Kevin Drum - September 2009

The Tentacles of the Fed

| Thu Sep. 10, 2009 10:21 AM PDT

You've heard of "regulatory capture," right?  This is the phenomenon in which interest groups end up running the government agencies originally designed to rein them in.  So farm interests dominate the USDA, Wall Street interests dominate the SEC, corporations dominate the NLRB, etc.

Today, Ryan Grim suggests that exactly the opposite has happened with the Federal Reserve.  The field of monetary economics is relatively small, and a startling number of its practitioners either currently work for the Fed or have at one time.  So if you want to get ahead in the field, it pays not to be too critical of the Fed:

The Federal Reserve's Board of Governors employs 220 PhD economists and a host of researchers and support staff, according to a Fed spokeswoman. The 12 regional banks employ scores more.

....It's fair to [estimate] that there are something like 1,000 to 1,500 monetary economists working across the country. Add up the 220 economist jobs at the Board of Governors along with regional bank hires and contracted economists, and the Fed employs or contracts with easily 500 economists at any given time. Add in those who have previously worked for the Fed — or who hope to one day soon — and you've accounted for a very significant majority of the field.

....Affiliations with the Fed have become the oxygen of academic life for monetary economists. "It's very important, if you are tenure track and don't have tenure, to show that you are valued by the Federal Reserve," says Jane D'Arista, a Fed critic and an economist with the Political Economy Research Institute at the University of Massachusetts, Amherst.

....The Fed [also] keeps many of the influential editors of prominent academic journals on its payroll. It is common for a journal editor to review submissions dealing with Fed policy while also taking the bank's money. A HuffPost review of seven top journals found that 84 of the 190 editorial board members were affiliated with the Federal Reserve in one way or another.

"Try to publish an article critical of the Fed with an editor who works for the Fed," says [Jamie] Galbraith. And the journals, in turn, determine which economists get tenure and what ideas are considered respectable.

Read the whole thing.  Even Paul Krugman gets into the act, claiming that ever since he began criticizing Alan Greenspan a few years ago, he's been blackballed from the Fed's annual Jackson Hole get-together of everyone who's anyone.

Overall, though, this is more a sociological critique than a claim that the Fed uses its raw power to stifle dissent.  Rather, you pull your punches a bit knowing that the editor of the journal you're submitting to used to work for Greenspan.  You dial it down a notch because someday you might want a job at the Fed yourself.  You stay within the mainstream because that's the safest place to be when upwards of half your profession depends on the largesse of the Fed to feed their families.

Is this true?  I don't know, but it certainly sounds plausible — and the circle of monetary economists really is startlingly small.  And from a journalistic point of view, the great thing about this story is that it's nonfalsifiable: the more economists who pooh pooh your theory, the more proof you have that they've all been captured by the Fed.  And you have to admit, it sure explains a lot about what happened over the past decade or so.  Did 98% of the profession really believe that there was no housing bubble in 2004?  Or did they just decide that staying quiet was a better career move?  The latter seems rather more likely, doesn't it?

(Via Tim Fernholz.)

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The Evolution of the Blogosphere

| Thu Sep. 10, 2009 9:14 AM PDT

Scott Payne of the League of Ordinary Gentlemen has posted an interview with me about how the political blogosphere has evolved over the past seven years.  If this seems like the most gruesome topic possible, don't click the link.  Do not click the link.  If it sounds like a decent excuse to avoid work for a few minutes, however, go ahead.  Click away.  It's short, and Scott had the good taste to illustrate it with the best photograph ever taken of me.

Another Million Uninsured

| Thu Sep. 10, 2009 8:23 AM PDT

Can we please please please not talk about Joe Wilson anymore?  Haven't we glorified enough assholes already this summer?  Via email, Bruce Bartlett says probably not:

No doubt, right wing publishers like Regnery and Crown will be beating down Wilson's door today to sign a book deal that will put him at the top of the New York Times bestseller list along with drivel from the likes of Michelle Malkin, who has probably already started writing her biography of Wilson, titled, "The Man Who Spoke the Truth."  By the end of the day a Wilson for President web site will be fully functioning if it isn't already.  Watch for the announcement on Glenn Beck’s show this afternoon.

OK, but we don't have to talk about it.  Instead, let's talk about this:

The U.S. Census Bureau said the number of uninsured Americans increased in 2008 to 46.3 million, compared to 45.7 million in 2007.

The poverty rate also increased to 13.2%, and the median family income declined to $50,303.  These are all worth far more discussion than the mentally unbalanced antics of yet another GOP congressman.

Following the Online Debate

| Wed Sep. 9, 2009 10:32 PM PDT

Here's something to chew on.  Market Sentinel, a British firm "specialising in online conversation monitoring and analytics," has canvassed the online media world to see who's most influential in the American healthcare debate.  As a proxy, the issue they surveyed was whether Britain's NHS was a good model for the U.S. to follow.

Their findings: The outlets most favorable toward the NHS are the Guardian and the New York Times.  The least favorable are IBD, the Telegraph, and Fox News.  The most influential medium is Twitter.  The least influential is the liberal blogosphere.

That's bad news for us bloggers.  On the other hand, is Twitter really the most influential medium out there?  Seriously?  And in what way is the UK Conservative Party influential in an American debate about healthcare?  For that matter, does trawling the web for references to the NHS really tell us anything at all about how Obama is doing on healthcare anyway?

In any case, I'm stumped by their conclusion that this chart shows that Obama "has lost the argument online."  Looks about even to me.  And color me a wee bit skeptical of their methodology: "We crawl the internet looking for pages which are about the topic, then we track mutual references between people, institutions, entities mentioned in the context.  The resulting structure gives us a mathematically verifiable measurement of 'authority' in the context."  You betcha.

But what I really want to know is whether Twitter is genuinely the most influential online medium in the healthcare debate.  Does that count Chuck Grassley's tweets?  If so, somebody please just shoot me now.  Western civilization is doomed.

UPDATE: Some good points about this from Tim F. over at Balloon Juice.  Comparing all of Twitter to individual outlets makes Twitter look a lot more influential than it really is.  And if blogs are nearly as influential as the Washington Post and the New York Times, as the graph suggests, that's actually pretty good news for the blogosphere, isn't it?

Obama's Big Speech

| Wed Sep. 9, 2009 6:41 PM PDT

A few miscellaneous comments on Obama's big healthcare speech:

The relentless attempt to appear bipartisan was kind of grating.  I mean, how many Republicans did he end up namechecking by the time he was done?  Sheesh.  Still, he wasn't trying to please me, and I imagine this kind of stuff goes over pretty well with the average viewer.

Props for not sidestepping the whole individual mandate issue.  I sort of expected him to, since requiring people to buy insurance isn't necessarily a popular position, but he met it head on.  Key quote about people who choose to stay uncovered even if they can afford insurance: "Such irresponsible behavior costs all the rest of us money."  I'm not sure it will work, but it was admirably direct.

He waffled at first on the public option ("These are all constructive ideas worth exploring," he said unctuously about competing proposals), but then he finished up strong: "I will not back down on the basic principle that if Americans can’t find affordable coverage, we will provide you with a choice."  But was this as strong as it sounded in real time?  Not really, and I think he left things pretty fuzzy about just how vigorously he's planning to push for a serious public option — which I suppose was exactly his intention.

He did a pretty good job calling out some of the ridiculous lies that have been spread about healthcare reform.  This is where his (sometimes annoying!) focus on post-partisanship and "ending the ideological bickering" can pay off.  It allows him to get away with strong criticism of this stuff without seeming merely partisan himself.

There was no mention of subsidy levels in his speech.  This is no surprise, since that's an ultra-wonky technical detail, but it's also a pretty important one.  Even if it's just in some talking points released on the website, I'd like to hear where he stands on this.

When Obama said at the end that Americans had been sharing their stories in emails and letters and that he had "received one of those letters a few days ago," I was ready to start cringing.  But no!  It was a letter from Ted Kennedy.  That turned out to be a pretty powerful part of the speech, I thought.  Too bad he then weakened the impact by going on just a wee bit too long afterward.  Another minute would have been good.  Three or four minutes was too much.

And the big question: will it work?  Well, I've been on record for some time as believing that since healthcare reform emerged still standing even after the August hailstorm, the odds were good that it could pass this year in some reasonable form.  So obviously I still think that.  But I'd say the speech probably helped.  It won't affect Republican votes much, but it will probably move public opinon a few notches and make it easier for centrist Dems to stick together and overcome a GOP filibuster.  Basically, I'd say the odds of healthcare passing this year have gone up from 65% to about 75%.  Stay tuned.

Overdraft Hell Revisited

| Wed Sep. 9, 2009 10:25 AM PDT

Felix Salmon is every bit the hater of outrageous bank fees that I am, but he goes beyond the hate and responds to today's NYT front pager with some practical ideas for reform. Here's the Salmon Plan:

• Banks are allowed to offer automatic overdraft protection, but only if it’s free. (They can charge an annualized interest rate on the overdraft, but no set fees.)

• If a bank wants to charge fees as well as an interest rate for overdraft protection, then that protection has to be opt-in rather than opt-out, and the fees should be prominently disclosed at the opt-in stage.

• Fees should be be capped at $20, with a limit of one such fee per day.

I'm not sure I'd agree to even that much, frankly.  For my money, overdraft fees should be regulated as short-term loans with agreed-on interest rates, and banks should simply decide for themselves how to cap them.  If they don't trust you, the cap is zero and you can't overdraw your account at all.  If they trust you a lot, the cap is high and you can overdraw your debit card all you want while your bank rakes in the interest payments.  And yes, of course overdraft protection should be opt-in.  It's a sign of how fatally corrupt the finance industry is that either one of us even has to say that.

Would this make banks less profitable?  Of course not.  They'd make up for the overdraft revenue somewhere else, which is exactly what I want them to do.  I want banks to compete openly, with simple annual fees, clear interest rates, and services with plainly advertised up-front costs.  If debit cards cost the bank money, they should charge annual fees to everyone who uses them, rather than subsidizing 90% of their business with hidden fees on the 10% who are least able to afford it in the first place.  It's a disgrace that we've allowed this to go on as long as we have.

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Patriot Games

| Wed Sep. 9, 2009 9:51 AM PDT

In some biography of FDR that I read once, I remember learning that one of Roosevelt's parlor tricks was to have a guest draw a straight line anywhere through a map of the United States, and he'd then name every county along the line, as well as the party leaders and other political VIPs in the county.  Impressive.

Compared to that, I suppose that drawing a map of the United States freehand isn't that big a deal.  Still, it's impressive in its own way.  Maybe we should make all our U.S. senators perform patriotic tricks like this. Via James Joyner.

No More Miracles

| Wed Sep. 9, 2009 9:23 AM PDT

Over at his new digs, Bruce Bartlett offers some belated advice on healthcare reform from the perspective of someone who was deeply involved in the 1986 Tax Reform Act:

Before the tax reform proposal ever went to Congress in 1985, Treasury already knew all the potential problem areas, which provisions were expendable and which ones were not. Consequently, Treasury was able to manage the inevitable trade-offs necessary to get a bill enacted without sacrificing the basic goal.

I would just add from my own experience that the 1986 act was the culmination of a long-term process that began with a lot of discussion on Capitol Hill, at think tanks and elsewhere about ideas such as a flat rate consumption tax, a comprehensive income tax and other options. By the time the Reagan administration sent a formal proposal to Congress the basic idea of tax reform was clear in everyone's minds. Even so, it took a solid year of work to get a final bill.

This sort of process never occurred with health reform. There was never a study from the Department of Health and Human Services laying out the options, discussing the pros and cons of various alternatives, or with the sort of reference data that is essential for developing really big policy changes. In fact, there has never really been a formal White House proposal. This has made it easy for Congress to take control of the whole health reform debate, with Obama often appearing to be a mere bystander.

For a couple of reasons, I'm not sure I buy this.  First, practically everyone seems to agree that the 1986 Tax Reform Act was little short of a miracle: not only did it manage to accomplish significant tax reform, but it did so without caving in to special interests at every turn.  That might be because Treasury was so well prepared, but lots of bills that have been equally well researched beforehand have failed.  More likely it was because of the bullheadedness of Donald Regan, virtuoso lobbying by James Baker, a Congress that genuinely wanted reform on both sides of the aisle, and the fact that the stars just happened to align.  It was sui generis, and I'm not really sure how many lessons we can learn from it.

Second, healthcare reform has been studied to death.  Granted, there isn't a three-volume HHS study sitting around, but few domestic subjects have gotten more attention from both scholars and activists over the past decade, and all the various options and the tradeoffs between them are well known to virtually everyone.  What's more, before this process ever started there were half a dozen actual proposals on the table from actual members of Congress.  There was in no way a dearth of serious, detailed thinking widely available on healthcare reform.

The real problem is that we just don't have the consensus for action that we had with tax reform in the mid-80s.  Roughly speaking, Democrats wanted to close loopholes and Republicans wanted lower top marginal rates, and both were willing fend off the special interests in order to make a deal on those terms.  This time around, there's nothing Republicans want, so there's no deal to be had.  Democrats have no choice but to bull something through on their own, and with Republicans already opposed en masse they can't afford to make too many other enemies.  The result is a mediocre bill that makes some good progress, but does so only by bribing special interests instead of standing up to them.

Overdraft Hell

| Wed Sep. 9, 2009 8:19 AM PDT

The New York Times has a nice front page piece today about overdraft fees on debit cards, and for the most part it's the usual horror show: the fees are outrageously high; banks deliberately arrange them so that you always pay the maximum number of fees, not the minimum; an enormous fraction of their operating profit now comes from overdraft fees; and they actively adopt policies designed to encourage overuse of debit cards.  And naturally this hits the hardest among those who are the most financially stressed in the first place: 93% of all overdraft charges come from 14% of bank customers, most of them lower-income consumers.

That's all blood-boiling stuff, but it's also been pretty well covered over the past year or two.  However, I did learn a couple of new things from this piece.  First, I always figured that as bad as the overdraft racket was, at least you could opt out if you want and just have the bank turn down any debit that would take your account below zero.  Nobody ever does it, but in theory you have the option.  Right?  Wrong:

Ruth Holton-Hodson discovered that the hard way. She keeps close tabs on the welfare of her brother, who lives in a halfway house in Maryland and uses what little he has in his account at Bank of America to pay rent and buy an occasional pack of cigarettes or a sandwich.

When the brother, who has a mental illness that she says requires her to assist with his finances, started falling behind on rent, Ms. Holton-Hodson found he had racked up more than $300 in debit card overdraft fees in three months, including a $35 one for exceeding his balance by 79 cents.

Ms. Holton-Hodson said she spent two years asking bank employees if her brother could get a card that would not allow him to spend more than he had. Though Bank of America does not typically allow customers to opt out of overdraft protection, it finally granted an exemption.

“I’ve been angered and outraged for many years,” she said. “When there is no money in his account, he shouldn’t be able to pay.”

Go ahead and try to defend that.  I dare you.  And then there's this:

In 2005, after intense industry pressure, the Federal Reserve ruled that overdraft charges should not be covered by the Truth in Lending Act. That meant bankers did not have to seek consumers’ permission to sign them up, nor did they have to disclose the equivalent interest rate for the fees.

Well, of course the Fed ruled that way.  Just because banks are charging the equivalent of 3,000% interest on these fees is no reason to force banks to disclose that fact to customers.  That's our Fed!

But maybe the worst aspect of the whole thing is the almost unbearable smarminess of the bank lobbyist who blew off the whole subject with this: “Everyone should know how much they have in their account and manage their funds well to avoid those fees,” Scott Talbott told the Times.  There's a circle in hell reserved for this guy.

UPDATE: Some practical reform suggestions here.

Tough Choices

| Tue Sep. 8, 2009 7:12 PM PDT

One of the common features of the healthcare reform bills currently on the table is that they include a personal mandate combined with insurance subsidies.  What this means is that you're required to buy health insurance if you don't get it from your employer, but the government will help pay for it if you can't afford it.

But what's the right level of subsidy?  The draft bill introduced by Sen. Max Baucus today provides subsidies for families earning up to 300% of the poverty level, or $66,000 per year.  That's a problem: health insurance can easily set you back $15,000 or more, and requiring families with modest incomes to suddenly add a $15,000 item to their annual budget may be more wishful thinking than serious policy.  What's more, politically it's likely to prove to be very, very unpopular.

Much better would be 400% of the poverty level, or $88,000 per year.  There would still be some unhappy families, but a lot fewer of them.  It's a big difference.

Now, compare this to the much discussed "public option."  This would be a federal insurance plan offered in addition to private insurance, and the idea behind it is that the competition would help force down insurance prices across the board.  That would also make a big difference to a lot of families.

Ideally, we'd like to have both in the final bill.  But what if we can't?  So here's the question for the day: if someone put a gun to your head and forced you to choose between (a) a public option and (b) a higher subsidy level, which would it be?  Please show your work.