2009 - %3, December

We're Still at War: Photo of the Day for December 4, 2009

Fri Dec. 4, 2009 7:03 AM EST

Soldiers of the 3rd U.S Infantry Regiment (The Old Guard) prepare to move the casket of Medal of Honor recipient Leonard Keller to his final resting place in Arlington National Cemetery's section 60, Monday, November 30, 2009. (US Army photo via army.mil.)

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Need To Read: December 4, 2009

Fri Dec. 4, 2009 7:01 AM EST

Today's must reads:

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The Real World

| Fri Dec. 4, 2009 2:25 AM EST

In a column about how to deal with asset bubbles, Tim Duy says:

I am sympathetic with the view that interest rates were not necessarily too low during the build up of the housing bubble. Indeed, relatively low rates of investment (equipment and software) growth suggests that real rates were actually too high. But capital flowed to housing instead of more productive investment activities because that was the path of least resistance.

But why did capital fail to flow to productive investments?  Saying that housing was the "path of least resistance" doesn't explain anything.  In some sense, housing (or property in general) has always been the path of least resistance for investment dollars.

The real difference seems to lie not in housing becoming a better target for investment, but in real goods and services becoming less attractive ones.  Why?  Surely this is something that deserves considerably greater scrutiny than it's gotten.  Why did investors no longer think that the returns from investing in the real world portion of the American economy looked very compelling?  Why was demand for real world goods and services not high enough to provide ample investment opportunity?  This seems like a core question of the past decade that hasn't gotten enough attention.

Why We Won't Go Broke Cutting Emissions

| Thu Dec. 3, 2009 9:33 PM EST

It's what scares many people: Cleaning up our greenhouse gas emissions will bankrupt the world. That fear drives naysayers to neigh and keeps true believers mired in stasis.

Except it's not true. A modelling exercise conducted for New Scientist examined the world ahead for the UK if it meets its pledge to cut emissions to 80 percent below 1990 levels by 2050. (Which is close to what the IPCC says we need to do. Though below what James Hansen believes we need to do.)

How much would the Brit pledge wallop the Brit wallet? Here's a sample of estimated consumer costs increases in British pounds (£1=$1.63 at today's exchange rate). Retail prices would likely rise:

  • 1% higher on clothing: A £500 men's suit will become £5 more expensive
  • 2% higher on electronics: A £1000 laptop would cost £20 more
  • 1% higher on food: The average UK household spends £50 a week on food and this would increases by less than £1
  • 15% higher on electricity: A typical UK household spends £400 a year on electricity and this will jump by roughly £60
  • 0% higher on communications: UK phone bills will be essentially unaffected
  • 140% higher on air travel: A return flight from London to New York would jump from £350 to around £840
  • 2% higher on tobacco: Barring new taxes, the cost of a pack of 20 cigarettes will rise by roughly 10 pence
  • 2% higher on alcohol: The cost of a pint of beer will rise by about 6 pence by 2050
  • 1% higher on cars: A new Toyota Prius, currently about £20,000, will cost £240 more in a low-carbon 2050
  • 2% higher on household goods: The price of a washing machine will rise by a few pounds

Why so cheap? Because the energy used to produce food, alcoholic drinks, and tobacco makes up only 2 per cent of the consumer price.

Nor are these fire sale prices to save the world good only in the UK. A June paper in Energy Economics predicted similar underwhelming price rises in the US. A 50 percent emissions cut here by 2050 would increase most consumer goods prices by less than 5 percent.

The biggest loser in these scenarios? Airlines. Since there's currently no low-carbon alternative to jet fuel. Until that changes, air travel will bear the brunt of carbon pricing, with average fares rising at least 140 percent. On the other hand, I blogged earlier about a study predicting that the European Commission's plan to include the airlines in the continent-wide market for greenhouse gas emissions will likely reap the industry billions, at least in the short run.

Whatever the true airline scenario, I don't see the economic world ending in the minuscule interval between rising airfares and the emergence of technological innovation driven by the promise of monster profits. Just one of the many fortunes waiting to be made as we're dragged whingeing and cringing into the Sustainable Age.

All Power to the Fed?

| Thu Dec. 3, 2009 8:40 PM EST

Ben Bernanke thinks it's important for the Fed to hold onto its bank regulation and consumer protection functions.  "Because of our role in making monetary policy," he said in an op-ed this weekend, "the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests."

But is this really true?  Today, Vincent Reinhart, former director of the Fed’s monetary affairs division, says Bernanke is peddling hokum:

Apparently, the argument runs, there are hidden synergies that make expertise in examining banks and writing consumer protection regulations useful in setting monetary policy. In fact, collecting diverse responsibilities in one institution fundamentally violates the principle of comparative advantage, akin to asking a plumber to check the wiring in your basement.

There is an easily verifiable test. The arm of the Fed that sets monetary policy, the Federal Open Market Committee (FOMC), has scrupulously kept transcripts of its meetings over the decades. (I should know, as I was the FOMC secretary for a time.) After a lag of five years, this record is released to the public. If the FOMC made materially better decisions because of the Fed's role in supervision, there should be instances of informed discussion of the linkages. Anyone making the case for beneficial spillovers should be asked to produce numerous relevant excerpts from that historical resource. I don't think they will be able to do so.

An easily verifiable test!  I hope somebody does this.  Like Reinhart, I don't think they'll find any linkage either.  A separate bank regulator might or might not do any better than the Fed, but the Fed certainly doesn't bring any magic to the job.  (Via Real Time Economics.)

And in other Fed news, Bernanke's testimony today during his confirmation hearing didn't do much inspire confidence in his policy judgment either.  Bernanke, it turns out, is opposed to just about everything except cutting middle class entitlements.  Dave Dayen summarizes:

So let’s tally that up. No second stimulus, no jobs bill, no public investment to deal with the worst hiring crisis since the Depression, no relief for a jobless recovery, but yes to cutting people’s meager Social Security benefit and their health care in their old age.

That's the economic consensus among the Washington elite, so it's hardly surprising that Bernanke agrees with it.  It's also why I wish Obama had had the guts to nominate someone else.

Can Climate Change Drive You Crazy?

| Thu Dec. 3, 2009 8:07 PM EST

Trying to figure out why you're losing your mind this holiday season? It could be the fact that you've heard Jessica and Ashlee Simpson's rendition of "The Little Drummer Boy" three times in Walgreen's since Thanksgiving like I have. Or it could be climate change! King's College London psychiatrists recently published a metastudy of how the many charming side effects of rising temperatures—natural disasters, infectious diseases, mass migration—can really harsh your mental mellow, to say the least. Here are just a few of the ways in which global warming could drive you to distraction:

  • Natural disasters, such as floods, cyclones and droughts, are predicted to increase as a consequence of climate change. Adverse psychiatric outcomes are well documented in the aftermaths of natural disasters and include post-traumatic stress disorder, major depression and somatoform disorders.
  • Adverse impacts such as psychological distress, anxiety and traumatic stress resulting from emerging infectious disease outbreaks are also likely to increase if the predicted outbreaks of serious infectious diseases become reality.
  • Coastal change and increased flooding is expected to lead to forced mass migration and displacement, which will undoubtedly lead to more mental illness in affected population.
  • Urbanisation, a phenomenon which will be partially beneficial, for example by increasing opportunities for work and better access to health services, is associated with an increased incidence of schizophrenia in developed countries. In many low- and middle-income countries, mental health provision is already hugely inadequate and is unlikely to be prioritised should further economic collapse occur secondary to climate change.
  • The knowledge of man-made climate change could in itself have adverse effects on individual psychological well-being.

Surprisingly, the study doesn't mention another kind of climate change craziness: denial. And all its attendant weirdness

 

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Robert Byrd: Tough on...Coal?

| Thu Dec. 3, 2009 7:00 PM EST

Throughout his long political career, 92-year-old Robert Byrd has been one of the coal industry's staunchest defenders. But in a significant shift, he's now arguing that the industry needs to face facts and "embrace the future."

"[T]he time has come to have an open and honest dialogue about coal’s future in West Virginia," Byrd wrote in an op-ed on Thursday. Byrd acknowledged that coal-industry jobs had been declining in the state, that mountaintop removal mining comes with environmental and health problems, and that some regulation of carbon dioxide emissions is inevitable.

Byrd took aim at the industry's denial of climate change. "To be part of any solution, one must first acknowledge a problem. To deny the mounting science of climate change is to stick our heads in the sand and say 'deal me out,'" he wrote. "West Virginia would be much smarter to stay at the table." Coal-producing states "hold some powerful political cards," he continued, and can play a part in shaping policy—but only if they are "honest brokers," he wrote. 

Byrd also hit back at the West Virginia Chamber of Commerce's attempt to get him to block health care legislation until the Obama administration eases regulations on the coal industry. "I believe that the notion of holding the health care of over 300 million Americans hostage in exchange for a handful of coal permits is beyond foolish; it is morally indefensible," he wrote. "It is a non-starter, and puts the entire state of West Virginia and the coal industry in a terrible light."

This is a major change of heart for Byrd, who just last year was the only Democrat to vote against even proceeding to debate a climate bill. In the past, he's opposed most climate legislation, usually out of concern for coal interests. While he still sees a major role for coal, he's recognizes that it's  not going to be as abundant or as cheap as it has been in the past. "West Virginians can choose to anticipate change and adapt to it, or resist and be overrun by it," he concluded. "The time has arrived for the people of the Mountain State to think long and hard about which course they want to choose."

College Grads Owe an Average $23,200 in Student Debt

| Thu Dec. 3, 2009 6:47 PM EST

Recent college graduates with dreams of post-degree grandeur are being pummelled by the recession and forced to live with the reality of how much their degrees cost and how difficult it is to use them right now.

A report released this week by The Project on Student Debt shows that 2008 college graduates owe and average of $23,200 on their educations, a figure 25 percent higher than what their older brothers and sisters owed when they graduated from college in 2004. On top of double-digit debt, the report also cites unpublished numbers from the Bureau of Labor Statistics that show how seriously college graduates are being affected by unemployment. In the third quarter of 2008, the unemployment rate for graduates ages 20 to 24 was 7.6 percent. One year later, the rate has jumped to an all-time high of 10.6 percent.

The report also breaks down average student debt by state on a user-friendly map which shows a concentration of high averages in the Northeast and a concentration of low averages in the West. The District of Columbia ($29,793), Iowa ($28,174) and Connecticut ($26,138) have the highest averages while Utah ($13,041), Hawaii ($15,156) and Kentucky ($15,951) have the lowest. Though the report deals in averages, there are many students who owe much more than their state's average, and the number of students who owe twice the national average has been creeping up over the past few years.

Quote of the Day: Plutocrats!

| Thu Dec. 3, 2009 6:37 PM EST

From Felix Salmon:

When you have a progressive tax system, especially when there are surcharges on people making seven-figure incomes, you also have a system where for any given level of national income, the greater the inequality, the greater the government's tax revenues. And indeed federal revenues have been rising faster than median wages for decades now, thanks to the rich getting ever richer.

Given the government's insatiable appetite for cash, it's only natural that it would prefer to tax plutocrats, spending some of that money on poorer Americans, rather than move to a world where poorer Americans earn more (but still don't pay that much in taxes), and the plutocrats earn less, depriving the national fisc of untold billions in revenue.

The government's interests, then, are naturally aligned with those of the plutocrats — and when that happens, the chances of change naturally drop to zero.

This is true.  But it's not very true.  To see why, take a look at how progressive the federal tax system is.  The chart on the right is from a 2004 paper by Piketty and Saez, and it shows the total federal tax rate (income tax, payroll tax, etc.) for various income groups.1  As you can see, it's progressive, but it's not that progressive.  And that makes a difference.

Here's why: although the top 1% (the four richest groups in the chart) has a lot of income, the 60-80th percentile has about the same amount.  That's because although their incomes are a lot lower, there are a lot more of them.  So what happens if that group loses, say, 10% of its income and it goes instead to the very tippy-top earners?  Answer: total revenue to the government goes up about 1%.  The same is roughly true for the other income groups as well.

In other words, the federal government doesn't have much of an incentive to maintain lots of income inequality.  Not much fiscal incentive anyway.  For the most part, the political incentives swamp the fiscal ones, and unfortunately they aren't very closely balanced.  Pursue policies that raise middle class wages, and the effect is so diffuse and so slow that hardly anyone notices.  Pursue policies that benefit the rich and you get immediately showered with oceans of campaign contributions.  That's mostly what motivates our political economy, I think, not tiny changes in the total tax take based on changes in income inequality.2

1The chart starts at the 60th percentile because, basically, there's hardly any income to tax below that.  This is mostly an argument about the middle class vs. the rich.

2Plus, of course, the fact that the rich basically control the country and have an entire political party dedicated to their interests.  But that's a whole different post.

A Big Derivatives Loophole?

| Thu Dec. 3, 2009 6:14 PM EST

Rep. Collin Peterson (D-Minn.), the chair of the House Agriculture committee, is sponsoring an amendment to his own legislation that's supposed to regulate derivatives, the often-complex financial products that many people believe bear some of the blame for the financial crisis. Well, the guy who's regulating derivatives knows best how to improve that regulation, right? Not according to the Project on Government Oversight, a Washington watchdog group, which has written a damning letter to Peterson arguing that his amendment would actually blow a big loophole in the rules. Here's an excerpt:

The consequences of acquiescing to an unregulated and secretive over-the-counter (OTC) derivatives market became painfully clear last fall, when AIG nearly went under after it was suddenly forced to post collateral on its credit default swaps, and had to be bailed out with billions of dollars in government assistance.

We recognize that legislation approved by your Committee would begin to address these concerns by, for instance, creating new rules for margin and capital requirements. Unfortunately, the definition of an "alternative swap execution facility" described in Chairman Peterson's amendment creates a wholly unjustified loophole in the regulation of OTC derivatives, effectively undermining the spirit of your legislation and representing a giant step backwards for transparency and accountability.

Journalist Andrew Cockburn has provided a clear and concise analysis showing how Chairman Peterson's amendment creates this dangerous loophole. Under this amendment—which was adopted by voice vote with little debate—an "alternative swap execution facility" is simply defined as anything that "facilitates" swap trades. Such a facility would not be subject to the requirements of an actual exchange, thereby avoiding the new requirements for increased transparency and accountability. The specific authorization of voice brokerages is singularly troubling since it permits dealers to set prices that are not publicly disclosed.

We believe that the creation of this loophole is contrary to the avowed purpose of the bill. It will inevitably lead to the same kind of trading that created the financial crisis; it will undermine the transparency requirements that are needed to protect the public from fraud and manipulation; and it is inconsistent with confining financial trading, to the greatest extent possible, to well-regulated clearing houses.

A House committee using an unrecorded voice vote to approve an industry-supported amendment that guts its own—already weak—legislation: just another day on Capitol Hill.