Kevin Drum - November 2008

More Geithner

| Tue Nov. 25, 2008 12:03 PM PST

MORE GEITHNER....Dan Drezner reinflates the Tim Geithner bubble:

If Tim Geithner weren't so nice, he would probably be insufferable right now....This is a good thing too, because one could forgive Geithner right now if his head swelled just a little bit. The Dow Jones Industrial Average shot up five hundred points on Friday as word of his appointment leaked. The Dow jumped close to another four hundred points yesterday after Obama officially introduced him. One has to wonder if, sometime this week, when Geithner's wife asks him to do the dishes, he will be tempted to respond, "Have you caused the Dow to jump by more than ten percent? I didn't think so!"

But the real question is: who will Geithner bail out for Thanksgiving? Yet another turkey?

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Public Service

| Tue Nov. 25, 2008 11:52 AM PST

PUBLIC SERVICE....In the New York Times today, David Kocieniewski tells us the story of the Charles B. Rangel School of Public Service at City College of New York. The school was having trouble raising money, so in the summer of 2006 a friend of Rangel's, Manhattan district attorney Robert Morgenthau, suggested that he hit up Eugene Isenberg, CEO of Nabors Industries.

Isenberg, unsurprisingly, was open to the idea of helping out the future chairman of the House Ways and Means Committee. Nabors Industries, you see, was one of the companies that had rushed to reincorporate offshore in 2002 even though they knew legislation was in progress that would retroactively prevent them from doing so. Rangel, who loudly blasted the companies who were moving offshore, favored the anti-Nabors legislation, but Republicans eventually killed it and Nabors retained its tax haven.

Fast forward to 2007, and the same legislation was introduced again. This time, though, Rangel opposed it:

On Feb. 12, the day the bill was being marked up by the committee he leads, Mr. Rangel held two discussions at the Carlyle Hotel in Manhattan. First, the congressman sat down for breakfast with Mr. Isenberg and Mr. Morgenthau to further talk about Mr. Isenberg's support for the Rangel center, Mr. Morgenthau said. Mr. Isenberg said that after breakfast, he escorted Mr. Rangel across the room, where the lobbyist for Nabors, Kenneth J. Kies, was waiting.

Over sweet rolls and coffee, Mr. Kies asked Mr. Rangel if he would maintain his opposition to the efforts to take away the company's loophole. Mr. Rangel said he would, Mr. Kies and Mr. Isenberg said in interviews.

.... Eleven days later, a check for $100,000 from Mr. Isenberg was cashed by City College....The next month, Mr. Rangel presided over Ways and Means hearings during which he presented four witnesses who testified that the effort to eliminate the loopholes was bad policy because it was a retroactive tax increase. No testimony was taken from those on the other side, and nothing was offered to explain why Mr. Rangel was now defending Nabors and the other companies.

In their defense, Isenberg committed the money to CCNY before the breakfast with Rangel, and Rangel says that he's philosophically opposed to retroactive tax increases. But this still doesn't look good, does it? As Michael Kinsely likes to say, the real scandal is what's legal.

Job Creation

| Tue Nov. 25, 2008 10:30 AM PST

JOB CREATION....As word of Barack Obama's stimulus package starts making the rounds, conservatives are reviving one of their favorite tropes: that's sure an expensive way to put people to work! Basically, they divide $700 billion by 2.5 million jobs and announce that the cost of the plan is $280,000 per job, a whopping figure in anyone's book. But Mark Thoma does the actual math, and it turns out that the numbers at hand are actually $490 billion and 5.4 million jobs:

If we actually get the 5 million jobs the estimates say we will get, what is the cost per job? It is $490 billion divided by 5,425,000, or $90,323. (Note that by targeting spending to places that have a high employment rate per dollar spent, we may be able to do even better than this.)

But this is GDP per job, it includes wages, rent, interest, and profit, it's not the amount labor takes home. About 70 percent of income goes to labor....If we take 70% of $90,323, we get about $63,000 (actually, $63,226). That's less than a quarter of the $280,000 figure.

Read the whole thing for more. I'm just presenting this as a public service, since this talking point is almost certain to get extensive play on Fox News and elsewhere. Forewarned is forearmed.

FEMA

| Tue Nov. 25, 2008 10:08 AM PST

FEMA....Via Steve Benen, Al Kamen reports that FEMA may be getting a facelift under Barack Obama:

First off, the likely plan is to break off the agency from the Department of Homeland Security, a move that by itself would help restore the pride that folks at FEMA felt when it was an independent agency.

Second, there's increasing talk that former director James Lee Witt, who took over the then-troubled agency at the start of the Clinton administration and left it eight years later with a much-enhanced reputation, is coming back from retirement to run FEMA for six months to a year, to whip it into shape.

I assume this is one Clinton "retread" that no one will complain too much about?

Dishing on Geithner

| Tue Nov. 25, 2008 9:35 AM PST

DISHING ON GEITHNER....Andrew Ross Sorkin punctures the Tim Geithner bubble today, asking if he's really the financial star he's been portrayed as:

Perhaps what has most people on Wall Street stirring is Mr. Geithner's role in the fall of Lehman. At the time of its bankruptcy, he, along with Mr. Paulson, appeared to be the most vocal in supporting the government's refusal to bail out the firm, according to people involved in various meetings. With hindsight, many in the financial industry blame a deepening of the global financial crisis on the government's decision to let Lehman crumble.

Bloomberg tries to restore some of his luster:

Timothy Geithner was among the first policy makers to shine a light on the unregulated $47 trillion credit-default swap market back in 2005. The New York Federal Reserve president has struggled since then to get dealers to carry out reforms.

...."In classic Tim and New York Fed style, the work has been done behind the scenes, among technocrats, largely by consensus," said Adam Posen, a former Fed official who is now at the Peterson Institute for International Economics in Washington. "The downside is that it takes awhile to get consensus."

Of course, the problem here is that virtually everyone who's qualified to deal with the financial meltdown had at least some role in it while it was happening. And given the speed and ferocity of the meltdown, there probably isn't a person in the country who got every call right during the past year, including Geithner. (And that rather pointedly goes for the kibitzers, too, none of whom got every call right either.)

Anyway, Geithner seems like a pretty good pick, but it never hurts to remember that these guys are human. I don't think Obama could have done much better, but that doesn't mean the guy is a superman.

The Rise and Fall of Lobbyists

| Mon Nov. 24, 2008 11:47 PM PST

THE RISE AND FALL OF LOBBYISTS....On K Street, the free market is hard at work:

An assistant department secretary leaving the Bush administration three years ago, with Republicans in control of the House, Senate and White House, might fetch as much $600,000 to $1 million a year in the influence business, recruiters and lobbyists said. But the same person might now expect less than half as much.

....But for Democrats, the bidding is fierce. Three years ago, a Democratic staff director for an important House or Senate committee might have earned about $130,000 a year on Capitol Hill, and jumped to K Street for an annual salary of about $250,000. Now, the same person might command as much as $500,000 to $800,000 a year, several recruiters said.

OK, but it still sounds like Republicans work at a higher pay scale than Democrats. How come? The answer, perhaps, comes from Republican John Feehery, a former MPAA lobbyist who lost his job after Democrats took over in 2006:

A spokesman for the association declined to comment on the departure. So did Mr. Feehery, who now runs his own lobbying shop. But he said Republican lobbyists would always be in demand because Democrats lack the stomach to push for industry goals that go against their party, like rolling back environmental regulations.

"At the end of the day," Mr. Feehery said, "Democrats don't like to ask for the order" — the client's objective.

So there you have it. Democrats just aren't willing to screw their own party and violate their own principles quite enough. It's a pretty sad state of affairs.

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Taxes and Christina Romer

| Mon Nov. 24, 2008 7:23 PM PST

TAXES AND CHRISTINA ROMER....Brad DeLong says of fellow Berkeley economics professor Christina Romer — who has just been appointed by Barack Obama as head of the CEA — that she is "very good at explaining economics." That's good, because I have a question.

Last year Christina and David Romer wrote a paper that attempted to quantify the effect of tax changes on economic growth. I read it at the time and didn't understand it. I read it again a few minutes ago and I still don't understand it. So my question is: Can you please explain your paper titled "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks"?

Here's my understanding of what the paper says. Basically, the Romers looked at every tax measure enacted since 1945 and classified them into two groups. The first group they call endogenous. These are tax changes made in response to current or future economic conditions, including responses to spending changes or recessions. Since the effect of these tax changes is difficult to separate from the effects of the events being responded to, they are discarded.

The second group they call exogenous. These are tax changes designed either to reduce a deficit or to raise long-term growth. Since they aren't motivated by current or future economic conditions, their effect on the economy is untainted by external factors.

The Romers use this second group to calculate the effect of tax changes on economic growth without confounding factors, and their conclusion is that a tax increase of 1% of GDP reduces output three years later by nearly 3%.

Aside from the difficulties inherent with this kind of classification, I've got a few problems with this. First, their methodology eliminates a whole bunch of tax changes simply because their effect is hard to calculate. This might make practical sense, but doesn't it also introduce a whole new kind of bias?

Second, it assumes that if politicians say a tax increase is designed to spur economic growth or reduce the deficit, then that's what it's for. But ever since 1980, conservative politicians have said this about practically every tax cut whether it's true or not. For this reason, the Romers tag nearly every tax change since 1980 as exogenous. Doesn't this make their post-1980 analysis a little slippery since it essentially includes all tax changes while the pre-1980 analysis doesn't?

Third, it doesn't take into account different kinds of tax changes. If, say, exogenous changes tend to be capital gains cuts while endogenous changes tend to be payroll tax increases, wouldn't you need to take that into account?

Fourth, there have been tax changes practically every year for the past 50 years. How do you separate the effects of one tax change from another?

Fifth, can it really be true that a 1% tax increase produces a 3% GDP reduction over the long term? European countries tend to have total tax rates that are upwards of 15% higher than ours, which should mean their GDPs are 45% lower. For the most part, however, GDP per hour worked in Europe is only modestly lower than ours.

Anyway, those are my questions. I've found very little discussion of the paper on web (see here and here for a couple of exceptions) and I'm curious to know what the economics profession in general thinks of it. Can anyone point me in the right direction?

POSTSCRIPT: One of the Romers' conclusions, by the way, is that tax increases designed to reduce an inherited deficit have a positive impact on economic growth. So if Obama ever does raise taxes, expect this to be the reason he gives for it. Luckily for him, it will probably be true.

Nobody Knows Anything

| Mon Nov. 24, 2008 2:11 PM PST

NOBODY KNOWS ANYTHING....Via Tyler Cowen, I see that the Intercollegiate Studies Institute has released the results of their annual test on civics and history. The outcomes, as usual, are supposedly abominable: fewer than a third of the 2,500 randomly selected test takers managed to score higher than 60%.

Now, you can decide for yourself how hard the test is and whether a score below 60% is really that bad. (The test is here.) I managed to get all the questions right, but still, there were a fair number that were pretty far from obvious for most people. Is it really that big a deal, for example, that most Americans don't know that Socrates, Plato, Aristotle, and Aquinas would concur that certain permanent moral and political truths are accessible to human reason? Especially when the question and the five possible answers are being read to them over the phone?

Like I said, you can decide for yourself. But I just want to highlight one particular result: the average score by age group. As regular readers know, one of my pet peeves is the endless number of tests given to high school students and then trumpeted as evidence that kids today are abysmally ignorant. The standard headline is something like "80% of high school seniors can't find France on a map," but what I always wonder is: how many adults can find France on a map? Unfortunately, they never tell us that.

But ISI does. And the results are pretty simple: everyone is stupid. ISI themselves spin this as "Baby Boomers Do Best," but speaking ex cathedra for my generation, I really don't think that 52% vs. 47% (an average difference of less than two correct answers) says much about the awesomeness of boomer cultural literacy. Basically, the kids didn't do very well on ISI's test, but neither did the adults or the seniors, even though their average educational level is higher. This may be only a single fairly dubious data point, but it's still worth keeping in mind the next time you see one of those "Kids Are Stupid" headlines.

Other ISI findings, by the way, include these: the more education you have, the better you do; it doesn't matter much what kind of university you went to, whether you go to church, or what your politics are; watching lots of TV is bad for your score; and reading lots of history is good for your score. So there you have it.

Scouring the Budget

| Mon Nov. 24, 2008 12:00 PM PST

SCOURING THE BUDGET....Barack Obama rolled out his economic team today: Tim Geithner at Treasury, Christina Romer to head up the CEA, Larry Summers to head the White House Economic Council, and Melody Barnes as chair of his domestic policy council. Ben Bernanke, of course, is already in place as Fed chief. But what about Peter Orszag? Why wasn't he up on stage with the rest of them? Ben Smith provides a clue:

Obama's staff won't elaborate, but the President-Elect said just now that he'd roll out a plan to cut the federal budget tomorrow — something both presidential candidates said they'd do, but neither detailed.

"[T]o make the investments we need, we'll have to scour our federal budget, line-by-line, and make meaningful cuts and sacrifices as well — something I'll be discussing further tomorrow," Obama said.

I'm not sure why Obama wants to have a whole separate rollout for this — maybe he just wants more than one day's worth of headlines? — but obviously Orszag will be the star of that particular show. Via Taegan Goddard.

Admitting the Problem

| Mon Nov. 24, 2008 11:38 AM PST

ADMITTING THE PROBLEM....James Joyner bemoans the lack of substance in the conservative blogosphere:

Part of the reason I'm drawn to the center-left blogs [...] while finding it increasingly difficult to find center-right blogs worth my time is that the former are much more likely to get beyond the debates of the 1980 election. There's almost no serious analysis of health care reform, urban planning, education, and many other issues that regularly crop up on the best lefty blogs on their conservative counterparts. If we read about those issues at all, they're framed as if Ronald Reagan were still aspiring to high office: Say No to socialism! Abolish the Department of Education! Government IS the problem!

Right. The world has changed in the past 20 years but conservatism doesn't really seem willing to accept it. Take global warming. Here's the rough conservative reaction to it starting in the early 90s:

  1. It doesn't exist.

  2. It exists but it isn't manmade.

  3. It's manmade, but it's too expensive to do anything about.

Even this is a generous assessment. A lot of conservatives are still stuck at #2, and sizeable chunk at #1. What this means is that they're basically shut out of the conversation entirely. Which is too bad, because I'd actually be sort of interested to hear a conservative take on how to address global warming that accepts both its reality and the necessity of doing something about it. If we really are facing a global environmental catastrophe, what shape would a conservative solution take? I don't think anyone knows. Likewise, conservative reaction to wage stagnation and growing income inequality has gone down a similar road:

  1. It doesn't exist.

  2. It exists, but consumption inequality is what really matters.

  3. ??

Our current financial meltdown has pretty much wiped out #2 as a plausible explanation, since the stagnating middle class can no longer borrow to keep up their consumption. But what's #3? Will it be yet another attempt to deny that the problem even exists? Or some kind of interesting conservative take on what to do about it?

Global warming and skyrocketing income inequality are problems that didn't even exist in 1980, which means there is no "Reaganite" solution to appeal to. There might still be conservative takes on these things, but they won't do any good until conservatives actually accept that these are real problems that people genuinely care about. That day still seems pretty far off.