Kevin Drum - September 2010

Why the Fed is Hawkish

| Fri Sep. 10, 2010 11:42 AM EDT

Fed presidents are chosen by regional Fed boards, and regional Fed boards are chosen via a complex arrangement that, in practice, ensures that all the seats go to local bankers and business leaders. So why do these board members tend to be so hawkish? Wouldn't they be better off with an expansionary monetary policy that keeps the economy growing? Matt Steinglass uses the Minneapolis Fed as a case study:

You could argue that the fact that local banks pick the Class B directors, while the Fed's governors pick the Class C directors, ensures that ultimately they're representing the interests of banks, and not so much those of business — let alone those of consumers, labour, civic associations, or every other way to group citizens in order to express their many interests. That's actually a violation of the spirit of the Fed's charter. Class B and Class C directors are supposed to "encompass the broad economic interests of the District, including industry, agriculture, services, labor, consumers, and the nonprofit sector." The fact that every single member of the Minneapolis Fed is either a banker or a business executive makes a travesty of that principle. The interests of consumers and workers ought to be represented in choosing regional Fed presidents.

But I still think you need to have a theory as to why a group of prominent local businesspeople would be more likely to pick a regional Fed president who wants tight monetary policy than one who wants loose monetary policy. And at that point I think you start getting into the fuzzy terrain of people's economic ideologies, which aren't always entirely coherent.

OK, I'll offer up a simpleminded theory in two parts. First, local bankers and business folks, when you get right down to it, don't believe in modern economics. I don't mean that they believe in, say, Milton Friedman's economics compared to Paul Krugman's economics, I mean that in their hearts they basically don't get it at all. They may have been socialized not to admit it, but I'll bet that deep in their hearts most of them don't quite understand why we're not still on a gold standard.

Second, in the same way that Germans are supposedly still scarred by the great hyperinflation of the 20s, I think American business leaders are still scarred by the stagflation of the 70s. And what they think they know about stagflation is that it was caused by overeducated Keynesian technocrats fiddling with the money supply and then brought to heel by the common-sense hard money policies of Paul Volcker and Ronald Reagan. And by God, they don't want to go back to that. So they're hawkish.

Obviously I'm just engaging in armchair sociology here. But I suspect that the rarified arguments of the MIT economics department vs. the Chicago economics department simply wash over most of these guys. As far as they're concerned, the only thing the government can do successfully is control inflation, so that's what they're going to do. They are not, repeat not, going to be the villains who let the inflation genie out of the bottle again, and that's that.

Advertise on MotherJones.com

Here's What's the Matter With Kansas

| Fri Sep. 10, 2010 5:00 AM EDT

Why has income inequality grown so explosively over the past 30 years? Why do so many working and middle class voters cast their ballots for a party that's so obviously a captive of corporations and the rich? Why is there no longer any real sustained effort to improve the lot of the middle class?

There's no shortage of answers. There's the "What's the Matter With Kansas" theory. There's the demise of labor unions. There's the well-worn story of the rise of conservative think tanks. There's the impact of globalization on unskilled and semi-skilled labor. There's the growing returns to education in a world that grows more complex every year.

But these are all limited and therefore unsatisfactory explanations, and no one has yet put them all together into a single organic whole that feels genuinely complete and compelling. Until now. The book that finally does it is called Winner-Take-All Politics, by Jacob Hacker and Paul Pierson, and it puts together all of these pieces with a clarity of explanation that's breathtaking. I hesitate to summarize their argument for fear of ruining it, but here's the nickel version:

  1. In the 60s, at the same time that labor unions begin to decline, liberal money and energy starts to flow strongly toward "postmaterialist" issues: civil rights, feminism, environmentalism, gay rights, etc. These are the famous "interest groups" that take over the Democratic Party during the subsequent decades.
  2. At about the same time, business interests take stock of the country's anti-corporate mood and begin to pool their resources to push for generic pro-business policies in a way they never had before. Conservative think tanks start to press a business-friendly agenda and organizations like the Chamber of Commerce start to fundraise on an unprecedented scale. This level of persistent, organizational energy is something new.
  3. Unions, already in decline, are the particular focus of business animus. As they decline, they leave a vacuum. There's no other nationwide organization dedicated to persistently fighting for middle class economic issues and no other nationwide organization that's able to routinely mobilize working class voters to support or oppose specific federal policies. (In both items #2 and #3, note the focus on persistent organizational pressure. This is key.)
  4. With unions in decline and political campaigns becoming ever more expensive, Democrats eventually decide they need to become more business friendly as well. This is a vicious circle: the more unions decline, the more that Democrats turn to corporate funding to survive. There is, in the end, simply no one left who's fighting for middle class economic issues in a sustained and organized way. Conversely, there are lots of extremely well-funded and determined organizations fighting for the interests of corporations and the rich.

The result is exactly what you'd expect. With liberal money and energy focused mostly on non-economic concerns, the country moves steadily leftward on social issues. With conservative money and energy focused mostly on the interests of corporations and the rich—and with no one really fighting back—the country moves steadily rightward on econonomic issues. Thomas Frank's famous working-class Kansans who vote against their own economic interests are easily explained. It's not just that conservatives appeal to them on social grounds, it's that there's no one left to really make the economic case to them in the first place. And even if anyone did, they have little reason to believe that Democrats would actually follow through in concrete ways. So why not vote on abortion and gay rights instead?

I'm not doing Pierson and Hacker justice here. In fact, I'm not really even trying to. What I am doing is telling you to buy a copy of their book and read it. Seriously. Just get a copy and read at least Parts I and II. No book is perfect, and I feel a little silly gushing too much, but this is the most complete and sustained explanation I've ever read of why, over the past 30 years, America has gone the direction it has even while most other countries haven't. And although Hacker and Pierson's sympathies are obvious, this isn't a polemic. It's an explanation. For me, it was a 300-page "Aha!" moment.

More later. In the meantime, though, buy the book. I can almost guarantee you won't be disappointed.

Quote of the Day: Just a Coincidence, Folks

| Thu Sep. 9, 2010 8:55 PM EDT

From a spokesman for the rally in Anchorage this weekend being staged by Glenn Beck and Sarah Palin:

Event promoter Christopher Cox says the 9/11 date is a coincidence. Cox originally eyed Sept. 4, but didn't want to compete with the Alaska State Fair.

Roger that. The fiddle contest and the quarterfinals of the Alaska's Got Talent competition were on the 4th, and you'd have to be pretty full of yourself to try competing with that. 9/11 was a more modest choice all the way around.

Making Medicare More Efficient

| Thu Sep. 9, 2010 5:48 PM EDT

Can the free market save Medicare? The results to date aren't very encouraging: Medicare Advantage, a program that allows seniors to enroll in private health plans, costs taxpayers about 13% more per person than standard fee-for-service Medicare. But wait! Austin Frakt reports that in some areas MA is more expensive than FFS and in other areas FFS is more expensive than MA. So why not switch to a system where both kinds of plans bid against each other, and reimbursement rates are set differently for each area depending on who submits the lowest bid?

More here, and the AEI study it's based on is here. The AEI folks claim it would reduce Medicare costs about 8% nationwide. Seems worth a closer look.

State Secrets Alive and Well

| Thu Sep. 9, 2010 3:17 PM EDT

The infamous state secrets privilege has been with us for over half a century, ever since the Supreme Court created it in 1953 (ironically, in a case in which it turned out the government was lying about national security to cover up its own negligence). Until the Bush administration, however, it was used fairly sparingly and only to toss out specific pieces of evidence that the government wanted to keep secret even from a judge's review in camera. Bush changed all that. The use of the state secrets privilege jumped, but even more critically, Bush used it to get entire cases thrown out of court. It was no longer a matter of the defense being hamstrung in what evidence it could present — bad enough already — but a matter of not being allowed to bring a case at all.

Last year the Obama administration announced that it intended to tighten things up:

The new policy requires agencies, including the intelligence community and the military, to convince the attorney general and a team of Justice Department lawyers that the release of sensitive information would present significant harm to "national defense or foreign relations." In the past, the claim that state secrets were at risk could be invoked with the approval of one official and by meeting a lower standard of proof that disclosure would be harmful....The shift could have a broad effect on many lawsuits, including those filed by alleged victims of torture and electronic surveillance.

....The heightened standard is designed in part to restore the confidence of Congress, civil liberties advocates and judges, who have criticized both the Bush White House and the Obama administration for excessive secrecy. The new policy will take effect Oct. 1 and has been endorsed by federal intelligence agencies, Justice Department sources said.

However, that same article went on to say that the new Obama policy "is unlikely to change the administration's approach in two high-profile cases," including one in which Binyam Mohamed and four other men claimed they had been kidnapped by the CIA and then tortured in CIA black site prisons. And indeed, the Department of Justice continued to assert the most sweeping version of the state secrets privilege in that case, which was upheld yesterday on a 6-5 vote by the 9th Circuit Court of Appeals. The ACLU plans to appeal, but in the meantime Marcy Wheeler comments:

So basically, the government can kidnap you and send you to be tortured — as they did with Binyam Mohamed — yet even if your contractors acknowledge what they were doing, if the government wants to call their own law-breaking a secret, the most liberal Circuit Court in the country agrees they can.

This is, needless to say, one of the things I was thinking of yesterday when I mentioned Obama's "weak record on civil liberties." In a way, of course, it's unsurprising. Not, I think, because newly elected presidents "invariably become quite enamored of executive power once they settle into the Oval Office chair," as James Joyner says. But because newly elected presidents routinely find it almost impossible to buck a national security establishment when that establishment unanimously opposes something. And I have little doubt that the entire national security establishment of the United States (and probably a few other countries as well) is dead set against ever allowing the public to know exactly what happened at those black sites. I don't think there's a president ever elected who's been able or willing to stand up against this kind of united front.

That's not to defend Obama. It was still his decision, and it's an odious one. But until, as a country, we come to our senses on national security, it's not going to matter very much who's in the Oval Office. The system is stronger than the man.

Blogging for the Media Octopus

| Thu Sep. 9, 2010 2:36 PM EDT

Andrew Sullivan on the difference between blogging for yourself vs. blogging for a media site:

It's salient, isn't it, that even aggregator sites like Huff and Drudge are anchored by a personality embedded in their very titles. In the end, what's unique online is what's unique in life: the human individual....I've struggled with this, of course, myself. Why not just be an independent site, like TPM? The very difficult and entirely new attempt to integrate the Dish into, first Time and now the Atlantic has been a work-in-progress and sometimes confoundingly tricky.

The only reason this struck me is that my experience has been so different. When I moved from my own personal site to the Washington Monthly in 2004, there wasn't even a glimmer of struggle. I had to bookmark a new URL to enter blog text, and that was about it. Almost literally, nothing else changed. When I moved from the Monthly to Mother Jones, ditto. I pointed my browser to a different place and just kept on doing exactly the same thing.

Maybe I've just been lucky, but at both places I've had editors who were happy to let me do my thing without interference, and since I work out of my home I hardly even noticed the change. I wonder how common my experience is compared to Andrew's?

Advertise on MotherJones.com

The Great Income Shift

| Thu Sep. 9, 2010 1:19 PM EDT

Tim Noah is doing a long series of articles in Slate about the growth of income inequality in the United States, and the first part after the introduction is titled "The Usual Suspects Are Innocent." Actually, that could stand in for parts two and three as well. Gender and racial gaps don't explain it. Immigration doesn't explain it. And the explanation most beloved of wonks and libertarians worldwide, skill-biased technological change, doesn't explain it either. SBTC theory, roughly, says that over the past few decades the world has become more complex and therefore rewards education and smarts more than it used to. Thus, there's relatively more income going to the highly skilled and relatively less going to the unskilled and semi-skilled. There are several reasons to think that SBTC doesn't actually explain an awful lot, but the simplest is this concession from MIT economist David Autor:

Autor readily concedes that computer-driven job polarization can't possibly explain the entire trend toward income inequality in the United States, because income inequality is much greater in the United States than it is in Europe.

Hmmm. Yes. They have computers and electricity and cell phones in lots of countries, but not every country has seen vast increases in income inequality. The chart on the right is from Winner-Take-All Politics, by Jacob Hacker and Paul Pierson, and it shows the share of national income that goes to the top one-percent in various countries. In the United States it's doubled since 1973. In France, Germany, and Japan it's barely budged. But those other three countries are all as technologically advanced as we are. So what gives?

More about that later. Tomorrow morning, in fact. And of course, Tim Noah's series will continue through next week, so we'll see what he decides to finger as the main culprit. Stay tuned!

Privatizing the Post Office

| Thu Sep. 9, 2010 12:34 PM EDT

The Washington Times reports on a scandal within the United States Postal Service: is Priority Mail™ really as profitable as they say it is?

Two recent reviews by the Postal Service's office of inspector general have raised concerns about whether postal officials understated advertising costs to promote Priority Mail. The reduced ad expenses could make Priority Mail appear more successful in reports submitted to postal regulators and, in turn, to the public.

....At issue is how the Postal Service split advertising expenses. For every dollar spent to promote Priority Mail, postal managers reported spending 70 cents on Priority Mail while reporting the other 30 cents as "institutional" advertising to promote the overall postal brand, records show.

But the inspector general found that the Postal Accountability and Enhancement Act of 2006 required managers to allocate all ad costs directly to the product, though not all postal executives agree. Postal officials declined to comment Tuesday, but stood by a written response submitted to the inspector general.

Stuff like this almost makes me a fan of privatizing the postal service once and for all and being done with it. As a former product manager, I'm aware in mind-numbing (and often infuriating) detail of the vagaries of cost accounting and expense allocation among product lines, and there's just not much science to it. Does 30% of all those Priority Mail ads actually promote the general USPS brand? 40%? 10%? Who knows? In a normal corporation, a couple of product managers would duke it out with competing self-serving arguments, someone in accounting would make a decision, and that would be the end of it. (Until the losing product manager decided to renew the battle.) But in the USPS this produces not one, but two full-fledged investigations from the inspector general. Yeesh.

You know, if the postal service were allowed to account for its pensions the same as anyone else, it would be in fine financial shape and there'd be no talk of killing off Saturday service. So why not privatize and let them? Because of the universal service requirement, of course. If you allowed private competition in first class mail, someone would very quickly snap up delivery in dense urban and suburban areas for less than 44 cents an ounce. The postal service, stuck with its universal service requirement, would then have to raise rates astronomically until eventually it would have virtually no business left except for rural areas at two bucks an ounce or something. So much for universal service.

Of course, if you don't care about universal service, then privatizing the post office might be a great idea. Let 'em set different rates for different areas and then fight it out with anyone else who wants to deliver first class mail too. Any takers?

Chart of the Day: How the Kids Are Doing

| Thu Sep. 9, 2010 11:50 AM EDT

After reading Bob Somerby's post about test scores yesterday, I decided to create a handy chart showing how our school kids have been doing over the past few decades. When I was done, though, I realized I didn't really have anything urgent to say about the subject, so I didn't write a post. But there's no sense letting a good chart go to waste, so here it is:

These charts show scores on the NAEP math and reading tests, which are widely considered the most reliable ones out there. I chose the data for 17-year-olds, even though it gets a bit skewed by dropout rates, because I figure that, in the end, that's what we're most interested in.

As I said, though, I don't really have a point to make. You can say that black and Hispanic scores have risen dramatically since the early 70s. Or you can say that black and Hispanic scores have stagnated (or even dropped slightly depending on how you cherry pick your dates) since the early 90s. Or you can say that white kids have made slight gains. Or you can say that the black-white gap closed considerably for a while but hasn't changed much lately.

But for what it's worth, what you can't say is that schools today are performing any worse than schools in the past. At most you can say they aren't doing much better than they were 20 years ago. But there's certainly no dramatic dropoff in performance. As a rough rule of thumb, ten points on the NAEP test equals one grade level, and over the past 20 years scores on both tests for all three ethnic groups have bounced around within a range of half a grade level or so. There's just not much there there.

Mitch Daniels Revisited

| Thu Sep. 9, 2010 11:33 AM EDT

After plowing my way through the Mitch Daniels saga yesterday, I was surprised to read Ezra Klein today agreeing that Daniels had proposed a conventional stimulus plan:

The parties disagree on a lot of things, but they don't disagree over the idea that the government should act to increase demand when the economy sags. The theory behind a payroll tax cut (the government increases its deficit in order to get more money to people who can spend it so they will increase demand) and an infrastructure investment (the government increases its deficit in order to get more money to businesses who can spend it) is not theoretical, but practical: Do you think one is more stimulative than the other, and do you think one is more worthwhile than the other?

And Matt Yglesias agreed. Daniels' plan isn't as praiseworthy as all that, he says, but "that doesn’t mean it wouldn’t be effective stimulus relative to the policy status quo, and viewed in that light much is forgivable."

Am I missing something? In Ezra's interview with Daniels yesterday, Daniels addressed some of the confusion from his original op-ed and made it crystal clear that he didn't intend for his plan to increase the deficit either in the short term or the long term. In fact, he went so far as to say that if his spending cuts turned out to be smaller than he hoped, he'd cut back on the payroll tax holiday in order to keep things deficit neutral.

Would this act as a stimulus anyway? It might, possibly, at the very margins. Perhaps a payroll tax cut has a higher multiplier than than the TARP and ARRA spending Daniels wants to cut. Or maybe it would have a faster effect. But those are tiny effects at best. If Daniels intends for his plan to be deficit neutral, it's not neo-Keynesian or neo anything else. It's just a temporary tax cut, and even the supply siders don't give temporary tax cuts any credit for stimulating the economy. I don't think anyone else would either.