U.S. debt. We're going though a political dispute, not a crisis that impairs our ability to service our debt.

What Does "Default" Mean?

Dan Drezner says he's been "flummoxed" by the lack of market reaction to the stalemate over the debt ceiling. He suggests that it might be because U.S. bonds are mostly held by central banks and sovereign wealth funds who aren't likely to sell them in a panic regardless of what happens. So default isn't as big a deal as we think it is.

Maybe. But I think it's because we're throwing the word "default" around too casually. There are two ways people have been using the word lately:

  • That the United States will actually stop making interest payments on outstanding bonds. This would be a disaster, but it's also pretty much out of the question, since Treasury will prioritize coupon payments over everything else even if Congress stays stalemated for a while. So markets are quite rationally not very worried about this.
  • That the federal government will stop paying some bills on August 2nd. This is much more likely, but Wall Street has seen this movie before: it's roughly the same thing that happens whenever the government gets shut down because a budget hasn't been passed. It's a bit of a mess, but when checks stop going out and offices start getting closed, the political pressure to get things moving goes up exponentially and before long the stalemate ends one way or another. From the point of view of the bond market, it's nothing to get in a tizzy about.

Beyond this, there's the idea that bond markets should be troubled by our long-term financial problems. But they haven't been in the past, they aren't now, and Standard & Poor's to the contrary, nothing happening now really suggests they should be much more troubled about it than they've ever been. Maybe someday they will be, but that day is a ways off.

In other words, maybe there's just not much reason for bond markets to be panicking yet. A downgrade by the ratings agencies would be a more serious thing, especially since it would have knock-on effects on state and local bonds, but I suspect investors are treating that as a completely separate issue. Not: are U.S. bonds in trouble? but: what are S&P's analysts going to do? And for the moment anyway, investors apparently think their downgrade talk is just bluster. Perhaps they know something we don't?

A Few Little Budget Facts

As long as we're passing out facts today, here are some more. This chart shows federal spending over the past few decades as a percentage of GDP:

All numbers are from the OMB. The trend lines are pretty simple:

  1. Domestic discretionary spending and miscellaneous mandatory spending ("Other") is on a steady downward slope.
  2. Interest spending is on a downward slope.
  3. Defense spending has gone up over the past decade due to the wars in Iraq and Afghanistan, but otherwise is on a steady downward slope.
  4. Social Security is pretty flat.
  5. Medicare spending is up.

I cut this chart off at 2008 so that the long-term trends are easier to see. There's been a spike in these numbers over the past three years because the recession has temporarily depressed GDP and temporarily increased spending — just as there were spikes during the recessions of 1979, 1989, and 2001 — but that spike will go away when the economy improves. There's no special reason that it should affect our view of our long-term finances.

So: should we be especially worried about discretionary spending, defense spending, or interest expenses? No. They haven't gone up over the past 30+ years and there's no special reason to think that trend will change. As always, we should pay attention to which programs we need and how to make them more efficient, but these parts of the budget just aren't long-term problems.

Should we be worried about Social Security? Not really. It will go up in the future thanks to the retirement of the baby boomers, but we know exactly how much it's going to increase: 1-2% of GDP through 2030 or so, and then it flattens out forever. That's going to require some combination of very small tax increases and very small benefit cuts over the next two decades, and that's it. No surprises.

This leaves Medicare. And that we should be worried about. It's gone steadily up over the past three decades and every forecast suggests it will keep going up indefinitely. Ditto for every other kind of healthcare spending, both federal and private.

Bottom line: our current deficit panic is mostly just manufactured hysteria. Our recent spike in spending is an artifact of the recession and will go away in the next few years. Generally speaking, defense, discretionary, and interest expenses aren't an issue and don't really need any special attention. Social Security is basically fine and needs only a few small tweaks. The only thing we should be seriously concerned about is healthcare spending. Period. That's the whole story. Anything else is just partisan showmanship.

Those are the facts. Pass 'em along.

The 51 Percent Zombie Lie

Every morning I take a couple of short breaks from the keyboard to do some stretching exercises that are designed to ease my neck and shoulder pain. I usually turn on the TV while I'm doing this, and that's pretty much my entire exposure to Fox News. So what were they going on about a few minutes ago while I stretched? The fact that people get really upset when they hear that 51 percent of Americans pay no taxes.

Well, I'd be upset too. Who the hell are these freeloaders? Answer: They don't exist, of course. From the Tax Foundation, an organization that even conservatives ought to be willing to credit, here's a report from a few years ago showing the total tax burden on various income groups in America:

Other estimates put the low-end tax burden higher and the high-end tax burden lower, but no matter. This tells the story. The blue bars don't cherry pick just the federal income tax to make a dumb partisan talking point; they show how much each group actually pays in total taxes. Bottom line: Poor people pay less in taxes than rich people, as they should, but it's very far from zero. The midpoint of that first quintile is about $11,000, and even a household earning that little pays about $1,400 in taxes. The household in the second quintile, earning a munificent $30,000 per year, pays $7,000 in taxes.

I know we live in a post-fact environment, but those are the facts. Pass 'em around. There are no freeloaders here.

UPDATE: Just to clear this up in case there's any misunderstanding, it's approximately true that 51 percent of Americans pay no federal income tax. However, conservatives routinely abbreviate this by claiming that 51 percent of Americans pay no taxes. This is the zombie lie. Conservatives get very upset when you call them on it, but that never makes them stop.

So where does the rest come from? Well, in addition to federal income taxes, Americans pay excise taxes, payroll taxes, property taxes, sales taxes, state income taxes, and various other taxes. That's where the blue bar in the chart comes from. In one form or another, even poor Americans pay a fair chunk of their income in taxes.

Obama's Narrow Tightrope

Jon Chait on Obama's negotiating predicament:

President Obama has a credibility problem. He has compromised so often that Republicans simply don't believe that he'll sustain his opposition to anything.…Obama clearly faces a perception problem. Republicans may complain that he's walked away from deals, but they really think he's a pushover who will cede more and more ground the harder and longer they push. That's a dangerous position to be in on the verge of a high stakes game of chicken. It encourages the Republicans to push the envelope farther and farther—even to walk away from a deal they regard as a win in search of an even better win.

Unfortunately, Obama is between a rock and a hard place. His basic strategy is simple: to position himself as the endlessly reasonable guy willing to go the extra mile but constantly stymied by a crackpot, hard-line group of nihilists in the Republican Party. For various reasons, some genuine and some opportunistic, he thinks this is the way to play things.

Now, you may or may not like this strategy, but it's the one he's chosen. Unfortunately, it's an extremely fragile strategy. Republicans are already furiously trying to pretend that it's Obama who's being the obstructionist, and they're making headway even though there's virtually no substance to this at all. But if Obama gives them even the least opening by genuinely refusing an arguably fair deal, they'll have all the ammunition they need. Obama will lose his Mr. Reasonable cred overnight, and with it whatever public opinion advantage it gave him. Conversely, though, as Chait points out, if he sticks to his Mr. Reasonable guns at all costs, he looks like a pushover. He's chosen a very, very narrow tightrope to negotiate.

Blame Congress, Not Obama?

Is President Obama a huge sellout to the progressive cause, as many on the left believe? Matt Yglesias imagines a world in which that's true, but the Democratic caucuses in the House and the Senate were precisely as horrible as Obama. Such a legislature would have passed a bigger stimulus, a better healthcare bill, a card check bill, a cap-and-trade bill, and an immigration bill:

That’s a lot! And it’s what would have happened even if Barack Obama was exactly as rotten and unprogressive as the actually existing Barack Obama. All it would take to get to that world would be to make the people occupying the legislative pivot points as rotten and horrible as President Obama, a bar that left-wing critics of Obama keep assuring me is a low bar. So how come we can’t do it? It’s important for people not to let their frustrations with things Obama has done, is doing, or will do confuse them about the historical record. The overwhelming story of American politics in 2009 and 2010 was of Congress refusing to enact progressive measures that, had they passed Congress, would have been signed into law. If progressives failed during the leadup to the 111th Congress, the failure that really mattered was the failure to elect a more progressive Congress, not the failure to elect a more progressive president.

Actually, as Matt briefly alludes to earlier in his post, all of this would have become law easily if only the Senate didn't require 60 votes to pass a bill. The fact is that the left did manage to elect a Congress in which the median member was willing to pass all this legislation. They just didn't elect a Congress in which the 60th senator was willing to do it. That's a much, much, much higher bar.

On the bright side, though, if the Senate were a majoritarian body then George Bush might very well have been able to privatize Social Security in 2005. Not to mention lots of other stuff that he and Karl Rove probably didn't even bother trying for. On net, this bias toward the status quo hurts liberals more than conservatives, but it's not completely black and white.

As it happens, I think it's possible to get a little too caught up in political scienc-ey research suggesting that the president is all but powerless. It may be worth pointing out the president's limitations from time to time, since people fixate on his powers so much, but he's hardly a potted plant. Sure, Obama probably couldn't have gotten a lot more done if he'd been more aggressive, but I continue to think he could have gotten a little more done. To go much further, unfortunately, would require not just a more liberal Congress, but a stronger institutional base for the entire progressive movement. We're not really anywhere close to that at the moment.

Michele Bachmann's Hair

The latest on Michele Bachmann:

After launching her bid for the White House, Bachmann has broken with her usual frugality and shelled out some serious cash on a stylist in what could be seen as her own John-Edwards'-$400-haircut moment.

According to Bachmann's latest campaign finance filings, her campaign spent nearly $4,700 on hair and makeup in the weeks after she entered the presidential race on June 13. Records show her campaign made three payments of $1,715, $250, and $2,704 to a Maryland-based stylist named Tamara Robertson....blah blah blah....

I really, really wish we could knock off this stuff. Presidential candidates have to look good, and female candidates especially have to look good. It's unfair, but it's the way things are. To then turn around and gripe about their styling bills is shamelessly petty. MoJo is better than this.