Kevin Drum - September 2010

Public vs. Private

| Thu Sep. 16, 2010 12:21 AM EDT

On the ever popular subject of whether public employees are coddled and overpaid, EPI steps in with a new bit of research from Jeffrey Keefe of Rutgers today. I'll spare you the suspense and get right to the results:

This is pretty much what you'd expect. Public employees get a bigger share of their compensation in benefits than private sector employees (34% of total comp vs. 26-33%), and because of this the lower rungs of the public sector ladder get paid a bit more than their private sector counterparts. Anyone with a college education or more, however, is paid far less, and this brings the overall average for the public sector a bit below the private sector.

In a separate calculation that controls for full-time status, education level, years of experience, age, gender, race, employer organizational size, industry, and hours worked, the report concludes that public employees are compensated 2-7% less than equivalent private sector employees.

Take from this what you will. Obviously it's hard to know for sure if all the controls are properly accounted for, and you can decide for yourself if it's fair for high school and community college grads to make more working on the taxpayer dime than they would in private industry. Overall, though, this is yet another study that tells us the numbers are pretty close no matter how you slice them. It's always easy to find a few horror stories (usually cops or firefighters who works fantastic amounts of overtime), but in the aggregate it doesn't look like there's much evidence that government jobs are overpaid compared to private jobs.

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Policy vs. the Horse Race

| Wed Sep. 15, 2010 2:35 PM EDT

Atrios on the media's distaste for policy discussions:

One thing that is continually frustrating in our media is that the people who are paid to talk about politics focus on the polls, the horse race, the "appeal" of the candidate. I was listening to NPR for a bit and it took callers to inject any issues of policy or substance.

The modern press corps obviously deserves some of the blame for this, but for what it's worth, I'd add that politicians do too. After all, when was the last time you heard a politician give a genuinely interesting answer to a policy question? It happens sometimes, but the vast majority of the time you just get a canned talking point, a refusal to answer at all combined with a switch to some other topic, or a fat dollop of obviously dishonest spin. What's more, it's usually the exact same talking point, topic switch, or spin that you've heard a hundred times before. This makes it pretty unrewarding to ask about policy.

Raw Data: Crime Rate Continues to Fall

| Wed Sep. 15, 2010 1:32 PM EDT

The FBI released its latest crime statistics this week, and although absolute levels in the U.S. are still high by international standards, they show that crime of all types was down in 2009. In some cases the numbers were quite significant: murder is down 7% and auto theft is down 17%, for example.

Why? Who knows? More policing, maybe. Demographic changes. The continuing effects of unleaded gasoline. Whatever the cause, crime rates have been falling for two decades now, and they've been falling everywhere. Not just New York City and not just places with high-profile police chiefs. So here's your raw data for the day: two decades of uniform crime reporting from the FBI, all shown in rates per 100,000 inhabitants. Just so you know.

The Future of Tea Party Conservatism

| Wed Sep. 15, 2010 12:31 PM EDT

Jason Kuznicki ponders the meaning of Christine O'Donnell's suicidal victory in the Delaware Republican primary last night:

Every so often, a party nominates an unelectably extreme candidate, possibly because it’s deliberately testing the waters, though often it happens by accident. Then the party gets stomped at the general election....The next time around, the party bosses — who tend to lack all principles whatsoever — will move the whole apparatus to the center, where it can win the general election. How? With every single means at their disposal, and these are still extensive. You can see them at work even now, quietly trying to scuttle a Palin candidacy. The median voter theorem may not be in the front of Christine O’Donnell’s mind, or of Sarah Palin’s — neither shows much evidence of having considered it — but it isn’t entirely their party. Not by a long shot. The elites still bring things back to the center.

Not so fast. O'Donnell is only one candidate, and every professional politician knows that once you get a freight train barrelling forward you can't control every last twist in the tracks. And it's quite possible that the result of the Tea Party freight train this year will be lots of ultra-conservative victories and one or two preventable losses. Is that a reasonable price to pay? I don't know, but I do know that there are plenty of liberals who'd be willing to make that trade in the opposite direction.

If O'Donnell loses in November and turns out to literally be the difference between 50 seats in the Senate and 51, then plenty of Republicans will be gnashing their teeth. But if the net result is that they get 46 seats instead of 47, and those 46 are considerably more conservative than they would have been without tea party fervor, I'll bet most of them will consider it a pretty good bargain.

Of course, there are still Ken Buck, Pat Toomey, and Sharron Angle to contend with as well. It's conceivable that they could all lose too, in which case tea party fervor might be responsible for four preventable own-goals. If that happens, then the establishment might indeed rouse itself to action. Except for one thing: the Republican establishment right now is dedicated to the tea party message heart and soul. It's going to take more than a few midterm losses to convince them that doubling down on "true conservatism" isn't the road to riches. I think sane conservatives are going to have to wait until the aftermath of 2012 at the earliest to have any chance of regaining any influence with their party.

The Tea Party Batting Average

| Wed Sep. 15, 2010 11:40 AM EDT

So with primary season officially over, how has the Tea Party done? Dave Weigel tots up the body count here and here, and concludes that they won in 24 out of 51 contests. That's a 47% winning record for the insurgents, and as Marcy Wheeler tweets, "To be fair to Tea Party, they're doing much better than Govt on habeas petitions: govt has won just 15 of 53 cases." Quite so.

Black Income, White Income

| Wed Sep. 15, 2010 11:08 AM EDT

Matt Yglesias comments on a report that black income has gone from 41% lower than white income in 1975 to 35% lower than white income today:

As we know, however, a very large share of the income gains during this time period have accrued to a very small number of people. In particular, the top one percent of earners has gotten a ton and the bottom ninety percent have gotten basically nothing. Insofar as the super-elite is a disproportionately white group of people, this is going to drag the per capita white income upwards without doing much of anything for the typical white household. Consequently, you can easily imagine that there’s been a trend toward greater racial equality among the vast majority of the population even while a tiny group of white people has pulled away from the pack.

That got me curious, so I took a look a the Census Bureau's median data for black men, which would correct for the effect of a small number of super-rich people skewing the data. Sure enough, if you look at medians, then black income has gone from 40% lower than white income to 28% lower than white income. (The gap between black and white women has always been small, and remains so.)

This doesn't account for hours worked (the racial gap for full-time workers has moved only slightly) and it doesn't account for either non-wage benefits or for government transfers. And black unemployment remains astronomical, especially among the young. Still, it's true that a proper average does produce a slighly less bleak picture than per-capita figures suggest.

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Team Z

| Wed Sep. 15, 2010 10:31 AM EDT

Here's some hot news from the Washington Times:

A panel of national security experts who worked under Republican and Democratic presidents is urging the Obama administration to abandon its stance that Islam is not linked to terrorism, arguing that radical Muslims are using Islamic law to subvert the United States.

Wow! And who is this bipartisan panel?

The 19-member study group was led by retired Army Lt. Gen. William G. Boykin, deputy undersecretary of defense for intelligence in the George W. Bush administration, and retired Army Lt. Gen. Harry E. Soyster, Defense Intelligence Agency director from 1988 to 1991.

Included in the team of former defense, law enforcement and intelligence officials were Clinton administration CIA Director R. James Woolsey and Andrew C. McCarthy, former assistant U.S. attorney in New York, a career counterterrorism prosecutor during the Clinton administration.

....The group of experts was modeled after the official CIA Team B, whose 1976 contrary analysis said U.S. intelligence assessments had underestimated Soviet nuclear forces.

So there you have it. William "my God is bigger than his" Boykin. James Woolsey, a neocon former advisor to John McCain who lasted two years under Bill Clinton and started pushing for an invasion of Iraq before the Pentagon had stopped smoking. And Andrew McCarthy, NRO's famous ranter who spent a good part of 2008 obsessing over Barack Obama's ties to Bill Ayers. All in a group modeled after Team B, a task force most famous for being completely wrong in almost every assessment it made about the Soviet Union.

On the bright side, I don't know anything about Soyster. So maybe he's merely an ordinary conservative. I guess that makes this group bipartisan after all.

Breaking: Web Not Corrupting Our Youth After All

| Wed Sep. 15, 2010 12:31 AM EDT

The Washington Post reports today on a new study by Sandra Hofferth, director of the Maryland Population Research Center, which concludes that it's OK for kids to spend lots of time on their computers:

In what researchers describe as one of the first long-term looks at the effects of media use during childhood, a study released Wednesday linked hours at the computer with achievement test scores and behavior and found little sign of harm for children ages 6 to 12 as they increased their screen time over a six-year period.

....Hofferth's results, published in the journal Child Development, showed that African American boys' reading scores improved by four points, considered significant, as they increasingly logged more time on the computer.

Girls' achievement test scores for reading and math notched upward by a point. Socially, there was another positive effect: White girls were less likely to be withdrawn as they played more on the computer.

....Only white boys showed a decline in test scores — small but statistically significant - that Hofferth interpreted as resulting from too much surfing the Web. "Too much just random surfing isn't necessarily good," she said. "However, playing games and studying are more focused, and they have a positive effect."

OK, but what about sexting? That's still a danger to the republic, isn't it?

How Big is Too Big To Fail?

| Tue Sep. 14, 2010 11:59 PM EDT

Recent reports suggest that both the TARP payouts to big banks as well the government bailout of AIG will be fully repaid. Scott Sumner says this has changed his mind about the supposed moral hazard problem of banks that are too big to fail:

It appears that at the end of the day the biggest banking fiasco in the history of the universe will not result in any long run net taxpayer transfer to big banks. And yet the owners and managers of those banks incurred mind-boggling losses. So how plausible is it that TBTF was the primary cause of excessive risk taking in 2004-07? If even a crisis this big didn’t result in the long-run transfer of one cent of taxpayer money to big banks, does it seem likely that expectations of those transfers were a powerful motivating factor in the MBSs they bought?

I guess I'd look at this differently. I've always been a little skeptical of the pure moral hazard argument. Until the end came, my guess is that no one at any of the big banks expected to fail and therefore none of them expected to need bailing out. Partly this is because they believed in their own risk management strategies and partly it's because the kind of people who make it big on Wall Street are all convinced that they're smart enough to avoid disaster. Sure, good times and bad will always be with us, but they figure they can ride out the bad times even if some of the guys across the street don't.

So in this sense they weren't motivated by the expectation of a government bailout. But there are at least two other problems that are related but not identical to pure moral hazard. For one, big banks are where the big money is, and in a recent paper Vanderbilt's Margaret Blair argues that executives at big banks therefore have an incentive to amass dangerous amounts of leverage even if they know that this can lead to systemically threatening boom and bust cycles:

Bubble and crash cycles [] can be quite lucrative for the financial market participants who help to create them. This is because of the asymmetric nature of the gains and losses — financiers and shareholders of financial firms take home sizeable wages, bonuses, and dividends in good years, but are not required to pay these back in bad years. For this reason, financial markets will not be self-correcting and self-regulating.

....The effect of repeated bubble and crash cycles in the economy has been a steady ratcheting up of compensation in the financial sector, which has exacerbated the trend toward ever widening distribution of wealth and income in the U.S. In fact, the growing wealth of the financier class might be self-perpetuating because their high wages and astronomical bonuses gives them significant political clout.

The issue here isn't that executives expect to be saved by the government, it's that (a) they don't think they'll fail and (b) even if they do, they know that they get to keep all the money they made during the boom. Thus, dangerous behavior is rewarded, and this behavior costs taxpayers a bundle even if most of that cost isn't in the form of direct bailouts to the banks themselves.

Which brings us to the second problem: a banking crisis does cost a tremendous amount of money even if it's not mostly in the form of direct bailouts. The long-term cost of the 2008 crisis has been huge, but it comes largely in the form of lost economic growth, rising unemployment, and staggering additions to the federal deficit. This cost is borne almost entirely by taxpayers, not by players in the financial industry itself — which has recovered quite nicely, thankyouverymuch. And while it's not possible to say for sure how differently the financial crisis would have played out if we'd had lots of small banks failing instead of a few big ones, I think you can make a pretty good case that the systemic damage came mostly from the crash of the big banks and the shadow banking sector, not from failures at smaller FDIC-insured banks. But those big banks didn't have to pay much of the price.

So: the problem isn't that Wall Street bankers knew they might fail and took risks anyway in the knowledge that the feds would bail them out if the worst happened. The problem is a little more subtle: they're incentivized not to care if they're taking dangerous risks because (a) they get to keep all the money they make during the boom years and (b) they know that even a massive financial crisis will cause them only temporary pain, with most of the cost borne by the broad public which suffers from its aftermath. That's a great big dollop of moral hazard even if, technically, the government doesn't lose a dime on any of its direct bailout programs. And the problem is much worse and much bigger at big banks than at small ones.

Second Thoughts on Basel III

| Tue Sep. 14, 2010 5:32 PM EDT

So is the new Basel III agreement on bank capital a win for the forces of light? I'd say so, but I confess that news like this gives me second thoughts:

The U.S. banking industry breathed a sigh of relief Monday after international regulators proposed new rules dictating how much capital financial institutions must hold....Financial stocks shot up Monday on word that the new requirements would be phased in over a longer period than expected. An index of 24 bank stocks jumped 3%.

In some sense, it's probably banks themselves that have the best idea of just how effective the new regulations are — they have the biggest incentives to figure it out, after all — and this reaction almost certainly says a whole lot more about what they think than all their reams of special pleading over the past few months put together. I've said before that the acid test for financial regulation is whether or not it reduces industry profits, and so far the reaction to both Dodd-Frank and Basel III suggests that the banks themselves are pretty sure that the good times are going to keep rolling.

Beyond that, there's another big criticism of Basel III. But first, some background: the basic idea of the Basel regulations is that banks need to have a certain amount of money (capital) to cushion potential losses from their loans (assets). So there are two sides to the equation. The first is how good a bank's capital is. Ideally, it should be something that a bank has fast and sure access to, not something that another party might be able to claim when times get bad, or something that can't be quickly converted to cash. On that score, Basel III does a fairly good job of tightening things up.

But assets are the other side of the equation. Suppose you have some ordinary loans that are ordinarily risky. How much capital should you be required to carry to cushion possible losses? Let's say 10% of the value of the loans. But what if you have some A+ rated assets? Those have a more modest risk of defaulting or losing value, so do you really need 10% for those too? Of course not! So let's say you only need half as much. And how about AAA assets? Those are safe as houses.1 There's very little chance of them losing value at all, so how about if we only require you to hold a fifth of the usual cushion for those? This is how the old Basel II requirements worked, and the logic is perfectly sound. In practice, though, it turned out not to be such a great idea because we were too confident of our ability to measure risk. Noah Millman comments on how this plays out in real life:

Precisely because you now feel like you know what your risks are, you’re going to be inclined to hedge them, until you get your risk position down to something de minimis....Everybody still has to make money, though. And since taking any additional measurable risk is now stigmatized, the game becomes how to increase returns without increasing measurable risk. And that, predictably enough, means that more and more money piles into products with risks that either cannot yet be measured or, even worse, that the financial world is not aware exist.

Developments in banking regulation in the last decade, meanwhile, have turbocharged this process, and I’m increasingly convinced contributed mightily to the financial crisis. At the heart of the financial crisis, after all, was banks investing in highly-rated debt backed by lousy mortgages. But why did they hold so much of this debt? In part because they could plausibly argue that it was risk-free or nearly risk-free. Double- and triple-A-rated debt had very low risk-weighting. Similarly, anything hedged with a double- or triple-A-rated financial counterparty had a very low risk-weighting....Basel III retains this basic framework, but increases (somewhat) the amount of capital that banks need to hold generally. Therefore, it should further increase the incentive to avoid measurable risks and to hold positions whose risks are not well-measured.

When I first read the BIS press release on the new capital requirements, I was under the impression that it didn't address the issue of risk-weighting simply because that was scheduled to be addressed later. But I gather that I was wrong about that. It didn't address it because Basel III simply doesn't address it. This means that banks still have a huge incentive to engage in regulatory arbitrage, desperately searching for assets with AA or AAA ratings because they can be levered up far more than ordinary loans. In fact, the higher capital requirements might provide an even bigger incentive to do this than before. After all, reducing your capital requirement from 10% to 2% is a bigger deal than reducing it from 5% to 1%.

Now, as it happens, Basel III does add a simple leverage ratio to complement the new capital requirements: capital has to be at least 3% of total assets with no risk weighting. That's a good addition, but 3% produces leverage of 33:1. That's a lot of leverage, and as Zach Carter points out, it's probably too high to really have any moderating effect. So what's the right leverage number to shoot for? Martin Wolf thinks it should be in the neighborhood of 5:1. That's probably too extreme in the other direction. But ten or fifteen to one? That would do the job nicely.

Bottom line: requiring banks to carry more, and better quality, capital is a good idea. Basel III really does make things better. But I'm beginning to think that, like Dodd-Frank, it only makes things a little bit better. Consider me a bit deflated.

1Irony fully intended.