Kevin Drum - January 2011

The Big Freeze

| Tue Jan. 25, 2011 6:46 PM PST

Barack Obama plans to propose a five-year discretionary spending freeze in tonight's State of the Union address. Is this a good idea? A preemptive capitulation to Republican deficit hawks? Or what?

I vote for "or what." Let's all keep in mind that budgets are set one year at a time, and they're mostly set by Congress. The president has a certain amount of agenda-setting power, but that's about it. Members of Congress will do whatever they want, and next year they'll once again do whatever they want. If that means spending more money, they'll spend more money. Obama could announce a hundred-year discretionary spending freeze and it would mean about as much as a five-year freeze. This is more a PR exercise than anything else and should be evaluated on those terms.

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The Myth of Slow Growth Revisited

| Tue Jan. 25, 2011 5:26 PM PST

Was economic growth in the period 1950-80 really significantly higher than it has been in the period since then? Yesterday I said that growth rates in those two periods were actually about the same, and today Stuart Staniford and Ryan Avent say I'm wrong. They both have a point, so let's revisit this.

Stuart points out that a 100-year logarithmic chart hides small differences. Ryan points to decadal averages for real GDP. So here's a new chart that addresses both of these concerns (GDP and population data from FRED.):

First off, I'm using GDP per capita, not raw GDP, since that's a better measure of actual economic growth. Stuart suggests that GDP per working-age person might be a better measure, and I'm open to that depending on what it is we want to measure. Still, GDP per capita is the usual measure, so that's what I used.

The most obvious conclusion that pops out from the data is that growth has been fairly steady for the past sixty years with the exception of a nice growth spurt in the mid-60s. You can see that in the average growth rates per decade:

  • 1950s: 1.67%
  • 1960s: 3.42%
  • 1970s: 2.49%
  • 1980s: 2.43%
  • 1990s: 2.02%
  • 2000s: 1.27% (through 2007)

For the 30-year period 1950-79, growth averaged 3.18%. For the 28-year period 1980-2007, growth averaged 2.53%.

There are a couple of conclusions here. (1) The 60s were great, the 2000s were lousy. (2) Overall growth in the most recent three decades was indeed lower than in the three decades of the postwar era. (3) But not by a lot.

So I overstated things yesterday, but I'd still say it's the economy of the aughts that's a problem, not the entire post-70s era. The fact is that the post-70s economy as a whole simply wasn't a lot worse than the post-40s economy. The problem during this era wasn't primarily that growth was lackluster, it's that middle class wages consistently lagged growth by upwards of a percentage point per year.

So to revisit yesterday's point: yes, growth is important. You can't have 2% wage growth if the economy is growing 1.27% per year. But it's not enough. We had good growth for three decades after the end of the 60s and it didn't produce steady middle-class income gains. Distribution is important too. 

The Culture of Wall Street

| Tue Jan. 25, 2011 12:53 PM PST

Every once in a while Reihan Salam writes something so weird that I'm not sure what to make of it. Is it simply ridiculous on its face? Or is it actually a penetrating insight that merely strikes me as ridiculous because I haven't given it enough thought? I dunno. But today, I report, you decide. Here is Reihan talking about the fact that lots of rich Danes live in other countries in order to escape Denmark's high tax rates:

My guess is that it is somewhat less common for income-maximizing U.S. born individuals to spend the bulk of their prime-age years working in countries with a lower tax burden. And my guess is that this is beneficial in its own way, e.g., agglomerations of rich people might improve the quality of high-end consumption, driving the creation of novel experiences, enabling artists and other creative professionals to make a living doing highly specialized work (e.g., trapeze artists, experimental fiction writers, etc.).

I often think of the U.S. as creating cultural public goods for the world. Our agglomerations of the rich are a big part of it. London deserves credit as well on this front. None of this is to suggest that we shouldn't have more distribution. My skepticism towards dramatically increasing the amount of redistribution we engage rests on other arguments. But it is something to think about, and, I'd suggest, something we should be proud of.

Seriously? The insane wealth of socially worthless Wall Street zillionaires helps provide a living for trapeze artists and experimental fiction writers? That doesn't even strike me as "high-end consumption," for starters. Do rich people really go to Cirque du Soleil and read Michael Ondaatje? I suspect that better examples would be gold-plated bathroom fixtures and Damien Hirst artworks. Both of which, frankly, the world could do without pretty easily. Especially the Damien Hirst monstrosities.

Maybe this is just class envy talking, but America's wealthy class doesn't strike me as much like the Medicis of old, at least when it comes to support of great art. For the most part, it also doesn't strike me that support of great art requires dense agglomerations of rich people anyway. Those agglomerations probably help support great museums and great opera houses, but that's about it. And in any case, all that great art would still exist somewhere even if MOMA and the Met monopolized less of it.

But maybe I'm wrong! Maybe stratospheric wealth — as opposed to merely titanic wealth — really does improve high culture for everyone. Anyone want to take a crack at making a more detailed defense of this thesis?

Bonds vs. Bankruptcy

| Tue Jan. 25, 2011 11:50 AM PST

Republicans have lately been floating the idea of a new law that would allow states to declare bankruptcy. The benefit, from their point of view, is that union contracts can be forcibly renegotiated in bankruptcy, which would allow states to roll back public sector pension plans and — not coincidentally — deliver a hammer blow to public sector unions. However, House majority leader Eric Cantor recently came out against the idea, and James Pethokoukis smells a rat. He thinks GOP pols are caving in to Wall Street interests:

Let’s try and connect a few dots....In 2010 election cycle, Wall Street campaign contributions shifted to Republicans from Democrats....Wall Street does not like the idea of states being given the power to file for bankruptcy....Overall, banks own some quarter-trillion bucks worth of state and local debt.

....Also, some Wall Street firms make a lot of money off the public pension system and don’t want to get on the wrong political side of the issue. Take the Blackstone Group, a private equity firm....Blackstone’s view on public employee pensions is clear and unambiguous: We believe a pension is a promise. Working men and women should not have to worry about their retirement security after years of service to their communities....Billionaire Blackstone CEO Steve Schwarzman is a big Republican moneyman...Many Republicans would love to cement their rekindled financial relationship with Wall Street heading into 2012 when they have a good chance of retaking the Senate.

I'd say Pethokoukis has this about right. Corporate and financial interests may hate unions, but they don't hate public sector unions. Why should they? Higher wages for public sector workers don't cause them any grief. Conversely, they do hate the idea that their bonds will ever be paid off at less than 100%, no matter how dire the emergency. They made that crystal clear during the 2008-09 financial crisis, and indeed, their counterparty obligations were paid off at 100% in virtually every case.

Put it all together and you have a pretty united financial/corporate stand against anything that might allow states to default on their obligations. That's a lot more important than a longshot attack on public sector unions they don't care about anyway. This is a bitter pill for Republicans, who'd love to take a shot at one of the Democratic Party's big funding sources, but it's the price you pay when you're a wholly owned subsidiary of corporate America. You do what they say whether you like it or not. And what they're saying is: don't even think about endangering our money. Capiche?

The Partisan Supreme Court

| Tue Jan. 25, 2011 10:42 AM PST

From the LA Times:

Justice Antonin Scalia's appearance at a meeting organized by the House Tea Party caucus and Rep. Michele Bachmann (R-Minn.) on Monday provoked new cries from liberals and some academics that conservative justices are shedding the appearance of impartiality. The session, part of what Bachmann calls a series of constitutional seminars, was closed to the media. Lawmakers said Scalia advised them to read the Federalist Papers and to follow the Constitution as it was written.

University of Texas law professor Lucas A. Powe, a historian of the liberal Warren Court, said Scalia's appearance made the court look partisan. "He is taking political partisanship to levels not seen in over half a century," Powe said.

I'm on Scalia's side here, though probably not for reasons he'd appreciate. I think the notion that the Supreme Court is nonpartisan is so laughable that I'm surprised anyone even defends the idea any longer, and as long as it's going to be nakedly partisan, why shouldn't justices engage in partisan pep rallies? Might as well be honest about the whole thing.

The Voter ID Tap Dance

| Tue Jan. 25, 2011 10:30 AM PST

The incidence of actual voter fraud at the polls in America is indistinguishable from zero. Basically, it just doesn't happen. But that hasn't stopped conservative states from eagerly passing voter ID laws anyway, and Texas is in the vanguard. Oddly, though, they've decided there ought to be an exception in the new law they're considering:

In 2009, they were talking about requiring photo ID or two forms of non-photo ID; the 2011 bill does not have that non-photo ID option. It does, however, have an exemption from the photo ID requirement for those who are at least 70 years old at the start of 2012 and who have their voter-registration card when they go to vote.

Hmmm. Why make an exception for old people? The answer, obviously, is that lots of senior citizens don't have driver's licenses, and if they have to go to the trouble of getting a state ID card just to vote, they might decide not to bother. In other words, the photo ID requirement would create an artificial obstacle to voting among a group of perfectly law-abiding citizens.

It's good to see Texas Republicans tacitly admitting that. It's an excellent point, after all. There are other groups this applies to, though: students, poor people, and minorities, for example. But no exemption for them! I wonder why. What could possibly be the difference between senior citizens and these other groups? It's a poser, isn't it?1

1Kay Steiger provides the answer at the link, which is where I stole my snark from in the first place.

POSTSCRIPT: And just for the record, I've long supported a national voter ID card, aka a national identity card. See here and here for more.

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Housing Bubble Still Bursting

| Tue Jan. 25, 2011 9:11 AM PST

Federal home-buyer tax credits expired last spring, and a few months later home prices started to sag again. As of November of last year, they're still sagging:

The 20-city index is now about 3 percent above April 2009 levels, "suggesting that a double dip could be confirmed before spring," David Blitzer, the index committee's chairman

....From October to November, prices fell in 19 of the 20 metro areas tracked by the Standard & Poor's/Case-Shiller index, widely considered a gauge of the housing market's health. The only exception was San Diego, where prices were basically unchanged.

My own guess is that house prices still have a ways to fall, but not a long ways. Still, even another 10% over the next year or so would continue to put a big drag on the economy. Prosperity may be somewhere around the block, but it's not quite around the corner yet.

The Virtue of Self-Control

| Mon Jan. 24, 2011 11:18 PM PST

This isn't too surprising, but a new study that tracked over a thousand children from the age of 3 to the age of 32 has found that the long-term effects of poor self-control are at least as important as intelligence and social class origin:

Childhood self-control predicted adult health problems....elevated risk for substance dependence....less financially planful....less likely to save and had acquired fewer financial building blocks for the future....struggling financially in adulthood....more money-management difficulties....more credit problems....more likely to be convicted of a criminal offense.

The authors suggest two different paths by which poor self-control creates problems later in life:

Adolescents with low self-control made mistakes, such as starting smoking, leaving high school, and having an unplanned baby, that could ensnare them in lifestyles with lasting ill effects....Thus, interventions in adolescence that prevent or ameliorate the consequences of teenagers’ mistakes might go far to improve the health, wealth, and public safety of the population. On the other hand, that childhood self-control predicts adolescents’ mistakes implies that early childhood intervention could prevent them....Early childhood intervention that enhances self-control is likely to bring a greater return on investment than harm reduction programs targeting adolescents alone.

The policy implications here remain to be worked out, but it's yet another indication that the benefits of intensive early childhood interventions go far beyond academic achievement. Even if early childhood programs have no lasting effect on school test scores at all, they might still be immensely valuable if they improve levels of self-control. The question is, what's the best way to do that?

The Mystery of Fact Checking

| Mon Jan. 24, 2011 4:39 PM PST

Megan McArdle comments on a book review that bemoans its target's many basic factual errors:

This is what fact checkers are for, and I don't understand why book publishers don't have them. They cost money, to be sure--but not that much money....A quarter of a million dollars a year would get you the world's finest staff of crack fact checkers.

....Presumably the answer is that it isn't economic: readers don't care, and indeed rarely learn; there's no money in preventing the occasional catastrophe []. But then one must turn the question around: why do magazines like The Economist, the New Yorker, and yes, The Atlantic, employ fact checkers? Our readers are the potential consumers of books like the one that the Economist is reviewing; do they care less about accuracy in their books than in their magazine articles?

Not that anyone at The Atlantic thinks about it that way; we employ fact checkers because it seems like the right thing to do. But why does this ethic prevail at so many magazines, and at no publishing house?

I have my doubts about this. When I think about the amount of work that MoJo's fact checkers put into the 4,000-word articles I write, and then multiply that by 20 for the entire magazine, that's a lot of fact checking. And it's probably less than you'd need for the average 300-page nonfiction book. At a guess (since no fact checkers are checking this blog), I'd say that fact checking a book would cost upwards of $5-10,000, and considering that most nonfiction books don't even make back their advances, that's a lot of money.

But there's another thing going on here as well: if a book has errors, people blame the author. They don't generally blame Random House or Simon & Schuster. But if there are errors in a magazine, people blame the magazine. So magazines simply have a stronger incentive to protect their brand than book publishers do.

Beyond that, I suppose it's just inertia: magazines have had fact checkers for a long time and book publishers haven't. Any other ideas?

The Myth of Slow Growth

| Mon Jan. 24, 2011 4:00 PM PST

Earlier this morning I suggested that policies aimed at economic growth, though obviously a good thing, aren't enough to raise middle class fortunes. You also need economic policies that focus on the middle class. Matt Yglesias counters:

I’m not really sure how separate they are. I think the specific fate of the very poor can become pretty unmoored from overall economic conditions, but certainly as a historical matter middle class incomes have risen the most at the same times America’s has had the most rapid economic growth—the 30 years after World War II and the late 1990s. You can construct some models in which this isn’t the case, but in practice the basic mechanisms for faster economic growth lead to rising middle class incomes, though not necessarily rising incomes for each individual middle class household.

This is a surprisingly hardy myth, and I'd like to help it die the grisly death it deserves. Here's a chart showing real per capita GDP growth in the United States over the past century. I've helpfully added a straight red line for the period from 1950 to the present day:

The past 30 years simply haven't been a low-growth period. In fact, economic growth has been about the same as it was in the 30 years before that. Our problem isn't growth, our problem is that the returns to growth have increasingly been skewed in favor of the very rich.

It's certainly true that middle class wages tend to rise in extremely tight labor markets, like the one we had in the late 90s. Mickey Kaus is fond of making that point. But this is pretty meaningless unless you have a plan to keep labor markets perpetually tight. If you do, then believe me, I'll be the first to sign up. But no one has such a plan. In the real world, we have to deal with the fact that real per capita growth is likely to be a pretty steady 2% per year over the long term and labor markets are going to fluctuate around a level that's (hopefully) snug but not perpetually at 90s-era tightness.

The prosperity of the middle class obviously depends on a growing economy. But just as obviously, it depends on more than that. For liberalism to mean anything at all, we need to support policies that are aimed both at overall economic growth and at ensuring that prosperity is widely shared. We haven't done a very good job of that over the past 30 years.