Kevin Drum - April 2011

Durbin to Dimon: Stop Whining

| Thu Apr. 14, 2011 5:14 PM EDT

JP Morgan Chase CEO Jamie Dimon recently described Sen. Dick Durbin's amendment regulating debit card interchange fees as "counterproductive," "price fixing at its worst," and "downright idiotic." Felix Salmon directs us to Durbin's acid reply, which is well worth reading in full. But I want to highlight one of the more boring passages from Durbin's letter, which gets at the core reason for regulating these fees:

A strong bipartisan majority supported my amendment, which said that if Visa and MasterCard are going to fix fee rates on behalf of banks [...], those rates must be reasonable and proportional to the cost of processing the transaction. It is important to make clear that if Chase wants to set and charge its own fees in a competitive market environment, the amendment does not regulate those fees. The only regulated fees are those fees that banks let card networks fix on their behalf.

This is the guts of the case for regulating swipe fees: Visa and MasterCard are an effective monopoly, and they're able to set fees with virtually no competitive pressure. What's worse, their member banks collude to insure that fees stay high. After all, as long as everyone gets charged the same rate, it's in their interest to make sure that swipe fees are as high as possible. As Durbin points out, this leads to almost comically corrupt behavior, like banks actively encouraging their customers to use signature debit rather than PIN debit, even though signature debit is more fraud prone. Why? Because the interchange fees are higher:

Durbin's amendment is unquestionably second best policy. The first best policy would be genuine competition between banks that issue debit cards along with the freedom for merchants to pass along interchange fees to customers if they want to. That would very quickly set a market rate for interchange fees, one that would almost certainly be far lower than current rates.

But banks aren't willing to do that. They know perfectly well that it's Visa and MasterCard that are engaging in price fixing, not Durbin. Their monopoly position allows them to extract enormous rents from merchants and consumers, and they don't want to give that up. Monopolists never do. Thus the need for Durbin's amendment.

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Saving Grandma

| Thu Apr. 14, 2011 2:57 PM EDT

Should Medicare be a requirement? Or should seniors be allowed the option of foregoing medical coverage and just taking cash instead? Ezra Klein lays out the obvious objection:

As a society, we are not willing to let people die painfully in the street, even if they have previously made decisions that would lead to that outcome. In reality, what terrifies all of us is what happens after someone takes the cash and then gets sick.

Let’s run through the cash-grant world: At age 65, grandma decides to purchase no health-care plan, as she figures she’ll just get one when she gets sick, or maybe just get one next year, or perhaps she just doesn’t want to spend money extending decrepitude. But then she has a stroke and gets rushed to the hospital. Someone is paying for that emergency care. It might be the hospital. It might be the taxpayers. But it’s someone....[Or] perhaps you just build in a requirement that grandma has to at least purchase a catastrophic care plan. The problem with catastrophic care plans, of course, is that they often don’t cover the care you need. That’s why they’re cheaper. So the question is what happens when grandma needs more than the catastrophic care plan will provide — and when you’re dealing with seniors, that’s a “when,” not an “if.”

This is all true, but I think there's something else at work here that no one really likes to admit: not all medical care is emergency care. So if grandma gets sick and can't afford her non-emergency treatment — drugs, chemotherapy, hospice care, hip replacement, you name it — who's going to pay? "Someone," says Ezra, and he's right. And most likely that someone is her kids. Which is to say, you.

I think this is sort of the dirty little secret of universal care for seniors. Obviously we all pay Medicare taxes because we think we'll benefit from receiving Medicare ourselves in our old age. But there's also this: We would all rather pay a modest annual amount to cover everyone over 65 than be on the hook for an eventual decision to either (a) let grandma die of cancer or (b) bankrupt ourselves paying for grandma's proton therapy. This is, after all, about the most wrenching kind of decision you can imagine, and today the average worker pays less than $2,000 each year to avoid ever having to make it. That's a pretty good deal. But it's only a good deal if it genuinely relieves you of the prospect of having to decide whether to save grandma's life. If she's allowed to opt out, that prospect becomes very real all over again and the deal suddenly looks very crappy indeed. For that reason, grandma doesn't get a choice.

There are other reasons that it's a bad idea to let grandma opt out of Medicare too. But this one is probably both the most important and the least likely to be talked about.

Why Does Obama Want a Debt Ceiling Fight?

| Thu Apr. 14, 2011 12:55 PM EDT

In the past, both Democrats and Republicans have used fights over the debt ceiling to embarrass the opposition party whenever it happened to be in power. Yawn. But they've never threatened to vote against raising the ceiling in order to extort goodies of one kind or another from the president. Obama, however, has indicated he's open to just this kind of extortion, and Republicans are eager to take him up on it. Jon Chait:

I don't really blame the Republicans for this, either. If Obama is going to begin by saying he'd like a straight vote on the debt ceiling but is willing to make policy concessions, what do you expect the Republicans to do? Keep in mind, the assumption that the Congressional minority can use the debt ceiling as a hostage to win substantive policy the president opposes is entirely novel. Obama has introduced this new development.

Jon calls this Obama's "insane hostage bargaining strategy," but I think we should at least admit the possibility that Obama is neither stupid nor insane. Sticking firmly to a negotiating position is hardly rocket science, after all, and all analogies to poker playing aside, it's hardly plausible that Obama doesn't get this. So surely the most likely explanation for his position is that he wants Republicans to make demands on him.

I don't know exactly why he wants this. Maybe he's itching for a fight. Maybe he thinks it will make Republicans look bad. Maybe he wants to cut spending but would rather give the appearance of having been forced into it. I don't know. But he's pretty obviously inviting Republicans to do this, not just stumbling into it accidentally. The only question is why.

Budget Cuts Disappear in a Cloud of Smoke

| Thu Apr. 14, 2011 12:30 PM EDT

So, um, about that $38 billion budget cut:

A new budget estimate released Wednesday shows that the spending bill negotiated between President Barack Obama and House Speaker John Boehner would produce less than 1 percent of the $38 billion in promised savings by the end of this budget year.

The Congressional Budget Office estimate shows that compared with current spending rates the spending bill due for a House vote Thursday would cut federal outlays from non-war accounts by just $352 million through Sept. 30. About $8 billion in immediate cuts to domestic programs and foreign aid are offset by nearly equal increases in defense spending.

When war funding is factored in the legislation would actually increase total federal outlays by $3.3 billion relative to current levels.

So now we're down to $8 billion in actual cuts, all of it offset by increases to the Pentagon budget. But what about future years? Surely these savings will start to add up down the road? Not really:

In response to multiple requests for estimates of the effects of post-2011 outlays from H.R. 1473, CBO has developed additional information about the budgetary impact of H.R. 1473 in years beyond 2011.

....CBO estimates that enactment of H.R. 1473 would produce federal outlays over the 2011-2021 period that are between $20 billion and $25 billion lower than the amount of outlays that would be expected from having 2011 appropriations set at the same level as 2010 appropriations.

That's a cumulative number, which means the CBO estimates savings of about $2 billion per year over the next decade. Turns out that budget cutting is harder than it looks, even for Republicans. I predict that John Boehner is in a heap of trouble with the tea party wing of his caucus.

Just the Simple Truth

| Thu Apr. 14, 2011 11:40 AM EDT

Have I mentioned my favorite part of Obama's speech yesterday? Here it is:

America’s finances were in great shape by the year 2000. We went from deficit to surplus. America was actually on track to becoming completely debt free, and we were prepared for the retirement of the Baby Boomers.

But after Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed. We increased spending dramatically for two wars and an expensive prescription drug program — but we didn’t pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts — tax cuts that went to every millionaire and billionaire in the country; tax cuts that will force us to borrow an average of $500 billion every year over the next decade.

To give you an idea of how much damage this caused to our nation’s checkbook, consider this: In the last decade, if we had simply found a way to pay for the tax cuts and the prescription drug benefit, our deficit would currently be at low historical levels in the coming years.

But that’s not what happened. And so, by the time I took office, we once again found ourselves deeply in debt and unprepared for a Baby Boom retirement that is now starting to take place. When I took office, our projected deficit, annually, was more than $1 trillion. On top of that, we faced a terrible financial crisis and a recession that, like most recessions, led us to temporarily borrow even more.

Translation: Fuck you, Republicans.

And I'd say it's a well deserved flip of the bird. Republicans, as you can imagine, are less enthusiastic, and this bit of the speech undoubtedly accounts for most of the bile being tossed around on Fox and elsewhere today. But hey — sometimes the truth hurts. And all Obama did was speak the simple truth. In the past decade, Republicans slashed taxes, started two wars, approved a big unfunded entitlement, and presided over an economic collapse that cratered tax revenues and required massive government spending to counteract. That's pretty much 100% of our existing deficit problem right there. All we're doing now is trying to clean up the mess the GOP has left us.

Fair Shares and Tax Shares

| Thu Apr. 14, 2011 11:19 AM EDT

Will Wilkinson wasn't impressed with President Obama's defense of progressive taxation yesterday:

It's rather less intuitive that fairness demands that the wealthy not only pay more in taxes, but pay a larger percentage of income. But let's accept that fairness does require it. Anyway, high-earners in America do pay higher rates. In 2008, the top 1% paid 38% of all federal income taxes, and the top 5% paid 58%. Indeed, America is the industrialised world's champion of income-tax progressivity! If any country's upper-crust pays its fair share, America's does.

Notice the bait and switch there? (If you don't, my blogging for the past eight years has been for nought.) First, there's the insistence on judging tax fairness solely by federal income taxes. But if you take a look at total tax burdens (federal/state/local), America's tax system is only very modestly progressive. Second, there's the switch from tax rates to tax shares. It's true that the top 1% pay a big share of all federal income taxes, and there's a good reason for that: it's because the top 1% earn a big share of all income.

For a better idea of what Obama was talking about, here's a handy chart that EPI sent around today. It shows average overall tax rates over time and the picture isn't very pretty. For the average schmoe (the bars on the right), tax rates have decreased only slightly. For the rich (the bars on the left), they've plummeted. And for the super-duper rich (the bars on the middle) they've gone down so much that on average they pay a lower tax rate than your average bank clerk.

So Will ought to be pretty happy. America's tax code is progressive, but it's not very progressive, and it's getting less progressive all the time. Given the explosion in wealth at the top over the past 30 years, asking them to go back to Clinton-era rates — which is all that Obama is proposing — hardly seems like a vast unfairness.

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Chart of the Day: How to Get Parole

| Wed Apr. 13, 2011 5:30 PM EDT

Via Andrew Sullivan, here's a peek into the criminal justice system that's either fascinating or appalling depending on your temperament. Ed Yong explains:

The graph above [...] summarises the results of 1,112 parole board hearings in Israeli prisons, over a ten month period. The vertical axis is the proportion of cases where the judges granted parole. The horizontal axis shows the order in which the cases were heard during the day. And the dotted lines, they represent the points where the judges went away for a morning snack and their lunch break.

The graph is dramatic. It shows that the odds that prisoners will be successfully paroled start off fairly high at around 65% and quickly plummet to nothing over a few hours (although, see footnote). After the judges have returned from their breaks, the odds abruptly climb back up to 65%, before resuming their downward slide. A prisoner’s fate could hinge upon the point in the day when their case is heard.

This is something to keep in mind if you ever end up doing a stretch in San Quentin: when you come up for parole, be sure to bribe the bailiff to get you an early-morning hearing. It's money well spent.

Itemizing Obama's Savings

| Wed Apr. 13, 2011 4:15 PM EDT

So how much does President Obama's deficit reduction plan save? For some reason he's chosen a 12-year timeframe, and here's how things add up:

  • Domestic discretionary: $770 billion
  • Defense: $400 billion
  • Healthcare: $480 billion
  • Mandatory spending: $360 billion
  • Tax expenditures: $300 billion?
  • Bush tax cuts for the wealthy: $820 billion. (Note: this is based on estimated savings of $690 billion over 10 years.)
  • Lower interest costs: $1 trillion

Obama claims this adds up to "three dollars of spending cuts and interest savings for every one dollar from tax reform," but that's an odd way of looking at things. Who cares where the interest savings come from? (And that $1 trillion number looks dodgy anyway.) This is basically a 2:1 ratio of spending cuts to tax increases.

Which is unfortunate. It might be politically wise, but it probably ought to be more like 2:1 in the other direction. Eventually it will be once everyone wakes up and realizes we don't have any other choices left, but it's going to take a while and Obama apparently isn't going to be the guy to push us in that direction.

No More Tax Cuts for Millionaires and Billionaires

| Wed Apr. 13, 2011 3:10 PM EDT

More on the Obama speech later, but my initial reaction is that there wasn't a lot new here. He's talked about limiting discretionary spending before. He's talked about letting the Bush tax cuts for the wealthy expire before. He's talked about cutting spending on prescription drugs before. The most specific new big ticket items were a plan to change the Medicare growth target from GDP + 1% to GDP + 0.5% and his promise to rein in tax expenditures (though the latter was pretty vague).

But this was new too:

In December, I agreed to extend the tax cuts for the wealthiest Americans because it was the only way I could prevent a tax hike on middle-class Americans. But we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society. And I refuse to renew them again.

That sure sounds like a very public ultimatum, doesn't it? So what happens next year if House Republicans flatly refuse to send him a bill that extends only the middle-class cuts? Then all the Bush tax cuts would expire.

Question: is Obama laying down a marker in hopes of getting a bill that extends only the middle-class cuts? Or is he laying down a marker knowing that Republicans will refuse to budge and therefore the entire Bush tax cut package will expire? Hmmm.

Should We Gut Medicare Like a Trout?

| Wed Apr. 13, 2011 12:22 PM EDT

Ezra Klein point us to the latest Gallup poll on Medicare, and he's gobsmacked that among Republicans the most popular position is that Medicare shouldn't be touched at all. They don't think we should even try to control costs, let alone gut it the way Paul Ryan is proposing. But I think I'd highlight something else:

A pretty large majority wants either no changes or only minor changes, and this is true of all three subgroups. This doesn't surprise me, but I'd like to see a followup that paired each option with the taxes it would require. In other words, your options would be:

  • Major changes & taxes about the same as today
  • Minor changes & higher taxes
  • No cost control & and significantly higher taxes

I'm willing to bet that the results would be roughly the same, with perhaps a chunk of the "no cost control" folks moving into the minor changes column.

But I might be wrong, so it would be worth finding out. These kinds of questions, after all, are pretty useless if they're not tied to anything else. I mean, who wouldn't be in favor of leaving everything the way it is if they don't understand that it might cost them more?