Kevin Drum

Complicated Problems

| Thu Oct. 23, 2008 2:34 PM EDT

COMPLICATED PROBLEMS....Douglas Holtz-Eakin, John McCain's primary economic advisor, says that income inequality has gone up everywhere, not just in the U.S., and opines that "The source of that is education." Matt Yglesias has a bunch to say about that, including this:

While there does seem to be an education-related component to the growth in inequality (specifically, the number of college graduates has not kept up with the growing labor market demand for college educated workers) there are also other factors, including the declining real value of the minimum wage and declining rates of unionization. In both cases, and all others I'm aware of, McCain takes the pro-inequality side.

I just want to quickly endorse the broader point Matt is making here. The growth of income inequality is a complex problem with multiple causes. In fact, virtually every social problem interesting enough to remain unsolved has multiple causes, and that makes them hard to address. The answer to this is not to pretend otherwise ("education" by itself certainly doesn't explain the astronomical income growth of the top 0.1% compared to the top 1%, for example), nor is it to give up because there are lots and lots of causes and it's hard to fix them all.

There are multiple kinds of income inequality, and assuming you care about this in the first place (and you should, both for reasons of basic fairness and because an egalitarian economy works better than a vastly unequal one) you have to address them all. You need things like minimum wage laws and the EITC to help the poor keep up. Unionization can help the working class and educational and training policies can help the middle class. Tax policies, at a minimum, should be designed to be at least modestly progressive at the high end. (Our current tax system, which features regressive state, local, and payroll taxes, and which taxes capital gains and dividends at low rates, has produced overall tax rates that are only slightly progressive. Most billionaires don't pay an awful lot more than grocery checkers.) Things like universal healthcare can ameliorate some of the ill effects of whatever income inequality is left even after you've addressed the other stuff.

One way or another, though, any solution has to focus like a laser on increasing median wages to keep up with GDP growth. In the same way that TV revenue has produced an immense ocean of money for top athletes, keeping median wages flat has produced an immense ocean of extra money that sloshes around for the benefit of the tippy top executive class. Treat the middle class more fairly, and income inequality will decrease naturally. That should be Job 1 for Barack Obama's economic team.

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Proposition 8 Update

| Thu Oct. 23, 2008 1:30 PM EDT

PROPOSITION 8 UPDATE....A new poll shows that California voters remain opposed to a ban on gay marriage:

But the poll also found that support for Proposition 8, which would amend the state Constitution to disallow same-sex marriage, has gained somewhat since a similar survey was taken in late August. The latest results show 44% in favor and 52% opposed, with a margin of sampling error of 3 percentage points.

It's gonna be close, folks. Back in May, based on demographic fundamentals, I predicted that Prop 8 would pass 52%-48%. There's good news and bad news that might change that, though.

The good news is that this is a Democratic year and liberal turnout at the polls might be higher than normal. The bad news is that the No forces are running bland, generic ads, while a few weeks ago the Yes forces began saturation coverage of fiendishly effective scare ads that scream, "Gay marriage will be taught to second graders!" — and the Mormon church is providing them with plenty of money to scream with. Conversely, the No side is determined that their ads not mention "gay marriage" or anything else that might potentially upset anyone, hoping that people won't figure out what Prop 8 is about and will just vote against it because it's vaguely "unfair." Unfortunately, it's hard to see that working. Given the high-wattage campaign from the Yes folks, there can't really be many people left in the state who don't know what Prop 8 is about.

Here in my little neck of the woods, the Yes folks are also pretty well organized. They've got troops of people holding signs and banners at street corners during rush hour, and I chatted with a few of the sign holders yesterday on my way to the market. They were all nice folks. Wrong, but nice, and very committed to the cause. And judging from the honking of horns as cars whizzed by, there are plenty of people here who agree with them.

But that's Orange County for you. It's hardly a representative sample of the state. Still, there are plenty of people who think the same way, and another couple of weeks of high-decibel Yes ads are probably going to add to their numbers. It's gonna be close.

UPDATE: Elizabeth Gettelman has a report from Oakland about the street corner picketers there. Apparently most of them have been organized by local Mormon churches, which I guess isn't surprising.

One of the guys I talked to on my corner last night asked if my opposition to Prop 8 was "because of the church thing," and at first I didn't really realize what he was talking about. As I walked away I figured it out: he wanted to know if I was turned off by the Yes campaign because I'd heard it was bankrolled by the Mormon Church. I guess they must run into that a lot.

Mortgage Hell

| Thu Oct. 23, 2008 12:41 PM EDT

MORTGAGE HELL....Sheila Bair, head of the FDIC, is working on a plan to help homeowners stuck with mortgages they can't afford. One problem she faces is that any plan that helps genuinely distressed homeowners would almost certainly help plenty of others who just feel like lowering their payment terms. But even if we grit our teeth and accept that, there's another problem:

Renegotiating troubled mortgages — as opposed to paying them off — is difficult because most have been packaged into securities and sold off to multiple investors. Mortgage servicers — companies that collect payments and work with homeowners — typically act on behalf of those investors, who often have competing interests. Getting servicers to rework mortgages has been a tough slog for the government under its existing programs, which encouraged but didn't require industry compliance.

Ms. Bair's proposal is designed to overcome some of these problems by significantly raising servicers' incentives to cooperate. The government would agree to share a portion of any losses on a new, more-affordable mortgage, should it go into default.

I suspect that this consideration was behind John McCain's plan to buy up mortgages at face value and replace them with new, cheaper mortgages. This may be a windfall for investors, but it also probably means that you don't have to negotiate a separate agreement with all the noteholders who own a piece of the securities. The terms of most (though not all) mortgages allow them to be repaid at face value at any time, which means you don't have to get the approval of all the noteholders to do so.

At least, that's my guess. It would be nice to read a definitive explanation of how all this works and what the problems are with renegotiating sliced-and-diced mortgages, but I haven't seen one yet. If anybody comes across something authoritative, let me know.

Conversation of the Day - 10.23.2008

| Thu Oct. 23, 2008 3:10 AM EDT

CONVERSATION OF THE DAY....Between Rahul Dilip Shah and Shannon Mooney, a pair of analysts at the credit rating agency Standard & Poor's, chatting via IM back in 2007:

RDS: btw: that deal is ridiculous

SM: I know right ... model def does not capture half of the risk

RDS: we should not be rating it

SM: we rate every deal

SM: it could be structured by cows and we would rate it

This was made public as part of a House committee hearing today. The New York Times reports on other revelations:

Among the documents uncovered by the committee was an internal board presentation delivered by [Raymond] McDaniel to Moody's directors in October 2007. According to the presentation, he told his board: Analysts and managing directors "are continually 'pitched' by bankers, issuers, investors." At times, he conceded, "we drink the Kool-Aid."

....Mr. Waxman's committee also cited an internal e-mail exchange between [Frank] Raiter, who had been asked to rate a collateralized debt obligation called "Pinstripe," and Richard Gugliada, an S.& P. managing director. Mr. Raiter had requested highly detailed data about each individual loan, known as loan level tapes, to assess the creditworthiness of the loans in the security, but Mr. Gugliada wrote: "Any request for loan level tapes is totally unreasonable!!! It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so."

Mr. Raiter responded: "This is the most amazing memo I have ever received in my business career."

Kinda reminds you of all those Enron emails and phone conversations gloating over how they'd created the California energy "crisis," doesn't it. Good times.

Election Pool

| Wed Oct. 22, 2008 9:28 PM EDT

ELECTION POOL....Do Republicans really think they might lose 34 seats in the House? Wow.

And as long as we're on the subject, it's time for predictions. There are three categories this year:

  • Winner and total electoral votes for president.

  • Composition of the House. Current composition is 235-199-1.

  • Composition of the Senate. Current composition is 49-49-2.

I suck at this, but I'll predict (a) Obama with 310 electoral votes, (b) 250-185, and (c) 55-43-2. Leave your predictions in comments. Winner gets a free subscription to Mother Jones.

Palin and McCain

| Wed Oct. 22, 2008 8:55 PM EDT

PALIN AND McCAIN....Sarah Palin told James Dobson today that John McCain is 100% committed to the Republican Party platform on abortion. Marc Ambinder comments:

If McCain is going to implement it — something of which Palin is convinced from the bottom of her heart — then that means that McCain will support a constitutional amendment to ban all abortion (including those cases where the mother was raped or was the victim of incest), a constitutional amendment banning gay marriage, and he will oppose government-sponsored embryonic stem cell research.

Either Palin trying to mislead Dobson, equivocate, or perhaps [she] doesn't know what her running mate believes. McCain opposes a constitutional amendment banning gay marriage.... He supports embryonic stem cell research...he opposes a constitutional amendment banning all abortion.

Hmmm. Here is NBC political analyst Chuck Todd's impression of a joint McCain-Palin interview conducted today by Brian Williams:

There was a tenseness....I couldn't see chemistry between John McCain and Sarah Palin. I felt as if we grabbed two people and said "here, sit next to each other, we are going to conduct an interview." They are not comfortable with each other yet.

Let's summarize. Palin doesn't know McCain's own positions. Earlier this week she criticized his robocalling messages. The conservative base is practically bursting at the seams waiting to dump McCain after November 4th and embrace Palin as the future of the party. And to top it all off, it has to be hellishly embarrassing to sit beside her during an interview and be forced to pretend that she's talking like an actual adult while she's spouting her usual stream of index card nonsense.

So, yeah, he's probably not comfortable with her yet. I suspect McCain knows perfectly well what's in store from the Palin camp after they lose the election. Loyalty to her mentors, after all, is not exactly her strong suit.

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The Obama Chronicles

| Wed Oct. 22, 2008 7:46 PM EDT

THE OBAMA CHRONICLES....Michael Ledeen is worried about Barack Obama:

I have nothing against hanging out with Marxist radicals. Some of my best friends are still Marxist radicals. I learn from them, even though I don't agree with them very often. But what's alarming about Obama is that he seems to have predominantly radical friends.

....And that pattern of behavior seems to me...to be a harbinger of the ideological nature of an Obama presidency....I fear that one of the catastrophes of an Obama Administration would be a high density of intellectual radicals, and not just on domestic policy, not just an increase in self-destructive political correctness in the schools and the media (the stifling of dissent in talk radio, etc. etc.), but also in foreign policy, where, as Andy tells us, Obama is a fan of dangerous characters like Odinga.

Remember way back in....oh....February? The conservative conventional wisdom at the time regarding Obama was remarkably sanguine. Sure, sure, he was a liberal, but he was thoughtful, cautious, nonradical, and always seemed willing to take the other guy's side into account. If this really did turn out to be a Democratic year — well, we could do a lot worse than Barack Obama.

Now, a change of heart was always in the cards. Once the campaign really heated up we'd hear about his likely Supreme Court nominations, his liberal voting record, his elite Ivy League background, etc. etc. That's all in a day's work. But it's not what happened. The conservative intelligentsia may not be quite willing to baldly support the "Obama is a secret Muslim" trope — that's a little too....common — but a significant chunk of them really, truly seem to believe that Obama is a Manchurian candidate of some kind. That he's a genuine 60s-vintage radical leftist hiding behind a carefully constructed, smooth-tongued exterior. And much like the John Birch Society conspiracy theorists of the same era, their best evidence of this is the very fact that he's thoughtful, cautious, nonradical, and always seems willing to take the other guy's side into account. Just look at his advisors — or should I say, "advisors"? His economic team is headed by Austan Goolsbee, Jason Furman, and these guys. His foreign policy team? Susan Rice, Tony Lake, and these guys. Domestic policy? David Cutler, Jason Grumet, and these guys. Of course, this is all a front for the rubes, deliberately designed to piss off guys like David Sirota and lull guys like David Broder into narcotic acquiescence. It's very, very clever.

But not quite clever enough. Despite a full quarter century of carefully hiding his radical views from the public while he ascended the political ladder, he screwed up. He palled around with Bill Ayers. He spent 20 years in an America-hating black nationalist church. He supported an Islamofascist opposition leader in Kenya. He approved grants to a guy who promoted Maoism in American schools.

Those seem like odd mistakes for a savvy guy like Obama to make if he was otherwise so good at hiding his inner radicalism, don't they? And yet, a lot of conservatives really seem to believe this stuff. Obama is a crypto-Marxist. A crypto-black nationalist. A crypto-appeaser. Everything you think you know about him is just a mask, the public side of a very careful, very deliberate, 25-year act. And nobody gets it except for us. Isn't that always the way?

Next stop: Arkham Asylum. Or, more likely, membership in the same loony bin groups that thought Bill Clinton was dealing blow out of Mena when he was governor of Arkansas. I wonder which crazy billionaire is going to bankroll the Obama Chronicles when January 20th rolls around?

Priceless

| Wed Oct. 22, 2008 2:55 PM EDT

PRICELESS....Email from a friend at 12:14 pm:

Prediction: By the end of the week, someone will make a Sarah Palin spot that is a takeoff on the Mastercard "Priceless" ads.

End of the week? Here's former McCain advisor Mike Murphy blogging at Swampland at 1:00 pm:

New ad slogan: "Clothes for Gov. Palin? $150,000. Time machine to go back two months to late August and ask what the Hell were Schmidt and Davis thinking when they cooked up this idea and sold it to McCain? Priceless."

I think my friend is still working on old-fashioned MSM time. We'll probably have three or four versions of that ad up on YouTube by tomorrow morning at the latest. Sometime tonight is probably a better guess.

Chart of the Day - 10.22.2008

| Wed Oct. 22, 2008 1:35 PM EDT

CHART OF THE DAY....Via Alex Tabarrok, a trio of boffins at the Minneapolis Fed argue that the credit crisis is a myth. Using Fed data they demonstrate that bank credit is up, loans and leases are up, commercial loans are up, consumer loans are up, and interbank loans are up. This is all potentially interesting, but unfortunately they then proceed to ruin their credibility by saying blandly that "while commercial paper issued by financial institutions has declined, commercial paper issued by nonfinancial institutions is essentially unchanged during the financial crisis." Technically that's true, but commercial paper from financial institutions makes up 80% of the entire market, and Figure 6A shows it plunging over the past month like a barrel jumper at Niagara Falls. You'd think that might have been worth a more vigorous mention.

I'm going to go out on a limb and suggest that using aggregate data like this somehow misses the story. It also probably doesn't take into account all the term facilities and loan guarantees that the Fed has put in place over the past year. Still, seeing some data that challenges the conventional wisdom is always worthwhile. Even if it turns out to be wrong, reading the explanation of why it's wrong should be instructive. Perhaps some enterprising econblogger will provide us with just that.

The Market

| Wed Oct. 22, 2008 12:59 PM EDT

THE MARKET....Stocks are down today:

Worries about the corporate sector sent stocks on Wall Street lower again on Wednesday, with the Dow Jones industrials dropping more than 400 points before recovering slightly.

....The problems have appeared in a range of industries. The aviation giant Boeing saw profits fall 38 percent last quarter. Merck, the pharmaceutical company, posted a 28 percent drop in net income and will cut jobs. The North Carolina-based bank Wachovia, which was recently acquired by Wells Fargo, suffered a $23.7 billion net loss.

Stocks have been swinging around pretty wildly over the past few weeks as investors have responded to the drama of the credit crisis, but it's worth keeping in mind that over the long term this is what really matters. If earnings reports stayed strong regardless of credit market problems, then the market would do fine. But that's extremely unlikely to be the case. We've got at least a year of weak corporate earnings ahead of us, and that almost certainly means we've also got at least a year of declining stock prices ahead of us too. Main Street's suffering is just starting.