Kevin Drum

China's Dumb Embargo

| Wed Oct. 20, 2010 11:25 AM EDT

China's decision to respond to U.S. complaints about its trade practices by embargoing exports of rare earth minerals is, obviously, pretty stupid. Even if it succeeds in garnering some concessions, it's sent a crude, ear-splitting message to the rest of the world that China can't be trusted as a trade partner. If they keep it up, they'll end up going down the same self-destructive path that Russia has gone down with its endless gameplaying over natural gas deliveries to western Europe. Dan Drezner comments:

China's foreign economic policies with respect to raw materials suggests that Beijing doesn't think market forces matter all that much — what matters is physical control over the resources. This is a pretty stupid way of thinking about how raw materials markets function, and it's going to encourage some obvious policy responses by the rest of the world. Non-Chinese production of rare earths will explode over the next five years as countries throw subsidy after subsidy at spurring production. Given China's behavior, not even the most ardent free-market advocate will be in a position to argue otherwise.

More importantly, China's perception of how economic power is wielded in the global political economy is going to have ripple effects across other capitals. If enough governments start reacting to China's economic statecraft by taking similar steps to reduce interdependence with that country, then China will have created a self-fulfilling prophecy in which geopolitics trumps economics. Another possibility is that the rest of the would will operate as before in dealing with each other, but treat China differently, developing CoCom-like structures and fostering the creation of explicit economic blocs.

China has developed its economy pretty shrewdly over the past three decades, but over the past year or two they've become suddenly far clumsier and almost comically menacing. It's not down to any single thing — getting into tiffs with neighboring countries over barren rocks in the China Sea has been going on forever — but it becomes more apparent when you look at everything put together. Chinese leaders seem to be panicking: over demographics in the long run, managing an increasingly fractious middle class in the medium term, and over a global economic meltdown that finally seems to be seriously affecting them too in the short run. This is a potentially toxic combination, especially since, as Dan implies, all the evidence suggests that China has been gearing up for a sustained resource war with the West for a long time. The battle over rare earths is just a minor skirmish in all this, but it's a telling one precisely because it's so minor and so transparently dumb. It's not the kind of thing a smart, confident leadership pulls off.

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American Exceptionalism

| Wed Oct. 20, 2010 10:40 AM EDT

Britain, unlike the U.S., has decided that if spending needs to be cut then the military has to bear some of the burden:

Though defence chiefs said today they will still have significant expeditionary forces, they will not be able to intervene on the scale of recent years. According to new defence planning assumptions, UK forces will be able to carry out one enduring brigade-level operation with up to 6,500 personnel, compared to the 10,000 now in Afghanistan, plus two smaller interventions, at any one time.

....The construction, mainly in Scottish shipyards, of two aircraft carriers — the largest ships ever built for the navy — will go ahead even though there will be no planes to fly from them until 2020 at the earliest. That is because the existing fleet of Harriers will be scrapped immediately and an as yet unknown number of US Joint Strike Fighters due to replace them will not be ready for another 10 years.

Only one of those carriers will actually be commissioned, though. Apparently penalty clauses in the contracts makes it more expensive to scrap the carriers than to build them, so they'll finish both and then mothball one of them immediately.

There's no big lesson here, though I think a lot of Americans might be surprised to hear just how constrained the British forces will become. Despite British claims, the fact is that right now the United States has virtually the only expeditionary force left on the planet. Other countries can defend themselves, or send troops across a border, but there's almost no capacity left for projecting force any further than that anywhere in the world. This is one area where American exceptionalism is truly a fact.

Same Old, Same Old

| Tue Oct. 19, 2010 6:52 PM EDT

The outrage du jour heure comes, once again, from Delaware, where Christine O'Donnell today questioned the constitutional basis of secular government:

"Where in the Constitution is separation of church and state?" O'Donnell asked while Democrat Chris Coons, an attorney, sat a few feet away.

Coons responded that O'Donnell's question "reveals her fundamental misunderstanding of what our Constitution is. ... The First Amendment establishes a separation."

She interrupted to say, "The First Amendment does? ... So you're telling me that the separation of church and state, the phrase 'separation of church and state,' is in the First Amendment?"

Her campaign issued a statement later saying O'Donnell "was not questioning the concept of separation of church and state as subsequently established by the courts. She simply made the point that the phrase appears nowhere in the Constitution."

OK, two things. First, why does anyone still care what Christine O'Donnell says? She's a carnival sideshow who's eleven points behind in the polls and will disappear from public view in a couple of weeks. Can't we all stop obsessing over her now instead of waiting until November 2nd?

Second, isn't it common knowledge that social conservatives have questioned the modern doctrine of separation of church and state for decades? They write books about it, they give talks about it, they write law review articles about it, they blog about it, and they denounce it from the pulpit. The fact that it's news in any way is less a reflection on O'Donnell than it is on the fact that the mainstream media still doesn't do much serious reporting about social conservatives. If they did, this wouldn't have been even remotely newsworthy.

UPDATE: I still think that breathless reporting on Christine O'Donnell's every gaffe is dumb, but I see via comments that the AP dispatch above doesn't quite give the flavor of what she really said. She did question whether the phrase "separation of church and state" is in the constitution, which is a standard social conservative talking point, but a few seconds later she had this exchange (at about the 7:00 mark):

Coons: The government shall make no establishment of religion.

O'Donnell: [dubiously] That's in the First Amendment?

That's definitely a wee bit higher on the nutball scale.

Banks and the New Rules

| Tue Oct. 19, 2010 2:46 PM EDT

Barbara Kiviat reads Bank of America's earnings press release today to find out how they're reacting to all those draconian new regulations on their credit card business. Then she translates for the rest of us:

So, let’s see. We’re getting 1) more transparent financial products; 2) better banking service; and 3) a boost to B of A’s bottom line. How could Congress have done this to us?!

Sounds like they're weathering the storm pretty well. But there's more to all this, and I want to second Kiviat's conclusion too:

I’ll be the first to admit that “upfront and transparent” pricing might very well mean higher pricing, especially for people who are used to getting a free ride when it comes to financial services — like those of us who pay off our credit card balances each month, thereby borrowing at no cost. On CNBC this morning, B of A CEO Brian Moynihan was pretty darn clear: “Instead of charging penalty fees, we’ll charge monthly fees.”

Yet, as I’ve long argued, there is nothing wrong with that. If my bank wants to charge me for a service that I am receiving — credit card usage, paper statements, a low-balance checking account — why would I be upset? Just clearly tell me what the price of the service is, and then I’ll make a decision about whether or not I want to buy it. Old-fashioned, I know, but still so beautiful. I understand that many people continue to feel the effects of the recession, and that the idea of paying more for anything right now is a painful one. But, in the long run, it only seems fair that people pay for the services they get.

My problem with credit and debit cards has never really been with the overall cost of the cards. It's a business, and banks and card networks should make money on it. What I object to is the evolution of the card industry over the past couple of decades, from one in which fees were open and fair and interest rates were relatively transparent, to one in which fees were hidden and penalties were increasingly targeted at those least able to bear them. (But also least likely to have the political clout to complain about them effectively.) The new fees will seem worse because you can see them, but they're almost certain to be less than the hidden fees you're paying now. What's more, they provide you with a better ability to decide whether you want various credit card products in the first place. That's the whole point of a Hayekian price signal, after all, but it doesn't work very well if consumers don't really know what price they're paying in the first place.

Plus there's the fact that the rich will be getting less in the way of truly revolting subsidies from the poor in the credit/debit market. That's nice too.

Not Your Father's Recession

| Tue Oct. 19, 2010 1:00 PM EDT

Over at The Corner, Stephen Spruiell is unimpressed with the Obama administration's decision to effectively spread out its tax cut over time by withholding less money from workers' paychecks each month:

To me, this demonstrates just how much of the administration’s thinking is guided by Keynesian economics, pump-priming, aggregate-demand-goosing, whatever you want to call it....But in giving small tax rebates to middle-income workers — workers whose incentives are mostly fixed — the administration chose to do the politically popular thing instead of the right (or correct, if you prefer) thing. The right thing to do, if you’re going to cut taxes, is to cut them for businesses and high earners so as to strengthen their incentives to expand, invest, produce more, and work more efficiently. Of course, these are the groups whose taxes Obama seeks to raise.

Fascinating. Not that Spruiell favors tax cuts for the rich. That goes without saying. But why does he think lowering taxes on the rich will raise their incentives to expand if there are no customers out there to buy their tidal waves of new stuff? This is a massive balance sheet recession, after all, characterized by relentless and still ongoing deleveraging. So where's the demand-side money going to come from?

I understand that conservatives owe fealty to supply-side economics at all costs, but this is ridiculous.

Medical Inflation: A Case Study

| Tue Oct. 19, 2010 12:17 PM EDT

Since it's my birthday, it's an excuse to provide a one-document explanation for why healthcare costs have skyrocketed so much in the past 50 years. Here it is:

That's the bill for my delivery. I cost $133.98. Adjusted for ordinary CPI inflation, that comes to $1,000 in current dollars. Today, an uncomplicated birth (which mine was — I was born at 8:02 pm, ninety minutes after my mother was admitted to the hospital) will run you upwards of $10,000. Add even a little bit of complication and it can easily rise to $20-30,000.

Why? Because doctors were paid fairly ordinary middle-class salaries in the 50s and there was essentially no technology involved in any of this. My mother says that her room in the hospital basically had a bed and a telephone. In the delivery room there were no epidurals, no beeping machines, no phalanx of specialists. Just piped in music, which played "Yellow Rose of Texas" while I was popping out.

We can go back to that any time we like. But I doubt there are any takers.

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And Now, China

| Tue Oct. 19, 2010 11:48 AM EDT

China's financial mandarins are finally getting worried enough to do something about their bubble economy:

China’s central bank unexpectedly announced Tuesday that it would raise interest rates for the first time in nearly three years, apparently in the hopes of dampening inflation and cooling off this country’s hot property market.

....Analysts said they were surprised by the decision, because a bank oficial had suggested just days ago that no rate increase was needed. Still, late Tuesday the bank announced the first rate increase here since 2007. Analysts said it was one of the strongest signals yet that Beijing is having difficulty managing the country’s growth.

....The decision to raise the rates came after a surge in bank lending in September, reports of higher property prices last month and indications that inflation may have risen sharply in September, after a big jump in August.

China's economy is more opaque than most, but I think big governments everywhere react approximately the same way to bad news: too slowly and too weakly. Thus, the fact that China is finally taking modest but highly public action to rein in their property bubble and cool down inflation suggests to me that their economy is in more serious trouble than anyone thinks. I suspect they're now in about the same position that the U.S. and the rest of the world were in during 2007: they know things are going south, but they're still hoping against hope that the problem is temporary and manageable and can be muddled through with only modest measures. By the time they finally face up to the fact that it's not, it will probably be too late.

I hope that one of two things turns out to be the case. (1) I'm wrong. (2) The rest of the world economy is in good enough a shape a year or two from now to handle a major Chinese downturn. I don't have a ton of faith in either one of these possibilities, though.

Ace of Spades Day

| Tue Oct. 19, 2010 11:18 AM EDT

Today is my birthday. I can now boast one year for every club, diamond, heart, and spade in a deck of cards. Not a pinochle deck. Not a skat deck. A standard deck. But not one with jokers, at least. Give me another twenty years and I'll finally be old enough to run for governor of California.

In cat years, however, I'm only about nine. So there's that.

Apologize Yes, Surrender No

| Tue Oct. 19, 2010 10:43 AM EDT

Eliot Spitzer's fate isn't a big concern of mine, but I think Matt Yglesias is exactly correct about why he was hurt more by his scandal than other politicians have been by theirs: because he allowed himself to be hurt by it.

I think the contrasting fates of Spitzer and guys like Clinton or Senator David Vitter (R-LA) shows that Spitzer’s problem was much simpler than [a lack of friends in high places] — he resigned. When a reasonably popular public official is hit with a scandal of a personal nature, the natural immediate first reaction of his same-party colleagues is to want to get rid of him. After all, no reason this guy should be a millstone around all of our necks. That leads to an initial torrent of criticism from friendly-ish sources and a wave of pressure to resign. But if you resist that first wave, apologizing for your conduct but refusing to apologize for your years of public service and highlighting the pernicious special interests who’d love to see you brought low, you basically flip the dynamic. Now you’re definitely going to be a millstone around everyone’s necks so the question becomes how heavy a stone?

Suddenly all your same-party colleagues have an incentive to defend you and to attack your enemies. Suddenly an incumbent Republican in Louisiana is just another guy with a safe seat. An incumbent President presiding over an economic boom is super-popular. And I bet an incumbent Democratic governor in New York could have cruised to re-election.

This seems to be nearly universally true. Sure, there are some things that a politician can't bounce back from, but garden variety sex scandals and corruption charges aren't among them. Especially in today's supercharged partisan atmosphere, all you have to is tough it out and before long the folks on your side of the aisle will reluctantly line up behind you. Short of impeachment, after all, nobody can force you to resign, and if you time your scandal properly it will be "old news" by the time election season rolls around.

For all that we obsess over this stuff, the plain truth is that Americans don't care much about sexual peccadillos. Liberals don't care, conservatives don't care, and social conservatives really don't care. In fact, being a social conservative is practically like having a Get Out of Jail Free card in your vest pocket for this kind of stuff. All you have to is tearfully confess to your sinning, admit that you've let down both your family and the Lord, and promise to rededicate yourself to a life of virtue in the future with the help of your church and your supporters. If you do that, then as near as I can tell, you'll be more popular than you were before. Sinning and repenting is the best proof there is that you're really one of the family.

So anyway, Spitzer probably shouldn't have resigned. If he'd gutted it out for a couple of months the whole thing would have gone away.

The World's Greatest Tax Cut?

| Tue Oct. 19, 2010 12:48 AM EDT

Michael Cooper writes today that the Obama tax cut, which was part of the 2009 stimulus bill, was so subtle that lots of people think their taxes have gone up under Obama:

In a troubling sign for Democrats as they head into the midterm elections, their signature tax cut of the past two years, which decreased income taxes by up to $400 a year for individuals and $800 for married couples, has gone largely unnoticed. In a New York Times/CBS News Poll last month, fewer than one in 10 respondents knew that the Obama administration had lowered taxes for most Americans.

....The tax cut was, by design, hard to notice. Faced with evidence that people were more likely to save than spend the tax rebate checks they received during the Bush administration, the Obama administration decided to take a different tack: it arranged for less tax money to be withheld from people’s paychecks.

They reasoned that people would be more likely to spend a small, recurring extra bit of money that they might not even notice, and that the quicker the money was spent, the faster it would cycle through the economy.

....But at least one prominent economist is questioning whether the method really was more effective. Joel B. Slemrod, a professor of economics at the University of Michigan, analyzed consumer surveys....After the Obama tax cut took effect, he said, only 13 percent said they would use the money primarily to increase their spending.

Wait a second. Earlier in the year, before election hysteria had fully set in, 12% of Americans knew that Obama had cut their taxes. And according to Slemrod's research, 13% said they planned to use the money to increase spending. In other words, virtually every single person who knew about the tax cuts said they planned to spend it. Doesn't that suggest that the people who didn't know about the tax cut probably spent it too? The withholding trick might have been lousy politics, but it looks like it was probably surprisingly good policy.