Kevin Drum - December 2009

Obama's Economy

| Fri Dec. 11, 2009 11:10 AM PST

Brad DeLong continues to be puzzled by the Obama administration's unwillingness to aggressively pursue more expansionist fiscal policies:

Yes, uncertainty is enormous. And any one policy might not work. But that any one individul policy initiative might not work is not an argument for not trying anything — unless you are happy if things develop according to the current-policy forecast and we see an unemployment rate between 9% and 11% for the next year and a half at least.

Thus if I were in the administration I would be trying everything:

He follows this with a list of suggestions, including several Fed actions, a bunch of spending actions, and some regulatory stuff.  So given the weak state of the economy, and the fact that unemployment promises to stay high for 4-5 years, why isn't Obama's team pushing for any of these things?

It's a good question, but I think the answer is pretty simple.  However, it requires you to ignore what people are actually saying.  I imagine that no one in the administration will ever admit this, even off the record, but the main reason for inaction is almost certainly because they believe there's zero chance of getting any of this stuff done.  Politically, then, there's nothing but downside here: yet another long, bruising battle with both Congress and the Fed, ending in total defeat.  If everyone in the administration were utterly convinced that the economy was completely sunk otherwise, they might risk that.  But no one in his right mind will risk it for anything less.

The key thing to remember here is simple: the original stimulus bill passed the Senate 60-38.  That was for a bill passed a month after inauguration, while the economy was still in deep recession, and that was supported by virtually every economist with an IQ higher than Donald Luskin.  Given that, what are the odds of passing anything significant now?  The only thing that prevents the answer from being negative is the laws of probability.

So we'll get a little playing around the edges, maybe with the remnants of TARP, and maybe the Fed will do a bit of tinkering too.  But unless there's another crisis that sends the world into a tailspin, a little bit of uncertainty combined with the same Republican intransigence that's marked the entire previous year will prevent any serious new action.  Welcome to America.

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Quote of the Day: You Talkin' To Me?

| Fri Dec. 11, 2009 10:24 AM PST

From Olympia Snowe, on the idea of allowing 55-64 year-olds to buy into Medicare:

I can’t see it. I am talking to a lot of my providers this afternoon and I know they are mighty unhappy.

Maybe she should try talking to some of her constituents instead?

Are Democrats Sunk?

| Thu Dec. 10, 2009 11:31 PM PST

A friend of mine from Virginia forwarded an email to me today from the NRCC.  It started like this:

After the spending spree the Democrats have gone on in 2009, you better believe there will be a backlash in 2010. As all Americans are tightening their belts to weather the Pelosi Recession, her Democrat puppets just voted to extend their credit limit. What they don't realize is that their bills are past due and next fall, we'll have the opportunity to collect by sending them home. Etc. etc.

I laughed it off, but he wasn't having any:

Not to be too presumptuous, but you might want to share the fundraiser (or parts of it) with your readers because Democrats better get off their butts soon and start pushing back and getting a lot more energized or we are going to get our clocks cleaned in 2010.

The main reason Bob McDonnell won in Virginia last month was Democratic exhaustion. After the 2008 election, most Virginia Democrats were emotionally and financially exhausted. We were in such a stupor we foolishly (and quite lazily) allowed Creigh to get the nomination. I can't tell you the number of usually-politically-plugged-in friends who were calling me a month before the election asking me who were the Democratic nominees for Lt. Governor and Attorney General.

We can't afford for that to be the prevailing national mood among Democrats in 2010. There is way too much at stake and it's time to rally the Democratic troops, left, right and moderate. We really cannot afford to allow the Republicans to seize control of either the House or the Senate but if we behave like Virginia Democrats just did, that will almost surely be the case.

Comments?  Is lefty obsession with the public option going to torpedo Dems in 2010?  Or will everyone manage to get energized in time for the midterms?  I live in California, where elections are almost all preordained, so it's hard for me to judge.  What's it like in the rest of the country?

Razzle Dazzle From Goldman

| Thu Dec. 10, 2009 6:13 PM PST

Goldman Sachs plans to restructure its bonus payouts this year:

With a resurgent Goldman set to award billions of dollars in bonuses — a trove that could rival the record payouts of the bubble years — the bank said that its 30 most-senior executives would be paid in the form of a special stock, rather than in cash.....This year, [CEO Lloyd Blankfein] and other top executives will receive bonuses in the form of what Goldman called “shares at risk,” or stock that cannot be sold for five years and can be retracted if the executive does something reckless or risky that hurts the firm.

Can I just take this opportunity to say how underwhelmed I am with this?  Let me count the ways.  (1) The amount of the bonuses hasn't changed a whit, only their form. (2) The whole point of changing a compensation plan is to change incentives.  Announcing a new bonus plan at the end of the year does nothing to change incentives unless Blankfein invents a time machine too. (3) It's only for the top 30 executives.  What about the traders? (4) It's apparently only for this year. See #2.  (5) The official definition of reckless ("materially improper risk analysis") is so stringent that there's really no chance it will ever apply to anyone.

So what's the real point of this little kabuki play?  Dennis Berman translates here.

El Niño and the Deniers

| Thu Dec. 10, 2009 1:47 PM PST

The last major El Niño event occurred in 1997-98 and it produced a big temporary spike in global temperatures.  This has given climate deniers like George Will a field day: if 1998 was hotter than 2008, global warming must be a hoax!  This is ridiculous, of course: El Niño events happen every five years or so (the 2004 El Niño was a smallish one) and choosing one of those years as your baseline for temperature activity is like choosing 2000 as a baseline for dotcom activity.

Well, El Niño is back, and this year's version looks like it's going to be at least a moderate strength occurrence lasting through next summer.  This means that temperatures are likely to spike over the next 12-18 months, and that in turn means that even with the sun in a deep solar minimum, next year might set a new warming record:

The current El Nino is forecast to get stronger, probably pushing global temperatures even higher next year, scientists say. NASA climate scientist Gavin Schmidt predicts 2010 may break a record, so a cooling trend "will be never talked about again."

Unfortunately, this is wishful thinking.  If 2010 really is hotter than 1998, I suspect that deniers will suddenly discover the virtue of not relying on a single year that's strongly affected by decadal oscillations.  They're clever that way.

Getting to Yes

| Thu Dec. 10, 2009 11:30 AM PST

David Frum, who has been estranged from the hard-right wing of the Republican Party for a while, explains what their "Party of No" strategy has produced:

1) Instead of a healthcare reform to slow cost increases, Democrats in the Senate seem to be converging upon an expansion of Medicare to include age 55-64 year-olds....Republicans could have been architects of improvement, instead we made ourselves impotent spectators as things get radically worse. Plus — the bad new Democratic proposal will likely be less unpopular with voters than their more promising earlier proposal. Nice work everybody.

2) House and Senate conferees last night rejected a proposal to deny EPA funds to enforce its new powers over greenhouse gasses. So instead of an economically rational approach to carbon abatement — a carbon tax or even a cap-and-trade system stripped of the abuses and boondoggles attached to it by House Democrats — we’re going to have the least rational approach: bureaucratic enforcement.

The furious rejectionist frenzy of the past 12 months is exacting a terrible price upon Republicans. We’re getting worse and less conservative results out of Washington than we could have negotiated, if we had negotiated.

Roughly speaking, I think Frum is right.  The Republican strategy is high-risk/high-reward.  If it works, then no legislation is passed and they get everything they wanted.  But if it doesn't, they get a far worse deal than they could have gotten if they'd bargained.

But I'd a few caveats to Frum's specifics.  First, the healthcare bill could have been improved only if Republicans had proposed serious cost-control ideas within the basic Democratic framework.  After all, Democrats won the election, and the very least they expect is to be able to dictate the basic framework.  But it's not clear to me that Republicans even have any ideas along those lines.  It's possible that they could have bargained for, say, some tort reform concessions, but how else would they have cut costs?  There's no one in the GOP seriously in favor of sticking it even harder to doctors, insurance companies, Big Pharma, or the elderly.  So what would they have proposed?  Their pet ideas (HSAs, gutting state regulations, etc.) don't really fit within the Democratic framework, and to be honest, their support for these ideas has always been so ephemeral and opportunistic that I'm not sure they care about them very much anyway.  It's hard to believe that they genuinely believe in any of this stuff enough to bargain their votes away for it.

The EPA endangerment ruling is a different kettle of fish.  My sense is that the Obama administration has no real desire to use the Clean Air Act to regulate greenhouse gases.  The reason they've moved ahead quickly on the endangerment finding isn't because they really want to implement it, but precisely because they think it's a good stick to get some Republican support.  The message is: you might not like cap-and-trade, but if you scuttle it you're going to get something worse.  So why not work with us?

So far, then, conservatives haven't really lost anything on this front.  They're just being confronted with some hardball politics.  As with healthcare reform, though, I wonder what Republicans have to offer.  It's true that cap-and-trade was originally a conservative idea that was largely adopted by liberals after it proved itself in the case of acid rain, which means that theoretically Republicans ought to be able to support it.  But the "boondoggles" that have been attached to it haven't really been ideological.  They've been cave-ins to corporate and regional interest groups.  What are the odds that Republicans would help resist that kind of pressure?

Still, Frum does have a point: Democrats are genuinely anxious to have a few more votes for both the healthcare bill and the climate bill, and I'm pretty sure they'd be willing to bargain away a fair amount in exchange for a vote.  So I'm curious: within the basic Democratic framework of these two bills, what kind of deals does Frum think Republicans could plausibly make that would be worth trading their vote for?  This is a real, not a rhetorical or snarky, question.  Given the current state of the conservatism,1 it's hard to see what they'd be.

1Which, admittedly, is Frum's whole point.  There are no deals to be made until conservatives start getting serious about governance again.

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Watching the Finance Lobby at Work

| Thu Dec. 10, 2009 10:42 AM PST

After following the sausage-tastic construction of healthcare reform over the past year, no one should be surprised to learn that financial regulatory reform is likely to be even harder to get right.  After all, the finance lobby is bigger and more pervasive than the medical lobby.  What's more, they benefit from the fact that they frequently lobby for things so arcane that no one really understands them.

Take derivatives.  (Please.)  One of the key changes that reformers want to see is a regulation that requires credit derivatives to be traded on an exchange, just like stocks and pork belly futures.  It wouldn't solve all the world's problems, but it would add a layer of transparency to the derivatives market that would help regulators keep a better handle on brewing problems.

Barney Frank agrees, and so the House bill includes a section that requires credit derivatives to be traded on an exchange.  Except there's an exception for "end users" who want to buy things like currency hedges as part of their day-to-day business, not as a financial speculation.  That's basically fine.  But the exception was worded in a way that would allow pretty much anyone to claim they were an end user doing real hedges, not speculation.  So after a big fight the wording was changed.  Hooray!

But as Nick Baumann reported the other day, the Project on Government Oversight says that a subsequent amendment may gut the rule yet again.  It allows derivatives to be traded on either an exchange or a "swap execution facility."  Mike Konczal explains further:

First the definition of a swap execution facility has been expanded to include “a person” (different from the “or entity”). It’s also expanded to an “or trading” definition, and includes voice brokerage firms....This could, quite simply, be a telephone over which two people trade a derivative (with one person declaring himself to be the exchange?).

....[Another sentence] allows an intermediary to execute a swap, ignoring the section 2(k) which is the meat of the reform, as long as the swap is recorded somewhere. Now we already have, from above, that a swap execution facility can be something other than the exchange. This is a rule that guts the regulation right out the door, and for no apparent benefit to reform. Many of these alternative swap facilities will be owned by the banks, so it won’t necessarily force the price transparency that has been promised. To trust regulators to simply do the right thing is naive at best when the ability to follow fixed rules is available.

Obama in Oslo

| Thu Dec. 10, 2009 10:11 AM PST

Ross Douthat thinks that Barack Obama threaded the needle pretty decently in his Nobel acceptance speech today:

He didn’t give the address that American neoconservatives would have written for him, obviously, but pieces of that speech showed up — the defense of the war in Afghanistan and the idea of just war in general; the Bush-ian, “make no mistake, evil does exist in the world” line; the insistence that “the United States has helped to underwrite global security for sixty years, with the blood of our citizens and the strength of our arms.” He didn’t give a Gandhian ode to nonviolence, or an activist’s paean to human rights, but those threads were woven in as well.

He talked up international institutions, promised action against climate change, and took credit for ordering the closing of Guantanamo (one of the few applause lines, inevitably), but at the same time he praised the use of force for humanitarian purposes, and reserved the right to act unilaterally in America’s interests. He defended diplomatic outreach to Iran, called on the world to put pressure on Iran’s nuclear program, and promised that the world would stand behind Iran’s protestors — and he made it all run smoothly together, in rhetoric if not in reality. And he managed to co-opt everyone from M.L.K. to J.F.K. to Nixon to John Paul II and Reagan along the way.

I didn't listen to the speech, but I've read it and I mostly agree.  (Here's a transcript.)  Frankly, though, I really don't think neocons have much to complain about even if Obama didn't use the opportunity to announce construction of a new generation of nuclear missiles or something.  Given that he was, after all, accepting a peace prize, it was a surprisingly robust defense of war and America's military role in the world.  Surprisingly Bushian, really, with one obvious caveat: among the many wars he mentioned as necessary and justified, there was one that was deliberately conspicuous by its absence: Iraq.  So neocons have that to gripe about if they're in a griping mood.  (And when are they not?)

One additional thing that struck me, though, was that the speech seemed pretty mechanical.  Like his West Point address.  It's possible that this is more an artifact of reading the transcript vs. hearing the speech, but it sounded to me a little too obviously like he was trying to thread a needle.  There wasn't any single place where I felt like he laid down a marker and really spoke about something he believed deeply in.  Dan Drezner made (I think) a related point: "Pick a paradigm, and you can find a sliver of the speech dedicated to its theoretical propositions."  But he also explained it: "Doesn't this imply that the speech was logically contradictory?--ed.  No, it implies that the world is a hell of a lot more complex than any of these theoretical approaches.  Alas, knowing when to apply each of these worldviews is more art than science."

And there's another parallel between Obama's West Point speech and this one: both times he told his audience (i.e., the one actually in the room with him) something they didn't want to hear.  At West Point he stressed that we have limited resources for war when those resources are desperately needed at home.  In Oslo he stressed that wars aren't going away and the United States is going to keep fighting them.  Is this a demonstration of bravery?  Or an indication that his real audience is always the one on TV?  Either way, I'd say it worked better this time than it did last week.

Tired of Bankers?

| Wed Dec. 9, 2009 11:29 PM PST

General Electric CEO Jeffrey Immelt spoke at West Point today:

I think we are at the end of a difficult generation of business leadership, and maybe leadership in general. Tough-mindedness, a good trait, was replaced by meanness and greed — both terrible traits. Rewards became perverted. The richest people made the most mistakes with the least accountability. In too many situations, leaders divided us instead of bringing us together.  As a result, the bottom 25% of the American population is poorer than they were 25 years ago. That is just wrong.

John Gapper comments:

Mr Immelt’s remarks are the latest — perhaps the strongest — among business and financial leaders calling for self-restraint and a change in attitude. Such appeals have fallen on deaf ears.

....Many people — probably most — believe that bankers’ bonuses are profoundly unfair, especially since they were not curtailed in the wake of the financial crisis. Meanwhile, bankers regard themselves as victims of  populism kindled by politicians and the media.

The significance of Mr Immelt’s speech, I think, is that the leader of one of the biggest companies in the US is willing to say publicly what many non-business people feel. Leaders in non-financial industries have worried since last year about being tainted by the behaviour of bankers. Now, it seems, they are running out of patience.

Well, we can hope.  But I hope Immelt keeps in mind that it's not just bankers.  They may be the worst offenders, but they're not the only ones.

Taxing Banks

| Wed Dec. 9, 2009 4:55 PM PST

A couple of days ago I wrote about Britain's proposed super-tax on big bank bonuses.  Today, via , I see that it would work a little differently than I thought:

Banks will be charged a 50 percent tax on 2009 bonuses of more than £25,000, or $40,800. It will be imposed on the pool of bonuses paid by a bank, rather than individual payments, and it will be paid by the bank — not by the recipient of the bonus. It will take effect immediately and will affect banks’ 2009 profits.

For what it's worth, I like this approach better than an individual tax because it gets more directly at what the immediate outrage is.  Basically, the banking system was about to go under last year as a result of its own folly and was rescued by the government.  With a couple of exceptions, however, instead of outright nationalizing the weakest banks, the rescue plans in both Britain and the U.S. were aimed at boosting bank profits and letting them earn their way back to solvency.  You can argue about whether this was the right approach or not, but it's the approach we took.  Given that, it makes sense to give banks a strong incentive to retain their outsize earnings and use them to strengthen their balance sheets instead of paying out huge bonuses to their traders and executives.

Of course, this also puts paid to the whole idea that the tax might be a human rights violation.  Unless you want to argue that a bank has human rights.  Do you?