Kevin Drum - June 2010

Elena Kagan and the Vegetables

| Wed Jun. 30, 2010 10:40 PM PDT

Supreme Court confirmation hearings are little more than figurative jokes these days, but the LA Times tells me that today's questioning of Elena Kagan was literally a joke:

Perhaps no amount of cramming could have readied her for the question asked of her by Republican Sen. Tom Coburn of Oklahoma: Can the government, he wondered, pass a law forcing Americans to eat fruits and vegetables?

To Kagan, at first blush, the question must have seemed absurd, maybe even a joke. "It sounds like a dumb law," she replied off the cuff. Then, realizing Coburn was serious, she segued into sort of the windy, contextual, cautious analysis that she has employed to answer most of the questions asked of her over the last two days.

But she had fallen into Coburn's trap by answering more like the law professor she is than by simply responding like most people would. She never just said: "Of course it can't."

Within hours, a video detailing the exchange was atop the Drudge Report website, hundreds of thousands had viewed it on YouTube, and conservatives were having a field day. Her equivocation fit ideally with the narrative Republicans are trying to fashion during these hearings — a story of a federal government out of control and a Congress running amok.

We are truly ruled by idiots. At least, we will be if Republicans win control of Congress in November. Be afraid. Be very afraid.

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Federal Stimulus, State Sedative

| Wed Jun. 30, 2010 8:03 PM PDT

Over at The Corner, Ramesh Ponnuru recommends a post by Alan Reynolds of Cato:

A recent Washington Post column by Ezra Klein dreamed up a new excuse for the conspicuous failure of Obama’s so-called stimulus plan. Klein argues that the stimulus of federal spending has been offset by the “anti-stimulus” of fiscal austerity by state and local governments.

....But it is easy to identify each sector’s direct contribution to the overall growth rate of real GDP from a St. Louis Fed publication, “National Economic Trends.” State and local government spending was rising during the first three quarters of the recession, and the drop in the fourth quarter of 2008 accounted for just 0.25% of the 5.37% annualized decline in GDP. In the first quarter of 2009, state and local spending subtracted just 0.19% from real GDP, but federal spending subtracted more (0.33%) due to cuts in defense spending. Government obviously made only a minor contribution to the 6.4% drop in overall GDP.

....The table shows that government spending on goods and services had nothing to do with the recovery (transfer payments don’t contribute to GDP). As a matter of simple accounting, the state and local sector has been a very minor negative force — scarcely comparable to the Fed’s inaction in 1930-32.

This is a very peculiar argument. If you cut through the fog of words, here's the table from the St. Louis Fed report that Reynolds is relying on:

The stimulus bill passed in February 2009 and presumably started taking effect in the second quarter of 2009 and beyond (red shaded area). Add up the numbers and they show that federal spending was responsible for 1.58 percentage points of GDP growth during that period while state spending was responsible for -0.36 percentage points of GDP growth. Look at just the three most recent quarters and it's even worse: 0.73 points of growth from the feds and -0.84 points from the states. In other words, it's exactly what Ezra said: the federal stimulus has been largely offset by declines in state spending.

Now, it's true that federal spending in general has a fairly small impact on total GDP. But that's because when you remove transfer payments the federal government only accounts for about 15% of total spending. The rest is private sector. There's nothing mysterious about this.

I dunno. Maybe I'm missing something. I'm not sure that this is a very illuminating way to judge the effect of the stimulus on GDP in the first place, but to the extent that it is, it backs up Ezra completely: the federal stimulus has been largely counteracted by state cutbacks, just like he said.

Time to Repeal Godwin's Law

| Wed Jun. 30, 2010 4:16 PM PDT

You know what I'm tired of? Godwin's Law. Who do I need to see about getting it repealed?

In theory, of course, Godwin's Law is merely descriptive. But in practice it's an endlessly tiresome way of feigning moral indignation. Here's how it usually works in real life:

  • Person A makes a comparison between something happening today and something the Nazis did.
  • Person B expresses outrage. How dare you?!?
  • Person A clarifies, and the clarification is always the same: I'm not saying that today's bad thing is as bad as what the Nazis did. I'm just illustrating.
  • Person B will have none of it. All comparisons to Nazis are ipso facto outrageous.

Glenn Greenwald and Joe Klein act out this kabuki to perfection today. You can put me on Glenn's side here. Not on the substance of the argument (where I think both sides have a point), but simply on whether or not it's OK to illustrate a point by reaching into the history of World War II for an analogy. I say: why not? WWII analogies are extremely useful because they're familiar to almost everyone. In this case, Glenn is arguing that the invasion of Iraq wasn't justified by the fact that the Kurds welcomed it, and he could have illustrated his point by saying that, likewise, Vietnam's invasion of Cambodia wasn't justified because they were welcomed by some of the survivors of the killing fields. But you know what? Not many U.S. readers are familiar with that bit of history, so the analogy wouldn't help much. If you're looking for something that lots of people will understand quickly, Hitler and World War II are fertile fields.

Yes, yes: historical analogies should be used carefully, and if you really are suggesting that [blank] is as bad as Hitler/Nazis/the Holocaust, then you'd better be damn sure you mean it. But if you're just reaching for a point of comparison that will be widely understood, then why not? Contra Klein, this isn't a "litigator's trick." It's just a handy way of making an easily understood comparison. And if Godwin doesn't like it, tough.

The Politics of Healthcare Reform

| Wed Jun. 30, 2010 2:49 PM PDT

So how's healthcare reform doing among the unwashed masses? According to a new Kaiser poll:

  • 48% have a favorable view of the law.
  • 41% have an unfavorable view.
  • Of that 41%, only 27% want the law repealed. (The remainder think it ought to be given a chance for a while.)

That doesn't bode well for conservatives who think that wholesale repeal is the road to electoral victory in November — though admittedly that 27% number might be higher in certain specific right-leaning swing districts where Democrats are most vulnerable. Still, as Jon Cohn points out, overall approval of healthcare reform, as measured by Pollster's poll averaging, is slowly but steadily increasing. It's gone up from 40% to 44% since February and has now crossed the critical point where it's viewed as a net favorable. If it keeps trending this way for the rest of the year, it'll be at around 49% approval by November.

The overall politics of repeal still differs dramatically in different congressional districts, of course, but numbers like this make it virtually impossible for the Republican leadership in Congress to seriously push for total repeal as a partywide platform. Like it or not, healthcare reform is here to stay.

Chart of the Day: Torture for Thee, But Not For Me

| Wed Jun. 30, 2010 11:48 AM PDT

Via Andrew Sullivan, a new study from the Joan Shorenstein Center finds that major U.S. newspapers routinely referred to waterboarding as torture until 2002, when they suddenly stopped. Unsurprisingly, the U.S. media's attitude toward waterboarding depended almost entirely on who was doing it:

News articles that considered other countries or individuals committing waterboarding were far more likely to classify waterboarding as torture than articles that dealt with the U.S. using waterboarding.

In the NY Times, 85.8% of articles (28 of 33) that dealt with a country other than the U.S. using waterboarding against an individual called waterboarding torture or implied it was torture. Yet when the U.S. was the perpetrator, only 7.69% (16 of 208) articles said or implied that waterboarding was torture. Just 0.8% of the articles (1 of 133) dealing with the War on Terror where the U.S. was the perpetrator said or implied that waterboarding was torture.

The LA Times follows a similar pattern of avoiding the label of torture when the U.S. is responsible for using waterboarding. In articles that considered other countries using waterboarding, 91.3% of articles (21 of 23) called waterboarding torture or implied the practice was torture. When the U.S. was the violator, only 11.4% of articles (9 of 79) used this classification.

As always, where you stand depends on where you sit.

Is the CBO Playing Politics?

| Wed Jun. 30, 2010 10:44 AM PDT

When the CBO estimates future federal budget deficits, it uses two scenarios. The first is the "current law" baseline scenario, which is just what it sounds like: it assumes that everything unfolds as if current law stays in effect forever. Everyone understands that this is a fantasy.

So they also have an "alternative scenario." If, for example, Congress "fixes" the alternative minimum tax every year without fail, then CBO assumes it will continue doing this even if Congress never permanently changes the underlying law. Ditto for several other things that Congress tends to deal with on an ad hoc basis every year.

But this year CBO has done something new: it has assumed that virtually none of the cost savings in the recently passed healthcare reform bill will take effect. Brad DeLong, assuming the guise of "Technocrat" in a debate in which he plays all sides, cries foul:

The alternative baseline is now based on judgments about the strength of the doctors' lobby and about the configuration of American rent-seeking politics rather than being merely an attempt to construct an honest baseline. It's not clear to me that CBO has the expertise to make such judgments. It is clear to me that if it is going to make them, it needs to back them up much more comprehensively than it has done.

The CBO does itself a disservice if it starts getting too heavily involved in political calculations like this. They've already made their best estimates about what effect healthcare reform will have on the federal budget, and if they want to change those estimates they should do so openly. But simply assuming that a future Congress will kill all cost savings measures with no special evidence to back that up? That's just not their job. CBO is supposed to be an honest broker, not a Washington Post op-ed columnist.

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The Conservative Alternate Universe

| Wed Jun. 30, 2010 10:02 AM PDT

Steve Everly responds to David Roberts's call for a carbon tax to address global warming:

The last time we imposed a tax regime of this scale was when the Progressives convinced us we needed an income tax. Four years after the 16th Amendment, Congress raised the top rate from 7 percent to 67 percent, partially to pay for cost overruns in administering the tax itself.

This is what makes debating with conservatives such a pleasure. The federal income tax was introduced in 1913. Four years later was 1917. The legislation that raised the top rate to 67% was called the "War Revenue Act." Anyone want to take a guess about just how big a factor "cost overruns in administering the tax itself" was to this measure?

The rest of the conversation isn't much more edifying. Better conservatives, please.

Fixing Social Security

| Wed Jun. 30, 2010 9:38 AM PDT

Megan McArdle responds today to the idea of balancing Social Security's books in one fell swoop by removing the cap on earnings that are hit by the payroll tax. This cap changes with inflation each year and it's currently set at a little over $100,000. If we removed the cap and taxed all income, Social Security's financing would be in great shape:

This is not actually surprising, since what this amounts to is hiking the marginal tax rates on high incomes by 15 percentage points--making the Federal Tax take on the highest incomes 55% in 2012, assuming that Obama/Congress follows through and allows the Bush tax cuts to expire in 2011.

This is obviously a gigantic hike, and moreover, when Medicare and state/local taxes are added in, would push the tax burden on the highest incomes to over 2/3 in the hightest tax jurisdictions.

Whatever you think of this plan, this is not an easy solution. It would be fought bitterly in Congress; it would cause high earners to put enormous effort into generating income in forms (capital gains) that are not subject to payroll tax; and at that level, you would start seeing serious avoidance activity, as well as possibly simply diminished effort.

This is basically right — though I think the marginal increase would be 12.4%, not 15%. But that's still a helluva lot. If we're ever going to raise marginal rates on the rich by that amount, I'd want to use it for more than just balancing Social Security's books.

Really, though, you don't need to go down this road. Contra Megan's headline ("No Easy Way To Fix Social Security"), Social Security is a pretty easy problem to address, and the reason it's easy is that you don't have to limit yourself to a single big solution. In fact, Social Security reform practically cries out for a basket of small, almost imperceptible changes. You could, for example, partially uncap the payroll tax or change the tax rate slightly (or a combination of the two); gradually increase the retirement age to 68; and adjust the inflation calculation for annual benefits slightly. This would fix Social Security's problems entirely and would be barely noticeable for most people. There are lots of other possibilities, and the more of them you put together the less painful they are. Chapter 4 of this report can help you put together your own plan.

There are several nice things about Social Security. First, it's a long-term problem. The trust fund doesn't go out of balance for several decades, so we have plenty of time to phase in changes slowly. Second, its demographics are well known and flatten out after about 2035. Unlike Medicare, which will need constant vigilance over the next few decades, a proper Social Security fix probably only has to be done once. And third, Social Security's funding problem is modest (less than 2% of GDP) and can be solved without very much pain.

Of course, even given all that, we still haven't solved it. Needless to say, this doesn't bode well for our ability to fix genuinely hard problems like climate change and healthcare costs.

Do We Have Quotas of Dogmatism?

| Wed Jun. 30, 2010 8:55 AM PDT

Tyler Cowen, responding to a question about whether deeply religious people tend to be generally dogmatic, says this:

I don't know of any systematic evidence, but often I favor portfolio models of dogmatism....That is, most people have an internal psychological need to fulfill a "quota of dogmatism." If you're very dogmatic in one area, you may be less dogmatic in others. I've also met people — I won't name names — who are extremely dogmatic on ethical issues but quite open-minded on empirics. The ethical dogmatism frees them up to follow the evidence on the empirics, as they don't feel their overall beliefs are threatened by the empirical results.

I am, of course, just guessing here, but this doesn't feel right to me. If I had to extrapolate from my experience, I'd say that rigidity of thought is a general personality characteristic, and that people tend to be either rigid or open across the board. Religious fundamentalists, for example, often seem to be political fundamentalists, moral fundamentalists, and lifestyle fundamentalists as well. Curious people tend to be curious about lots of different things.

But there's one aspect of this where Tyler seems right: I often run into people who are generally rigid but have one particular area, usually a specialty, where they understand the level of complexity involved and therefore tend to be more open to alternatives. Likewise, I've run into people who are generally open but have one particular obsession where they're absolutely unmovable.  Unfortunately, although Tyler agrees about this, I suspect his advice — "If you wish to be a more open-minded thinker, adhere to some extreme and perhaps unreasonable fandoms, the more firmly believed the better and the more obscure the area the better" — gets the causality backwards. Open-minded people may sometimes develop obsessions, but I doubt that obsessions help you stay open minded about the rest of your life. (Though if the obsession is strong enough, it might make you apathetic about the rest of your life. This is not quite the same thing, though.)

Thoughts?

The Fat Lady Starts Warming Up On Financial Reform

| Tue Jun. 29, 2010 8:20 PM PDT

After three Republican senators threatened to vote against the financial reform bill unless its $18 billion bank fee was removed, Democrats briefly reopened conference committee proceedings today and voted to remove it:

Conference negotiators voted to eliminate the proposed tax and, in its place adopted a new plan to pay the projected five-year, $20 billion cost of the legislation. The new plan would bring an early end to the Troubled Asset Relief Program, the mammoth financial system bailout effort enacted in 2008, and redirect about $11 billion toward heightened regulation of the financial industry. The conferees also voted to increase the reserve ratio of the Federal Deposit Insurance Corporation but specified that small depository institutions — those with less than $10 billion in consolidated assets — be exempt from paying any increase.

If Maria Cantwell, who voted against the bill on its first go-around, agrees to support the final conference report, that will give Democrats 57 votes. If the removal of the bank tax buys the support of Republicans Susan Collins, Olympia Snowe, and Scott Brown, that will give them 60 votes and the bill will pass. So cross your fingers and hope this does the trick.

That is, cross your fingers if you think this bill is worth passing in the first place. And since I got into a Twitter argument with Marcy Wheeler last night about that very subject, here's a brief rundown of what we'll get out of it:

  • Companies selling mortage-backed securities will be required to retain a portion of the risk on their own books. The originate-to-distribute model, where dealers bundled up loans and immediately turned around and sold off the whole package, created a system where bundlers had no incentive to make sure the underlying loans were any good. This provision helps rein this in.
  • Commercial banks will face restrictions on the amount of proprietary trading they can do. This is the so-called Volcker Rule, and although it was watered down in conference (banks can still trade up to 3% of their capital for their own accounts) it's still a pretty good safety valve for the banking industry.
  • A Consumer Finance Protection Agency will be set up within the Federal Reserve. I was initially opposed to housing the CFPA at the Fed, but I came around to the idea based on the argument that this will allow the CFPA to offer higher salaries and attract better talent. This is a significant win, and Elizabeth Warren says she's pretty happy with it.
  • Derivatives trading will largely be forced onto public exchanges. Certain standard derivatives will still be offered over-the-counter, which is too bad, but more complex instruments like credit default swaps will be made considerably safer by this rule.
  • Dick Durbin's interchange regulation for debit cards was adopted. This doesn't affect the safety and soundness of the banking system, but it's a good step forward for transparency and consumer protection.
  • Capital requirements for large banks will be increased. Together with the Basel III requirements currently under negotiation, this is a key step toward making the entire financial system safer and less leveraged.
  • Other changes that are good, though watered down from where they ought to be, include ratings agency reform, resolution authority, systemic risk regulation, and SEC authority over hedge funds.

This doesn't go as far as it should. There should be greater constraints on leverage. The prop trading and derivatives trading regs were weakened more than they should have been. Some critics think the big banks should have been forcibly broken up.

Still, even in its weakened state, the bill is stronger than it was a few months ago and it will go a long way toward reducing the size and profitability of the banking sector — which is why the banking industry is fighting it tooth and nail. Here's the Wall Street Journal:

A weekend of number-crunching left no doubt that the changes would hurt the bottom line at thousands of banks, brokerage firms and other financial companies. "This is wrong, and we have one last chance to do something about it," the American Bankers Association wrote in an email to its members, urging them to write opposition letters to members of Congress. Financial-industry lobbyists are aiming at Republicans who voted in favor of the Senate version, hoping to change their position when the final bill comes up for a vote. "You keep playing until the whistle blows," says ABA spokesman Peter Garuccio.

Inside most banks, the mood already has shifted to assessing how much revenue and earnings are likely to evaporate if the bill becomes law — and how to make up for the forgone money. Keith Horowitz, an analyst at Citigroup Inc., estimated the legislation would reduce annual earnings per share for big U.S. banks by 6%, down from his previous estimate of 11%.

This is half a loaf, but at this point the only credible alternative is doing nothing. There's not enough time to draft a new bill this year, and after November there's no chance of passing anything at all. Given the alternatives, anyone who cares about financial reform should support this bill.