Kevin Drum - May 2010

Sarah Palin's Neighbor

| Wed May 26, 2010 5:56 PM EDT

In case you missed it because you actually have a life, author Joe McGinniss, who's writing a book about Sarah Palin, has rented the house next door to her. Palin immediately posted a Facebook greeting that included this line: "Wonder what kind of material he’ll gather while overlooking Piper’s bedroom, my little garden, and the family’s swimming hole?" The none-too-subtle insinuation that McGinniss is some kind of pedophile is vintage Palin, and undeniably disgusting.

Still, I have to wonder: am I the only lefty around who finds McGinniss's action a little disturbing? McGinniss obviously isn't breaking any laws, public figures have very little expectation (legal or otherwise) of privacy, and digging deep for book material is what any good journalist should do. Still. It seems a little over the top. Am I being too squeamish, allowing my personal conviction that even politicians deserve a certain zone of privacy to override my better judgment? In the age of Oprah, am I just a dinosaur? Or is McGinniss in fact crossing a line here? Comments?

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Healthcare Reform Won't Hurt State Budgets

| Wed May 26, 2010 3:44 PM EDT

This should be old news, but since a lot of people still don't get this it's nice to see it getting front page treatment from the Washington Post:

The federal government will bear virtually the entire cost of expanding Medicaid under the new health-care law, according to a comprehensive new study by the Kaiser Family Foundation that directly rebuts the loud protests of governors warning about its impact on their strapped state budgets....Governors of many of those states have predicted fiscal calamity for their budgets, and some have cited the Medicaid expansion in the suits they have filed against the new law, saying it violates their states' rights.

But the Kaiser study released Wednesday predicts that the increase in state spending will be relatively small when weighed against the broad expansion of health coverage for their residents and the huge influx of federal dollars to cover most of the cost.

Even the small increase in Medicaid costs may be canceled out by the savings states will enjoy from no longer having to subsidize the uncompensated care of uninsured people who will be on Medicaid, study co-author John Holahan said. "It's absurd," Holahan, an Urban Institute researcher, said of the states' doom and gloom predictions. "They come out ahead. It's just crazy."

Bottom line: the federal government is paying more than 95% of the cost of the Medicaid expansion that's included in the healthcare reform bill. In some states the federal share is even higher. Total state spending on Medicaid will go up only 1.4%, a grand total of about $4 billion per year to cover more than 11 million people. What's more, it might be even better than that: as Holahan says, states might find that in the end they come out in the black on overall healthcare costs since their spending on care for the uninsured will go down. Keep this in mind the next time your state's governor starts wailing about healthcare reform and how it's going to bankrupt your state. It won't. The full report is here.

Why Did North Korea Do It?

| Wed May 26, 2010 1:09 PM EDT

I haven't been posting about the North Korean situation, but I've been following it with considerable interest ever since the start. And the biggest question all along has been: Why? Even by North Korean standards, torpedoing a South Korean ship is nuts. What on earth were they thinking? In the Financial Times today, Christian Oliver runs down the theories:

  1. Revenge
  2. To smooth the succession
  3. An internal power struggle
  4. A reversion to hardline ideology
  5. Breakdown of command in North Korea
  6. To distract from economic woes at home
  7. Bitterness about G20 meeting in Seoul

I have to say that I find all of these unsatisfactory, and I haven't read anything better anywhere else. It's just weird as hell. Even granted that North Korea acts like a mental case much of the time, this doesn't make sense. There's simply nothing good that can conceivably come out of this incident from their point of view.

So: my guess is that it was an accident. Or perhaps some combination of #3 and #5, a rogue commander who fired the shot because of some kind of chaos in the chain of command. Then, once the deed was done, we got all the usual North Korean bluster and delusion that we've come to know and loathe over the past few decades.

And then there's another obvious question: just how long is China willing to put up with all this? Sharon LaFraniere had a pretty good rundown of the Chinese dilemma a few days ago in the New York Times, and their unwillingness to put serious pressure on North Korea mostly seems to come down to a combination of inertia and a fear of massive refugee flows across the border if North Korea collapses. This, again, is something I've never quite bought: refugee flows can be managed with international help, and in any case they wouldn't be any kind of existential threat to China. Propping up North Korea hardly seems to be in China's self-interest any longer, and if that's the case I'll bet they eventually overcome their inertia and decide that the refugee problem can be managed after all. The only question is just how long "eventually" is.

Wall Street's Temper Tantrum

| Wed May 26, 2010 12:29 PM EDT

John Heileman’s recent New York piece on financial reform tells us, among other things, that "it’s hard to find anyone on Wall Street who doesn’t speak of Obama as if he were an unholy hybrid of Bernie Sanders and Eldridge Cleaver." It's always fun to link to someone else's rant, so here's James Kwak's response:

Wall Street CEOs like to think they are the adults, the big men in the room, the ones who know how the world works. Well, you know what? They screwed up their own banks, the financial system, and the economy like a bunch of two-year-olds. Every single major bank would have failed in late 2008 without massive government intervention — because of wounds that were entirely self-inflicted. (Citigroup: holding onto hundreds of billions of dollars of its own toxic waste. Bank of America: paying $50 billion for an investment bank that would have failed within three days. Morgan Stanley and Goldman Sachs: levering up without a stable source of funding. Etc.) The financial crisis should have put to rest for a generation the idea that the big boys on Wall Street know what they’re doing and the politicians in Washington are a bunch of amateurs. Yet somehow the bankers came out of it with the same unshakable belief in their own perfection that they had in 2005. The only plausible explanation is some kind of powerful personality disorder.

It really is pretty mind boggling. I mean, obviously I get the fact that no one likes government interference in their business, no one likes being regulated, no one likes to make less money, and everybody has a million excuses for their own mistakes. But considering the epic FUBAR the bankers laid at our feet and the Obama administration's obvious efforts to protect them from the worst of the populist backlash by keeping the financial reform bill toned down — well considering that, and considering the fact that even bankers ought to occasionally take the long view and understand that better rules might be in their enlightened self interest, you'd think they could restrain themselves a bit. But no. I guess there's a reason that their nickname is Big Swinging Dicks.

Quote of the Day: Bipartisanship

| Wed May 26, 2010 12:09 PM EDT

From Sen. Lamar Alexander, commenting on the fact that no progress was made during a "good and frank" meeting yesterday between President Obama and congressional Republicans:

We simply have a large difference of opinion, which [will] not likely ... be settled until November.

Well, I'd say he's half right.

Federal Spending and Private Investment

| Wed May 26, 2010 11:35 AM EDT

Tyler Cowen points today to some interesting new research on government spending. Three researchers at Harvard took a look at what happened to federal earmarks when a state's senator or congressman took over chairmanship of a key appropriations committee. Answer: the state's earmarks went up a bunch (by 50% for senators and 20% for House members). No surprise there. So what happens to economic activity after this bounty starts pouring in? From the paper:

Seniority shocks result in economically and statistically significant declines in firm capital expenditures. Across all measures of seniority, the declines are large and highly significant....The coefficient implies a 1.2% drop in scaled capital expenditures []. Since firms have average capital expenditures of 8 percent of assets, Senate chairmanship causes a roughly 15 percent reduction in the representative firm’s capex.

Italics mine. So when federal spending goes up in a random way (committee chairmanships are generally unrelated to broader economic activity), capital expenditures by private industry goes down. A lot. Researcher Joshua Coval takes a crack at explaining why:

Some of the dollars directly supplant private-sector activity — they literally undertake projects the private sector was planning to do on its own. The Tennessee Valley Authority of 1933 is perhaps the most famous example of this. Other dollars appear to indirectly crowd out private firms by hiring away employees and the like. For instance, our effects are strongest when unemployment is low and capacity utilization is high. But we suspect that a third and potentially quite strong effect is the uncertainty that is created by government involvement.

Italics mine again. These are interesting results. But they need some followup. Even if you believe that government spending crowds out private spending in a serious way, the effect here is enormous. How can you possibly get an 8% drop in private sector capital expenditures from the relatively trivial increase in federal spending that comes from earmarks? There has to be something more to this story.

On the other hand, it makes perfect sense that whatever effect there is, is more pronounced when unemployment is low. That's exactly when you'd expect government spending to crowd out private sector spending. However, it probably doesn't tell us much about current stimulus spending, which is taking place in an environment of zero-bound monetary policy and extremely high unemployment. We haven't had an environment like that since the Great Depression, which means that empirical evidence one way or the other on this kind of federal spending is just very hard to come by. I'd certainly be surprised if the 2009 stimulus bill provoked any significant private sector crowding out.

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What Went Wrong in the Gulf?

| Wed May 26, 2010 1:47 AM EDT

So what caused the Deepwater Horizon oil rig to fail? Here's the latest:

BP previously told investigators that a "negative pressure" test, which checks for leaks in the well, was inconclusive at best and "not satisfactory" at worst. But in the meeting Tuesday, BP went further, saying the results were an "indicator of a very large abnormality" but that workers — unnamed in the memo — decided by 7:55 p.m. that the test was successful after all. That may have been a "fundamental mistake," BP's investigator said in the meeting, according to the memo.

Next up is a "top kill," in which mud is injected into the well in order to plug the broken pipe. According to one expert, "There's always a trade-off between making it better and making it worse. This probably has the least amount of risk of making it worse." Why does that not make me feel especially comforted?

Global Financial Reform Update

| Wed May 26, 2010 1:30 AM EDT

The Washington Post reports that efforts to coordinate global financial reform aren't going so well. Among other things:

European diplomats are alarmed by a measure, introduced by Sen. Susan Collins (R-Maine), that they say could force European financial companies to shift significant amounts of capital to their U.S. subsidiaries to cover potential losses....Geithner has said that new capital standards are at the heart of reforming the global banking system, and the financial overhaul bill on Capitol Hill largely defers to the Basel committee to set the standards. Some Europeans complain they have found it hard to coordinate with the United States over the Basel process.

Well, look: Collins's amendment requires banks to hold more capital. That will indeed force European banks to shift capital to their U.S. subsidiaries, but only if European negotiators insist on the new Basel accords having toothless capital standards. Conversely, if they adopt standards similar to Collins's, then European banks will simply need to carry similar levels of capital every place they do business.

Now, maybe European banks don't like Collins's capital standard and want Basel to adopt a looser one. What happens then?

The outcome, for instance, could be very different ways of banking in New York and the financial capitals of Europe, prompting leading American firms to shift their riskiest activities overseas beyond the purview of U.S. regulators.

And that right there is the whole enchilada. If we adopt tough rules and banks decide to move their risky activities in Europe to take advantage of their looser rules, then Europe will be taking a big chance. But they'll be doing it with their eyes open. They can reduce that risk anytime by adopting stricter standards. Every country and every region always has that option.

I'm pretty much convinced that the Basel standards are almost certain to be inadequate unless the rest of the world is essentially forced to accept tough standards. And the only effective way to make that happen is for the United States to adopt strict standards first, thus giving Europe an implicit choice: agree to make strict standards global or else accept becoming the worldwide hub for risky investment. Hopefully they'll choose the former.

Are We Japan 2.0?

| Wed May 26, 2010 12:46 AM EDT

A balance sheet recession is different from a normal recession. It's caused not by inventory cycles or monetary manipulation by the Fed, but by a debt fueled boom that eventually bursts and leaves the economy in the doldrums until debt levels get back to normal. That's the kind of recession we went through last year, and it's the kind of recession that wracked Japan in 90s. Mike Konczal points us today to a paper written a few months ago by Richard Koo of Nomura Research that compares what we're going through today to Japan's earlier experience:

As Koo argues, the economy will not enter self-sustaining growth until the private sector balance sheets are repaired. Even with zero interest rates, there are no borrowers of newly generated savings and debt repayments. With no borrowers, the economy will continue to lose aggregate demand.

And how long will it take for balance sheets to get back to normal? Here's Koo on Japan's experience:

With their balance sheets in a shambles, people had no choice but to reorient their economic priorities from the usual profit maximization to debt minimization in order to put their financial houses in order. This shift, in turn, nullified the effectiveness of economic theories and
policies based on the assumption that the private sector always seeks to maximize profits.

....Those whose balance sheets are underwater will try to pay down debt as quickly as possible to restore their credit ratings, regardless of the level of interest rates. By 1995 Japanese interest rates were almost at zero, but instead of borrowing more, Japan’s corporate sector became a net repayer of debt until 2005 — fully 10 years later — as shown in Exhibit 4....No economics or business textbook recommends that the private sector pay down debt when interest rates are at zero, but that was precisely what happened in Japan for a full ten years.

Exhibit 4 is below. Japan's property bubble was roughly similar in size to ours, and their recession lasted 16 years. Between 1995 and 2005, net corporate borrowing was negative despite interest rates of zero percent. Monetary policy simply lost traction: you can't force businesses that are deeply in debt to borrow even more no matter how cheap you make it. So what to do? Koo argues that the only answer is fiscal stimulus and plenty of it, even if that means piling deficits on top of deficits. "Now that the experience of Japan is available for anyone to see," he says, "there is no reason for the U.S. to repeat the same mistake....The U.S. government should not embark on fiscal retrenchment until it is absolutely certain that the private sector is healthy enough to borrow and spend the funds left unborrowed by the government."

Why Now for DADT Repeal?

| Tue May 25, 2010 6:29 PM EDT

OK, so what caused Barack Obama to change his mind and actively press for repeal of DADT this year? Offhand, I'd say there are three leading contenders:

  • Nothing changed his mind. His plan all along has been to do it this summer or next, and he was willing to stay quiet and accept the hostility of advocacy groups before this because he knew that a bit of discretion on his part offered the best chance for enacting permanent change with broad public support. This is more or less Mark Kleiman's view.
  • Strong pressure from the gay community forced his hand. In other words, this is an example of that old FDR legend where he wants to do something, but tells his supporters they have to "go out and make me do it." (It's worth noting that this apocryphal story1 is pretty popular among liberals as a story, but we all sure hate it in practice.)
  • Obama (and congressional Democrats) are afraid they're going to lose their majority in November and will then lose their chance to push this through for good.

Because I'm a milquetoast centrist sellout, I'm going to punt and say that the answer is all three. Obama really has planned to do it all along during his first term but without a more specific timetable; the pressure from gay and lefty advocacy groups helped push congressional leaders into action and they in turn pressured Obama; and there was probably some additional political calculus related to the possibility of Democrats losing their House majority in November. That's my guess, anyway.

1At least, I assume it's apocryphal. I managed to find a reference to it from I.F. Stone in 1969 once, but I've never been able to track it back any further than that.