Kevin Drum - April 2011

Wall Street Watch

| Tue Apr. 19, 2011 11:19 AM EDT

So how's the banking industry doing in the wake of the Great Collapse? Here are a few bellwethers:

  • Goldman Sachs crushed analysts' expectations. They're doing great!
  • Citigroup is successfully gaming those pesky new capital requirement. Nice job, Citi!
  • America's top bank regulator is cutting yet more sweetheart deals with America's top banks. Good job, OCC!

Being on Wall Street means never having to say you're sorry. It's a grand life.

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Why We Deny

| Tue Apr. 19, 2011 1:33 AM EDT

I've always known that facts and evidence don't generally affect people's opinions much. But possibly the worst aspect of blogging for the past nine years is that now I really, really know it. I have my face rubbed in it every day. That's a different, and far more discouraging thing, than simply knowing it in an abstract, intellectual sort of way. But Chris Mooney comes to the rescue today, putting this all back into the realm of the abstract and using science to explain why science persuades so few people:

The theory of motivated reasoning builds on a key insight of modern neuroscience: Reasoning is actually suffused with emotion (or what researchers often call "affect"). Not only are the two inseparable, but our positive or negative feelings about people, things, and ideas arise much more rapidly than our conscious thoughts, in a matter of milliseconds—fast enough to detect with an EEG device, but long before we're aware of it. That shouldn't be surprising: Evolution required us to react very quickly to stimuli in our environment. It's a "basic human survival skill," explains political scientist Arthur Lupia of the University of Michigan. We push threatening information away; we pull friendly information close. We apply fight-or-flight reflexes not only to predators, but to data itself.

We're not driven only by emotions, of course—we also reason, deliberate. But reasoning comes later, works slower—and even then, it doesn't take place in an emotional vacuum. Rather, our quick-fire emotions can set us on a course of thinking that's highly biased, especially on topics we care a great deal about.

Read the rest for the whole story. But be prepared to be annoyed when Chris wrenches his spine out of shape bending over backward to find an example of liberals denying science as much as conservatives. It might be true that you can find vaccine deniers in the aisles of Whole Foods, but if there's any rigorous evidence that belief in the vaccine-autism link is especially pronounced or widespread among liberals, I haven't seen it. Surely there's a better, more substantive example than that floating around somewhere?

Why Fox Dumped Glenn Beck

| Mon Apr. 18, 2011 6:06 PM EDT

Joshua Green:

A friend in the TV industry whose business it is to know these things has a persuasive theory about why Fox News dumped Glenn Beck: Beck simply wasn't toeing the company line. Whereas other Fox News personalities dutifully parroted the preferred mantra about Obama and the White House being a bunch of left-wingers, Beck — after initially targeting administration figures (Van Jones, etc.) and winning huge ratings — consistently departed on his loony flights of fantasy about caliphates, SDS, and even fish sticks (stick with me here). My friend wasn't just spit-balling; he had evidence to back it up. He'd kept a list of about two months' worth of the tease headlines for Beck's show. He also had a similar list for Bill O'Reilly, whom he perceived as representing the Fox News baseline. It makes for a fascinating contrast — and if you plug it into Wordle, one you can visualize.

Well, it turns out Green's friend is also a friend of mine, and he emailed this morning to alert me to this. "A fun little side project of mine that you might find interesting," he said. And you might too. Click the link to see how Beck's brand of lunacy just wasn't quite the brand that Fox wanted.

On Partisan Rhetoric and Fainting Couches

| Mon Apr. 18, 2011 2:35 PM EDT

After listening to the delicate flowers in the GOP whine for the past week about how brutally partisan President Obama's deficit speech was, I thought I should remind them of some of the things Paul Ryan said in his budget plan. Here's a taste of what Obama was responding to:

Where the President has failed, House Republicans will lead....[The president's budget] Locks in reckless spending spree....Never reaches primary balance — failing to clear even the low bar the administration set for itself.

....The President and his party’s leaders embarked on a stimulus spending spree that added hundreds of billions of dollars to the debt, yet failed to deliver on its promises to create jobs. Acute economic hardship was exploited to enact unprecedented expansions of government power.

....Since his inauguration, the President has promoted a heavy-handed compliance culture in the energy sector, brimming with regulations and reckless spending on government-appointed winners and losers.... Gas prices have more than doubled since the President took office. Burdensome and ineffective regulations on businesses in the service of dubious environmental goals have driven up the prices of many products and services, while creating barriers for needed capital investment and job creation.

....The insistence by the President and his party’s leaders on spending money the government does not have has yielded trillion-dollar deficits now and into the future....By failing to address the unsustainable growth of autopilot spending programs, the President’s budget commits this nation to a crushing burden of debt.

I'll forego my fainting couch for the moment. I'm pretty sure I can handle this kind of rhetoric. But somebody needs to remind Republicans that tough partisan talk wasn't exactly invented last Wednesday by President Obama's speechwriters.

Who's Being Rude?

| Mon Apr. 18, 2011 2:03 PM EDT

Andrew Sullivan lodges a familiar complaint:

I've gotten progressively ruder with my friends, who, even when just hanging out in the evening, keep their iPhones and Blackberrys in their hands. I understand the desire to check your email, stocks, Facebook wall, OKCupid or Grindr message in those moments when you simply have to walk or sit on a train or scarf some lunchtime Chipotle. But when you are actually among people you know, the act of glancing down at your mobile device is simply bad manners. It states absolutely that your current interaction is not as important or as interesting as any number of online connections. It's rude. And it misses the point.

The point is that these devices can enhance your social life, not replace it. And yet they seem like cuckoos in our social nest. I know I'm not one to talk. I communicate directly with probably ten times the number of people online that I do by face or physical presence. (Summers in Provincetown change that ratio dramatically, thank God.) But I try not to do both at once.

I feel precisely the same way. And not uncoincidentally, I think, Andrew and I are close to the same age. As near as I can remember, I have never heard this complaint from anyone under the age of 30 or so.

So: is this behavior rude? Or is it rude only if you're socializing with old fogies who consider it rude, sort of the way you watch your language around people who you know are offended by four-letter words? Or is it not even that, but simply a cultural change, like calling someone to thank them for a gift instead of writing a card, and it's us fogies who are being rude by refusing to understand that this behavior is neither offensive nor meant to be offensive? It's just the way teens and twenty-somethings live.

There's no answer to this, of course. I will probably go to my grave thinking it's rude, but unlike Andrew, I long ago decided to simply live with it because it seems so obviously to be a value-neutral cultural change, not something intended to annoy people.

But that's only for the young. If you're over 50, you don't get that forbearance from me: for our generation, it's just rude, full stop. When you're socializing, turn the damn thing off.

Downgrading America

| Mon Apr. 18, 2011 12:35 PM EDT

Standard & Poor's issued a warning today that it might downgrade U.S. debt if no deal is made to rein in the deficit. Or, more precisely, it might not downgrade debt, but might declare that America's AAA rating isn't quite as good as some other countries' AAA rating. Or something. In any case, Matt Yglesias says we should ignore them:

The thing about the United States of America is that we’re not an obscure country. Nor is our sovereign debt an obscure financial instrument. No major investor is going to be outsourcing his research on the desirability of American bonds to the S&P ratings service. There are two metrics to keep an eye on when assessing American debt. One is the interest rate the Treasury has to offer to get people to buy the debt. Currently that number is low. The other is the “spread” between bonds that are indexed for inflation and bonds that aren’t indexed for inflation which serves, among other things, as a gauge of market assessment of the risk that we’ll have no choice but to inflate the debt away. Currently that number, too, is low.

I agree with this completely, and I've made a similar comment in the past. And yet.....

And yet, there's something to think about here. One of the reasons I take our medium and long-term deficit fairly seriously, even though current financial indicators suggest the market is unconcerned, is that financial indicators can turn around in a flash. There are limits to how far a big country like the United States can get from fundamentals, but we're still susceptible to the kinds of mob emotion that power both bubbles and bank runs. And the thing is, there's never any telling what might spark such a turnaround. One day everything is fine. Then Bill Gross announces that he's no longer thrilled about holding treasuries. The next day S&P makes some negative noises. A day after that the Chinese government cuts back on treasury purchases. Then an auction of 10-year bonds is slightly soft, and suddenly everyone panics.

This most likely won't happen. Certainly not anytime soon, given the underlying fundamentals of the American and global economies. Still, it could happen in the near future, and there's no telling what might set it off. So in that sense, this kind of announcement from S&P actually is meaningful. Maybe not today. But a similar announcement someday might be. It's true that major investors don't outsource their opinion on U.S. treasuries to S&P, but even major investors can get nervous if enough people start telling them they're being idiots. Sometimes perceptions are as important as reality.

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The End and the Beginning of the Tea Party

| Mon Apr. 18, 2011 12:17 PM EDT

Time's Michael Scherer on the evolution of the tea party:

Back in 2010, the Tea Party, though diffuse, came to stand for something. It was a populist movement of fiscal conservatives angry at President Obama and upset at the institutional Republican Party....Enter the 2012 Republican primary season. Every one of the semi-declared candidates in the field want to claim a part of the Tea Party mantle as their own, and everyone has a slightly different definition of just what that mantle means. In the meantime, pretty much every candidate in the race has a reason to claim Tea Party support.

....In short, anyone and everyone is “Tea Party.” The term is open-sourced. And though it will continue to be used over the coming months as a short-hand for the populist, unsettled upsurge in the Republican Party, it will mean less and less. Barring a third party run, there is unlikely to be a single Tea Party candidate because most candidates will claim Tea Party support, and since Tea Partyers in Iowa will have a different set of self-defining traits that Tea Partyers in New Hampshire. Your Tea Party is not my Tea Party. His Tea Party is not her Tea Party. We are all Tea Party, and none of us are Tea Party, because Tea Party everywhere, and as a result, nowhere in particular.

Yes indeed. Or as I put it a few months before last year's election:

The sheer size of the tea party movement may be as much a curse as a blessing. An insurgent movement can retain its vigor if it remains limited to true believers, but once it takes the reins of power, it has no choice but to offer a winning platform if it wants to keep its influence. The tea partiers are thus likely to be victims of their own success: When everyone's a tea partier, then no one's a tea partier.

....The tea party movement is likely to provide plenty of drama this November, but if the historical record is anything to go by, it won't last long after that. As with the earlier incarnations, 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.

The tea party is dead, and at the same time, the tea party will be with us forever. Doesn't that just send a tingle up and down your spine?

Tax Day Charts!

| Mon Apr. 18, 2011 11:53 AM EDT

Courtesy of Dave Gilson, here's a whole bunch of handy charts for tax day to show you who's paying how much to whom. For example, the chart below shows average effective tax rates for various income levels. Note that the federal tax system as a whole (including both payroll and income taxes) is fairly progressive at the bottom half of the income scale but then flattens out. Someone making an absolutely average income pays about 16.3% of their income in taxes, and that goes up to only 19.8% for someone at the very tippy top. That's pretty damn flat for an allegedly progressive tax code. More here.

Saying Goodbye to George Bush's Holiday From History

| Mon Apr. 18, 2011 12:54 AM EDT

If we just left the tax code completely alone, a big chunk of our deficit problem would go away. This is not my preferred policy; I support allowing all the Bush tax cuts to expire, but allowing the Alternative Minimum Tax to blindly hit more and more families over the next couple of decades is a pretty blunt instrument for raising money. I think we can do better.

Still, it would solve a big piece of both our medium-term and long-term deficit problems. Ross Douthat, however, thinks this would be a catastrophe:

Today, for instance, a family of four making the median income — $94,900 — pays 15 percent in federal taxes. By 2035, under the C.B.O. projection, payroll and income taxes would claim 25 percent of that family’s paycheck. The marginal tax rate on labor income would rise from 29 percent to 38 percent. Federal tax revenue, which has averaged 18 percent of G.D.P. since World War II, would hit 23 percent by the 2030s and climb even higher after that.

Such unprecedented levels of taxation would throw up hurdles to entrepreneurship, family formation and upward mobility. (Or as the C.B.O. puts it, in its understated way, they would “tend to discourage some economic activity,” and “harm the economy through the impact on people’s decisions about how much to work and save.”)

There's a lot of cherry picking going on here designed to make this look as oppressive as possible. For example:

  • That 15% in federal taxes is mostly payroll taxes. Only about 3-4% is federal income taxes. That's pretty low.
  • In fact, it's historically low, as the CBPP chart on the right shows. Far from a higher level being "unprecedented," a higher level would actually do nothing more than get us back to the average rates of the Reagan and Clinton eras.
  • It's true that federal tax revenue has averaged 18% of GDP since World War II. But why stop there? If you looked at average tax revenue since World War I it would look even lower and modern rates would look even worse. But this is a silly game. Average tax revenue over the past 30 years, a far more representative period, has been 21% of GDP.
  • This means that if tax revenue goes up to 23% of GDP by 2030, it's risen above its 30-year average by only two points. That's hardly a catastrophe.

It's easy to play games with this stuff to make it look like it's the end of the world. That's especially true if we resort to blunt comparisons, rather than constructing a tax code that actually makes sense. But we don't have to do that.

The beginning of wisdom here is to accept that taxes are going up. The aughts were a nice holiday from history for us all, but they were an irresponsible one. America is aging, and that's something we knew back in 2000 just as well as we know it now. Even if we do a good job of managing spiraling healthcare costs, this means that our obligations to retirees are going to go up. That's not because of any insidious liberal plot, it's just because there are going to be more of them.

So 21% of GDP isn't going to cut it in the future. I doubt that 23% of GDP will cut it either. More likely, we're looking at 25% of GDP or even a little more by the 2030s. But the fact is that this just isn't that much. It's four points of GDP above our post-Reagan average. We can afford that fairly easily, and if we reform the tax code with common sense in mind the impact will be pretty moderate on everyone. Middle class families will pay a little more in taxes, the upper middle class will pay a little bit more, and the rich, who have been showered with tax cuts over the past 30 years that really are unprecedented, will see theirs go up more than that. But the increase won't be crushing for anyone.

I don't question for a second that we need to do more to rein in spiraling healthcare costs. There's just not enough evidence that we're getting good value for money, and President Obama's goal to keep future increases to GDP + 0.5% is a good one. But it needs to be more than just an aspiration, with seniors paying a crushing price in lost medical care if we don't meet it — as they would under Paul Ryan's flight of fancy. It needs to come with serious, detailed efforts to hold down costs and make sure we're funding medicine that provides real benefits.

But even if we do that, we need to prepare for a world in which we pay upwards of 25% of GDP in taxes. That's not the end of the American dream, as conservatives would have it, it's a modest increase that ensures all of us a decently secure retirement. Letting the Bush tax cuts expire on both the middle class and the rich is a good place to start, and a smart reform of the tax code can pretty easily get us the rest of the way there over the next couple of decades without causing anyone very much pain. It's time to grow up and face this reality.

American Exceptionalism

| Sat Apr. 16, 2011 1:25 PM EDT

Europe, it turns out, wasn't really ready for the war in Libya they were so anxious to get into:

Less than a month into the Libyan conflict, NATO is running short of precision bombs, highlighting the limitations of Britain, France and other European countries in sustaining even a relatively small military action over an extended period of time, according to senior NATO and U.S. officials.

....Libya “has not been a very big war. If [the Europeans] would run out of these munitions this early in such a small operation, you have to wonder what kind of war they were planning on fighting,” said John Pike, director of GlobalSecurity.org, a defense think tank. “Maybe they were just planning on using their air force for air shows.”

This kind of mockery is well deserved in one sense, but in another it just highlights the fundamental difference between the United States military and everyone else's. The reason our defense budget is ten or twenty times the size of any other country's isn't literally because our army is ten or twenty times bigger. It's because the American army is designed to project power. Most other national defense forces are designed to work only locally: either to defend against invasions or, at most, to be able to mount offensives across local borders. The only real exceptions are Britain and France, but even they have only a small ability to project power. Nobody else has much at all.

There's a quantum leap between that kind of military and the kind that the United States has. You can't get it by spending just a little more money; you have to spend a lot more money for a whole range of capabilities that local defense forces don't need. That quantum leap is the real reason the U.S. military is so much staggeringly larger than anyone else's.

So in that sense, the mockery is undeserved. Britain and France just aren't set up to project power on a large scale, and we knew that perfectly well going in. They don't have bases all over the world, they don't have heavy lift capacity, they don't have long-range bombers, they don't have a dozen supercarrier groups, they don't have huge arsenals of cruise missiles, they don't have fleets of reconnaissance satellites, and they don't have hundreds of aircraft and trained pilots at their beck and call. In fact, they're only doing as well as they are because Libya is only barely not a next door neighbor.

So sure, maybe Britain and France should have more planes and more bombs. But really, there's not a lot of point to arguing over nits like this. For them to project power effectively, even in nearby Libya, would require not just a bit of shoring up here and there, it would probably require a doubling or tripling of their defense budgets. Likewise, cutting the U.S. defense budget by bits and pieces wouldn't really change our posture. If we want to project power all over the world, it's going to continue costing us roughly what it costs us today. If we don't want to, we could cut our defense budget by two-thirds in a stroke. There's not a lot of room in between.

This is all Defense 101, but we seem to be learning it all over again in Libya. I keep wondering whether one of President Obama's goals in this operation is to somehow rub everyone's noses in this, and I suppose the answer is no. But it's a useful reminder anyway.