Kevin Drum

Who's Afraid of Futures Contracts?

| Tue Jul. 21, 2009 7:16 PM EDT

It's become popular lately to attack the Waxman-Markey cap-and-trade bill as yet another giveaway to Wall Street.  In his recent tongue-lashing of Goldman Sachs, for example, Matt Taibbi warned that trading in carbon credits would be the next subprime debacle:

Instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits — a booming trillion dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an "environmental plan," called cap-and-trade.  The new carbon credit market is a virtual repeat of the commodities-market casino that's been kind to Goldman.

As you know, I'm pretty skeptical of this.  The market for carbon credits may be big, but it's nowhere near big enough to cause the kinds of systemic problems that abuse of subprime mortgages did; the derivatives in question are simple ones like options and futures, not CDOs and swaps; and Waxman-Markey has some pretty good language regulating them in any case.  Today Paul Krugman takes up the argument:

Any time you have a market, there’s some opportunity for speculation....So, should fear of speculation lead us to ban trading in wheat? Nobody would say that....Now substitute “emission permits” for wheat. It’s exactly the same story. Why should you address it any differently?

....The prime example of an energy market gone bad is the western electricity market in 2000-2001; and let me say that I have some moral authority here, since I called it when it was happening. That was the real thing — but what made it possible was a combination of at least two factors. First, the demand for electricity was highly unresponsive to prices; second, the relevant markets were fairly small (northern and southern California were isolated both from the outside world and from each other by transmission bottlenecks).

In the case of emission permits, demand will probably be quite responsive to prices — and the market will, as Joe Romm says, be huge.

Read the whole thing. Joe Romm has more here. I'm all in favor of Waxman-Markey containing strong language to restrict fraud and speculation, but there's no reason tie ourselves in knots thinking that this is another subprime debacle waiting to happen just because it involves commodity trading.  The facts on the ground really don't back it up.

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F-22 Fail

| Tue Jul. 21, 2009 2:57 PM EDT

The Senate has voted 58-40 to cut off funding for the F-22.  There's still more to come on this, both in the Senate and in conference, but it's promising news.  The case against the F-22 was pretty rock solid, and if the funding cutoff had failed it would have meant that, basically, it's impossible to cut anything in the Pentagon budget.  Score one for common sense.

How to Market Healthcare Reform

| Tue Jul. 21, 2009 2:11 PM EDT

As the healthcare debate plays out, we're all getting to see in real time the fundamental political contradictions that make it so hard to get anything done.  The big lesson learned from the Clinton debacle of 1994 is that people who currently have insurance from their employer don't want it touched.  Ditto for senior citizens covered by Medicare.  So Democrats are making sure they aren't touched: in fact, they're repeating like a mantra that if you like the insurance you have now, you can keep it.  No one's going to take it away.  No one's going to so much as look at it crosseyed.

Fine.  But two-thirds of the country already has health insurance through their employer and another big chunk are on Medicare.  If these aren't going to be touched, then why should they care about healthcare reform?  In particular why should they be willing to pay higher taxes for something that won't help them out in any way?

No reason, really.  So instead Dems are promising to increase "access" and cut costs.  The former is basically welfare and gets only anemic support.  The latter is not only unproven, but doesn't do much to excite most people anyway.  Sure, they'd like it if their copays went down, but mainly they just want healthcare and they don't care how much it costs.  Mickey Kaus comments:

1) As is so often the case, overpolling seems to blame....I suspect [Obama aides] saw what they wanted — and they wanted to focus on costs. It's possible to take polls that show something very different2) Is "access" the right word to test-as opposed to "security"? "Access" makes it sound as if you are focusing on the problem of the uninsured — i.e. charity, to many middle class Americans — as opposed to security for everyone. If they polled "access," that may have stacked the deck from the start; 3) "Maybe" they "overcorrected from the Clinton model"? Maybe?

I sympathize with the Obama folks.  How do you promise to leave most people alone and also convince them to support major change?  It's a tough nut.  And putting aside whether the Obama team overcorrected or not, it's still true that "security" didn't get the job done for Clinton.  So what's the answer?  In a nutshell, fearmongering.  Like so:

Rather than overall cost....the selling point of national healthcare is freedom from the endlessly gnawing problems of our current jury rigged system. For example: HMOs that make it hard to see a specialist. High and rising copayments. Fear of losing coverage if you lose your job. Long waits for non-urgent care. New (and usually worse) healthcare coverage every time your HR department is told to find a cheaper plan.

And more: Small businesses that have a hard time attracting good employees because they can't afford to offer health coverage. Big business that are on the verge of bankruptcy because of skyrocketing health costs. Lack of choice in physicians because you're limited to whichever medical groups have signed contracts with your company's insurance carrier. Losing your longtime family doctor because your company switches insurance carriers and you can only see doctors on your new carrier's approved list.

And yet more: Fear that preexisting conditions won't be covered if you take a new job. The risk of financial ruin if someone in your family has a truly catastrophic illness. Crowded emergency rooms that have essentially become clinics of last resort for the poor. Being forced to go on strike year after year because your employer relentlessly tries to gut your healthcare benefits every time your union contract gets renegotiated. 43 million people who lack health coverage of any kind.

Reducing healthcare costs ought to be a goal of any national healthcare plan, and a truly national plan is probably the only way we'll ever accomplish that. But that's not the way to sell it. Freedom from fear, freedom from pain, and freedom of choice are the ways to sell it.

Fine.  I'm cheating.  That was me a couple of years ago.  But I still think it's the right sales pitch.  And even if it's not as highminded as Obama might like, it has the virtue of being true.  For most people, healthcare reform isn't so much about insuring their health now as it is about insuring their health tomorrow.  If they understood just how precarious that is, they'd be a lot more enthusiastic about healthcare reform today.

Chart of the Day

| Tue Jul. 21, 2009 12:20 PM EDT

This comes from Foreign Policy magazine, which ranks the world's countries every year to figure out which ones are stable and which ones aren't.  According to FP, a grand total of 37 countries are minimally stable this year.  The entire rest of the world is either borderline or in outright chaos:

The financial crisis was a near-death experience for insurgency-plagued Pakistan, which remains on IMF life support. Cameroon has been rocked by economic contagion, which sparked riots, violence, and instability. Other countries dependent on the import and export of commodities — from Nigeria to Equatorial Guinea to Bangladesh — had a similarly rough go of it last year, suffering what economist Homi Kharas calls a “whiplash effect” as prices spiked sharply and then plummeted. All indications are that 2009 will bring little to no reprieve.

Instead, the global recession is sparking fears that multiple states could slip all at once into the ranks of the failing. Now more than ever, failed-state triage could become a grim necessity for world leaders from the United Nations and World Bank to U.S. President Barack Obama’s White House. All of which puts a fine point on an old and uncomfortable dilemma: Whom do you help when so many need it?

Delaying Guantanamo

| Tue Jul. 21, 2009 11:48 AM EDT

The latest on Guantanamo:

Obama administration officials said Monday they would not meet self-imposed deadlines for deciding what to do with scores of detainees too dangerous to release from the prison in Guantanamo Bay, Cuba.

....The officials said they had made substantial progress in reviewing the cases of the approximately 240 prisoners at the facility, and had decided that dozens of detainees were eligible for transfer to other countries or were suitable for trial.

But the officials acknowledged that two reports that were supposed to be delivered to the president by Wednesday — one on how to overhaul the nation's detention policy and another on interrogation policy — would not be ready...."We want to get this right and not have another multiple years of uncertainty," one senior administration official said in a background briefing with reporters at the White House.

Well, that's probably right.  It is a complex problem, and they do want to get it right.  But it's not really as complex as all that, and there's a far more likely explanation for the delay: after the bipartisan meltdown when this first surfaced in May, Obama realized that it's a political issue so explosive that it could easily derail his entire domestic agenda if he lets it detonate in public again. Passing healthcare reform and climate change bills will be hard enough as it is, and he's probably made a cold-blooded calculation that it's better to slow-roll Guantanamo than it is to endanger either of his centerpiece domestic initiatives.  It's not pretty, but it's politics.

Does Independence Matter?

| Tue Jul. 21, 2009 11:08 AM EDT

Why do independent central banks (ICBs) generally produce low inflation?  Alex Tabarrok says it's because bankers tend to get appointed to run ICBs and bankers have a bias toward low inflation.  Megan McArdle says no, it's because nobody holds Congress accountable for the performance of ICBs, which gives them the freedom to appoint people who will do things they don't have the guts to do themselves.  Matt Yglesias isn't sure that the Fed is really an ICB in the first place: it was pretty clearly politicized in the 70s and produced high inflation, and it was quite likely politicized in the oughts and helped produce an economic meltdown.

These all sound like reasonable points to me, and I don't think they're mutually exclusive.  Maybe they're all right.  But I'm curious about something else: what does the academic literature say about the performance of ICBs in advanced economies in the first place?  There must be a considerable amount of research on this point.  If we take some measure of "independence" and compare that to various measures of medium-term economic performance (inflation, wage growth, GDP growth, unemployment, etc.), what do we find?  Does independence really matter very much?  Is there some specific aspect of independence that matters more than others?  Can some friendly econoblogger summarize the literature for us?

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Checking In On the Rich

| Tue Jul. 21, 2009 1:51 AM EDT

The communists at the Wall Street Journal present us with the latest executive pay data today:

Executives and other highly compensated employees now receive more than one-third of all pay in the U.S.....In the five years ending in 2007, earnings for American workers rose 24%, half the 48% gain for the top-paid. The result: The top-paid represent 33% of the total, up from 28% in 2002.

....The data suggest that the payroll tax ceiling hasn't kept up with the growth in executive pay. As executive pay has increased, the percentage of wages subject to payroll taxes has shrunk, to 83% from 90% in 1982. Compensation that isn't subject to the portion of payroll tax that funds old-age benefits now represents foregone revenue of $115 billion a year.

You probably thought that the big problem with skyrocketing executive pay was the fact that it left nothing for the rest of us.  And you're right: that 24% increase for "American workers" includes the 48% increase for the top earners.  In other words, the executives got a 48% increase, the rest of us got approximately nothing, and it all averaged out to 24%.

But that's not all!  It also means that the average joes with stagnant wages couldn't keep up, so they went deeper and deeper in debt.  And who loaned them the money to do that?  Well, the rich can't really spend that ocean of extra dough they're getting — the technical reason is that they have a lower marginal propensity to consume than average joes; the nontechnical interpretation is that you can only buy just so many yachts — so they ended up loaning most of it back to the middle class.  We all know how that turned out — but the rich got bailed out by the taxpayers so they ended up OK.  The rest of us, not so much.

And now the Journal is pointing out yet another problem with running our economy solely for the benefit of the wealthy: you only owe payroll taxes on income up to $106,000.  This number rises every year, but it doesn't rise nearly as fast as the earnings of the rich.  Which means that more and more income every year is above the cutoff and doesn't get taxed.  And that in turn means that Social Security is in considerably worse shape than it would be if increases in national income weren't being hoovered up almost exclusively by the executive class.

So there you have it.  If we don't pass healthcare reform it will be because the rich don't want to help pay for it.  Average wages are stagnant because that leaves a bigger pool of money for the rich to slosh around in.  We're letting the planet fry because policies to stop it would inconvenience the rich.  Regulatory reform of the financial system increasingly appears to be a dead letter because Congress is owned by the rich and they don't want it.  Against all that, I suppose that crippling Social Security hardly even shows up in the ledger.  But we might as well tot it up anyway.

Kindle v. Kindling

| Mon Jul. 20, 2009 6:47 PM EDT

This is apropos of nothing in particular, but I thought I'd update everybody on what I think about the Kindle after a few additional months of usage.

Here's what happened: a couple of months I found myself at loose ends, book-wise.  I didn't really have anything special I wanted to read, so I started browsing around on Amazon for books I might enjoy.  I found one, but it wasn't available for the Kindle.  Then another.  And another.  Hmmph.  Then Eric Boehlert's Bloggers on the Bus came in the mail, so I read that instead.  When I was done, I wandered over to the corner of my living room that temporarily holds the stack of books publishers send me and took one off the top.  Then the next, and the next. It was kind of fun: totally random book selection.  So over the course of a few weeks I ended up reading half a dozen real books printed on real paper: Bloggers on the Bus (excellent); In Search of Jefferson's Moose (Jefferson stuff pretty good, internet stuff not so much); Intelligence and How to Get It (better than I expected); The Summer of 1787 (pretty good, though not really groundbreaking or anything); Bailout Nation (polemic, but mostly good polemic); and The Evolution of God (one of the less convincing books I've read in a while).

Then I got bored and went back to the Kindle.  This was all pretty unplanned, but what's struck me the most in my back and forth between Kindle and paper is that the Kindle is really unsatisfactory for books that have a lot of charts and tables.  The resolution is poor; columns don't line up right; captions break up halfway through; and both charts and tables can sometimes be pages and pages away from the text they're connected to.

More generally: the Kindle is bad for any book in which the actual layout of the text is important.  That's pretty obvious for something like a coffee table picture book, but it turns out to be true for nonfiction with lots of illustrations too. (I can't imagine what it's like reading In Search of Jefferson's Moose on the Kindle, for instance. Between all the charts, tables, footnotes, and callouts, it must be a real mess. If anyone's done it, let me know.)

I guess this is all pretty obvious, but a few months has driven it home more strongly.  The problem is, how do you know if a book relies on lots of illustrations?  Most fiction doesn't, of course, but a lot of nonfiction doesn't either.  But some does, and it's not always obvious from the title or subject of the book.  I suppose I could look at the table of contents on Amazon and see how long the list of figures and tables is.  That's not a perfect proxy, though, and not all books have a ToC for tables and figures anyway.  (And not all books are browsable on Amazon, either.)

Anyway, I'm not quite sure what to do about this.  Right now, for example, I'm reading A Farewell to Alms on the Kindle and it's driving me crazy.  I should be reading it on paper.  But I didn't know.  I'm not quite sure what the answer to this dilemma is.  Can the hive mind help?

POSTSCRIPT: Of course, this is all quite aside from this, which is pretty disturbing all on its own.  The future may not be quite as Kindle-riffic as I initially thought.

Peloton Madness

| Mon Jul. 20, 2009 2:33 PM EDT

I kinda sorta tried to figure out what the whole Hincapie/Garmin/Columbia/etc. contretemps this weekend at the Tour de France was about, but I eventually gave up.  Cycling is just such a stupid sport.  explains it here in case you're interested.

Still a stupid sport, though.  Especially the velodrome version.

Baghdad Update

| Mon Jul. 20, 2009 1:41 PM EDT

Four years ago, during a commemoration of the Shiite saint Imam Musa al-Kazim, a thousand pilgrims to the Al Kadhimiya Mosque in Baghdad were killed when rumors of an imminent suicide bomb attack caused a panicked stampede across a bridge.  Every year since then, the commemoration has been regularly targeted by insurgents and militias.  Until now:

President Barack Obama's withdrawal strategy for Iraq got a big bump this weekend, when the Iraqi military and police presided over massive gatherings of pilgrims from the provinces in the capital, and pulled it off with no bombings. Obama could not plausibly withdraw from Iraq unless Iraqi security forces could keep a minimum of social peace. But if they can do so, the withdrawal could go smoothly. This weekend's evidence is positive.

That's from Juan Cole, who has more over at his place, both good and bad.