Kevin Drum - November 2010

Friday Cat Blogging - 5 November 2010

| Fri Nov. 5, 2010 11:54 AM PDT

On the left, an action shot of Inkblot! He looks like he's about to thrash some poor defenseless insect or something, but no. He was just arousing himself from his midday nap. He looks far more purposeful than he actually was. On the right, Domino stretches out in the afternoon sun to her full majestic length.

In other adorable mammal news, my sister passes along this story about a sloth sanctuary in Costa Rica. Who knew sloths needed a sanctuary? But before you click, be warned: the sheer cuteness factor is so high you might want to have your insulin shot ready ahead of time.

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Quote of the Day: Entitlements

| Fri Nov. 5, 2010 11:31 AM PDT

From Eric Cantor (R–Virginia), in a letter to his fellow Republicans:

Getting our long-term deficit under control will require that we address major entitlement reform. It is a conversation that we must have, but one that is easier said than done. President Obama, congressional Democrats, and their liberal allies have made it abundantly clear that they will attack anyone who puts forward a plan that even tries to begin a conversation about the tough choices that are needed.

Uh huh. Matt Steinglass takes a well-deserved sledgehammer to this particular piece of sophistry. Republicans have just finished up an absolute blizzard of campaign spending demonizing Obama and congressional Dems for daring to rein in Medicare spending earlier this year, and now they're trying to pretend that Obama and congressional Dems are the problem when it comes to reining in Medicare spending? Gumption indeed.

Obama and the Economy

| Fri Nov. 5, 2010 10:58 AM PDT

Did Barack Obama screw up by not focusing on the economy like a laser right from the beginning of his administration? I think there's a good argument to be made that a bigger, better stimulus would have goosed the economy more strongly, reduced unemployment, and helped eventual Democratic election prospects. But once that was finished up, what else could he have done? Here is the core of Bruce Bartlett's case:

Substantively, I think there was more that could have been done to stimulate growth that might have been doable if Obama had been more engaged in the problem. For example, all economists know that monetary policy is critical to restoring growth. Yet Obama allowed vacancies on the Federal Reserve Board to be unfilled for months and then did nothing to get his appointees confirmed in the Senate.

....If Obama had been out there every day talking about the economy, pressuring Congress and cabinet agencies to be more active, and paying closer attention to the progress of the stimulus, then I think the political dynamics might have been quite different. It’s likely that further stimulus, which has appeared to be politically impossible, might have been achievable. At least Obama could have been more engaged in the extension of expiring tax cuts, which threaten a significant fiscal contraction on January 1 unless Congress acts quickly.

Maybe. But this still strikes me as thin gruel. A better Fed still would have been a Fed with a limited ability to affect the economy. What was needed was fiscal stimulus, and I have my doubts that talking relentlessly about the economy would have improved the prospects of getting Congress to act. Republicans and centrist Dems simply weren't persuadable and, in any case, probably didn't care all that much about unemployment in the first place. Which brings us to this:

It has amazed me since the beginning of the recession that the many millions of those unemployed seem to have accepted their fate so meekly. I don’t know why this is the case. Perhaps it’s because they have been browbeaten into accepting the right-wing idea that they are just lazy and could find a job if they really wanted to, or maybe they have given up hope of ever finding a job and taken early retirement, or perhaps a still-working spouse has kept the family adequately afloat.

I think that a major factor is the decline of labor unions in the U.S., especially those in the private sector, because they tend to be the organizers of political pressure related to jobs. Another factor may be that so many of those that are still union members are now in the public sector, where they have different political priorities, such as protecting their own jobs, pay and benefits from cuts forced by sharply-declining state and local government revenues.

As a structural explanation, this strikes me as much more powerful. Mountains of research suggests that members of Congress don't really care about the desires of the poor and the working class very much, and this goes double when the poor and working class aren't taking to the streets with torches and pitchforks. And it goes triple when there's no longer any institutional power to speak for them, something that the long-term decline of private sector unionization cemented into place many years ago.

So count me as still skeptical. By focusing on other things, Obama passed a historic healthcare bill, a decent financial reform bill, and half a dozen smaller bills. If he had skipped this stuff and instead spent all his time "focused on" the economy, I think the result would have been no healthcare reform, no financial reform, and — maybe — a loss of 55 seats in the House instead of 65. There just flatly wasn't that much he could do. Warts and all, I think he made the right decision.

Why Are Banks Foreclosing?

| Fri Nov. 5, 2010 10:12 AM PDT

Mike Konczal makes a familiar point today about the HAMP program, which was supposed to help reduce home foreclosures but, in fact, has accomplished close to nothing:

Obama's Treasury team took a system that had a terrible design and doubled-down on it. Servicers aren't modifying mortgages. There's an active empirical debate we'll cover next week over whether or not servicers are not modifying mortgages because of information problems or becomes of adverse incentive structure — or if you don't speak economics, whether or not the servicers are dumb or corrupt. What was meant to be a passive, thin, pass-through vehicle with obvious conflicts of interest now has to actively manage a giant portfolio of troubled mortgages. And they are either unwilling or incapable of acting as a fiduciary for investors and getting mortgages back to being current and working.

Well, I for one look forward to next week's discussion of this. As I understand it, the basic problem is that loan servicers can make a lot of money by stringing homeowners along, raking in a lot of fees along the way — for insurance, appraisals, title searches, legal services, etc. — and then eventually allowing them to default anyway. The basic story is here. To some extent, then, what's happening is understandable: the incentives are lousy and companies are simply making money on other people's misery. Nothing new about that.

And yet....somehow this has never quite added up. I don't doubt that loan servicers are in business to make money and don't really care if homeowners suffer or not. That's pretty commonplace corporate behavior. But they are in business to make money, and if there's one thing banks are good at, it's figuring all the angles when it comes to making a buck. If, in the long run, principal reductions really, truly were the most profitable way to deal with underwater homeowners, I'd expect that not only would banks figure this out pretty quickly, they'd be figuring out ways to create securitized bundles of principal reductions to sell to gullible German investors. That well can't be completely dry, can it?

So why hasn't this happened? There are a couple of obvious possibilities here. One is that the complicated nature of mortgage securitization simply makes principal reduction too hard. Once the loans have been securitized, tranched, retranched, and re-retranched, there are so many note holders with a legal stake that it's all but impossible to get unanimous agreement to do a principal reduction. Another possibility is that banks are afraid of knock-on effects: once they start reducing principal in a few cases, their entire customer base will find out what's going on and start withholding payment in hopes of getting the same treatment. Reducing principal for 10% of their customers might make sense, but banks might be afraid that there's no way to hold the line there.

However, this is just uninformed speculation, and I await Mike's more informed take on this. One way or another, though, it's hard to believe that banks are really, truly passing up a win-win opportunity here. There has to be more going on.

TV's Bleak But Bright Future

| Fri Nov. 5, 2010 9:41 AM PDT

Reihan Salam links today to a post by UCLA sociologist Gabriel Rossman on the future of television if the cable universe moves to a la carte pricing. Long story short, simple economics suggests that we'll all cut back on the number of channels we subscribe to, which in turn means that we'll end up with both (a) fewer channels and (b) channels with lower production values. I've long thought this was pretty obviously true, and it's what's made me sort of a mushy supporter of a la carte pricing. Still, a supporter I am, and Reihan suggests what will happen if/when this comes to pass:

But this could mean that U.S. viewers will consume more entertainment that is peer-produced, produced overseas, or by institutions that otherwise work outside of the WGA and SAG structure. Quality writing is of course very important, but perhaps quality writers will attach themselves to hyper-realistic animation projects, etc. No more actors! Or rather a somewhat smaller cadre of actors who focus primarily on screen-capture work, and who make middle-class wages rather than outsized sums. There are many, many ways this phenomenon could play out.

Italics mine. For what it's worth, this is what I think is going to happen in the medium term. I'm not sure just how distant this is, but I don't think we're too far away from an era where a single person — or perhaps a small team — can create high-quality, 100% CGI shows that are virtually the equal of what you see today on network TV. Think xtranormal.com but with supercomputers and a crack creative team. Basically, you'll need some good scriptwriters and a few good designers and that's it. Brave new world, eh?

Taking One For the Team

| Fri Nov. 5, 2010 9:15 AM PDT

More political science wonkery! Eric McGhee wants to know if Yes votes on health care reform, the economic stimulus, cap-and-trade, and TARP were bad for vulnerable House Democrats. As I noted yesterday, regressing this on the entire Democratic caucus isn't very interesting, since the results are swamped by lots of members of Congress who voted Yes on all four but are in very safe seats and won reelection easily:

So I modeled Democratic vote share in contested House districts using this count of "yes" votes, plus campaign money in 2010 (from here and here) and each district's House and presidential vote in 2008 as controls (here). The model also estimates whether the effect of roll call votes depended on the partisanship of the district, as captured by the 2008 presidential vote.

....What does this model tell us about roll call votes on these four bills? Simple answer: they mattered. A lot. A Democratic incumbent in the average district represented by Democratic incumbents actually lost about 2/3 of a percentage point for every yes vote. That doesn't sound like a lot, but that's for incumbents in districts that voted 63% for Obama.

....What might have happened if vulnerable Democrats hadn't voted for any of the four bills?....The Democrats gain back 32 seats, enough to retain control of the House.

Now, McGhee isn't saying vulnerable Dems shouldn't have made these votes. In fact, he doesn't even think it cost them their majority, because it turns out there are some other confounding factors. Read the full post for details. "But," he says, "it seems safe to say that they had a big negative effect on Democratic performance, and they certainly didn't help."

Perhaps so. For now, though, treat it as just another data point. It's probably going to take a while for the real answers to emerge from the data.

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Weird Findings From 2010's Exit Poll Data

| Fri Nov. 5, 2010 3:00 AM PDT

It's time for my biannual look at the exit polls. This won't explain everything about Tuesday's election. It's not intended to. What it is intended to do is provide a baseline that shows where Democrats did better and where they did worse than they did in the last midterm election.

First things first: In 2006 Democrats won the popular vote for the House of Representatives by about 8 points. In 2010, Republicans won the popular vote by about 6 points. That's a shift of 14 points. There are plenty of broad structural explanations for this—the economy, dislike of health care reform, whatever—but beyond that, we'd also like to know if there were any specific groups that helped power this Republican victory. Was it the youth vote? The evangelicals? What?

To find out, you have to look for groups that swung by substantially more or less than 14 points. So here they are. Based on a comparison of 2006 and 2010 exit polls, here are the demographic groups that showed the biggest swing into the Republican column this year:

  • Nonvoters from 2008 (+56)
  • Independents (+36)
  • Rural voters (+25)
  • Northeast voters (+20)
  • Age 65 and older (+21)
  • Catholics (+21)
  • White voters (+19)
  • Income under $30,000 (+19)
  • Income over $200,000 (+19)
  • High school grads (+19)

The most intriguing result here is the top one: People who didn't vote in the previous presidential election shifted into the Republican camp at a fantastic clip. I have no idea why. Maybe people who suddenly care about voting even though they didn't two years ago are usually motivated by animus toward whoever won. Hard to say. Still, intriguing though this is, the actual number of people in this category is small enough that it's not especially important.

The most important categories are probably white voters and older voters, both of whom shifted Republican far more than the general population. Beyond the raw size of the shift, however, whites are important because their absolute numbers are so big and older voters are important because their big Republican shift was accompanied by higher turnout. Conversely, although rural voters also shifted Republican in big numbers, their importance was diluted because their turnout was down.

And then there are the "independents." The scare quotes are deliberate, because it's hard to know what to make of them. It's a big group and it shifted strongly Republican, which makes them an important factor in the election. But there's more to this. Self-described "moderates" turned out in lower numbers than in 2006 and shifted Republican in lower numbers than average. Put these two things together and they suggest that there's a large number of independent voters who have shifted their self-ID from moderate to conservative. Were they really conservative all along but only started fessing up to it this this year? Or is there a genuine ideological shift in progress? Hard to say. But either way, this year they showed up at the polls in much larger numbers than in 2006. This is the famous "enthusiasm gap," likely driven by tea party fervor and millions of dollars of Medicare demagoguery.

So: White voters and older voters swung big, and conservative leaners turned out in bigger numbers than usual. Add to that Northeasterners and Catholics, and you've accounted for most of the big swings.

But was there anyone out there who showed unusual loyalty to Democrats this cycle? Indeed there were. Here are the groups that showed the smallest swing into the Republican column:

  • Liberals (-6)
  • African-Americans (-2)
  • Mothers (+1)
  • "Other" religion (+2)
  • Age 18-29 (+5)
  • No high school (+7)
  • Union households (+8)
  • Big city voters (+8)

Self-described liberals actually voted for Democrats in bigger numbers than in 2006. They also showed up to vote at the same rate as 2006. Unfortunately, conservatives showed up in bigger numbers, swamping the liberal tide. Likewise, African-Americans stayed loyal to the Democratic Party, but their numbers were too small to make a big difference.

One of the most interesting categories here is mothers. They didn't swing Republican at all, voting for Democrats at virtually the same rate as in 2006. I don't have a good explanation for this. Health care reform, maybe? (Single women swung Republican at the same rate as the general population.)

And finally, the youth vote. According to CIRCLE, turnout among young voters was down compared to 2006 (20 percent vs. 23 percent). And while they swung away from Democrats a bit, it wasn't by much. They remained pretty loyal to the Ds, but they just didn't show up to vote in big numbers.

So that's that. We'll all be arguing for months about what the big narrative is, but at least if someone tells you a story about how it was evangelicals or blue-collar workers or Hispanics that really made the difference, you'll know just how big a difference they really made. In a few cases it's a lot, but in most cases it's not.

The Fed and You

| Thu Nov. 4, 2010 9:54 PM PDT

Felix Salmon explains the mechanics of quantitative easing:

The way that QE works is that the Fed will publish a schedule of how many Treasury bonds it intends to buy and when....What that means is that the New York Fed has a direct line to the biggest banks in the world (Goldman Sachs, Morgan Stanley, Deutsche Bank, etc — 18 in all). And it gets all those banks to compete with each other, either directly or on behalf of their clients, for who will sell the Fed the Treasury bonds it wants at the lowest price.

....The people selling Treasury bonds to the Fed, then, are big banks, who are told in advance exactly how many Treasury bonds the Fed wants to buy. As a result, they’re likely to buy Treasuries ahead of the auction, with the intent of selling them to the Fed at a profit....Once the banks have made that profit, it’ll get paid out in bonuses to the people on the bank’s Treasury desk, with the rest going to their shareholders. We’re not exactly helping the unemployed here.

More detail at the link. And for yet more detail, Felix recommends Shahien Nasiripour's long HuffPo piece about Fed policy and how it works.

Budget Deficit Arithmetic

| Thu Nov. 4, 2010 9:19 PM PDT

Folk wisdom suggests that budget deficits cause trade deficits, but in reality this isn't quite true. Dean Baker explains the reality:

However, there is a relevent accounting identity which is always true. The trade surplus is equal to net national savings....The implication of a large trade deficit is that either public savings must be very low or negative (i.e. a large budget deficit) and/or we must have very low private savings. There is no possible way around this accounting identity.

This means that if the U.S. has a large trade deficit, as it currently does, then it must be the case that either households have very low saving or the country has a budget deficit. At the peak of the housing bubble, private saving was very low, since households spent based on their housing bubble wealth. Now that much of this bubble wealth has disappeared with the collapse of house prices, saving has moved back toward more normal levels. This means that to sustain the same level of output, the budget deficit must rise. There is no way around this identity.

To say this slightly differently: with private saving at normal levels, if you want to reduce the budget deficit (as conservatives say they do) then you have to reduce the trade deficit. And how do you do that? The most obvious way is to engineer a weaker dollar, which makes exports cheaper and imports dearer. That means we sell more stuff to foreigners and buy less from them. But as a few minutes listening to Glenn Beck or any other conservative talker will convince you, conservatives are dead set against this. A weak dollar, they believe, is a sign of national decay.

So then what? If you have to reduce the trade deficit in order to reduce the budget deficit, but you want the dollar to remain strong, what are your options? Well, an economic slowdown would do the trick, since that means we'd buy less stuff from overseas. That worked a treat during our most recent recession. But that's pretty much it. In other words, as Dean says, if you want a lower budget deficit and you want to keep the dollar strong, "you must want [] the level of output in the United States to fall and its unemployment rate to rise. That is the only plausible way that the accounting identities can be kept in balance." Will somebody please tell John Boehner?

Partisan Districts, Partisan Votes

| Thu Nov. 4, 2010 4:31 PM PDT

John Sides asks today for the single factor that best predicts which Democratic House incumbents lost their seats on Tuesday. It's not ideology, he says, or how you voted on TARP, or any of those things:

The best predictor by far is none of those. It is simply how Democratic their district is. In our dataset, Eric McGhee and I measure that with the percentage of the vote that Obama received in 2008....In all 402 contested House elections, the 2008 presidential vote in that district would explain 83% of the variation in the Democratic House candidate's vote share. Nothing else in our dataset comes close.

I'm a big fan of simple structural explanations like this, but I've got a big problem here. Sides's chart is above, and it does indeed seem to show a very clean relationship. But a big reason for that is the large number of districts that are wildly partisan: above 60% is entirely Democratic and below 40% is (almost) entirely Republican.

This is no surprise, and also not very interesting. Of course massively partisan districts are highly likely to return partisan results. For one thing, most of them are hardly even contested.

But what happens if you stay in the general vicinity of the middle? That's the thick black box I added to to chart, and it shows only districts where Obama won 40-60% of the vote in 2008. I've enlarged it on the right. Just by eyeballing it, it looks like there's still a relationship, but it's a much weaker one. Note, for example, that the Republican pickups (bright red) are spread fairly evenly across the entire range. The overall regression line might be just as steep (I can't say just by looking), but it's definitely a lot muddier. It certainly explains way less than 83% of the variation in the 2010 vote.

A model that gets most of its power from its extremes doesn't strike me as very explanatory. Everyone knows there's no action there. What we want is a model that explains what happens in districts that are truly contested. Looking solely at the 2008 presidential votes doesn't seem to get us very far there.