Kevin Drum - May 2011

The Laws of Economics

| Thu May 19, 2011 2:50 PM EDT

Ezra Klein highlights this interesting passage from Tim Harford about the problems that the Great Collapse exposed in the economics profession:

In terms of how economics needs to change in light of the crisis, where I would put my emphasis is not so much in behavioural economics, though I have no problem with it — it’s a very interesting area and it’s producing really important insights — but I think it’s more about engaging with the world, and the institutions of the world as it is. Economists got too used to reasoning in fairly abstract ways, without looking at the details of what was actually going on. If, as an economist, you’d looked at the way sub-prime loans were being sold, and the kinds of contracts that were being written and the financial instruments that were being created, you don’t need any mysterious appeal to psychology to explain the disaster. You just need to have been paying attention. That’s not to write off behavioural economics — but it’s just not true that behavioural economics was the single thing that was missing, that if only we’d had it, there would have been no crisis.

I think this is an interesting insight, but I'd make it more broadly. One of the interesting things about economics as a science is that its basic laws change all the time. This is quite unlike, say, physics, where the applications change but the basic laws of the universe don't.1 But the laws of economics are just fundamentally different in a barter economy vs. a money economy vs. a banking economy vs. a fiat money economy vs. a credit economy etc. etc. Keynes' great opus on unemployment literally couldn't have been written a century or two before 1936 because unemployment wasn't even a well-defined concept in the pre-industrial age.

So here's my guess: in the past, we could at least take solace in the fact that the basic structure of the economy didn't change very fast. But now it does. And the changes in the financial sector over the past few decades — which are part cause and part effect of the globalization and computerization of finance — have cumulatively produced enough quantitative change in the structure of the economy that it's finally become a qualitative change, one that I'm not sure the economics profession has entirely grasped yet. Long story short, the laws that govern the economy of 2011 are fundamentally different than the laws of only 20 or 30 years ago. And Harford is right: understanding how the financial sector has changed, and how that's changed the basic functioning of the economy, is really important. The question is whether modern economists are smart enough to figure out what the new laws are before the economy has changed on them yet again.

IMPORTANT DISCLAIMER: I am not an economist. I might be completely full of hooey about this. But then again, maybe not.

1New physical laws are discovered periodically, of course, but those laws have always been in operation. We just didn't know it. Conversely, once you get beyond supply and demand, many of the laws of economics actually change as the nature of the economy changes.

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Goodwin Liu and the Politics of Personal Pique

| Thu May 19, 2011 1:50 PM EDT

Goodwin Liu is a smart, accomplished, liberal constitutional lawyer who's been nominated for a seat on the 9th Circuit Court. Lots of conservatives support him, but his confirmation looks increasingly unlikely regardless. Yesterday Adam Serwer tried to figure out why Republicans are so hellbent on blocking his nomination:

The real reason Republicans are trying to block Liu is this: Because of his youth (he’s 39), intelligence and outlook, he’d be a tempting choice the next time a spot opens up on the Supreme Court.

But I think Adam's take today is much closer to the truth:

Senate Republicans appear poised to filibuster the nomination of Goodwin Liu to the 9th Circuit Court of appeals, and they’ve settled on their reason why: Liu was awful mean to Justice Samuel Alito. As the Legal Times reports, Senators Lindsey Graham, John McCain, and Johnny Isakson all cited Liu’s testimony against Alito’s nomination as a reason for blocking him.

Yep. Liu is plenty liberal, which gives Republicans cover for voting against him. But honestly, it's mostly pique that's driving this. Here's conservative Jonathan Adler writing about Liu over a year ago:

I believe Senate Republicans are likely to oppose Prof. Liu for multiple reasons. First, Prof. Liu Chairs the Board of Directors the American Constitution Society for Law and Policy. This is not the sort of thing that should be disqualifying for a federal judgship, to be sure. Yet Senate Democrats firecely opposed, and ultimately blocked, confirmation of Peter Keisler to the U.S. Court of Appeals for the D.C. Circuit, largely because he was a co-founder of the Federalist Society for Law and Public Policy Studies (where he is also now Chairman of the Board).

Second, Prof. Liu was an outspoken critic of President Bush’s nomination of Samuel Alito to the Supreme Court. He co-authored an ACS report critical of Judge Alito’s record on death penalty cases and, more importantly, testified against then-Judge Alito’s confirmation to the Supreme Court. In his testimony, Prof. Liu argued that Senators should consider a nominee’s “judicial philosophy” and suggested that Judge Alito should fail such a test. According to Prof. Liu, then-Judge Alito was “at the margin, not the mainstream,” and that the America envisioned by his record on the bench “is not the America we know. Nor is it the America we aspire to be.” I suspect Senate Republicans will remember this testimony when considering Prof. Liu’s nomination.

Judicial nominations have spun out of control over the past couple of decades, and there's blame to go around on this. Conservatives have never forgiven liberals for the Bork/Ginsburg/Thomas trifecta of the late 80s and early 90s. Liberals continue to seethe over Orrin Hatch's transparent abuse of the blue slip rules in the aughts. Both sides are convinced that the other is dedicated to nominating extremists to the bench.

I don't know what the answer is. As a matter of policy, I believe that presidential nominations should get considerable deference. Conservative presidents are going to nominate conservative judges and liberal presidents are going to nominate liberal judges, and both sides should accept that. But there's always a but, and in this case it's whether there's genuinely a line that separates the merely ideological from the recklessly extreme. There probably is, but I've never heard anyone explicate it in an actually usable way. Maybe some nice bipartisan commission ought to take a crack at it.

Tom Coburn Is Angry at Tom Coburn

| Thu May 19, 2011 12:20 PM EDT

Sen. Tom Coburn is angry that the Senate can't seem to make any progress on deficit reduction. "The lack of leadership and initiative in the Senate is appalling," he says. Then this:

For the past several months I have been meeting with a small group of senators from both parties, informally known as the Gang of Six, that was designed to force the idle — not gridlocked — Senate, and then the House and the president, to enact a long-term deficit-reduction package. Our talks reached an impasse this week when, in my view, it became clear we would not be able to produce a balanced, specific and comprehensive deal that would improve on, and in some ways meet, the standard set by the Bowles-Simpson plan.

OK, let me get this straight. A group of six — six! — senators meeting together intensively for months can't manage to agree on a deficit reduction plan. And this is mostly because of Coburn himself, who walked out when the other five wouldn't agree to his ever-shifting list of demands. And yet, Coburn wants us to believe that even though six senators can't manage to agree on a plan, a hundred senators can. Despite the fact that, as usual, it will be Coburn himself throwing bombs from the sidelines if anyone tries.

Chutzpah, baby! Or something.

Throwing the Tea Party Under the Bus

| Thu May 19, 2011 11:56 AM EDT

Nick Carey reports that Wall Street wants the debt ceiling raised but the tea party movement doesn't:

That leaves [John] Boehner stuck between the Tea Party and a hard place. If he pushes too hard on cuts, that will rattle the Republican Party's powerful Wall Street wing, potentially roiling the markets and unsettling the broader electorate.

But backing down will also hurt him. "After accusations he didn't do enough in the budget battle, Boehner has to have something real to take back to conservatives or he's in trouble," said James McCormick, a professor of political science at Iowa State University. "He's boxed in between two components of the Republican Party. Obama knows that and is not under the same pressure."

If the Republicans falter, the search for establishment targets will kick into a higher gear — with freshmen, or those elected in 2010 seen as the easiest to unseat as they are new. "The Tea Party will almost certainly primary those they want to get rid of," said Larry Sabato, a politics professor at the University of Virginia. "They are not out to rebuild the Republican Party. They are out to take over the Republican Party and make it more like the Tea Party."

"If it takes some Republican defeats along the way to make that happen, then that is what they'll do," he added.

This scares Jon Chait, but frankly, I'm going to need more than the opinion of a couple of university professors to get my blood pressure up. They're not saying anything here that a thousand bloggers haven't already said before.

In any case, I actually see this as a bigger problem for the tea party than it is for Boehner. Don't get me wrong: it's a huge pain in the ass for Boehner because, in the end, he'll have to defy the tea partiers and do what Wall Street wants — which, on the bright side, also happens to be the right thing to do. In the longer term, though, this is just another sign of the tea party wearing out its welcome. It was a handy force for rousing the voters in the 2010 election, but there's only so much idiocy that even Republicans can put up with. Talk radio is one thing. Fox News is one thing. For the most part, they talk big but don't actually demand that politicians commit suicide. Tea partiers, conversely, do want them to commit suicide, and if they get their way the only real result is going to be more Democrats in Congress and the reelection of Barack Obama. The adults in the party understand this perfectly well, and they're going to throw the tea partiers under the bus if it looks like they're seriously screwing things up for GOP hopes next year.

So, yeah, Boehner is going to take this down to the wire. He's going to try to extort some spending cuts out of the White House. He might as well do what he can to appease the tea partiers, after all. But in the end, he'll vote to raise the debt ceiling, he'll get enough Republican votes to make it stick, and the Republican establishment is going to finally decide it's tired of the tea party if they make too much trouble about it. They already (arguably) lost a chance to take control of the Senate in 2010 because of the tea party, and they're not going to take that chance again in 2012. Either the tea partiers start playing ball with the millionaires or they're history. The history of the Republican Party is crystal clear on this point.

How To Improve Auto Mileage

| Thu May 19, 2011 12:25 AM EDT

Stuart Staniford reprinted a chart today showing the improvement in gas mileage of American cars since World War II. He's not happy with the progress we've made:

You can see that fuel economy drifted up slowly from the forties to the early seventies, barely accelerated at all in response to the first oil shock in 1973, then took off upwards after the second oil shock in 1979, improving several percent per year through the eighties. Then it went into gradual drift again in the early nineties.

It seems abundantly clear that the US is going to have to improve its fuel economy at a faster rate in the future to cope with rapid increases in emerging market demand in an oil constrained world. It would have been better if people had done this proactively. However, it appears that it's going to take a bigger, meaner, oil shock to get people moving in the right direction.

But was it really the oil shock of 1979 that prompted a big increase in auto efficiency? Here's a look at the chart, but with a chart of oil prices overlaid on top of it:

Certainly the price of oil has an effect on consumer behavior, but it really doesn't seem to be the prime motivator here. In 1973 the price of oil skyrockets, but mileage goes nowhere. In 1979 there's another shock and mileage goes up. Then in 1985 oil prices plummet but mileage keeps going up. Finally, in 2003, oil prices go up again but mileage doesn't react at all. (And it continued not to react even when prices continued to rise for the next five years.)

There's something else that explains this chart much better: the introduction of CAFE mileage standards. They take effect in 1978 and within a couple of years you see the first real spike in average mileage. CAFE standards keep rising until around 1987, and for a few years after that mileage keeps going up while new cars continue to replace old pre-CAFE cars. Then mileage plateaus. In every single year outside the CAFE era, absolutely nothing happens: mileage drifts ever so slightly upward and that's it.

Price signals do matter — which is why a carbon tax or a cap-and-trade system would help reduce fossil fuel usage — but for something like gasoline they need to be large and persistent to really have any effect. That's why I like to think of them as similar to a tailwind: nice to have, but not always the prime motivating force. If you really want something to happen, sometimes you still need good old command-and-control regulation. Luckily, between 2011 and 2016 CAFE standards are finally set to go up again. High gas prices will help motivate people to buy high mileage cars, but it's CAFE standards that are going to make the real difference.

Attention Class of 2007: Change Jobs Now!

| Wed May 18, 2011 8:37 PM EDT

Here's an interesting factlet about recent college graduates:

While young people who have weathered a tough job market may shy from risks during their careers, the best way to nullify an unlucky graduation date is to change jobs when you can, says Till von Wachter, an economist at Columbia.

“If you don’t move within five years of graduating, for some reason you get stuck where you are. That’s just an empirical finding,” Mr. von Wachter said.

That was a close call. I stayed at my first job after graduation for three years. Another two years and I would have been trapped forever. I never realized just how close I was cutting things.

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How Not to Fix Medicare

| Wed May 18, 2011 2:54 PM EDT

"You can’t save Medicare by raising taxes," says Ezra Klein:

The problem with health-care costs is that they rise faster than wages, GDP or most anything else. That’s why balancing Medicare and Medicaid’s books through straight cost-shifting, as Ryan does, entails such savage cuts in care, and why balancing their books through straight tax increases, as Egan suggests, would be such a disaster. You wouldn’t just need to raise taxes. You’d need to raise them again and again and again, because every tax increase would soon be outpaced by Medicare’s growth.

This is true. You can, if you want, save Social Security by raising taxes. That's because the cost of Social Security is projected to rise for a couple of decades and then plateau at 6% of GDP forever, so one option for saving it is to simply raise payroll taxes to 6% of GDP. Problem solved. You can also save discretionary programs by raising taxes. That's because discretionary spending has been pretty flat for decades, is projected to remain pretty flat in the decades to come, and can be funded by simply raising enough money to cover that cost. You might not want to do it this way, but it could be done.

But Medicare is different. Its cost trajectory is so steep that it's impossible to keep raising taxes forever to cover it. At some point, you have to take serious steps to level out those costs. That level will certainly be higher than it is today, since in the future there will be more elderly people to take care of, but it can't be too much higher.

So how do we rein in that cost growth? Paul Ryan says: don't bother. Just refuse to pay those rising bills and tell the elderly they're on their own. It's up to them to buy insurance, and if it's too expensive because the Ryancare voucher is too small, that's tough. See you on the other side.

That's really not a serious solution. We need something instead that genuinely has an effect on healthcare costs. Something that reduces the amount we pay doctors, hospitals, and insurance companies. Something that provides incentives for difficult end-of-life decisions. Something that makes credible tradeoffs between the cost of new treatments and the likely benefits. And something that gives taxpayers and patients alike a reason to care about all this.

There are both liberal and conservative ideas that can help us with this. Unfortunately, we're not quite grown up enough yet to really start talking about them. Maybe someday.

Just Another Day At Fox News

| Wed May 18, 2011 1:59 PM EDT

Pretty remarkable Fox News segment a few minutes ago between Martha MacCallum and Monica Crowley. In a piece about Fox's latest 24/7 obsession they announced that 20% of all healthcare waivers had gone to Nancy Pelosi's district! And they were all going to high-end steakhouses! They're exempt from the healthcare reform law even though Pelosi was one of its biggest supporters! And this was all obviously due to political pressure from Pelosi's office!

OK, not so remarkable, I guess. But for the record: it was 20% in the month of April only, mainly because a benefits servicing company that does a lot of work in California submitted a whole bunch of waiver applications at once. And it's not because San Francisco steakhouses are freeloading, it's just the opposite: it's because a San Francisco ordinance requires companies to provide healthcare, which means more of them need waivers for their plans than in most places. And they're not exempt from healthcare reform, they're just getting a waiver through 2013, something that was anticipated by the law. (The idea was that inadequate coverage would be taken care of when the law fully kicks in in 2014, but until then even inadequate coverage is better than nothing.) And none of this came within miles of Pelosi's office. It's all just wending its way through the ordinary federal bureaucracy.

All of this is common knowledge because Suzy Khimm has reported it here and here. But the Fox reporting team didn't even acknowledge this aside from a brief, pro forma comment from MacCallum that there were a few people who denied anything was amiss. Crowley just snorted at the idea and the segment wrapped up.

Anyway, not remarkable. Just the usual Fox News light touch. But if you're interested in what's really going on, just click the links above.

Steven Levitt's Morality

| Wed May 18, 2011 12:53 PM EDT

Steven Levitt is taking a lot of online abuse for this passage on his blog a few days ago:

I’ve never really understood why I personally come down on one side or the other with respect to a particular gray-area activity. Not that my opinion matters at all, but despite strong economic arguments in favor of drug legalization, the idea has always made me a little queasy. Conversely, although logic tells me that abortion as practiced in the U.S. doesn’t seem like such a great idea (see the end of the abortion chapter in Freakonomics for our arguments on this one), something in my heart makes me sympathetic to legalized abortion.

It wasn’t until the U.S. government’s crackdown on internet poker last week that I came to realize that the primary determinant of where I stand with respect to government interference in activities comes down to the answer to a simple question: How would I feel if my daughter were engaged in that activity?

If the answer is that I wouldn’t want my daughter to do it, then I don’t mind the government passing a law against it. I wouldn’t want my daughter to be a cocaine addict or a prostitute, so in spite of the fact that it would probably be more economically efficient to legalize drugs and prostitution subject to heavy regulation/taxation, I don’t mind those activities being illegal.

This is, logically, pretty lame. If I had a daughter, I probably wouldn't want her to get a tattoo, play videogames all day, or pursue a career in the WWF. But neither I nor Levitt would think even for a moment that tattooing, videogame playing, or WWF wrestling should be outlawed.

Still, I think Levitt performs a valuable service here. Chattering class types tend to intellectualize morality, but the vast majority of people view it through a lens much closer to Levitt's "would I mind if my daughter did it?" heuristic. And one of the reasons for this is that ordinary people often have a clearer view of human nature than chatterers do. There are lots of activities we AP-class types find acceptable — drug use, gambling, etc. — because we sort of assume that everyone has the same level of impulse control that we do. And if you have good impulse control, then drugs and gambling are just pleasant ways of filling in your free time. And even if you don't have good impulse control, you probably have a decent support network to help you if things turn pear shaped. These things may have their problems, but they're manageable problems.

But if you're not part of the AP-class cohort, there's a pretty good chance that your impulse control isn't quite as good as all that, and an excellent chance that even if it is, you're keenly aware that good impulse control isn't exactly universal. And that means your view of things like gambling and drug use are considerably dimmer. You'd just as soon your daughter didn't get involved with that stuff because you've seen too often the effect it has on people with moderate education, moderate to poor impulse control, moderate to low incomes, and non-great support networks. Logically there might be a case for a lenient attitude, but your real-life experience tell you that it's a ticking time bomb best kept under tight control.

This is just something to think about, not some grand pronouncement about moral calculus. But it's worth keeping in mind sometimes that the broad working and middles classes often have different moral sentiments than us well-off, highly verbal types, and it's not always because they go to church more than us or anything like that. It's because they live in different communities and this stuff affects them differently than it does us. As always, where you stand depends on where you sit.

Republicans are Depressed

| Wed May 18, 2011 11:24 AM EDT

Mike Allen reports on the current mental health of the Republican Party establishment. Nickel version: it's not good:

Interviews this week with longtime party activists and strategists made clear that many in the Republican establishment are unnerved by a field led by Mitt Romney, who could have trouble confronting Obama on health reform; Tim Pawlenty, who has yet to ignite excitement; Jon Huntsman, who may be too moderate to get the nomination; and Newt Gingrich, weighed down by personal baggage and a sense that he is a polarizing figure from the 1990s.

Despairing Republican lobbyists say their colleagues don’t ask, “Who do you like?” but instead, “Who do we back?”

“It’s not that they’re up in arms,” said a central player in the GOP money machine. “It’s just that they’re depressed.”

So the question is, will 2012 be the Republican version of 1972 or the Republican version of 1984? They could nominate a base hero like Michele Bachmann or Sarah Palin or Newt Gingrich and go down in epic flames. Or they could nominate a worthy timeserver like Mitt Romney or Tim Pawlenty and go down in flames.

Or, of course, they could pray for some kind of gigantic global disaster — maybe an economic collapse, an oil spike, or a drawn-out hostage crisis — in which case they can win with anybody. That seems like a pretty weak hope, but right now the fever dreams of the GOP base are so debilitating that it's hard to see them coming together and beating Barack Obama any other way.