Kevin Drum - October 2009

Taking Graft to New Heights

| Wed Oct. 28, 2009 5:01 PM EDT

I've never heard of the Italian news agency ADNkronos, but today they report a pretty spectacular statistic:

Kabul, 28 October(AKI) - Anti-corruption officials believe graft is eating up a staggering 75 percent of the Afghan government's revenues, a news conference heard on Wednesday. A senior official in Afghanistan's anti-corruption department, Muhammad Yasin Osmani, said most of the revenues were being wasted due to administrative corruption.

....Finance ministry spokesman Aziz Shams admitted government revenues were being squandered but said Osmani had over-dramatised the situation.

But does Aziz Shams mean over-dramatized in the sense of "wrong" or over-dramatized in the sense "making too big a fuss over it"?  Steve Hynd wants to know.

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Helping Out

| Wed Oct. 28, 2009 2:46 PM EDT

A friend of mine with a son serving in Afghanistan emailed yesterday about a group that raises money to provide injured service members at military hospitals with voice-controlled laptop computers and related technology that helps their recovery.  It's a terrific organization that's holding a fundraising drive right now, and I just kicked in for a hundred dollars.  If it sounds like a good cause to you too, just click here.  They accept donations in any amount.

Arnold Speaks

| Wed Oct. 28, 2009 1:01 PM EDT

In case you're wondering what's up in California these days, here's our current object of obsession: Arnold Schwarzenegger's veto message for AB 1176.  Arnold's flack says it's just "a weird coincidence."  No doubt.

Quote of the Day

| Wed Oct. 28, 2009 12:21 PM EDT

, a Jesuit-trained Catholic turned Anglican, on Pope Benedict's decision to allow conservative Anglicans to join the Catholic church while retaining some of the Anglican rites:

If personal experience and lifelong immersion in a sub-culture is any form of persuasive evidence, I can tell you that conservative Anglo-Catholicism — at the clerical level — is totally dominated by gay men.  Mostly repressed.  What used to be called when I was in seminary, the pink mafia.  And the thing that is the initial trigger for this decision is the upcoming very likely to happen decision to ordain women as bishops in the Church of England (there have already been women priests there for about 15 years or so).  Which has a certain irony in this case.  If these Anglo-Catholics join the Roman Communion they can join up with very conservative Roman Catholic groups like Regnum Christi and The Legionaries of Christ, also totally dominated by closeted gay fellows.  You don’t need to be Sigmund Freud to see the awesome tragic humor in a bunch of non-wife having grown men wearing pink dresses (and in the Pope’s case super expensive fabulous Prada shoes!!!) telling everybody else they shouldn’t be gay.

Well, OK then.  Always nice to see a happy ending.

Race and the LAPD

| Wed Oct. 28, 2009 12:07 PM EDT

I don't have a lot to say about this (I don't live in LA and don't know its politics well), but thought it was interesting enough to highlight:

The Los Angeles Police Commission forwarded to Mayor Antonio Villaraigosa on Tuesday the names of three finalists to become the next police chief -- a list that contained no women or minorities, but sparked little initial criticism.

....In the not-so-distant past, when tensions between the LAPD and minority communities in the city ran high, the selection of three white men as finalists would almost certainly have set off intense criticism. On Tuesday, however, news of the decision was met generally with praise as officials and outsiders said reforms made under [Bill] Bratton had largely rendered racial and gender politics a moot point.

John Mack, the commission president and a prominent African American civil rights activist, said he was struck by how little attention was devoted to race and ethnicity when the panel held community meetings throughout the city seeking the public's guidance on a new chief, including in Watts, Crenshaw and the San Fernando Valley.

The day is young, and racial politics may yet rear its head, but if Bratton has really accomplished this it's a helluva lot more impressive than any of his other reforms.

Conventional Wisdom Watch

| Wed Oct. 28, 2009 1:27 AM EDT

Mainstream hawkish pundits rarely have a change of heart that leads them fully into the withdrawal camp.  They'll often get to the point where they hem and haw a bit, explaining all the downsides of continued engagement and the longs odds against success, but then they'll conclude with either a reluctant insistence that we have to keep on fighting anyway, or else a murky affirmation that there's no good choice to be had, just a least bad one.

But Afghanistan is changing that.  Tom Friedman has now joined George Will in flatly recommending that we leave.  "China, Russia and Al Qaeda all love the idea of America doing a long, slow bleed in Afghanistan," he says today. "I don't."  The conventional wisdom is slowly but surely shifting before our eyes.

So who will be the next bigfoot pundit to jump ship?  Vote in comments.

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More on Bubbles

| Tue Oct. 27, 2009 10:22 PM EDT

Speaking of asset bubbles, Steve Randy Waldman takes a crack at explaining why an expanding money supply sometimes creates ordinary consumer price inflation and other times creates asset price inflation:

Whether an economy generates asset price inflation or consumer price inflation depends on the details of to whom cash flows. In particular, cash flows to the relatively wealthy lead to asset price inflation, while cash-flows to the relatively poor lead to consumer price inflation.

Why? In Keynesian terms, poorer people have a higher marginal propensity to consume....Poorer people disproportionately use their cash to purchase goods, while richer people disproportionately "save" by purchasing financial assets. If the supply of both goods and financial assets is not perfectly elastic, then increases in demand will be associated with increases in price. If relative demand for goods and financial assets is a function of the distribution of cash, what price changes occur will be a function of who gets what.

So: as income inequality goes up, more money flows to the well-off, who use it to buy financial assets.  Conversely, less money flows to the poor and middle class, who respond by increasing their debt level.  Both of these mechanisms produce a higher demand for financial assets and therefore promote asset inflation.

Turn that around, of course, and you limit asset inflation but promote consumer inflation instead, which has to be held in check via periodic recessions.  So the question is, which would you rather have: periodic modest recessions or long periods of stability interrupted by occasional huge bubbles bursting?  The latter is typical of the "Great Moderation" of the post-1980 era, and Steve argues that it's been economically destructive in multiple ways:

First, in exchange for apparent stability, the central-bank-backstopped "great moderation" has rendered asset prices unreliable as guides to real investment. I think the United States has made terrible aggregate investment decisions over the last 30 years, and will continue to do so as long as a "ride the bubble then hide in banks" strategy pays off. Under the moderation dynamic, resource allocation is managed alternately by compromised capital markets and fiscal stimulators, neither of which make remotely good choices.

Second, by relying on credit rather than wages to fund middle-class consumption, the moderation dynamic causes great harm in the form of stress from unwanted financial risk, loss of freedom to pursue nonremunerative activities, and unnecessary catastrophes for isolated families.

Finally, maintaining the dynamic requires active use of policy instruments to sustain an inequitable distribution of wealth and income in a manner that I view as unjust. In "good times", central bankers actively suppress the median wage (while applauding increases in the mean wages driven by the upper tail). During the reset phase, policymakers bail out creditors. There is nothing "natural" or "efficient" about these choices.

Regular readers will be unsurprised that I generally agree with all this, although I might put it a little more pithily: rich people tend to do really stupid things when they have too much money lying around for too long.  So do poor people, of course, but in their case "too much money" is only enough to buy a bigger TV, not enough to blow up the world.  That's why I think getting a handle on rising income inequality is important.  To paraphrase William F. Buckley, if I had an extra million dollars to divvy up, I'd rather give it to the first thousand names in the New York City phone book than to the CEO of Goldman Sachs.

Big Bubbles, Little Bubbles

| Tue Oct. 27, 2009 6:33 PM EDT

One of the problems with the notion that central banks should respond to asset inflation (in addition to normal price inflation) is that asset bubbles are hard to identify.  Even in retrospect, for example, there's still no consensus on whether the huge runup in oil prices in 2007-08 was a bubble.

But maybe we don't have to identify every single bubble out there.  Martin Wolf today glosses a proposal from Andrew Smithers that suggests central banks limit themselves to tracking just three big asset classes:

Mr Smithers suggests that policymakers should monitor the price of stocks, houses and liquidity. If one of these, and especially if all three, are flashing red central bankers should respond. He recommends measures that raise capital requirements of banks in the boom. I would also support measures that directly limit the leverage among borrowers, as asset prices soar, particularly house prices.

Obviously I'm not going to argue with Wolf's suggestion that we toss some leverage restrictions into the mix, but the main virtue of Smithers' proposal is that it's specific enough to argue with.  For measuring stock bubbles, he proposes using either Tobin's q or CAPE, both well-known and understood metrics.  For housing, there are several good measures of froth, including price-rent ratios, mortgage payments as a percent of personal income, and long-term trends.  That just leaves liquidity, and I'm not sure if there's a broadly accepted measure there.  But there might be something good enough.

Anyway: it's an interesting idea, and it goes beyond a generic suggestion that "central banks should respond to asset bubbles."  It won't solve the world's problems, but it might be enough to keep future bubbles merely painful, not catastrophic.

The Politics of Opt-Out

| Tue Oct. 27, 2009 3:03 PM EDT

Andrew Sullivan thinks the "opt-out" public option is a piece of political genius.  Imagine, he says, what happens next if it passes:

Well, there has to be a debate in every state in which Republicans, where they hold a majority or the governorship, will presumably decide to deny their own voters the option to get a cheaper health insurance plan. When others in other states can get such a plan, will there not be pressure on the GOP to help their own base? Won't Bill O'Reilly's gaffe — when he said what he believed rather than what Roger Ailes wants him to say — be salient? Won't many people — many Republican voters — actually ask: why can't I have what they're having?

....Imagine Republicans in state legislatures having to argue and posture against an affordable health insurance plan for the folks, as O'Reilly calls them, while evil liberals provide it elsewhere. Now, of course, if the public option is a disaster in some states, this argument could work in the long run. But in the short run? It's political nightmare for the right as it is currently constituted. In fact, I can see a public option becoming the equivalent of Medicare in the public psyche if it works as it should. Try running against Medicare.

I was mulling over the exact same scenario last night and couldn't quite make up my mind about how this would play out.  In the end, though, I think Andrew's argument is pretty compelling.  As Rich Lowry complained over at The Corner, "Does a state get to opt-out of the taxes too?"  That's technically a moot point if the public option is truly self-funding, but in the reality of the political world it's powerful whether it makes sense or not.  It's like Republican governors turning down stimulus money: it sounds good on the stump, but who's going to do it in the real world?  It's crazy if you're paying for it anyway.

So yes, this could be a huge winner.  If it passes, then for the next four years Republican state legislators all over the country will be teaming up with the universally loathed insurance industry to try and deny their citizens access to a program that, to most of them, sounds like a pretty good deal.  I don't know if Harry Reid was deviously thinking exactly that thought when he decided on this, but I'll bet someone was.  It's hard to think of something that could force the GOP to make itself even more unpopular than it already is, but this might be it.

The High Cost of Technology

| Tue Oct. 27, 2009 2:25 PM EDT

Ezra Klein quotes Kaiser Permanente CEO George Halvorson on the cost of healthcare:

The point is that CT scans in this country cost a multiple of what everyone else pays. It costs a few hundred dollars in Europe and over $15,000 here. You can't find a place in Europe than costs $15,000. You can't find a place here that costs less than $15,000. Anyone who is looking at the cost of care and is not looking at the unit cost of care is missing the point. ... To have a health care debate in this country that isn't aware of the price differential is not an informed debate.

Hmmm.  This doesn't sound quite right.  CT scan prices vary depending on the procedure, but in general they seem to range from around one thousand to a few thousand dollars.  $15,000 seems like a stretch.

Still, CT scans and MRIs do cost a lot more here than overseas — upwards of 5x as much in some cases.  Why is this?  I sort of understand why doctors are paid more here and why prescription drugs cost more.  But a CT machine is a CT machine.  Siemens sells them for the same price in the U.S. as in Europe, don't they?  So what accounts for the fantastic cost difference?  And why don't insurance companies bargain the price down?  This really does seem to be a little more mysterious than high physician salaries and high drug costs.