Kevin Drum - March 2010

Online Advertising Watch

| Wed Mar. 17, 2010 10:25 AM EDT

After sitting through an SXSW panel about magazines on the iPad, Felix Salmon has a brainstorm about online advertising:

After the panel ended, I got to talking to one attendee about bridal mags, and it struck me that the bridal category could be one of the first to be truly revolutionized by the iPad. After all, bridal mags are quite unashamedly bought for the advertising content, rather than any supposedly independent editorial: the idea is that brides-to-be will flick through them, looking carefully at pretty much every ad, searching for that idea which inspires them to spend thousands of dollars on something for their wedding.

On an iPad, that experience can become much more immersive and interactive: brides could spend days if not weeks flicking through the offerings of all the different advertisers, adding various products and ideas to their virtual scrapbooks, finding local retailers for anything they're interested in, and firing off carefully-curated scrapbooks, in PDF form, to their wedding planners, parents, bridesmaids — even occasionally the fiancé too. I don't know how much inclusion in that kind of an app would be worth to an advertiser, especially one who jumped in and created deep wells of content rather than simply repurposing their print ads. But clearly there's an opportunity here for brands to really connect with readers in a new and very exciting way.

Maybe! But I wonder. If the big draw of these magazines really is advertising, won't some bright soul just start up a bridal advertising aggregation site that skips all that annoying editorial stuff in the first place? It would be nothing but a great browsing experience for ads, and since it could be run by a staff of one, the cost to advertisers would be tiny. If this took off, it could be the death of bridal magazines, not their rebirth.

Unless that editorial content turns out to be more important than we think. Upcoming brides, what say you?

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Why is Obama Ignoring the Lehman Scandal?

| Tue Mar. 16, 2010 10:06 PM EDT

Mike Konczal thinks the Lehman Brothers accounting scandal is being wasted:

One thing that I’m finding surprising is that the President and the Treasury Secretary aren’t out there beating the hell out of this story. For financial reformers, this report should be like a “Get 2 Free Financial Reforms” monopoly-style card falling out of the sky. Why isn’t the administration thumping the hell out of this story?

I remember when Anthem Blue Cross Blue Shield decided to raise rates 39% in the middle of a recession and Obama immediately got on the point that this is exactly why we need comprehensive health care reform. I remember thinking at the time “If a giant scandal blows up in the financial sector, I bet he’ll go equally as hard as to why this proves we need comprehensive financial reform.”

Oddly, that isn’t happening. Senator Ted Kaufman is giving a speech today about how this fraud calls for tougher regulation, which is fantastic. Why isn’t the administration?

Mike suggests that part of the answer is that Tim Geithner is compromised by his past presidency of the New York Fed. After all, he can hardly scream blue murder about Lehman's bookkeeping outrages when he was the guy who was supposed to be overseeing their bookkeeping in the first place.

There's probably something to this. Sellout Obama apologist that I am, though, I think there's another, less sinister possibility: the White House wants all its ammunition focused on healthcare right now. They'll spare a few words on other topics here and there, but basically this is not the week for anything to push healthcare reform off the front page. If it passes the House this weekend, however, financial reform probably moves to the top of the list when Obama's overseas trip is over.

At least, I hope so.

Our Apathetic Investor Class

| Tue Mar. 16, 2010 2:11 PM EDT

Atrios today:

I think the reaction to the Lehman scandal (not particularly strong generally) is very telling. The investor class should, much more than me, care that a major company was engaged in accounting fraud and should worry, much more than me, that other companies are doing the same. That they aren't says a lot about how the game really works.

It's true. When it comes to the general public, the lack of interest is pretty understandable: Lehman's collapse is old news, the whole "Repo 105" scam is hard to explain, and everyone already assumes that Wall Street bankers are a bunch of crooks anyway.

But the investor class is a different story. They understand Lehman's accounting trick perfectly well, and even the ones that never invested with Lehman know that this same kind of thing can bite them in the ass if someone else does it.

So why don't they care more? It's obvious why banks don't want more banking regulation — who wants to be regulated, after all? — but there are lots of wealthy investors out there who ought to be screaming for it. But they don't seem to be. Part of this might be a result of the rentier class solidarity I mentioned earlier today, but it's hard not to think that all the government bailouts and Fed programs are part of it too. Basically, rich investors just didn't lose enough. When the banks got bailed out, a lot of them did too. So they aren't really all that angry about what happened. And anyway, they might want to use a similar scam themselves someday. Memories are short and Congress is powerless, after all. It's every mogul for himself.

China's Empty Threat

| Tue Mar. 16, 2010 1:13 PM EDT

What should we do about China? The basic problem is simple: China runs a huge trade surplus — exporting way more stuff to the rest of the world than they import back — and that means the rest of the world runs a huge trade deficit with them. That includes the United States. And for us, the problem is even worse because we also run a big trade deficit with OPEC countries in order to satisfy our boundless thirst for oil. What to do?

In the case of oil, there's not much to do except use less of the stuff. In the case of China, however, our trade deficit is largely artificial: it only exists because Chinese goods are so cheap, and they're only as cheap as they are because China manipulates the value of its currency down, which in turn causes the dollar to be overvalued. Dean Baker:

This is of course unsustainable. The only way that this deficit can be corrected is by reducing the value of the dollar....This decision would mean that the United States could finally get its trade deficit down to a manageable level. The trade deficit has been the leading imbalance in the U.S. economy over the last decade. The large trade deficit required very low private savings and/or large budget deficits. This is an accounting identity. If the country is a net borrower from abroad (this is what a trade deficit means), then it must have low national savings. There is no way around this story.

In reality, China is pointing a water gun at our heads. We should beg them to become unhappy with our fiscal and monetary policies and stop investing in Treasury bonds. The improvement in the trade deficit that will result from the fall in the dollar will create ten times as many jobs as any "jobs bill" that President Obama can possibly get through Congress.

Paul Krugman agrees, but takes a different approach to explaining the problem. An undervalued renminbi is a symptom of the real problem, which is that China is buying too many U.S. treasury bills:

Although people don’t always think of it this way, what the Chinese government is doing here is engaging in massive capital export — artificially creating a huge deficit in China’s capital account. It’s able to do this in part because capital controls inhibit offsetting private capital inflows; but the key point is that China has a de facto policy of forcing capital flows out of the country....By creating an artificial capital account deficit, China is, as a matter of arithmetic necessity, creating an artificial current account surplus. And by doing that, it is exporting savings to the rest of the world.

....Notice that I didn’t mention the value of the renminbi at all in this account. It’s there implicitly: a weak renminbi is the mechanism through which China’s capital-export policy gets translated into physical exports of goods. But you want to keep your eye on the ball: it’s the artificial capital exports that are the driving force here.

Both posts are worth reading. Krugman and Baker both agree that China's threat to stop buying U.S. treasuries is not only hollow, it's something we should actively favor. If they started dumping their U.S. assets, China would lose money on the deal and the dollar would fall in value, which would help correct our trade deficit. What's not to like?

Collective Action in the Boardroom

| Tue Mar. 16, 2010 12:36 PM EDT

Over at his new home at the Harvard Business Review, Justin Fox writes about the relative silence of nonbanking corporate executives on financial regulatory reform:

It's nonfinancial businesses, not financial firms, that create lasting wealth. This is not a moral distinction. It's just the way the world works. The finance sector enables wealth creation, but the innovations that make the economy grow over time come from elsewhere. The financial industry really ought to be seen, and treated, as a servant of the real economy. It's when finance takes the lead and begins to drive economic activity, as it did during the Internet stock bubble of the late 1990s and the mortgage lending craziness of 2003-2007, that we get into big trouble. And even when it's not blowing bubbles, the financial sector can be too successful for the rest of the economy's good.

....So while the rest of the business world needs a financial sector that's healthy enough to extend credit, it also ought to favor a regulatory structure that keeps the financiers from getting too big for their britches. Explicit restrictions on pay tend not to work, so the real goal should be to rein in financial-sector profits, especially the phantom profits that come from inflating speculative bubbles. That's where leverage limits come in, and restrictions (like the "Volcker rule" that's kinda/sorta included in the Dodd bill) that try to wall off riskier financial activities from those deemed so essential that they're backed up by government guarantees.

Justin argues that this corporate silence is basically an agency problem: Wall Street frothiness is actually good for top CEO pay even if it's bad for business as a whole. True. But I'd add another thing: business executives tend to stick together. Partly this is ideological — they really are a conservative bunch and they really do believe that excessive regulation is bad — and partly it's just plain logrolling. An airline executive might believe that financial sector reform would benefit the airline industry, but he also knows that someday he's going to want help fighting some kind of government regulation of the airline industry. The best way to ensure this is to stick together and oppose government regulation no matter which sector it's aimed at.

You see the same thing at work in healthcare. Most big corporations would benefit from healthcare reform — in fact, they'd benefit from a root-and-branch government takeover of healthcare — but ideologically they don't like the idea, and in any case they don't want to abandon their fellows in the healthcare industry. This kind of tribalism broke down a bit this time around, but not a lot. For the most part, corporate executives either stayed on the sidelines or actively opposed healthcare reform. In the corporate world, it's all for one and one for all.

Deem and Pass Revisited

| Tue Mar. 16, 2010 12:05 PM EDT

I've been mulling over the "deem and pass" strategy a bit more since I wrote about it earlier this morning, and I think it's worth saying again what a bad idea this is. Not because it's unconstitutional or unprecedented, but just because the political optics are so horrible. Here's my best crack at a graphic demonstration. First, take a look at a likely Republican attack ad this fall:

Cue ominous music. Liberal Joe Smith voted for a bloated, big-government takeover of healthcare that spends trillions, balloons the national debt, and puts a federal bureaucrat between you and your doctor [etc.]

And here's the version if the bill moves through the House via deem and pass:

Cue ominous music. Liberal Joe Smith voted for a bloated, big-government takeover of healthcare that spends trillions, balloons the national debt, and puts a federal bureaucrat between you and your doctor....Cue even more ominous music....and then he tried to pull the wool over your eyes by pretending he didn't really vote for it at all. Joe Smith: not just a big-spending liberal, a contemptible, sneaky [add other words from the Newt Gingrich lexicon here] big-spending liberal.

I know that House Democrats aren't much interested in sniping like this from the peanut gallery, but they really need to man up on healthcare. Memories are short, and deem-and-pass probably won't matter a lot by November. But it will matter a bit, and that bit will be entirely negative. Best to bite the bullet and cast your vote proudly.

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The Mullen Doctrine

| Tue Mar. 16, 2010 11:27 AM EDT

Spencer Ackerman reports today on the Mullen Doctrine, unveiled in a speech at Kansas State University earlier this month. Echoing Clausewitz, Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, told his audience that war is diplomacy by other means:

Perhaps Mullen’s most provocative “principle,” as he called it in the speech, is that military forces “should not — maybe cannot — be the last resort of the state.” On the surface, Mullen appeared to offer a profligate view of sending troops to battle, contradicting the Powell Doctrine’s warning that the military should only be used when all other options exhaust themselves. Powell’s warning has great appeal to a country exhausted by two costly, protracted wars, one of which was launched long before diplomatic options had run out.

But Mullen’s aides said the chairman was trying to make a subtler point, one that envisioned the deployment of military forces not as a sharp change in strategy from diplomacy but along a continuum of strategy alongside it. “The American people are used to thinking of war and peace as two very distinct activities,” said Air Force Col. Jim Baker, one of Mullen’s advisers for military strategy. “That is not always the case.” In the speech, Mullen focused his definition of military force on the forward deployment of troops or hardware to bolster diplomatic efforts or aid in humanitarian ones, rather than the invasions that the last decade saw.

Italics mine. To be honest, I'm not sure the American people do think of war and peace as two very distinct activities. America has sent troops into significant combat actions eight times over the past three decades — more depending on what you count as "significant" — which means that the American public is pretty damn used to the idea of troops being sent overseas at virtually the drop of a hat. Sending troops into trouble spots is very much the norm for Americans, not an unusual occurrence. Mullen seems to be acknowledging this more than he is trying to change public perceptions about it.

Now, Mullen tempered his advice by suggesting we shouldn't send troops to war unless and until all the related civilian agencies were ready to go too:

Mullen’s major proposal is that the military should be deployed for future counterinsurgencies or other unconventional conflicts “only if and when the other instruments of national power are ready to engage as well,” such as governance advisers, development experts, and other civilians. “We ought to make it a precondition of committing our troops,” Mullen said, warning that “we aren’t moving fast enough” to strengthen the institutional capacity of the State Department and USAID in order to lift the greatest burdens of national security off the shoulders of the military.

Is this something that mitigates Mullen's seeming willingness to use military force more frequently? I'm not so sure. Partly it's just the same sniping between the Pentagon and the State Department that's been around forever but has become especially acute over the past decade. But it's also partly a positive recommendation that we beef up our civilian capacity so that we can intervene overseas more effectively. Mullen is apparently afraid that lack of civilian capacity will hamstring our ability to use military force in short, intense bursts, something that he thinks we should be better at.

This ought to be more controversial than it is. The Afghanistan and Iraq wars have made it clear that the occcupation phase of wars is as important as the main combat phase, so it makes sense to focus on improving that. At the same time, those wars (as well as Kosovo) have also made it clear just how difficult and resource intensive long-term occupations are. Getting "better" at it will be immensely costly.

So: just how good do we want to be at this stuff? Good enough that we can continue to intervene frequently in overseas conflicts? Or just good enough that we can do a decent job on the rare occasions when we really need to intervene overseas? I'd vote for the latter, but in any case, it's not a decision that should be made without lots of public buy-in in the first place.

Deem and Pass

| Tue Mar. 16, 2010 10:33 AM EDT

If you have a life, you don't care about the subject of this post and have never heard of it. But then there are the rest of us, the people who read (and write!) this blog, and for us the issue of the day is "deem and pass":

After laying the groundwork for a decisive vote this week on the Senate's health-care bill, House Speaker Nancy Pelosi suggested Monday that she might attempt to pass the measure without having members vote on it. Instead, Pelosi (D-Calif.) would rely on a procedural sleight of hand: The House would vote on a more popular package of fixes to the Senate bill; under the House rule for that vote, passage would signify that lawmakers "deem" the health-care bill to be passed.

The tactic — known as a "self-executing rule" or a "deem and pass" — has been commonly used, although never to pass legislation as momentous as the $875 billion health-care bill. It is one of three options that Pelosi said she is considering for a late-week House vote, but she added that she prefers it because it would politically protect lawmakers who are reluctant to publicly support the measure.

For Republicans, this is the latest sign of a liberal apocalypse. Here's Sarah Palin tweeting frantically: "Listen2 MARK LEVIN radio;he argues Obamacare passage plan UNCONSTITUTIONAL (will Dems care about that?) Art. I is clear how bill becomes law"

Well, whatever. Republicans have used this procedural tactic before too, Democrats have challenged it, and the Supreme Court ruled that it was fine. So they're on thin ice both on grounds of partisan hypocrisy and legal fundamentals. Still, it's remarkably tone deaf for Democrats to do this. Like it or not, process has become a big issue as healthcare has dragged along into its second year, and the public really does seem to have grown weary of endless procedural wankery. What's more, there's no benefit. Any Democrat who thinks that Republican attacks this fall are going to be blunted even a smidge because, technically, they voted for the package of fixes, not the main bill, is living in fantasy land.

In fact, it will probably just make things worse. They still will have voted for the Senate bill, but it'll look like they're trying to hide the fact. That's the worst possible tack they can take. For the fence sitters, their best hope is to pass the bill — through gritted teeth if they must — and then come out of the House chamber smiling broadly and proclaiming it a historic advance for ordinary Americans of all incomes etc. etc.

To summarize then: deem-and-pass won't help anyone, puts process back in the news, will give Republicans another free shot at Democrats, and makes individual House members look like cowards. But other than that it's a great idea.

End of Day Roundup

| Tue Mar. 16, 2010 12:55 AM EDT

Late night tab dump:

  • Healthcare. Is California a bellwether for the nation again? From the LA Times: "The state's uninsured population jumped to 8.2 million in 2009, up from 6.4 million in 2007....Among those over age 18, nearly 1 in 3 had no insurance for all or part of 2009, the UCLA researchers found. The ranks of uninsured children also grew."
     
  • The Middle East. Gen. David Petraeus recently dispatched a team to the Pentagon to carry a message: lack of progress in resolving the Israeli-Palestinian conflict is endangering American troops. "The 33-slide, 45-minute PowerPoint briefing stunned Mullen. The briefers reported that there was a growing perception among Arab leaders that the U.S. was incapable of standing up to Israel, that CENTCOM's mostly Arab constituency was losing faith in American promises....The Mullen briefing and Petraeus's request hit the White House like a bombshell."
     
  • Debt Bomb. We all know about the coming wave of option ARM resets and commercial real estate defaults. But in 2012 a huge pile of junk bonds are going to come due too. "With huge bills about to hit corporations and the federal government around the same time, the worry is that some companies will have trouble getting new loans, spurring defaults and a wave of bankruptcies....Even Moody’s, which is known for its sober public statements, is sounding the alarm. 'An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this,' said Kevin Cassidy, a senior credit officer at Moody’s....The result is a potential financial doomsday, or what bond analysts call a maturity wall. From $21 billion due this year, junk bonds are set to mature at a rate of $155 billion in 2012, $212 billion in 2013 and $338 billion in 2014."

And in other news, Federal Express says that my new computer will arrive tomorrow. Hooray! Or maybe not. If I disappear from the intertubes but you hear lots of swearing and broken crockery from the general direction of the Pacific Ocean, you'll know that things aren't going so well.

From the Annals of Laughable Threats

| Mon Mar. 15, 2010 6:16 PM EDT

A bunch of people have already commented on this, but it's hard to resist piling on. On Sunday, Sen. Lindsay Graham warned that if Democrats push through healthcare reform via reconciliation, "it's going to poison the well for anything else they would like to achieve this year or thereafter." Today, Brian Darling of the Heritage Foundation agreed: "If they pull off this crazy scenario they are putting together, they are going to destroy a lot of the comity in the House."

Reasonable guy that I am, I'll concede that there's a colorable argument that Democrats haven't really tried all that hard to be genuinely bipartisan. Still, that pales compared to what Republicans have done. The GOP caucus voted virtually unanimously against a stimulus bill that was 40% tax cuts. They voted against the Waxman-Markey climate bill. They pretended to negotiate for months in the Senate over healthcare reform before Max Baucus finally figured out they weren't serious. Then they voted unanimously against it. Then they did the same thing to Chris Dodd over financial reform. They've held up nominees out of sheer pique. They've filibustered everything in sight, even bills they approve of, just to clog up the Senate calendar. If Democrats float a Mother's Day resolution this year, the GOP will probably filibuster it on the grounds that it doesn't explicitly exclude illegal immigrants.

So what can Graham possibly be talking about? I mean, we're talking about the guy who floated the notion that if Obama agrees to try al-Qaeda suspects in military tribunals then he'll round up Republican support for closing Guantanamo Bay, even though he must know full well that he can't possibly hold up his end of that bargain. The well was poisoned long ago. There's no comity left. Who do these guys think they're kidding?