Kevin Drum - September 2010

How To Order Thai Food

| Mon Sep. 20, 2010 11:40 AM EDT

Last night at a Thai restaurant, Mark Kleiman wanted to order Tam Kah with just mushrooms, which produced the following question from our server:

OK. Would you like the chicken and mushroom soup without the chicken, or the shrimp and mushroom soup without the shrimp?

A pretty philosophical conundrum, no?

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Good News and Bad on Wall Street

| Mon Sep. 20, 2010 11:12 AM EDT

The New York Times reports both good news and bad today:

The activities at the heart of what Wall Street does — selling and trading stocks and bonds, and advising on mergers — are running at levels well below where they were at this point last year, said Meredith Whitney, a bank analyst who was among the first to warn of the subprime mortgage disaster and its impact on big banks.

Worldwide, the number of stock offerings is down 15 percent from this time last year, while bond issuance is off 25 percent, according to Capital IQ, a research firm. Based on these trends, Ms. Whitney predicts that annual revenue from Wall Street’s main businesses will drop 25 percent, to around $42 billion in 2010, from $56 billion last year.

....As a result, executives, portfolio managers and analysts say that even the mighty Goldman Sachs, which posted a profit every day for the first three months of the year, is unlikely to deliver the kind of profit growth that investors have come to expect.

Keith Horowitz, a bank analyst at Citigroup, said he expected Goldman Sachs to earn $7.8 billion in 2010, a 35 percent decline from the $12.1 billion it made last year. The drop in trading translates into lower commissions for brokerage firms, as well as a weaker environment for underwriting initial public offerings and other stock issues, traditionally a highly lucrative niche.

Banks are also scaling back on making bets with their own money — known as proprietary trading — another huge profit source in recent years that will soon be forbidden under terms of the financial reform legislation passed by Congress this summer.

Wall Street should be earning less. Ideally, though, it should be earning less because margins have become thinner and the market for lucrative but idiotic rocket science finance has declined. So the good news here (maybe) is that prop trading activity is down and margins are getting squeezed. The bad news is that core businesses like issuing bonds and managing IPOs are also down. That's just a sign of a sluggish economy.

And speaking of a sluggish economy....

What Can Ben Do?

| Sun Sep. 19, 2010 12:07 PM EDT

Tyler Cowen says today that the Fed has an easy way to boost the economy: just commit itself to an inflation rate of 3% over the next few years and people will open their checkbooks again. Personally, I'd prefer 4%. But either way, he's not very optimistic that this will happen:

If the Fed promises to keep increasing the money supply until prices rise by, say, 3 percent a year, people should eventually start spending. Otherwise, if they just held the money, it would be worth 3 percent less each year.

In a self-fulfilling prophecy, the Fed could stimulate spending and the economy, and at no cost to the Treasury. Of course, if no one believes the Fed’s commitment to price inflation, spending and employment will not go up. The plan will fail, and people will view their skepticism as vindicated.

In other words, one of our economic problems can be solved, but only if we are willing to believe it can.....Sadly, although [Ben] Bernanke clearly understands the problem, the Fed hasn’t been acting with much conviction. This is understandable, because if the Fed announces a commitment to a higher inflation target but fails to establish its credibility, it will have shown impotence.

....Part of the credibility problem stems from the political environment, especially in Congress. Imagine the day after the announcement of a plan for 3 percent inflation. Older people, creditors and workers on fixed incomes — all connected to powerful lobbies — would start to complain. Republicans would wonder whether they had found a new issue on which to campaign, namely, opposition to inflation. And Democrats would worry about what position to take. Presidents of some regional Fed banks would probably oppose the policy publicly.

It's not clear, of course, if (a) Bernanke agrees that we should target higher inflation but hasn't been able to persuade the rest of his colleagues, or (b) he's part of the problem. Option A is plausible, but I've read nothing suggesting that Bernanke has even mooted higher inflation targeting. How likely is it that he could do that with any vigor and not have word leak out?

Not very, I think. So I'd conclude either that Bernanke himself isn't on board with this or that the political climate is so obviously hostile that he knows it's hopeless to try. Neither one is very reassuring news.

A Simple Look At Income Inequality

| Sat Sep. 18, 2010 8:39 PM EDT

Will Wilkinson is unimpressed with Tim Noah's recent series on growing income inequality. He cites several recent pieces of research to suggest that, in fact, inequality hasn't been growing as fast as we think:

Robert Gordon, an economist from Northwestern University....reports that improved use of income datasets "shows that there was no increase of inequality after 1993 in the bottom 99 percent of the population, and can be entirely explained by the behavior of income in the top 1 percent."....Christian Broda and John Romalis find that "the relative prices of low-quality products that are consumed disproportionately by low-income consumers have been falling over this period. This fact implies that measured against the prices of products that poorer consumers actually buy, their 'real' incomes have been rising steadily."....Using an updated price index, Christian Broda, Ephraim Leibtag, and David Weinstein find that the real wages at the 10th percentile increased by 30 percent from 1979 to 2005.

There's long been a cottage industry in efforts to show that income inequality isn't as bad as the raw numbers say it is. Until recently, the most popular tactic was to insist that we should look at consumption instead of income. This was mostly just an attempt at misdirection, but in any case the great credit bubble and bust has made it plain that a lot of recent middle class consumption was fueled by refi and charge card binges that ended disastrously. If anything, this strengthens the case of those who say that income matters after all, so we don't hear this argument much anymore.

But there are plenty of others. We're measuring inflation wrong. Cheap plasma TVs and Chicken McNuggets have made the life of the poor better than you'd think by just looking at their earnings. The whole thing is just a statistical artifact of the 1986 tax reform bill. The composition of households has changed, so household income goes farther than it used to. Income distribution looks better if you count government transfers. Etc. etc. etc.

There are bits and pieces of truth to some of these things, but for the most part they don't really address income inequality at all. They just move the spotlight to something else. Are households smaller than before? Yes, which is why I usually prefer to look at statistics for individuals. Have consumption patterns changed? Maybe so, and taking that into account in an effort to get a handle on the actual lived experience of the poor/working/middle classes is an interesting exercise. Is CPI the right inflation measure? I prefer it, but it's an arguable point.

But regardless of the answers to all these questions, there's still the raw fact that the flow of money in America has changed dramatically over the past few decades. That's why one of my favorite charts is the one on the right. It's updated from the older version that I posted a couple of days ago, and the data comes from an annual CBO report that shows the share of total earnings going to various income levels.

It's not perfect, but it's pretty good. Since it shows income shares, inflation measures don't matter. It doesn't try to measure consumption, it just measures who the money is going to. It includes pensions and government transfers. It accounts for reporting changes due to the 1986 tax reform bill. And it uses tax data to get a cleaner look at the top of the income distribution.

(Drawbacks: It doesn't include healthcare benefits, which would change the shape of the curves slightly. And it uses households as its unit of account. That's not the way I like to look at things, but it's pretty standard in the field.)

If you look at the raw CBO figures, they show that a full tenth of the national income has shifted since 1979 to the top 1% of the country. The bottom quintiles have each given up a bit more than two percentage points each, and that adds up to 10% of all earnings. That 10% has flowed almost entirely to the very tippy top of the income ladder.

Is the middle class worse off because of this? Of course they are. Income matters even if plasma TVs are cheaper than they used to be or if CPI mismeasures middle class consumption or if average households now contain 2.6 members instead of 2.7. If this massive income shift hadn't happened, middle class earnings would be higher, they'd be able to buy more stuff, and they probably wouldn't be in debt as much. And the top 1% wouldn't have quite so much idle cash lying around to do stupid things with.

This income shift is real. We can debate its effects all day long, but it's real. The super rich have a much bigger piece of the pie than they used to, and that means a smaller piece of the pie for all the rest of us. You can decide for yourself if you think this is something we should just shrug our shoulders about and accept.

The Circular Firing Squad

| Sat Sep. 18, 2010 7:06 PM EDT

Here's Barack Obama at a fundraiser last night:

Democrats, just congenitally, tend to get — to see the glass as half empty. (Laughter.) If we get an historic health care bill passed - oh, well, the public option wasn't there. If you get the financial reform bill passed — then, well, I don't know about this particular derivatives rule, I'm not sure that I'm satisfied with that. And gosh, we haven't yet brought about world peace and — (laughter.) I thought that was going to happen quicker. (Laughter.) You know who you are. (Laughter.) We have had the most productive, progressive legislative session in at least a generation.

"In other words," says Glenn Greenwald, "you're just a petulant, unreasonable, unrealistic, fringe child who doesn't appreciate the greatness and generosity he's given you....What's most striking about Obama's comments is that there is no acceptance whatsoever of responsibility (I've failed in some critical areas; we could have/should have done better)." Jane Hamsher piles on too: "It all appears to be little more than an egotistical, thin-skinned taunt aimed at those they feel aren’t giving them the accolades the Democrats think they deserve."

I know why Jane and Glenn and plenty of others are angry at Obama. Some of their disappointments I share, some I don't. And there's some history here. But still: come on, folks. It's a campaign fundraiser. It's a place where you rouse whichever troops are in the audience and reel off a list of your accomplishments, not one where you hang your head and talk about your failures. It's a place where you tell a few jokes — like acknowledging the fact that liberals have been devotees of the circular firing squad for as long as liberals have existed. It's lighthearted after-dinner stuff, not an address to the nation.

I wish Obama and his staff would knock off these kinds of jibes, but even so it doesn't make sense to go this ballistic over a casual remark at a fundraising event. Maybe we should all ease up a bit on this stuff.

Friday Cat Blogging - 17 September 2010

| Fri Sep. 17, 2010 3:11 PM EDT

This is pre-dinnertime catblogging. Every day, starting around 4:30 in the afternoon, both cats make their way into the living room and start looking ostentatiously bored (Domino, on the left) or ostentatiously cute (Inkblot, on the right). Eventually they get fed. According to me, it's because the clock strikes five and that's dinnertime. According to them, it's because the bored/cute act works. So the postmodernists are right: we all make our own realities, and who's to say which one is really true?

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The Inflation Bogeyman

| Fri Sep. 17, 2010 3:04 PM EDT

The Fed's preferred measure of inflation is core inflation, which excludes food and energy prices. According to the BLS, the core inflation rate in August was just slightly above zero. The core inflation rate over the past two years is 1.17% and the rate over the past year is 0.89%. Chart below. Needless to say, this is well below the Fed's target. Think they'll do anything about this at their next meeting?

Huckabee Takes on Healthcare Reform

| Fri Sep. 17, 2010 1:59 PM EDT

Gotta give Mike Huckabee some credit. If there's one part of healthcare reform that's really popular, it's the requirement that insurance companies stop turning down customers with preexisting conditions. But he's loudly against it:

And a lot of this, it sounds so good, and it's such a warm message to say we're not gonna deny anyone from a preexisting condition....Okay, fine. Then let's do that with our property insurance. And you can call your insurance agent and say, "I'd like to buy some insurance for my house." He'd say, "Tell me about your house." "Well sir, it burned down yesterday, but I'd like to insure it today." And he'll say "I'm sorry, but we can't insure it after it's already burned." Well, no preexisting conditions.

How would you like to be able to call your insurance agent for your car and say 'I want you to insure my car.' 'Well tell me about your car.' 'Well it was a pretty nice vehicle until my sixteen year-old boy wrecked it yesterday. [He] totaled the thing out but I'd like to get it insurance so we can get it replaced.' Now how much would a policy cost if it covered everything? About as much as it's gonna cost for health care in this country.

I dunno. Does this play well even with conservative audiences? Maybe. But the preexisting condition provision is wildly popular, and appears to be popular even with two-thirds of Republicans. I guess that's why Huckabee didn't seem to get a very strong reaction from the Values Voter Summit crowd where he delivered this. But bravo for putting his mouth where his money is. I just hope none of his kids ever lose their jobs and then get sick.

How Safe is John Boehner?

| Fri Sep. 17, 2010 1:22 PM EDT

The latest hot topic of Beltway conversation is whether the current Republican leadership in Congress can survive a tea party putsch after the midterm elections. John Boehner recently suggested that a government shutdown wasn't on his agenda for next year, and Jon Chait thinks that could be a problem for him:

Here's the problem. If Republicans want to defund the Affordable Care Act in 2011 — and it's their highest priority — shutting down the government is the only way to go. So Boehner is signalling to his rank and file that they have to abandon their most fervent demand.

I think he's about one gaffe away from being deposed and replaced with somebody more willing to indulge Tea Party fantasies.

If anybody wants to start up a Republican establishment Dead Pool, I'm picking Boehner.

A few things here. First, I'm sure that Boehner's comment was purely for public consumption. Democrats are trying to damage the Republican brand with independents by making Boehner the public face of Republican intransigence and corporate lackeyism. So he's trying to make some nice, statesmanlike noises in order to fight that. I doubt he means a word of it.

Second — and here I'm going out on a limb — I say that tea party anger is going to start dissipating as soon as the elections are over. It won't go away entirely, but let's face it: the primary motivation of the tea partiers isn't deficits or spending or even healthcare reform. It's loathing of Obama and his fellow liberals. Once they take that scalp, a huge chunk of their energy is going to vanish overnight.

Third, choosing a party leader is the ultimate in inside exercises. Sure, Boehner could lose his office, but it seems unlikely in the extreme. If Republicans retake the House, he'll be the guy who led the revolt, and even if some of the incoming freshmen don't support him he'll retain the loyalty of virtually the entire current caucus. What's more, on November 3rd he'll start making the appropriate noises and the tea partiers will swoon. I think he's pretty safe.

Unless Republicans don't take the House, of course. In that case, he's road kill.

TARP and Creative Destruction

| Fri Sep. 17, 2010 12:41 PM EDT

My post this morning praising TARP for helping to rescue the banking system in 2008 produced the following Twitter conversation:

Will Cain: B/C it may have "worked" doesn't make it right. TARP broke a central tenant of capitalism: success & failure....It's a dangerous place to be — defending and judging things on whether or not they worked and not whether they're principled.

soopertrev: Interning Japanese-Americans during World War II "worked" in a way too.

Will Cain: Exactly.

This is, obviously, a pure libertarian reaction, but it's misguided on a couple of levels. First, even taken on its own terms, interning Japanese-Americans during World War II only "worked" if you genuinely believe we might have lost the war if we hadn't done it. Aside from Michelle Malkin, I don't know anyone who believes that today. Conversely, I do believe that the American (and therefore global) banking system would have been in serious trouble if not for TARP.

Beyond that, though, you simply can't think about the banking system the way you think about, say, the computer industry or the textile industry. In the latter two, as with most industries, there's a private sector, where firms start up and fail, and a public sector that sets some rules of the road but — ideally, anyway — doesn't need (or want) to decide which firms succeed and which ones don't. The relationship between the two sectors varies from country to country and from era to era, but still, the private sector is basically distinct from the public.

In banking it's not. As far as I can tell, every large-scale banking system ever created is fundamentally a partnership between the public and private sectors all the way down to its roots. The fact that the government is charged with regulating the currency ensured this even in the past, and on a practical level the worldwide adoption of central banking over the past century has cemented this bond in ways that simply make it nonsensical to try and divide the two. Citigroup may be a private corporation, but for all practical purposes it's also a branch of the Federal Reserve. Money and credit successfully flow throughout the country (and the world) only because of a symbiosis between the two, and between Citigroup and every other bank in the world.

So, no, you can't simply let big banks fail. It's like letting the electric grid fail: the entire economy would grind to a halt if it did, and no responsible government will allow that. TARP "worked," and I'm happy defending it on those grounds, but I'm also happy defending it on the principle that sovereign governments have a responsibility to prevent their banking systems and their economies from collapsing. Safeguarding money and credit are obligations as fundamental to any modern government as defending against foreign attacks, and that's what TARP did.