Kevin Drum - October 2009

Quote of the Day

| Fri Oct. 16, 2009 11:29 AM EDT

From Ezra Klein, on the possibility that Balloon Boy was a hoax:

But whether or not the drama was staged, it certainly served as a perfect metaphor for cable news: America spent hours riveted by a powerful and gripping story that turned out to be totally meaningless, and will have no significant impact on anybody's lives going forward.

Word.  Or whatever it is that the youngsters say these days to indicate agreement.  (I turn 51 in a few days.  I'm feeling more and more ancient lately.)

True story: I was on the phone yesterday doing our weekly podcast with David Corn, and Laura McClure made some comment about Balloon Boy.  What?  David started to guffaw.  Did I live in a shack or something?  Balloon Boy is everywhere.  I had no idea what they were talking about, but David said that literally every television he had passed in the preceding four or five hours had been tuned to Balloon Boy.  This is the price I pay for not watching cable news during the day.  I am cut off from everything that matters the most.  Like boys who turn out not to be in balloons.

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Some Light Evening Reading

| Fri Oct. 16, 2009 12:59 AM EDT

David Roberts emails with a challenge:

Kevin, I've been casting around trying to think of someone who's wonky enough that they might actually read or care about this post. You're my only hope!

You're on, pal.  How bad can this be, after all?  It's not like we're talking about quantum mechanics, are we?

No.  It's much worse.  David is writing about how the CBO does budget scoring for greenhouse gas legislation.  Holy cow.  But we're troupers around here.  The question is: why does increased efficiency, which is (ahem) by far the most efficient way of reducing energy use, get scored so poorly by the CBO?  The answer has to do with the fact that if you tax some part of the economy, that means less spending, which in turn means less taxable income and therefore less tax revenue.  So you don't really get the full benefit of the taxation.  But how much do you lose?

Rather than try to calculate that percentage for every piece of legislation and every set of taxed entities, the CBO [...] has settled on a standard number, which it applies across the board: 25%. So for every buck that’s raised via an indirect tax, a quarter is lost in direct taxes and only $0.75 can be slated for new spending....This revenue offset is colloquially known, by the tiny number of people who have reason to know such a thing colloquially, as the “25% CBO haircut.”

But that's just the start.  It turns out that if you spend the money on certain things you can avoid taking the haircut.  You get to use all 100% of the tax revenue.  Hooray!  Unfortunately it also turns out that tax cuts and tax breaks avoid the haircut but spending on things like state energy efficiency block grants gets the full hit.  And since members of Congress prefer to spend as much money as possible in their bills, they're biased against things that get the haircut.  Things like energy efficiency programs.

Which is a drag, since energy efficiency programs are just about the best use of federal dollars you can imagine.  To learn more — a lot more — click the link and read the whole post.  It counts for three points toward your budget geek certificate.

Quote of the Day

| Thu Oct. 15, 2009 4:51 PM EDT

From Alan Greenspan, on the size of U.S. banks:

If they’re too big to fail, they’re too big.

Interesting.  On the one hand, Greenspan is really on the side of the angels here.  "I don’t think merely raising the fees or capital on large institutions or taxing them is enough," he says.  If they're too big, we need to just chop 'em down to size.  On the other hand, he's also using this as an opportunity to slag his successors for creating the moral hazard of too-big-to-fail in the first place: "When push came to shove, they didn’t stand up," he says of the decision last year to rescue Fannie, Freddie, and AIG.  But it's pretty hard to believe that if Greenspan had still been Fed chair at the time, he would have risked allowing the financial system to melt down.  And the "Greenspan put" predates the "Bernanke put" by many years.

Still and all, it's interesting that Greenspan, of all people, is willing to endorse an idea that's apparently too radical for current officeholders to even think about.  It's sort of like all those out-of-office Republicans who say they're in favor of healthcare reform now.  I guess it's a lot easier to buck the tide when you're not the one holding the bag.

Sticky Benefits

| Thu Oct. 15, 2009 2:10 PM EDT

As this CBPP chart points out, there was no net inflation in 2009, which means that Social Security recipients won't receive a benefit increase in January.  Sacre bleu!  That can hardly be allowed, so naturally politicians are taking swift action:

President Obama on Wednesday attempted to preempt the announcement that Social Security recipients will not get an increase in their benefit checks for the first time in three decades, encouraging Congress to provide a one-time payment of $250 to help seniors and disabled Americans weather the recession.

....An increase in benefit checks each January has been a yearly ritual since the mid-1970s, when the government moved to ensure that its subsidies to retirees, pension recipients and others who receive Social Security benefits kept pace with inflation. Thursday's announcement by the Labor Department will mark the first time that the federal formula used since then, which is tied to the consumer price index, will translate into no increase at all.

Now, I don't really have any objection to giving seniors an extra little bonus this year. Their 401(k)s and whatnot are sucking pretty bad, so why not?  A little extra stimulus is a good idea even if this isn't the most defensible use of federal money I can think of.

Still, this does go to show the power that sustained inflation holds on our imaginations.  Technical arguments about CPI calculations aside, the fact is that seniors haven't gotten a benefit increase for decades.  It's just not the way the program works.  But the fact that their checks keep going up makes it seem like they have.  So now, despite the fact that the huge benefit increase of last January combined with the deflation of the past 12 months means seniors really are getting higher benefits for the first time in recent memory, it doesn't seem like it.  So adjustments must be made and appearances kept up.  Sticky wages indeed.

Cracking the Whip

| Thu Oct. 15, 2009 1:30 PM EDT

Is it really true that the Democratic leadership acts like a high school social club while the Republican leadership acts more like the mafia?  Step out of line in GOP-land and they'll make you pay dearly: money, committee assignments, and more will be savagely withdrawn if you vote the wrong way.

Maybe.  But Politico reports that Republicans might not be quite the tough guys they were a decade ago:

Mitch McConnell and his deputies in the Senate Republican leadership are responding very cautiously to Olympia Snowe’s decision to become the first GOP vote for a Democratic health care reform bill.

....Senate Minority Whip Jon Kyl (R-Ariz.) [...] said a heavy-handed approach “doesn’t work.” And indeed, it could backfire — not just with Snowe but with other Republicans who’ve indicated that they could cross over to help Democrats pass some of President Barack Obama’s top domestic policy initiatives.

....Republican leaders know that if they crack down hard on Snowe, they risk pushing her and other wavering Republicans into the arms of the Democrats. So, instead, they’ll lobby their own intensely in order to keep the GOP united and force the Democrats to find 60 votes by themselves.

Well, it's tougher to maintain discipline as a minority party than it is when you're in the majority.  And John Boehner is no Tom DeLay.  In any case, maybe they've given up: healthcare reform now seems to have devolved into a furious battle over last-minute goodies, which is probably good news.  That's what usually happens when a bill actually looks likely to pass and everyone wants to make sure they aren't left off the gravy train.  They wouldn't be bothering if they thought the whole thing was never going to see the light of day.

Revenge of the Nerds

| Thu Oct. 15, 2009 12:10 PM EDT

This is so far over my head that it might as well be written in Martian, but it's still fascinating in its own geeky way.  A new paper by a group of Princeton computer scientists and economists uses Intractability Theory to demonstrate that a smart underwriter can deliberately construct a derivative that will implode and the buyer can never prove it.  Not even in theory:

The paper shows the example of a high-volume seller who builds 1000 CDOs from 1000 asset-classes of home mortages. Suppose the seller knows that a few of those asset classes are "lemons" that won't pay off. The seller is supposed to randomly distribute the asset classes into the CDOs; this minimizes the risk for the buyer, because there's only a small chance that any one CDO has more than a few lemons. But the seller can "tamper" with the CDOs by putting most of the lemons in just a few of the CDOs. This has an enormous effect on the senior tranches of those tampered CDOs.

In principle, an alert buyer can detect tampering even if he doesn't know which asset classes are the lemons: he simply examines all 1000 CDOs and looks for a suspicious overrepresentation of some of the asset classes in some of the CDOs. What Arora et al. show is that is an NP-complete problem ("densest subgraph"). This problem is believed to be computationally intractable; thus, even the most alert buyer can't have enough computational power to do the analysis.

Arora et al. show it's even worse than that: even after the buyer has lost a lot of money (because enough mortgages defaulted to devalue his "senior tranche"), he can't prove that that tampering occurred: he can't prove that the distribution of lemons wasn't random. This makes it hard to get recourse in court; it also makes it hard to regulate CDOs.

This gives caveat emptor a whole new meaning.  As if we didn't already know.

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Quote of the Day

| Thu Oct. 15, 2009 11:08 AM EDT

From John Shadegg (R–Ariz.), searching for just the right words to describe Democratic efforts to make sure everyone has access to decent healthcare:

You know, it occurs to me, and I’ll go through these other scandals very quickly, but what we’re really getting here is we’re not just getting single-payer care. We’re getting full on Russian gulag, Soviet-style gulag health care [...] It appeared in last Friday’s Wall Street Journal. You can Google it. You can pick up the phone and call Kim Strassel. You can ask her about Soviet-style gulag health care in America, where powerful politicians protect their constituents.

OK, OK, this was really a quote from yesterday.  Sue me.  But it's a good example of what I mean when I suggest that today's right-wing lunacy is different from left-wing lunacy of the Bush years.  Sure, there were lefty bloggers who went over the top about Amerika and how the NSA was bringing 1984 to life and so forth, but for the most part you didn't have members of Congress taking to the House floor and joining in.  They largely managed to keep a slightly more even keel.  But on the Republican side, after a mere few months of Obama, this kind of stuff has become routine.  They've joined the Caps Lock crowd feet first.

In other words, they're nuts.  A Soviet gulag?  Does this clown even know what a gulag is?

Goldman and the Economy

| Thu Oct. 15, 2009 10:49 AM EDT

Do rising profits on Wall Street mean that the economy is finally starting to pick up?  Not quite.  Here's how Goldman Sachs' soaring third-quarter revenue breaks down:

Goldman's business from fixed income, currency and commodities trading again bolstered its bottom line, with revenue more than tripling. Revenue from its principal investments soared 55% from second quarter after losing money a year earlier.

Investment-banking revenue fell 31% and financial advisory revenue dropped 47%.

In other words, even more than usual, Goldman is a hedge fund with a smallish investment bank tacked onto the side.  They made better bets than the other guys, but the kind of business that would indicate a recovering economy is still very much in the tank.

Burn it Down and Salt the Earth

| Wed Oct. 14, 2009 2:20 PM EDT

The Wall Street Journal reports that the good times are rolling again:

Major U.S. banks and securities firms are on pace to pay their employees about $140 billion this year — a record high that shows compensation is rebounding despite regulatory scrutiny of Wall Street's pay culture.

....Total compensation and benefits at the publicly traded firms analyzed by the Journal are on track to increase 20% from last year's $117 billion — and to top 2007's $130 billion payout. This year, employees at the companies will earn an estimated $143,400 on average, up almost $2,000 from 2007 levels.

I sort of feel like I've run out of things to say about this.  There's an insanity here that's almost beyond analysis.  Wall Street can spark an economic slowdown that misses destroying the planet and causing a second Great Depression only by a hair's breadth — said hair being an 11th hour emergency infusion of trillions of taxpayer dollars — and then turn around and use those trillions to return to bubble levels of profitability within a year.  And they can do it even though the rest of the economy is still suffering through the worst recession since World War II.  It's mind boggling.

Is there any silver lining here?  Probably not, but I'll try: If Wall Street can shrug off the worst recession of our lifetimes as if it's a minor fender bender and get the party rolling all over again in less than 12 months, it means the next bubble is already in the works and its collapse will be every bit as bad as this one.  That in turn means it will almost certainly happen while today's politicians are still in office.  So maybe news like this will finally spur lawmakers to realize once and for all that the financial industry needs to be cut down to size.  Half measures won't do it.  Self-regulation won't do it.  Compensation limits won't do it.  Byzantine, watered-down rules won't do it.  Something like a Morgenthau Plan for Wall Street is the only thing that has even half a chance of working.

Will Congress finally get this?  Probably not.  The financial lobby is just too strong.  But we can hope.

Karzai Revisited

| Wed Oct. 14, 2009 1:06 PM EDT

Matt Yglesias pushes back today on my contention that a counterinsurgency effort in Afghanistan is probably doomed unless the national government is largely accepted as legitimate by the Afghan public.  He's not in favor of a big COIN effort, but:

At the same time, I think [] critics have developed a tendency to drastically understate the extent to which COIN could “work” in Afghanistan.

....I went and looked up the most corrupt countries on earth at Transparency International and [...] Afghanistan, as you can see, is pretty corrupt. That said, it’s not really far out of line with local norms. Sundry other central Asian states join it at the bottom of the barrel. And while it’s true that some of the most corrupt countries are anarchic failed states, the examples of Myanmar and Turkmenistan clearly indicate that establishing effective control over your territory doesn’t at all require you to develop good governance or be respected by the people.

Well, sure, but I don't think anyone is arguing that corrupt states can't be effective.  The difference, though, is that a foreign superpower isn't fighting a war in any of those other places.  That's the issue: not whether corrupt states can "work," but whether a foreign army can successfully fight an insurgency when it's allied with a government that has little local support.  In fact, the success of the surge in Iraq, which Matt mentions, is precisely due to the fact that, corrupt or not, Nouri al-Maliki's government had built up a shaky but workable coalition among Shiites, Kurds, and Sunnis.  It wasn't exactly a shining beacon of good governance, but a combination of bribery, al-Qaeda overreach, sectarian cleansing, and a ceasefire from the biggest opposition group opened up just enough space for a counterinsurgency operation to work.  Without at least that minimal level of support for the Maliki government, the surge almost certainly would have failed.

In the modern era, as far as I know, the track record of success for counterinsurgencies led by foreign powers fighting alongside unpopular local governments is approximately zero.  In fact, I'm pretty sure it's exactly zero.  So the question isn't whether Karzai is corrupt — of course he is — the question is how wide his support is.  That's actually a bit of a tricky question, especially in the fractious tribal politics of Afghanistan, but it's the question to ask.  Corruption is just a symptom, not the core problem.