Kevin Drum - January 2011

Downgrading America

| Fri Jan. 28, 2011 3:45 PM EST

Karl Smith on the possibility that ratings agencies will downgrade U.S. debt from its current AAA rating:

I am [] willing to take 50 to 1 odds that President Obama doesn’t understand what a downgrading of US Treasuries would mean. He could probably trot out some line about investor confidence but what this actually meant and the significance or more to the point, lack thereof, he would not be able to explain cogently.

I can't speak for Obama, but I have a feeling that the significance would be: zero. Granted, there's symbolic importance to something like this, and on a substantive level there are certain funds that are legally prohibited from holding non-AAA debt. So fine: maybe not quite zero.

But U.S. debt is simply too big, too public, and too widely followed for ratings agencies to have much influence over it. Everyone knows what the problems with the American economy are, and no one thinks that the folks at Moody's or S&P know any more about it than anyone else. They just don't have any special expertise to offer here. A downgrade might provide an opportunity for some short-term arbitrage, but beyond that it's not clear if it would have any effect at all. It's the market that determines the price of U.S. debt, not the ratings agencies.

(The president couldn't actually say anything this cavalier, of course. He'd have to trot out some line about investor confidence and the long-term strength of the U.S. economy blah blah blah. Still, I think zero is more or less the actual correct answer.)

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Is Corporate Tax Reform Still Possible?

| Fri Jan. 28, 2011 2:59 PM EST

The New York Times has a pretty good primer on corporate tax reform today, and it includes the chart on the right showing the different rates that various industries pay thanks to the tax breaks, subsidies, and loopholes that they've lobbied for over the years. Jon Chait comments:

Guess what? The interest of the companies benefiting from loopholes outweighs the interest of the companies that would like lower rates. If nothing else, loss aversion will drive the loophole beneficiaries to lobby harder than non-beneficiaries. My prediction: nothing happens.

He's probably right, and this is a profound demonstration of just how far right the Republican Party has moved over the past couple of decades and how much more power the business community has amassed. After all, as Bruce Bartlett reminds us today, the idea of lowering rates but eliminating loopholes in the corporate tax code managed to get bipartisan support as recently as 25 years ago during the administration of conservative hero Ronald Reagan. Today, though, it's a nonstarter:

Republicans claim they are for it, but they steadfastly refuse to name a single existing tax provision that is worth getting rid of; they are only for tax rate cuts and that is the sum total of their contribution to the tax reform debate....The other factor in Republicans’ thinking is just cynical politics....Grover Norquist, president of Americans for Tax Reform and the man who, more than anyone else, lays down the Republican line on all tax issues, told me this when I asked him about coming up with offsets to pay for tax reform: “I recommend taking the corporate rate to 25 percent. The Dems can suggest tax hikes if they believe they need to ‘make up’ revenue. That is a bipartisan division of labor.”

The political trap is obvious. Any actual reform that would increase revenue will be relentlessly attacked by Republicans as a tax increase and they will quickly send out fundraising letters to whatever group or industry is affected, requesting campaign donations to prevent the Democrats from raising their taxes. No mention will be made by Republicans of the idea that the reforms would be coupled with tax rate reductions in a revenue-neutral manner that neither raises nor lowers net tax revenue in the aggregate. Unfortunately, this strategy will doom any hope of tax reform. No Democrat is going to put forward any revenue-raisers under these circumstances.

I've always been cautious about taking any lessons from the passage of corporate tax reform in 1986. It was, in some ways, sui generis, a sort of miraculous bipartisan stand against corporate interests that's just very, very rare. And yet: it happened. Twenty-five years ago conservative Republicans were willing to team up with Democrats to do something that was good for the country, and neither side backed down because of either corporate pressure or an unwillingness to allow the other side a victory. It was, in a way, an existence proof that this kind of thing was once possible.

In theory, there's no reason it couldn't happen again. Democrats are probably willing to go along, and base broadening is, officially anyway, something that conservatives favor. But in real life, Republicans are less willing to work across the aisle these days and Democrats are far more responsive to corporate pressure than they were in the 80s — which is, I suppose, just a longwinded way of saying that American politics is broken and big business reigns supreme. But it's a very concrete way of saying it, and it lends itself to an almost quantitative assessment. The fate of corporate tax reform is sort of a bellwether for the state of our political system, and I suspect our system is so broken that it will die without even getting a serious hearing.

The GOP and the Tea Party

| Fri Jan. 28, 2011 2:27 PM EST

Kathleen Hennessey of the LA Times reports that with the election safely out of the way, Republican senators are none too eager to associate themselves with the tea party movement:

The first meeting of the Senate Tea Party Caucus on Thursday attracted just four senators — out of 47 GOP members — willing to describe themselves as members. The event was as notable for who wasn't there as who was. Sen. Marco Rubio (R-Fla.), once a tea party favorite, has for now declined to join the caucus, whose first meeting was organized by Sen. Rand Paul (R-Ky.). Sen. Ron Johnson, a Wisconsin Republican whose campaign sprung from the small-government movement, has said he's unsure if he'll join. Sen. Pat Toomey (R-Pa.) showed up to address the group of activists, but then hustled out of the room, ignoring reporters' questions about whether he was in or out.

Hennessey notes that there are institutional reasons that might explain some of this, but I suspect the real reason is simpler: it's one thing to be a tea partier in a congressional district, which might be small and ideologically extreme. But it's a lot harder to be one in a statewide office, where you have to appeal to a broader range of the electorate. As lots of analysts have noted, congressional districts have become more polarized over the past couple of decades — partly due to gerrymandering, partly due to geography, and partly due to people actively segregating themselves — and this provides fertile ground for hardcore activists on both sides. But it just doesn't scale up. Sarah Palin will never be president. Hell, Joe Miller couldn't even win a Senate seat with her backing. The tea party is having an impact, but it's mostly at the fringes and the leadership of the GOP will, eventually, swallow it up and spit it out. As I put it earlier this year:

As with the earlier incarnations [of right-wing extremism], its core identity will slowly fade away and become grist for CNN retrospectives, while its broader identity becomes subsumed by a Republican Party that's been headed down the path of ever less-tolerant conservatism for decades. In that sense, the tea party movement is merely an unusually flamboyant symptom of an illness that's been breeding for a long time.

That's already happening, I think.

Egypt

| Fri Jan. 28, 2011 1:46 PM EST

This is probably obvious to everyone already, but just for the record: I don't have anything personally to add about events in Egypt, and I assume that you can follow the basic news from mainstream sources just fine without links from me. So I won't be posting much about this, even though it's plainly important stuff. If I run across some especially interesting commentary somewhere, I'll post about it, but that's about it.

My Problem With the Kindle

| Fri Jan. 28, 2011 1:07 PM EST

Last night I finally caved in and downloaded Tyler Cowen's e-booklet, "The Great Stagnation." I'll have a substantive review on Monday, but for now I'd like to whine a bit about the business model behind the thing.

Here it is: if you want to read TGS, you pay Amazon $4 and download it to your Kindle. The problem with this is that the Kindle sucks at rendering tables and charts. The screen cap on the right, for example, shows a chart from Tyler's book. As Kindle charts go, it's actually not too bad. But what's on the X-axis? It appears to start with 1455, and obviously the numbers go up. I get the idea. But the actual details are completely lost. Later in the book there's another table so badly rendered that I can't make it out at all.

In the case of "The Great Stagnation," this isn't too big a deal. I know what the chart above is getting at, and the table at the end is one I've seen before. But other nonfiction books don't fare so well. Gregory Clark's Farewell to Alms, for example, relies heavily on lots and lots of fairly complex charts and tables, and they're rendered so badly (unreadable graphs, table columns that don't line up, etc.) and placed so haphazardly that they made the book almost impossible to absorb properly. To this day, I'm not sure if my disagreements with his thesis are real, or mere artifacts of the fact that the e-version of the book was really hard to follow. In any case, that was the book that made me give up on the Kindle entirely for nonfiction. Until now.

I'd happily buy an iPad, or maybe even a bigger Kindle, if I thought that graphical elements would be properly rendered with a little more screen real estate. But I have a feeling they aren't, and I don't feel like examining nonfiction books closely before I buy them to see if they rely on graphical elements and should be purchased in paper form or are primarily text and can be safely read on the Kindle.

Besides, a pretty good business model already exists for pieces like Tyler's: sell it to a magazine. It's a little long, maybe, but I'll bet it could have been sweated down into a long magazine piece, especially since chapters 3 and 4 could profitably have been reduced to a few hundred words each. The advantages for Tyler would have been (a) great graphics designed by a pro and (b) a guaranteed wide audience. The advantages for me would have been (a) excellent readability and (b) I probably could have read it for free, increasing my consumer surplus by $4. This would have been a pareto-optimal state for all of us.

Anybody else have the same problem with the Kindle? Is the bigger version better? How about the iPad? I don't care about fiction. That already works fine. I just care about whether complex nonfiction renders nicely. What say ye, commentariat?

UPDATE: In case you're wondering how I got a screen cap of a Kindle book, I didn't. I just put the Kindle on my flatbed scanner and scanned the whole thing. Photoshop did the rest. I'm not really sure if there's a better way of doing it.

The Power of Fox

| Fri Jan. 28, 2011 12:18 PM EST

Conor Friedersdorf suggests that we give Fox News too much credit:

Yes, among a certain demographic, Fox News is a huge ratings success. So is Rush Limbaugh. But where is the evidence that this rating success has translated into electoral victories or a friendlier policy environment for conservatives? There is none.

This is true as far as it goes. The actual number of people who watch Fox is relatively small. But I think it misses the bigger picture.

First, Fox has agenda setting power. When they — along with Rush/Drudge/etc. — push a topic hard, it goes mainstream. And that affects the political atmosphere dramatically. Last summer I'm sure Democrats would have preferred that we talk about the glories of healthcare reform or the need to create jobs. Instead we were talking about the New Black Panthers, the Ground Zero mosque, anchor babies, and other conservative hot buttons. You can largely thank Fox for that.

Second, Fox's main influence, I'd say, isn't to win elections for Republicans or to influence who wins Republican primaries. It's to push the entire Republican Party further to the right. Fox certainly hasn't done this by itself, but there's really not much doubt that it's had a huge influence on this project over the past decade of its existence.

My guess is that Fox has very modest persuasive power. It has a bit just by virtue of its agenda setting power, but that's about it. After all, its viewers are already conservative. But that said, the power to push Republicans to the right is a huge one. Not only does this act indirectly to push the entire country to the right,  but it also makes it nearly impossible for liberals to pass compromise legislation. That's why the next dozen years or so are going to be grim ones for liberals. We're not going to get 60 votes in the Senate again for a long time, and in the era of Fox News Republicans just flatly won't work together on anything that isn't a hard right priority. I figure that it's 2024 at the earliest before liberals will get anything big done again, and Fox can take a lot of credit for that. Looking narrowly at their viewership misses their real influence.

UPDATE: Here's a paper suggesting the the power of Fox is actually more direct than either Conor or I gave it credit for. The authors measured voting behavior between 1996 and 2000 in towns where Fox News was introduced vs. towns where it wasn't introduced:

We find a significant effect of the introduction of Fox News on the vote share in Presidential elections between 1996 and 2000. Republicans gained 0.4 to 0.7 percentage points in the towns that broadcast Fox News. Fox News also affected voter turnout and the Republican vote share in the Senate. Our estimates imply that Fox News convinced 3 to 28 percent of its viewers to vote Republican, depending on the audience measure. The Fox News effect could be a temporary learning effect for rational voters, or a permanent effect for nonrational voters subject to persuasion.

Thanks to Philip Klinkner for the pointer.

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Obama's Sputnik Moment

| Fri Jan. 28, 2011 7:00 AM EST

On Tuesday President Obama said we were entering "our generation's Sputnik moment":

Half a century ago, when the Soviets beat us into space with the launch of a satellite called Sputnik, we had no idea how we would beat them to the moon. The science wasn't even there yet. NASA didn't exist. But after investing in better research and education, we didn't just surpass the Soviets; we unleashed a wave of innovation that created new industries and millions of new jobs.

This is only half right. It's true that after the launch of Sputnik science and math education became an American obsession, but that's not what got us to the moon. The scientists and engineers who eventually built the Apollo rockets weren't teenagers, after all. They were grown men and women who'd been educated in the 40s and 50s. The post-Sputnik push for better technical education may or may not have paid off—remember the New Math?—but if it did, it paid off two decades later in the personal computer revolution of the 80s.

So how did we unleash a "wave of innovation that created new industries and millions of new jobs"? Obama only touched on that in his speech, but part the answer is: big government. As Fred Kaplan reminds us, when Texas Instruments introduced a newfangled invention called the microchip in 1959, nobody in the private sector had any use for it:

However, these tiny chips would be needed to power the guidance systems in the Minuteman's nose cone—and in the coming Apollo program's space capsule. It was the Pentagon and NASA that bought the first microchips. The demand allowed for economies of scale, driving down costs enough so that private companies started building products that relied on chips. This created further economies of scale. And so came the inventions of the pocket calculator, smaller and faster computers, and, decades later, just about everything that we use in daily life.

The microchip would have found a market eventually even without NASA, but it might have taken years longer. And this same story goes beyond just integrated circuits. The first computer, ENIAC, was originally designed for the United States Army's Ballistic Research Laboratory. The internet was originally funded by the Pentagon's Advanced Research Projects Agency—which had been created in the wake of Sputnik—and was based on packet switching technology invented by a professor at a public university. And today, rocket technology itself, originally designed and funded by the federal government, is starting to become a thriving private business as well.

It was the private sector that turned these inventions into multi-billion dollar businesses, but it was government that provided either the basic research, the initial market, or both. Acknowledging this isn't an endorsement of socialism or tyranny or government run amok. It's an acknowledgment of the reality of progress in the modern era. Obama was right to focus our attention on education, technology, and infrastructure in his State of the Union address, because that's the seed corn that will provide long-term productivity growth for America and the world. But with apologies to Bill Clinton, if we're really serious about out-innovating, out-educating, and out-building, this means accepting that the era of big government is far from over. When it comes to basic R&D and the infrastructure to exploit it, it's only just begun.

Front page image credit: NASA Images.

The Spudnut Moment

| Thu Jan. 27, 2011 6:08 PM EST

My sister thinks I should join the movement to declare February a Palin-free month. The logic behind this is unassailable. And yet....it would prevent me from sharing stuff like this:

The first segment is some sort of painfully rehearsed word salad about Obama's mention of a Sputnik moment in his State of the Union address, and it ends with Palin suggesting that what America really needs is a “Spudnut moment,” referring to a small business in Richland, Washington. Tommy Christopher tries to make sense of it all:

Palin never really explains how this is supposed to work, but I think the equation goes something like this: “Sputnik moment” + “Something that sounds like Sputnik but isn’t”=WIN!

For what it's worth, Greta Van Susteren's blank look at the end of Palin's harangue is sort of priceless. Still, it leaves the question open: are we better off taking a month's vacation from this? Or is the entertainment value just too high? Decisions, decisions.....

Filibuster Reform Officially Dead

| Thu Jan. 27, 2011 3:57 PM EST

It's now official: filibuster reform is dead. Ezra Klein explains what we get instead:

There is some good stuff in the agreement Reid and McConnell struck. The Senate will vote on eliminating secret holds, ending the timewaster of having the clerk read legislation out on the Senate floor, and cutting the number of nominees who require Senate confirmation by a third (which would free about 400 positions from the process). Reid and McConnell have also agreed, in principle, to avoid filibustering the motion to debate and to grant the other side more opportunities to amend legislation.

All that is laudable, particularly the effort to lower the number of nominees the Senate needs to confirm. But this process kicked off because Democrats were furious at Republican abuse of the filibuster. It's ended with Democrats and Republicans agreeing that the filibuster is here to stay. And the reason is both simple and depressing: Democrats want to be able to use the filibuster, too. Both parties are more committed to being able to obstruct than they are to being able to govern. This is why people call the Senate dysfunctional.

Full-blown elimination of the filibuster was never in the cards, but it's still pretty disappointing that the whole thing petered out this badly. As always, fear of what the other side could do with majority rule outweighs the prospect of what your own side could do with it. Unfortunately, this gives us a system in which neither party is truly responsible for making government function, and the only compromises available are ones that contain enough bribes to keep both parties happy. This is not how we're going to win the future.

The Problem With Europe

| Thu Jan. 27, 2011 2:12 PM EST

Ryan Avent notes today that the relatively tight monetary stance of the European Central Bank has been nearly ideal for Germany. But that's a problem:

The funny thing here is that the ECB is not Germany's central bank; it's the central bank for the euro area. Growth in Germany has hugely outstripped that of other euro zone economies over the past year, especially those on the debt-addled European periphery. Ireland's nominal GDP growth rate was sharply negative in GDP, which isn't the easiest environment in which to try to pay down debts. A monetary policy that's pretty good for Germany is terrible for most of the euro zone. And if the ECB tightens policy because of rising headline inflation, then it will be contracting while austerity programmes around the continent kick into high gear, again hitting peripheral countries the hardest. It's almost as if the ECB wants to make sure that struggling countries can't meet their debt reduction goals.

....Food and energy issues aside, euro zone inflation overall is unlikely to get out of hand thanks to falling price pressures around the periphery. But in Germany, faster growth is finally turning into some inflation. So what the ECB should do, both in order to facilitate recovery across the entire euro zone and to speed internal euro zone rebalancing, is let German inflation run a bit. But all indications are that the ECB sets policy based on conditions in Germany. And so premature and costly tightening looks likely.

Obvously this is bad for lots of Europeans outside Germany, but just to be selfish for a moment, it's probably also bad for us. It's already the case that growth in the world's developed countries is too sluggish while growth in developing countries is heating up dangerously. This is the "two track" recovery that people talk about, and while some of it is probably inevitable, the last thing we should be doing is making it worse. The euro-area economy, like ours, is big enough that sluggish growth there eventually affects the entire world, including us. Right now, Europe simply has too many growth problems to remain a slave to Weimar-era phobias about inflation creeping above 2%.