Kevin Drum - January 2011

Foreclosures and the Economy

| Wed Jan. 19, 2011 3:08 PM EST

What's holding back a stronger economic recovery? For the millionth time: it's not regulatory uncertainty or lack of financing or inability to find good workers or fear of healthcare reform. It's lack of customers. Mike Konczal points us to the conclusions of Atif Mian and Amir Sufi of the Federal Reserve Bank of San Francisco:

Overall, the county evidence strongly suggests that credit demand is weak because of an overleveraged household sector. This view is supported by survey evidence that the main worry of businesses is sales, not financing. The October 2010 National Federation of Independent Business survey (Dunkelberg and Wade 2010) shows that almost no small businesses viewed credit availability as their primary problem. In fact, the NFIB has reported that weak sales were the top problem facing small businesses throughout the recession. Weak consumer demand also helps explain the enormous cash balances currently held by U.S. corporations (see Lahart 2010). These results have important policy implications. If the main problems facing businesses relate to depressed consumer demand due to a household sector weighed down by debt, investment tax subsidies and lower interest rates may have a limited effect on business investment and employment growth.

An effective regime for foreclosure relief would have done wonders for economic recovery, but it would have hurt the interests of the financial sector, which fought furiously to kill it in early 2009. And they won. Not because they were right, but because they had the raw muscle to get their way and middle-class homeowners didn't. That was good for banks, not so good for the rest of us.

Any explanation of the financial crisis and its aftermath that relies exclusively on economic analysis, without taking full account of the raw political power behind the economics, is doomed to failure. Economists would do well to rediscover this simple and timeless truism.

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Public Benefits, Private Benefits

| Wed Jan. 19, 2011 2:05 PM EST

Andrew Sullivan quotes an LA Times piece today that says average retirement benefits for California public sector workers are "now valued at more than $1.2 million. The taxpayers who pay for those retirement benefits have an average of $60,000 saved for their own retirement." Then he asks this:

California is a state where citizens can legislate at the ballot box. How long will they tolerate public employees more than $1 million richer in retirement benefits than they are?

I don't want to dismiss this concern. Public sector retirement benefits are generally pretty good, pension accounts are underfunded, and there are clearly some abuses in the system — prime among them the practice of piling on overtime in your last 12 months because pension benefits are calculated only on your final year's income. But you still have to compare apples to apples. Here are three things to keep in mind:

  • An average American one-earner couple planning to retire in ten years has Social Security and Medicare benefits worth about $900,000 (interpolated from data here). So the average Californian probably has roughly $960,000 in retirement benefits compared to $1.2 million for public sector workers. That's still a sizeable difference, but nowhere near what the LAT article suggests. (Control for education levels etc. and the difference would probably come down even further.)
  • Average public sector benefits are heavily skewed by the very generous retirement plans for public safety workers. These benefits may or may not be defensible, but cops and firefighters aren't the ones that politicians usually point to when they complain about this stuff. Your average worker in the county clerk's office probably has benefits well under that $1.2 million figure.
  • Pension accounts are indeed underfunded, but some of that is simply an artifact of the 2008 financial collapse. Pension funds always look bad during economic downturns, and they look better when the economy recovers. So take the astronomical figures that are tossed around on pension underfunding with a grain of salt.

There's no question that public sector pensions are a political problem, or that they've been mismanaged for years. (Private sector pensions too.) At the same time, keep in mind that there's only so much that Californians can do about it, ballot box or no ballot box. Even the voters aren't allowed to unilaterally abrogate contracts, so they can't just vote to slash benefits for public workers that were agreed to long ago. Like everything else, this is going to get settled via long, grinding negotiations, not a ballot box revolution.

UPDATE: Social Security and Medicare benefit levels revised to use the latest data from the Urban Institute.

Healthcare and the Culture Wars

| Wed Jan. 19, 2011 1:16 PM EST

Ross Douthat analyzes the political divide in America:

My sense is that Americans remain much more polarized on cultural and religious questions than they are on economic policy, which suggests that some of the apparent polarization we see on an issue like health care has less to do with the “markets versus government” debate referenced by Scheiber and others, and more to do with the way our divisions on more existential issues create a general climate of mistrust. It isn’t a coincidence that the health care debate burned hottest around two issues — abortion and end-of-life care — that were relatively tangential to the main purpose of the bill....The key question was whether they could trust a health care overhaul conceived and implemented by people — liberals and Democrats, that is — whose views about life-and-death issues like abortion and euthanasia were radically different from their own. And the answer, perhaps not surprisingly, was no.

I don't have a long, data-filled essay to offer up here, but I suspect this is quite wrong. My recollection is that abortion became a big issue only fairly late in the healthcare debate, long after the battle lines had been fully and loudly drawn. It was always Obama's "takeover of one-sixth of the economy," or Obama "telling you which doctor you can see" that was at the heart of the conflict. Even the death panel nonsense was pretty obviously just an opportunistic carbuncle added to an already raging fight.

I actually think there's an extent to which we should take tea partiers at their word: they're concerned more about economic and regulatory issues than they are about cultural issues. After all, with the exception of abortion, take a look at the usual constellation of hot button culture war topics. They're all still hot buttons, but gay rights have made enormous mainstream strides; gun control is practically a dead letter (despite the NRA's desperate efforts to pretend otherwise); church-state issues have been about 90% resolved and mostly crop up these days in dumb sideshow debates; and drug-related issues don't break neatly down on a left-right dimension. I'm not trying to make any kind of maximal case here — immigration is still a pretty blood-boiling issue, for example — but it does strike me that to an unappreciated extent Obama has been able to avoid culture war issues partly because they simply have less salience than they did in the past. To a large extent, our tribal affiliations really are defined more strongly these days by our views on taxes and regulation and public sector unions and so forth.

I guess I'd offer this more as a provocation than anything else. I'm not entirely sure I'm right about this. But it's worth a thought. The culture wars really aren't what they used to be.

The GOP's Calvinball World

| Wed Jan. 19, 2011 12:17 PM EST

So how are Republicans handling their return to power? Ezra Klein points to two telling examples today. First, we have the awesome spectacle of the GOP complaining that Democrats are thwarting the will of the people by refusing to allow an up-or-down vote in the Senate for repeal of healthcare reform. "Seriously?" asks Ezra, after picking his jaw up off the floor. "After mounting a record-breaking number of filibusters in recent years and screaming bloody murder when Democrats sought extremely modest changes in the practice, Republicans are now demanding up-or-down votes in the Senate?"

Yes, seriously. It's a new day in DC! Next up is the Congressional Budget Office, which has long been accepted as a neutral arbiter of the cost of new legislation. They're not always right, but everyone has accepted their conclusions as the best nonpartisan estimates available. Until now, that is, when bashing the CBO is suddenly the only way to make healthcare reform look bad:

They have claimed, as Doug Holtz-Eakin, Joseph Antos and James Capretta do in today's Wall Street Journal, that the CBO's work is now the product of "budget gimmicks, deceptive accounting, and implausible assumptions used to create the false impression of fiscal discipline." They have created a separate world for themselves when it comes to this bill, a world where there are no accepted estimates except the ones they choose to accept (notably, they regularly mention the CBO results that they think help their case), where there is no neutral arbiter who can be relied on to set the premises of the debate, and thus, where policy debate is not really possible.

This is especially notable since Republicans aren't just disagreeing with the CBO, they're flat out lying about a lot of its conclusions. I haven't gotten around to blogging about this before, but Ezra did a useful point-by-point takedown here, and today's post is a good followup. It's a pretty thorough takedown of the fanciful Calvinball world that Republicans live in these days. They believe what they believe, and they've set things up so that no evidence is ever allowed to contradict what they believe. And now they're in charge of half of Congress once again. Happy days.

WikiLeaks a Paper Tiger?

| Wed Jan. 19, 2011 2:21 AM EST

This actually isn't too surprising:

The damage caused by the WikiLeaks controversy has caused little real and lasting damage to American diplomacy, senior state department officials have concluded.

....A congressional official briefed on the reviews told Reuters news agency that the administration felt compelled to say publicly that the revelations had seriously damaged American interests in order to bolster legal efforts to shut down the WikiLeaks website and bring charges against the leakers. "I think they want to present the toughest front they can muster," the official said.

The official implied that the WikiLeaks fiasco was bad public relations but had little concrete impact on policy. "We were told [it] was embarrassing, not damaging," the official added.

Italics mine. For the most part, the leaked cables were interesting and in some cases embarrassing, but as a lot of people pointed out in real time, not really all that revelatory. In fact, they mostly showed U.S. diplomacy in a pretty good light. Obviously American diplomats would prefer that private conversations remain private — and that's perfectly reasonable — but in the end the WikiLeaks releases didn't cause nearly as much damage as government officials claimed.

How Americans Really Feel About Healthcare Reform

| Wed Jan. 19, 2011 12:00 AM EST

What do Americans think of last year's healthcare reform law? Here's the Washington Post today:

More Americans oppose health-care law, but few want a total repeal

Overall, Americans' views of the sweeping health-care overhaul, again under debate on Capitol Hill, remain firmly entrenched, with little change in stiff partisanship on the issue. Some 45 percent of those polled support the law, and 50 percent oppose it, numbers that exactly match their averages in Post-ABC polls going back to August 2009.

This is really starting to bug me. The headline and the text are, in some hypertechnical sense, correct. But here's the actual breakdown of opinion:

I think it's pretty plain that the people who "oppose" healthcare reform because it doesn't go far enough are, in any meaningful sense, in favor of the law but think it doesn't go far enough. In other words, about 58% of respondents support healthcare reform and 37% oppose it. This explains the apparent paradox that 50% of respondents oppose healthcare reform but only 37% want to repeal all or part of the law: it's because only about 37% truly oppose it in the first place.

I'm perfectly willing to concede that polling on this question is quirky and variable. Depending on how the question is asked and what the followups are, you can get a lot of different responses. Still, there's a pretty clear difference between people who genuinely oppose healthcare reform and those who only "oppose" it because they preferred Medicare for All or something like that. What's more, we've now seen this result often enough that there's no real excuse for not presenting it more meaningfully. At the very least, there's no excuse for not asking the question in a way that takes all this into account.

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The Holy Sepulchre of Apple

| Tue Jan. 18, 2011 2:10 PM EST

Andy Crouch defends the cult of Apple by calling it "a religion of hope in a hopeless world, hope that your ordinary and mortal life can be elegant and meaningful, even if it will soon be dated, dusty, and discarded like a 2001 iPod." Andrew Sullivan concurs:

This is certainly why my own conversion to Apple, and my deep loyalty to the company and its products, somehow felt comforting in the last decade. Their style elevates me, their power and reliability I have come to take for granted. Their stores have the innovation and beauty that a renewed Christianity would muster in its churches, if it hadn't collapsed in a welter of dogma and politics.

Seriously, guys? Come on. I've used Macs. I've been in Apple stores. Not in Manhattan, granted, but then, most Apple stores aren't in Manhattan. The last time I was in one, it consisted of a whole bunch of white tables with various products laid out on top. Seems to me we should expect better of our churches.

Steve Jobs's reality distortion field is justly famous, and as a former marketing guy I'm deeply envious of his talents. But I have to say, there's something wrong with the world if we've gotten to the point where an MP3 player or a laptop computer — even one that's designed nicely — is somehow supposed to redeem our faith in the infinite. Yikes.

Europe's Tough Choice

| Tue Jan. 18, 2011 1:49 PM EST

What should Europe do about its insolvent countries? Roughly speaking, the problem is fairly simple: Greece and Ireland are basically bankrupt, and Portugal might be too. Probably not Spain, but you never know. In any case, as long as these countries have to keep taking on more debt on top of all the old debt that caused their insolvency in the first place, they'll never recover. But if they default on their debts, the banks that hold their notes will implode. This is bad, because those banks are largely French and German, and France and Germany really don't want to see their biggest banks implode. So that means making good on the debt, which basically means that French and German taxpayers are bailing out Irish, Greek, and Portuguese taxpayers. French and German taxpayers aren't very thrilled with this plan.

But the end is near regardless, and Felix Salmon provides an explanation of the options:

To use a US analogy, the choice facing Europe right now is whether to deal with its peripheral nations like Frannie, like AIG, or like General Motors.

The Frannie approach means a fiscal union: their debts are our debts. The AIG approach is the current “tough it out” one, where the hoped-for outcome is that a solvency crisis can be solved with liberal applications of government liquidity. But that only happens when you have strong growth — share-price growth in the case of AIG, with lots of expected future profitability, or economic growth in the case of countries like Greece, Portugal, and Ireland. And right now it’s impossible to see how a country like Greece can possibly grow its way out of its debt trap.

Finally, there’s the GM approach: restructure the debt, and get back onto a long-term sustainable footing. It’s harder for countries than it is for companies. But it might well be the least-bad option, by some large margin.

I don't know quite how the details are going to work out, but I think Felix is right: debt restructuring is coming, like it or not. That being the case, the sooner it's done the better. The alternative is waiting until a crisis forces the EU into action, and a crisis is always the worst and most dangerous time to do anything. It's time to bite the bullet.

Free Market Healthcare

| Tue Jan. 18, 2011 1:00 PM EST

As House Republicans embark on their sham vote to repeal healthcare reform today, Matt Yglesias points out that in the GOP's free market paradise virtually no one would have health insurance:

The only reason most people are insured today has to do with the non-market elements of the system. First, the tax code provides an enormous subsidy for employer-provided health insurance that ends up putting the majority of employed Americans into large risk pools at the expense of everyone who doesn’t work full-time for a big company. Second, Medicare mops up the largest pool of non-employed people by giving single-payer health care to everyone over 65. Third, a regulation bans discrimination against people with pre-existing conditions as long as they maintain “continuity of coverage” as they shift from one employer to another. Fourth, COBRA allows people to maintain continuity of coverage even if they experience transient spells of unemployment. Fifth, Medicaid and SCHIP give coverage to many classes of poor people who’d otherwise be unable to afford it.

Conservative apologists will object that we're setting up a straw man. Why, Republicans don't want to eliminate government involvement in healthcare! They just have a different idea about how to do it.

Sure. And like the Beatles said, we'd all love to see the plan. When it comes to things like Medicare, the GOP's plan was to oppose its creation, subsequently do their best to demolish it every chance they got, and then cynically bash Democrats when they actually did something to rein in its costs. Nice plan. And pretty much every other advance in healthcare coverage has been passed over their objection too. So what do they want instead? Ask them and they'll usually mumble something about tax credits and HSAs, an idea so patently deficient that partisans usually just toss out a few incoherent words about it so they can pretend to believe in something before abruptly changing the subject.

There is, simply, no acceptable free market solution for healthcare. There's only a free market solution if you're willing to let lots of poor people get sick and die, which most of us aren't. Given that, the obvious solution is to create pools of coverage, and the most efficient pool of coverage is everyone in the country. Eventually even Republicans will figure that out and we'll finally have a real chance to provide better coverage for everyone and seriously slow the growth of healthcare costs at the same time. Eventually.

The Kids These Days, Part 784

| Tue Jan. 18, 2011 2:35 AM EST

Yet another new study purports to show that kids these days are just a bunch of slacker goofballs:

An unprecedented study that followed several thousand undergraduates through four years of college found that large numbers didn't learn the critical thinking, complex reasoning and written communication skills that are widely assumed to be at the core of a college education.

....Forty-five percent of students made no significant improvement in their critical thinking, reasoning or writing skills during the first two years of college, according to the study. After four years, 36 percent showed no significant gains in these so-called "higher order" thinking skills.

....Howard Gardner, a professor at Harvard's Graduate School of Education known for his theory of multiple intelligences, said the study underscores the need for higher education to push students harder. "No one concerned with education can be pleased with the findings of this study," Gardner said. "I think that higher education in general is not demanding enough of students — academics are simply of less importance than they were a generation ago."

Look: this might be true. I wouldn't be surprised. But how can anyone with higher reasoning skills claim that this demonstrates the declining importance of academics unless the study compares today's students to those of a generation ago — which this one doesn't? Without that, do we have any special reason to think that graduates of the Class of 1980 showed more progress in "higher order" thinking skills than today's kids? I don't think so.

Still, aside from the report's shocking finding that lots of students try to fill up their schedules with easy classes, there's a bright side to all this: "Students devoted less than a fifth of their time each week to academic pursuits. By contrast, students spent 51 percent of their time — or 85 hours a week — socializing or in extracurricular activities." According to David Brooks, this is perfectly suited to making them into the supergeniuses of tomorrow.