Where the Money Is

Over at Free Exchange, A.S. asks, "Are the rich making you poor?" Apparently not:

Talented traders and portfolio managers do make an obscene amount of money while other traders just get rich....The winner-takes-all nature of finance explains the income disparity within the industry. But it does not mean a Wall Street fat cat is getting rich at the expense of a more naïve investor whose stock holdings are limited to the mutual fund his 401(k) is in. The only thing that naïve investor is betting on is that the American economy will continue to grow and that companies will be profitable in the long run. Speculators actually can do this naïve investor a service. They can eliminate mispricing, promote efficiency, and provide market liquidity; this can enhance growth in the long run.

Well then, I have to ask yet again: where is this tsunami of money coming from? If financiers receive a greater fraction of national income than they did in the past, somebody else is getting less. That somebody is almost certainly you and me, whose wages haven't kept up with economic growth, thus creating a huge and growing pool of extra money for the financiers to hoover up.

The only other alternative is that the modern financial sector is actually creating wealth that otherwise wouldn't be created. That is, their magic has caused the economy to grow faster, and they're merely reaping the benefits of growth they themselves are responsible for. I imagine this is a popular explanation among Wall Street bankers themselves, but does anyone else buy it? If it were true, surely it would show up in accelerated growth rates starting around 1980. Right?

Bowdlerizing Huck

NewSouth Books plans to release an edition of Huckleberry Finn in which Mark Twain's 219 repetitions of the word "nigger" are replaced by "slave." Doug Mataconis is unhappy about this. Minor offensive scenes can be removed from movies that are aired on TV "without taking away from the central themes of the story," he says, but:

This is not the case with either Sawyer or Finn, both books are set in a time period when racial tensions were a central part of life and are based, to a large degree, on the racially prejudices that Twain himself encountered as a child growing up in Missouri. This is especially true of Huckleberry Finn where, despite the fact that “the n-word” appears 219 times, it’s fairly obvious that Twain is condemning racial prejudice and that one of the central themes of the book is the process by which Huck discovers that the things he’d been taught by society by blacks were wrong, and that his companion him was, in fact, an heroic figure. Twain’s use of a word that, even in his time, was meant to be insulting and demeaning, was deliberate and removing it because of “sensitivities” seems to me to detract significantly from the overall power of the novel.

I think I'd agree with Doug in nearly every other case. But the problem with Huckleberry Finn is that, like it or not, most high school teachers only have two choices these days: teach a bowdlerized version or don't teach it at all. It's simply no longer possible to assign a book to American high school kids that assaults them with the word nigger so relentlessly. As Twain scholar Alan Gribben, who led the bowdlerization effort, explained, “After a number of talks, I was sought out by local teachers, and to a person they said we would love to teach [Tom Sawyer] and Huckleberry Finn, but we feel we can’t do it anymore. In the new classroom, it’s really not acceptable.”

Given that choice, I guess I'd bowdlerize. After all, the original text will remain available, and teachers can explain the wording change to their classes if they want to. (Though even that's probably difficult.) And frankly, I doubt that the power of the novel is compromised all that much for 17-year-olds by doing this. In fact, given the difference in the level of offensiveness of the word nigger in 2010 vs. 1884, it's entirely possible that in 2010 the bowdlerized version more closely resembles the intended emotional impact of the book than the original version does. Twain may have meant to shock, but I don't think he ever intended for the word to completely swamp the reader's emotional reaction to the book. Today, though, that's exactly what it does.

In any case, the only realistic alternative is that Huckleberry Finn vanishes from high schools and becomes a book taught solely at the university level. Maybe that's better. But I doubt it.

Guantanamo and Indefinite Detention

Dafna Linzer at ProPublica reported yesterday that President Obama may be planning to challenge a provision in a military spending bill that makes it harder for him to shut down Guantanamo and transfer its prisoners elsewhere. This will be an interesting confrontation, but it's also a bit of a sideshow: the prisoners themselves, after all, have no real reason to care whether they're held forever in Cuba or Michigan. But that's pretty much what Obama intends to do. Amos Guiora and Laurie Blank take him to task for this in the LA Times today:

The Obama administration now intends to issue an executive order establishing indefinite detention without trial for detainees at Guantanamo Bay. This decision will formalize this violation of basic rights. Denying individual accountability will now be official U.S. policy and law.

....Those who argue that indefinite detention accords with the treatment of prisoners of war gloss over two key distinctions: POWs are held in protective custody and released at the end of hostilities, whereas post-9/11 detainees are held in de facto punitive detention and terrorism has no end to trigger release. Those who want to argue that we are at war with Al Qaeda and other terrorists fail to consider that the law of war and principles of morality in armed conflict do not countenance such an approach, where detainees face the prospect of generational, even lifetime, detention without charge or trial.

Indefinite detention completely undermines the basic notion of individual accountability, thus constituting a fundamental miscarriage of justice. The United States, uncertain whether the detainees are criminals or more akin to fighters in an armed conflict, must still grant them the basic right to a day in court. Without that, individual accountability is simply eliminated, effectively saying that the adjudication of individual liability is burdensome, perhaps even irrelevant.

A few days ago Adam Serwer wrote a pretty balanced explanation of Obama's plan, which you should read if you want to understand the details. But I sometimes wonder how much any of this matters in practice. After all, what happens to these detainees if they get a trial and are found not guilty? It would be political suicide to release them within the United States, and no president would ever try. But what other country would take them? For the vast majority of these detainees, my guess is: none of them. So even if they got a full and fair trial, and some of them failed to be convicted, they'd end up staying in prison anyway. It would be called something else, and possibly they'd be allowed more privileges than other detainees, but the odds are that they'd be locked up nonetheless.

I'm not making an argument for indefinite detention here. I'm just wondering what, in practice, happens if we eliminate it and give everyone trials. Would anything really change?

Do We Really Want Better Intelligence?

Foreign Policy magazine is running a package called "Unconventional Wisdom," and Stephen Sestanovich's contribution is to tell us that conventional wisdom debunking isn't what it used to be. Anne Applebaum then proves his point with a piece about the ongoing idiocy of TSA and the Department of Homeland Security:

Terrorists have been stopped since 2001 and plots prevented, but always by other means. After the Nigerian "underwear bomber" of Christmas Day 2009 was foiled, DHS Secretary Janet Napolitano claimed "the system worked" — but the bomber was caught by a passenger, not the feds. Richard Reid, the 2001 shoe bomber, was undone by an alert stewardess who smelled something funny. The 2006 Heathrow Airport plot was uncovered by an intelligence tip. Al Qaeda's recent attempt to explode cargo planes was caught by a human intelligence source, not an X-ray machine. Yet the TSA responds to these events by placing restrictions on shoes, liquids, and now perhaps printer cartridges.

Given this reality — and given that 9/11 was, above all, a massive intelligence failure — wouldn't we be safer if the vast budgets of TSA and its partners around the world were diverted away from confiscating nail scissors and toward creating better information systems and better intelligence? Imagine if security officers in Amsterdam had been made aware of the warnings the underwear bomber's father gave to the U.S. Embassy in Abuja. Or, for that matter, if consular officers had prevented him from receiving a visa in the first place.

This is conventional wisdom these days, as near as I can tell, so no points for originality. But it raises a question: we all hate TSA's physical security procedures, but the fact is that we don't much like the idea of tightening up TSA's non-physical operations either. Several years ago, Congress told TSA to screen passengers more tightly, and the result was expanded watch lists, expanded no-fly lists, and the proposed CAPPS system, which was designed to identify all passengers and cross reference them with government records and commercial databases to produce a "risk score" that indicated the appropriate screening level for each traveler. Needless to say, everyone screamed about this, so it was scrapped and replaced by a more modest system called Secure Flight.

But if physical security is mostly eliminated, it seems inevitable that it will be replaced with beefed up intelligence and surveillance operations, as well as beefed up tracking of individuals a la CAPPS. But if that's what we get, I wonder if we're going to like it any better?

Boehner and Healthcare Reform

Austin Frakt on the scheduling of a vote to repeal healthcare reform in the House:

I think the January 12 scheduling is telling. It significantly ahead of the State of the Union address (Jan. 25 or so, I believe). That means that it’ll be old news by the time Obama gets to reset the message. What’s likely going on is that Boehner, knowing that repeal won’t go anywhere, that it is a symbolic vote, wants to send a signal to the GOP base without really getting in the way of more important business. In a sense, the schedule suggests to me that Boehner knows that the repeal vote is not itself very serious. If he wanted to make a bigger show of it, why not schedule it for a day or two before the State of the Union? Why not do it the day of the speech itself? That would be very confrontational.

This seems pretty obviously true to me. Boehner knows two things: (a) he has to schedule a repeal vote because the tea partiers will go into open revolt if he doesn't, and (b) it's a dead letter with nothing more than symbolic value. So he's scheduling a quick vote with no hearings and no CBO scoring just so he can say he's done it, after which he can move on to other business he actually cares about.

The only thing that puzzles me is why he's being so obvious about it. Is this a genuine signal to Obama that he's kinda sorta willing to work with him on future legislation? Is it a signal that Boehner is tired of the tea partiers already? Or what? It really does seem like he's giving tea partiers the back of his hand a little too obviously here.

Banana Monoculture and Its Discontents

Felix Salmon on the blight threatening world banana production:

It turns out that the banana we all know and love — the Cavendish — is actually the second type of banana grown in enormous quantities and exported across Europe and North America. The first was the Gros Michel, which was wiped out by Tropical Race One; you might be saddened to hear that “to those who knew the Gros Michel the flavor of the Cavendish was lamentably bland.” Indeed, Chiquita was so sure that Americans would never switch to the Cavendish that they stuck with the Gros Michel for far too long, and lost dominance of the industry to Dole.

I asked my mother once if she remembered the bananas of her youth being better than the bananas of today, and she didn't. So maybe this whole banana blight thing is overrated. Then again, maybe not. Do I have any readers old enough to remember the taste of Gros Michel bananas? What were they like?

UPDATE: Commenter cld provides the dope:

The older bananas were tremendously better. They were larger and sweeter and rather creamier and the seeds within were longer and you could sort of taste them.

The texture of the Cavendish is more fibrous and not so even. On the other hand I think they keep a lot better than the Gros Michel, which would have spots all over it. (I mean on the inside).

Social Security Dealmaking

Atrios disagrees with my contention that a deal on Social Security could put it into balance for a good long time:

Social Security Will Never Be In Actuarial Balance

Not for more than a couple of years, anyway. If there's some deal to get there, then inevitably the Social Security Trustees will, perfectly justifiably, tweak a few assumptions about future economic activity so that there will be a DOOM scenario, an EVERYTHING'S AWESOME scenario, and a "uh oh maybe in about 40 years we will have a problem" scenario. And then Fred Hiatt will print another million ZOMG WE MUST DESTROY SOCIAL SECURITY NOW IN ORDER TO SAVE IT FORTY YEARS FROM NOW columns and some future president will marvel at those worthless IOUS and blah blah blah.

I don't really want to get into a blogspat over this, but this just isn't right. It's true that the Social Security Trustees normally produce three scenarios for future solvency (the 2010 version for trust fund solvency is on the right), but even critics almost universally use the intermediate scenario when they write about Social Security's finances. There's actually a plausible case to be made that the optimistic scenario has historically been closer to reality, but nonetheless, it's the middle scenario everyone uses. Even Fred Hiatt.

As for the actuaries making tweaks to their economic models, they do indeed do this. But if you look over trustees reports for the past 20 years you'll see that those tweaks have been small, have pushed in both directions, and have had only a tiny net effect on their projections. Obviously that could change in the future, but on past performance there's no real reason to think that tweaks to the forecast models will produce large changes to the forecasts themselves.

Needless to say, nothing is forever. Once we create food in replicators and have robot slaves to do all our work for us, I suppose no one will care about Social Security at all. But it's entirely possible to cut a deal on Social Security that will insure its long-term solvency for at least several decades, and that's about as much as anyone can ever hope for in real life.

And as long as I'm writing about this again, I'll reiterate a couple of points. First, the idea here is not that hardcore conservatives will stop attacking Social Security if a deal is reached. The idea is that they'll be ignored once they lose the support of centrist Beltway opinion — which they will if the intermediate trustees forecast shows the program in balance. Second, my support for a deal obviously depends on reaching a good deal. If Republicans refuse to consider revenue increases, then no deal. If they insist on means testing or increases to the retirement age, then no deal. Etc. But there are decent compromises available, and we should be just as willing to explore them as we are to reject deals that aren't good enough.

The Next Implosion

At our New Year's Eve party, I briefly got into a conversation with a friend about the next shoe to drop here in Orange County: now that residential real estate has finished (or nearly finished) its implosion, it's time for commercial real estate to implode. But that's not just a problem for Orange County, of course. Matt Yglesias points us to Gillian Tett:

The [Institute of International Finance] calculates that in March 2008, there was about $25bn worth of pre-crisis investment grade commercial real estate in distress. By March this year, however, that number had exploded to $375bn (and has probably swelled since).

Thus far, the banks have “dealt with potential delinquency problems in part by extending loans until 2011-13”, the IIF notes. Or, in layman’s terms, they have swept it under the carpet. But while this avoided defaults, the IIF reckons that about $1,400bn of CRE loans must be refinanced before 2014. Alarmingly, “nearly half of these are at present ‘underwater’, ie have mortgages in excess of the current value of the property”, it adds.

What's more, as Matt points out, owners of CRE aren't subject to the guilt-laden appeals to moral probity that homeowners are. Rather, "commercial property is owned by rich businessmen who’ll be expected to act like rich businessmen and try to maximize profits." This means they'll just default if it makes sense to do so. And in a lot of cases, it probably will. You can add this to the ever-expanding list of possible shocks to the global economy (oil, China, PIIGS, municipal defaults, etc.) that might still derail a fragile economic recovery. Buckle up.

The Financialization of America

Scott Sumner tries to explain why finance is so much more lucrative today than it was in the 50s and 60s:

Today the most productive members of society are not those who produce things, they are those who discover the things that need to be produced. Once you have the blueprint, it is easy to produce many types of software and pharmaceuticals. The big money goes to those who figure out the blueprint, but also to those who allocate capital to the guy who has the idea for a Google, or Facebook, or Twitter.

....And then there’s globalization, which means decisions about allocating capital can vastly improve productivity even in the old-line industries that were dominant in the 1960s, when the rest of the world hardly mattered. Finance is not that important in an agricultural economy or even in an economy where the mass production of goods can be done with almost military precision. It becomes extremely important in an economy where it is not at all clear what should be produced, or on what continent that production should take place.

This seems pretty unpersuasive. If Wall Street were making truckloads of money on their VC investments, then OK. Maybe he'd have a point. But I'm pretty sure that true venture capital constitutes a tiny fraction of finance sector earnings. Likewise, allocating capital to old-line industries is just....allocating capital to old-line industries. Why does it matter whether those industries are in Pittsburgh or Mumbai?

If the finance sector were truly creating lots of extra value, then most of us probably wouldn't mind that bankers were taking home outsize paychecks. But are they? Are overall global growth rates higher today than they were 50 years ago? Is productivity growth higher? Is modern finance repsonsible at all for higher economic growth than it was in 1965?

It sure doesn't seem like it — though I'm open to contrary evidence. Rather, it seems as if the explosion in finance over the past three decades has mostly consisted of rent seeking and massive increases in leverage and hidden risk thanks to post-Bretton Woods globalization and deregulation. The actual benefit to the rest of mankind is a little hard to suss out.

Doing a Deal on Social Security

Digby reposts a summary today of last year's "Fiscal Responsibility Summit," in which Gene Sperling — now a top contender to replace Larry Summers as head of the NEC — said the Obama administration was interested in cutting a deal on Social Security, and warns against taking the bait:

I know I've posted that too often and regular readers are sick of it. But it's terribly important, I think, to understand that the rationale for liberals in this thing is that they are doing a good thing for the program, taking it "off the table" for the next 50 years and "making it sound." Now, I don't know if they really believe it, but it doesn't matter. What matters is that in the current environment whatever changes they come up with will come at the expense of the elderly because there will be no deal that requires tax hikes.

Atrios agrees:

I don't know why some liberals think that there is some deal, good or bad, which can somehow take the Social Security issue off the table until the end of time. As Ben Bernanke said, that's where the money is and they'll be trying to steal it in perpetuity. Cutting granny's benefits a bit won't change that.

I just don't think this is true. It's possible that Republicans will never agree to a Social Security deal that increases taxes, but keep in mind that Republicans are mainly obsessed with taxes on the wealthy. A small increase in payroll taxes and/or an increase in the payroll tax cap wouldn't affect the millionaire class much and might get a fair amount of GOP support. In any case, the only way to find out is to try. If they won't do the deal, then they won't do the deal.

But assume that a deal is possible. If it is, I think it's wrong to insist that it will come solely at the expense of the elderly, or that it won't do any good because Social Security will never be off the table anyway. On the first point, it's quite possible to structure a deal that requires nothing more than a very modest slowdown in the the future increase of benefit levels that (a) affects only those with fairly high incomes and (b) phases in over a period of decades. That's hardly Armageddon. On the second point, sure, Republicans will probably go after Social Security forever. But that's not what matters. What matters is that if the program is officially in balance then Republicans no longer have the traction to succeed. Benefit cuts are unpopular, after all, and conservatives by themselves don't have either the desire or the ability to buck the public on this unless they also have the support of the Washington Post/Pete Peterson Beltway elite. And they won't have that once the program is officially solvent. A deal on Social Security kicks the legs out of the centrist support they need in order to have any chance of reducing benefits in the future.

Now, again: maybe a deal isn't possible. There's only one way to find out. But if a deal is possible, it really would take Social Security off the table for a very long time. That would be good for the elderly, good for the country, and good for the liberal project in general. If there's any chance of doing a bipartisan deal over the next two years, Democrats should be open to it.