Kevin Drum - August 2010

Iraq Update

| Wed Aug. 25, 2010 11:28 AM EDT

Anthony Shadid reports on a coordinated wave of insurgent attacks across Iraq yesterday:

For weeks, there had been sense of inevitability to the assaults, which killed at least 51 people, many of them police officers. From the American military to residents here, virtually everyone seemed to expect insurgents to seek to demonstrate their prowess as the United States brings its number of troops below 50,000 here. But the anticipation did little to prepare security forces for the breadth of the assault. Iraqi soldiers and police officers brawled at the site of the biggest bombing in Baghdad, and residents heckled them for their impotence in stopping a blast that cut like a scythe through the neighborhood.

....For weeks, insurgents have carried out a daily campaign of bombings, hit-and-run attacks and assassinations against the security forces and officials, seeking to undermine confidence in their ability to secure the country. They remained the target Wednesday in attacks in Falluja, Ramadi, Tikrit, Kirkuk, Basra, Karbala, Mosul and elsewhere.

....The attacks come amid deep popular frustration with the country’s politicians, who have failed to form a government more than five months after elections in March. Shoddy public services, namely electricity, have only sharpened the resentment.

Violence in Iraq is still far below its 2006-07 levels, but the main goal of the surge, in George Bush's words, was always to provide "breathing space" for political reconciliation that would make its security gains permanent. This has been its Achilles heel ever since it was completed, and the news on this score has continued to get worse for at least the past couple of years. The Florida-like inability to agree on the most recent election results and form a government of any kind is merely the latest act in the play.

And while we're on the subject of military intervention abroad, Fred Kaplan has a good piece in Slate explaining the regional politics that makes progress in Afghanistan so hard. I don't think I'm up for two separate posts on the subject of foreign wars today, so instead I'm just tacking this onto the Iraq news. It's worth reading.

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Two Memes Enter, One Meme Leaves

| Wed Aug. 25, 2010 1:18 AM EDT

Summing up Tuesday's election results, Newsweek's Andrew Romano says that the anti-Washington press meme is about to change:

On Tuesday, voters in Alaska, Arizona, Vermont, and Florida weighed in on a variety of marquee primary races--and in every case, they preferred (or were seeming at press time to prefer) the incumbent, establishment, and/or Washingtonian candidate to his or her insurgent foe.

....It's no secret that the press tends to shoehorn even the most multifaceted news event into a simple narrative. Expect that process to continue on Wednesday; both Politico and Agence France Presse have already published stories trumpeting the death of the anti-Washington meme. Unfortunately, the whole exercise is just as futile when incumbents are winning as when they were losing; politics just isn't that tidy. Case in point: even as the anti-establishment eulogies were hitting the wires, the Associated Press was reporting that health-care multimillionaire Rick Scott had defeated Washington-backed Bill McCollum in Florida’s Republican gubernatorial primary and Christian youth camp director James Lankford had upset former state Rep. Kevin Calvey, a Club for Growth favorite, in the runoff for Oklahoma’s open 5th District House seat.

Well, look. Isn't there someone who's enough of a political junkie to give us the straight dope on this? How many incumbents have lost this year compared to 2006? Or 2002? Can't we put a number to this? If the number is a lot higher than the average midterm election, then the anti-Washington meme deserves to live. Otherwise it deserves to die. Which is it? Who's ready to tot up the results from the past few elections and tell us?

Who You Calling a Statist?

| Tue Aug. 24, 2010 7:47 PM EDT

Conor Friedersdorf argues that although Matt Yglesias is a liberal, he's not entirely a liberal:

Mr. Yglesias favors deregulating various professional cartels, ending the legally proscribed monopoly on buses that some urban public transit agencies enjoy, reforming America's absurd system of agricultural subsidies, and making it easier for developers to build in accordance with the local demand for real estate, rather than government imposed zoning restrictions....Why does he favor some policies that conservatives like? And can we identify more of them for the sake of strategic alliances? We'll never know if, upon learning that he is a liberal, we automatically presume that he is a "statist," or even more absurdly, that he prefers tyranny to liberty.

In response to a similar argument yesterday, Mark Levin came out with all guns blazing:

This is so pathetic. So a liberal blogger favors regulation [I assume Levin actually means deregulation here –ed] in some respect, and this proves to Friedersdork that my characterizing the general left-wing enterprise as statist is unhelpful — to Friedersdork. So, the fact that the liberal blogger isn't advancing big-government arguments ALL THE TIME demonstrates the inaccuracy of referring to his agenda as statist.

Levin is a loon. Equating the liberal project with tyranny is deranged, his tone is consistently obnoxious (note the childish reference to "Friedersdork," one of his favorite bits of juvenilia), and he barely even pretends to offer arguments. He just screams into the microphone for a few hours a day.

And yet.....I actually think he has the better of things here. Let's face it: people like Matt and me aren't even as centrist as your average DLC Democrat of the mid-90s, let alone sympathetic in any serious way to most conservative arguments. I'm in favor of full-blown European style national healthcare, for example. Matt favors astronomical tax rates on the rich. It's true that neither of us has any intrinsic love for a big state per se, but it's still the case that a big state is pretty integral to attaining most of our preferred policy outcomes. And that's true even if there are a few modest areas where we might usefully team up with conservatives — though even there it's worth noting that of the three things Conor mentions, at least two of them (ag subsidies and zoning) are so wildly unlikely to change that favoring reform is sort of a freebie. It's the kind of thing where you can take a contrarian philosophical stand without any serious risk that you're ever going to be called to account for it.

Now, it's true that I'm generally in favor of reducing or eliminating government programs that don't work. Who isn't? But self-interest plays a big role here, even if we don't always like to admit it. Like Matt, I think we should eliminate ag subsidies. But that's a pretty easy stand to take since I'm not a farmer. Earlier today I suggested we do away with Fannie Mae because we subsidize housing too much. I can afford that too, since I already own a home and don't need any help buying one. High tax rates on the rich? That wouldn't affect me much, so I'm OK with it. National healthcare? That would be pretty handy in case I ever want to quit my job, so that's also in my self-interest. Fighting global warming? Well — fine. That wouldn't really do me any good since I don't have children and I'll be dead before climate change causes me any personal grief. So there's no self-interest at work there. On the other hand, I make enough money that a carbon tax wouldn't really inconvenience me much, so I'm not exactly taking a heroic stand by advocating one.

It's useful to know where you can find political allies. If you can find liberals who favor charter schools, less regulation of small businesses, and an end to Fannie Mae, that's well and good. But that's 10% or less of my worldview. I also favor high marginal tax rates on the rich, national healthcare, full funding for Social Security, more spending on early childhood education, stiff regulations on the financial industry, robust environmental rules, a strong labor movement, a cap-and-trade regime to reduce carbon emissions, a major assault on income inequality, more and better public transit, and plenty of other lefty ambitions that I won't bother to list. If we could do all that without a bigger state, that would be fine. But we can't. When it's all said and done, if we lived in Drum World I figure combined government expenditures would be 40-45% of GDP and the funding source for all that would be strongly progressive. "Statist" is an obviously provocative (and usually puerile) way to frame this, but really, it's not all that far off the mark. It wouldn't be tyranny, any more than Sweden is a tyranny, but it would certainly be a world in which the American state was quite a bit bigger than it is now.

Chart of the Day: Housing Prices Since WWII

| Tue Aug. 24, 2010 5:23 PM EDT

In what Matt Yglesias calls "the department of stuff people are wrong about," the New York Times reports the following:

In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.

With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.

“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.

That chart at the bottom of this post, constructed from Case-Shiller data, shows the reality: home prices have actually been pretty steady over time. In fact, if you look at a fifty-year period after World War II, home prices were absolutely steady. In 1947 the Case-Shiller index stood at 110, and in 1997, adjusted for inflation, it stood at 110 again.

So here's the question: why do people think that home price appreciation is a law of nature, when it so clearly isn't? Here are a few theories:

  • People are really bad at math. A 10% annual rise over ten years is a 150% increase. That's pretty crazy. But most people have no sense for how numbers like that compound.
     
  • People are bad at adjusting for inflation. If you bought a $20,000 house in 1947 and sold it in 1997 for $150,000, that seems like a tidy profit. In fact, it's zero profit. Adjusted for inflation those numbers are identical. But despite all the complaining we do about inflation, most people don't realize just how much it adds up to over the years. (It's that pesky compounding problem again.)
     
  • In some areas, housing prices really have increased a lot. The house I grew up in cost $16,000 in 1959. Adjusted for inflation that comes to about $120,000 today. But even after the recent downturn it would sell for at least three times that amount now. In Orange County, housing really has been a pretty profitable business in the postwar era.
     
  • We have a very human tendency to overreact to startling news. You hear a story about a neighbor who bought a house and sold it five years later for a 50% profit and you remember it. Newsweek runs a story about the Southern California housing bubble of the 70s that jump started the Proposition 13 tax revolt and you remember it. Your property tax bill keeps showing a higher assessed value every year and you remember it. You hear about one square mile of Tokyo being more valuable than the entire state of Oregon and you remember it.

    But what you don't remember is that another neighbor lost money on his house (he didn't crow about it, after all) or that the Southern California housing market cooled off in the 80s (and the Detroit market had been falling the entire time) or that your assessed value is basically just tracking inflation (the math is too hard) or that the Tokyo story was bogus to begin with (and the Tokyo property bubble collapsed shortly after that anyway). And you never even notice the occasional story that provides the big picture in the first place — partly because they don't often get written and partly because they're not very interesting even when they are. So we end up retaining lots of bits and pieces suggesting that housing prices always rise and downplaying or not noticing the news that tells us otherwise.

Add your own theories in comments. This really does seem like a belief that simply won't die regardless of how much evidence there is to the contrary, and that's something that's probably distorted the housing market every bit as much as all the government intervention in the world.

Should the Feds Exit the Housing Market?

| Tue Aug. 24, 2010 1:53 PM EDT

Speaking of housing, Dean Baker is unhappy with the likely resolution to the collapse of Fannie Mae and Freddie Mac, and I think he makes a pretty good point. Fannie and Freddie are in the business of buying 30-year fixed rate loans from the banks that originate them, and if it simply did that and nothing more as a fully public institution it would probably be OK. They'd be taking on interest rate risk, but it would be the mirror image of the interest rate risk on the broader federal debt. Overall, the federal government would be pretty well hedged on this bet.

Alternatively, we can simply get rid of them entirely:

We know that the private sector can and does issue mortgages without government support. This is demonstrated by the existence of the jumbo mortgage market. Jumbo mortgages exceed the size limits set for a loan to be purchased by Fannie and Freddie. Even in the current environment the spread is only 90 basis points (9/10ths of a percentage point) compared with the Fannie/Freddie backed conformable mortgages, and it is typically much less.

Dean believes — and I agree — that we should choose one of these alternatives. Either Fannie and Freddie are public institutions guaranteed by the federal government, with the risk of running them fully transparent, or else the secondary mortgage market is entirely private and everyone knows there's no government guarantee behind it. But that's not where the conversation is going:

Instead, the consensus seems to be to design some hybrid model in which private profit-making banks will decide which mortgages will get a government guarantee. We are assured by the housing finance wizards that the government regulators will effectively police the private banks. The basic issue is the problem of moral hazard: Private banks have incentive to issue the guarantee to the worst junk around, since they can will make money on the process and the risk goes to the government. It is difficult to believe that anyone who has lived through the crisis of the last three years would want to re-establish this sort of situation.

Status quo bias is hard to overcome, unfortunately. My own tentative take is that Fannie and Freddie should simply be phased out over a period of years and allowed to die. Regulated private markets can probably sustain housing just fine these days, and I'm just not sure we need a huge federal bureaucracy to provide homebuyers with a slight interest rate bonus.

More generally, I think we provide home buyers with too many bennies already, and we'd probably all be better off if we allowed the market to set prices here without the distorting influence of federal supports. I'm fine with the government getting involved when there's a clear market failure (as there was when Fannie Mae was first set up) or if there's some need to make a benefit universal (as with Social Security or Medicare). But I don't think either of those applies to the contemporary housing market, so why not just get the feds out of the mortgage business altogether? I'm open to good arguments to the contrary, but I haven't really heard any yet.

Housing Market Update

| Tue Aug. 24, 2010 12:37 PM EDT

Hey, how about that first-time homebuyer tax credit? It was originally scheduled to expire at the end of 2009, and home sales spiked as people rushed to get their loans approved in time. Then the program was extended, and after a brief lull sales rose again, this time spiking in June as people rushed to get their loans approved before the program went away for good. So what happened in July? The chart below, modified slightly from one created by Daniel Indiviglio, shows the results:

That's a stunning 27% decline in July. There's no telling whether that's a short-term effect or if home sales will stay low for a while. The most optimistic appraisal is that it's a short-term impact because of the intoxicating effect the tax credit seems to have had on people. Megan McArdle, who just bought a house, reports that she and her husband "were astonished by the effect that the tax credit seemed to be having on people. Prices were climbing rapidly, as people got into bidding wars that raised the price by more than 8%. Inventory vanished rapidly; the average days on the market for a new property that wasn't ridiculously overpriced, half-finished, or occupied by tenants who wouldn't let the place be shown, was 1-4 days."

That's been my sense too, which is remarkable since $8,000 shouldn't be that big an incentive to buy something as expensive as a house. But then again, maybe that's the Southern Californian in me talking. $8,000 isn't a huge incentive if you're buying a $500,000 house in Los Angeles or Orange County, but it's probably a much bigger deal if you're buying a $150,000 house in Little Rock.

In any case, we better hope this is just a short-term effect from housing sales getting artificially pulled in a month or two to take advantage of the tax credit. If it's not — if the tax credit really was propping up the market — then we're in for yet more economic pain. Slow housing sales drive lower house prices, and lower house prices have an outsize effect on consumer spending and on economic growth in general. Buckle your seat belts.

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More on Early Childhood Education

| Tue Aug. 24, 2010 12:07 PM EDT

Dylan Matthews interviews Harvard professor Raj Chetty about a subject I blogged on a couple of weeks ago. Better early childhood education, it turns out, might not directly affect scores on standardized tests (or on things like IQ tests), but it apparently does affect other behaviors that are strongly related to higher incomes later in life:

One thing I found interesting about the effect of test scores as relates to earnings is that it seems like some of the gains you find in early childhood, that might not show up on later test scores, later emerge when you're looking at earnings data.

Yes, and that's in fact, I think, the most striking finding....[Test scores] fade out over time. So kids who had better teachers and were in smaller classes in kindergarten aren't doing all that better, really, on tests in middle school and high school. But what's surprising is that those effects reemerge in adulthood. And I can talk about why we think that is.

Why do you think that is?

One explanation for this fadeout and then reemergence of the impact of kindergarten is through non-cognitive channels. [...] For a limited subset of the students we have measures of non-cognitive ability in eighth grade. So what that means is measures like, they ask teachers to evaluate whether the students are being disruptive in class, whether the students are putting in a lot of effort, whether they're motivated and so on. Now, we find persistent effects of your kindergarten class on these non-cognitive measures. There's no fadeout, or very little fadeout on the non-cognitive stuff.

So one potential explanation of all of the findings together is, a good kindergarten teacher teaches you the material that you're tested on in kindergarten, and so you do well on kindergarten tests. That same good teacher also imparts non-cognitive skills, like they teach you how to be a disciplined learner, how to put in a lot of effort, how to be patient....It's quite intuitive that these non-cognitive skills matter when you're an adult. It helps to get a good job and to do well in general if you're a disciplined person, if you're perseverant and so on.

Bottom line: school matters, and the way it matters doesn't get picked up entirely via standardized testing. In modern society, there are lots of behavioral traits that are just as important as IQ and subject matter knowledge. But we only test for subject matter knowledge, and so it gains an outsize importance.

Playing Fair With Climate Science

| Tue Aug. 24, 2010 11:47 AM EDT

A few weeks ago I wrote about a Nature article that suggested we were in the middle of a long-term decline in the volume of phytoplankton in the world's oceans. I had a bit of email back-and-forth with Stuart Staniford about whether the results in the paper were really robust, but the upshot was unclear and the paper was, after all, in Nature, not some C-list journal. What's more, the decline was pretty substantial. It was probably real.

But now comes another climate-related piece of research, this time in the equally respected Science, and this time Stuart's skepticism is on much firmer ground. For the last decade scientists have been collecting information on terrestrial vegetation coverage using the Moderate Resolution Imaging Spectroradiometer (MODIS) on board NASA’s Terra satellite. Their conclusion: vegetation coverage is down, which means plants are pulling less carbon out of the air, which means we have yet another positive feedback loop causing an increase in atmospheric carbon levels.

The problem is that there are only ten annual data points so far, and they bounce around like a pogo stick. The trend over the past decade is slightly down, but the variance is so large that it's almost imposssible to tell if this is just normal noise or a real decline. It's still worthwhile information to share, except that the writeup in Science appears to go out of its way to avoid acknowledging the problem:

There is a whole long history in science of how to assess this kind of thing — to test whether a particular number or trend is statistically significant, as opposed to the situation where it could well just be a fluke. It's a normal part of doing science that one analyzes the statistical significance of trends, and analyzes the likely range of uncertainty around a particular estimate. However, in this paper, there is no analysis in the paper of whether the reduction in NPP is statistically significant, and, as I noted, no error bar is provided for the "0.55 petagram" reduction.

So Stuart emails the authors, and they concede that their results aren't yet robust ("Some research findings are so important that society really cannot afford to wait another 10+yr for 95% or 99% statistical confidence"). Stuart is unhappy:

Ok. So here we have a statistically non-robust result, that the authors are well aware is not statistically robust, being published because it's of "high policy significance". However, and critically, the authors included no discussion whatsoever of the statistical limitations of the evidence. The "-0.55" in the abstract is not "-0.55 +/- 1.1" or something like that to give the reader a heads up that there is a lot of uncertainty here. There is no calculation of the "p-value" of that trend (how likely it was to occur by chance), even though the rest of the paper is littered with p-values of subsidiary results. They know perfectly well how to calculate this, they know it's not statistically significant, but they chose to put their readers in a position where we have to take the data off the graph and do our own statistical analysis to realize what's really going on.

And the refereeing and editorial process at Science allowed the paper to be published like that.

I think that sucks.

Stuart is no climate skeptic, just someone who thinks data ought to be presented clearly and transparently. I agree. Especially in the current post-Climategate atmosphere, the climate community needs to be purer than Caesar's wife about this kind of thing. There's no reason to withhold this satellite information, but it should be clearly labeled as preliminary, non-significant, and with error bars attached.

Fed to Unemployed: Drop Dead

| Tue Aug. 24, 2010 1:51 AM EDT

Jon Hilsenrath of the Wall Street Journal apparently got a detailed briefing about the most recent meeting of the Federal Reserve, and he reports that there was a considerable amount of dissension about even the puny action they ended up taking. The Fed's technical staff had told them that their portfolio of mortgage-backed securities "was about to begin shrinking much more rapidly than anticipated," which would likely have a contractionary effect and should have rung alarm bells given the current parlous state of the economy. But Ben Bernanke's proposal to offset this enough merely to keep the Fed's balance sheet stable — not shrinking and not growing — met with a fair amount of resistance:

Fed governor Kevin Warsh [...] worried that a decision to reinvest mortgage proceeds into Treasurys would confuse investors and lead many to believe the Fed was paving the way to resume major purchases before it had decided to do so....Richard Fisher, president of the Dallas Fed, and others expressed a concern that Fed moves might be ineffective, arguing that businesses weren't using already ample, cheap credit to fund investments because they were uncertain about many other problems, including government deficits and new financial regulations.

Narayana Kocherlakota, president of the Minneapolis Fed, argued that a large part of today's unemployment problem is caused by issues the Fed can't solve, such as the mismatch between the skills of jobless workers and the skills that employers wanted....The president of the Philadelphia Fed, Charles Plosser, who has had misgivings before about Mr. Bernanke's initiatives, deemed the latest move premature because, though the Fed was lowering 2010 growth estimates, it wasn't significantly ramping down its estimates for growth in 2011 and beyond. Two other frequent dissenters, Thomas Hoenig of Kansas City, and Jeffrey Lacker of Richmond, Va., also objected. Fed governor Betsy Duke, a former commercial banker, also expressed reservations, according to participants.

This doesn't bode well. If Hilsenrath is right, it means that there are no more than two or three Fed governors who are currently in favor of more aggressive action as long as the economy doesn't go completely off the cliff. For the time being, then, we have a Fed that's plainly not going to do anything expansionary on the monetary side and a Republican Party that's hellbent on keeping anything from being done on the fiscal side. Lost decade, here we come.

Red State, Blue State

| Mon Aug. 23, 2010 4:26 PM EDT

Mark Krikorian takes a vacation in Michigan and reports back:

Amidst the big-picture stuff, two things at the Ford museum stuck out: The map showing the outcome of the 1976 election had the red and blue states as they’re supposed to be — the Democrats in red and the Republicans in blue. Has anyone tried to dig out which graphic artist or art director at one of the networks decided to change this in 2000? It has to have been a considered decision by a leftie who didn’t think the Democrats should be portrayed as the reds, but I’ve never seen the name(s) of the specific person or persons responsible.

Nah. Nothing so sinister. Here's the answer:1

Since the advent of color TV, there has been a formula to avoid charges of giving any party an advantage by painting it a "better" color. Here is the formula: the color of the incumbent party alternates every 4 years.

In 2000 the formula produced blue for Gore and red for Bush, and shortly after that the famous electoral map showing blue coasts and a vast swath of red everywhere else made its debut. This prompted everyone to start talking about red states and blue states, and ever since then it's stuck. Something tells me this is an explanation that's going to have to be repeated every few years.

1The best answer I've been able to come up with, anyway. However, state colors have varied over the years, and not all networks and print outlets followed this formula perfectly. But it seems to have been pretty common, and in any case it was just a coincidence that Democrats got colored blue in 2000 and that was the election that produced a famous map. Just luck of the draw.