Kevin Drum - June 2011

Yemen Is Not A Good Place To Imprison Terrorist Suspects

| Thu Jun. 23, 2011 11:56 PM EDT

Kevin is on vacation this week, so Andy Kroll and I are filling in a bit.

The Washington Post reports on a massive jailbreak of Islamic militants from one of Yemen's largest prisons:

Among the escapees Wednesday were members of an al-Qaeda cell that has killed foreign tourists and tried to attack the U.S. Embassy in Yemen and other Western targets, according to Yemeni officials. [Al Qaeda in the Arabian Peninsula] was behind the attempted bombing of a Detroit-bound commercial flight on Christmas Day 2009 and the mailing of bombs on cargo planes destined for the United States....

...The prison break Wednesday, though far from the first in Yemen, came at a moment of political crisis in the country and seemed likely to heighten fears among U.S. counterterrorism officials that AQAP is gathering strength as the authority of the central government weakens.

Even in the best of times, Yemen was not a great place to imprison radical Islamists. The prisons there have always been leaky at best, and the central government's authority didn't extend very far past the capital. Now the country is even more wracked by chaos and intranational violence than usual, and AQAP has scored some successes—the latest being this prison break. The Obama administration has apparently decided, in the wake of the Christmas Day and cargo bomb attacks, that this is a threat worthy of a semi-secret drone war but not, well, an "actual" war.

In a "real" war, we'd go in and detain these guys ourselves, rather than relying on incompetent and potentially backstabbing proxies. That doesn't, thankfully, seem to be on the table right now. (I don't think America can afford another land war in Asia.) But the war on terror does produce some odd paradoxes. In today's world, it's easier, politically and legally, for America to vaporize a foreigner it suspects of terrorism than it is to keep that person in prison. That's pretty weird.

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The Tax Holiday Road to Ruin

| Thu Jun. 23, 2011 3:38 PM EDT

Is there a more terrible idea getting serious play in policy circles than a corporate "tax holiday"? That's when corporations that have put off paying American taxes get a one-shot chance to move that money into the US at the steeply discounted rate of 5 percent. Kevin has dismissed the proposal as a "scam," but I wanted to point out a new Center for Budget and Policy Priorities report thoroughly dismantling the idea.

Proponents—like the WIN America campaign, a group backed by major pharmaceutical, energy, and technology corporations—claim a new tax holiday will "strengthen our economy, pay down our debt, put people back to work, and invest up to $1 trillion in America." But the last tax holiday, in 2004, did nothing of the sort, CBPP says. "The evidence shows that firms mostly used the repatriated earnings not to invest in US jobs or growth but for purposes that Congress sought to prohibit, such as repurchasing their own stock and paying bigger dividends to their shareholders," the report's authors write. "Moreover, many firms actually laid off large numbers of US workers even as they reaped multi-billion-dollar benefits from the tax holiday and passed them on to shareholders."

Here are three more solid reasons why tax holidays are a dumb idea, per CBPP:

  • Repeating the tax holiday would increase incentives to shift income overseas. If Congress enacts a second tax holiday, rational corporate executives will conclude that more tax holidays are likely in the future. That will make corporations more inclined to shift income into tax havens and less likely to make investments in the United States.
  • The claim that a tax holiday would increase domestic investment by freeing multinationals from cash restraints is extremely dubious. U.S. non-financial corporations currently have $1.9 trillion in cash and other liquid assets, the highest level as a share of total corporate assets since 1959. The ten companies lobbying hardest for a new tax holiday alone have at least $47 billion in cash and other liquid assets that could be used for domestic investments—without triggering additional tax liability.
  • Some of the biggest beneficiaries of a tax holiday would be firms that have aggressively shifted income overseas. Companies in the technology and pharmaceutical industries have been particularly aggressive in shifting income abroad because they rely on intellectual property, which is relatively easy to shift to other countries as a tax avoidance strategy. Half of all repatriations from the 2004 tax holiday came from companies in these two sectors alone. The same corporations and sectors would stand to benefit disproportionately—and enormously—from a second tax holiday."

It seems that a tax holiday would have, in the long term, the opposite of its intended effect: it would encourage companies to shift cash out of the US. It's hard to see any upside whatsoever for American workers—or the American economy at all, really—from another tax holiday. That is, unless you're a member of Congress who depends on hefty campaign donations to stay in Washington. In that case, a tax holiday is exactly what the doctor ordered. I've even drafted a working title for such a piece of legislation: "The Keeping Corporations Happy and the Contributions Rolling In Act of 2011."

A mouthful, yes. Anyone else have a better name?

Quote of the Day: Cantor Bails

| Thu Jun. 23, 2011 11:33 AM EDT

From House Majority Leader Eric Cantor, explaining why he's bailing out of budget negotiations with the Obama administration:

I believe that we have identified trillions in spending cuts, and to date, we have established a blueprint that could institute the fiscal reforms needed to start getting our fiscal house in order. That said....Democrats continue to insist that any deal must include tax increases....Given this impasse, I will not be participating in today’s meeting and I believe it is time for the President to speak clearly and resolve the tax issue.

Roger that. Trillions in spending cuts already agreed to, but there can't be one dime in tax increases of any kind. Would any conservative apologists like to continue pretending that Democratic aversion to spending cuts is pretty much the same kind of thing as the Republican jihad against tax increases? Anyone? Ross?

GOP Mind Games, Job-Killing Edition

| Thu Jun. 23, 2011 10:32 AM EDT

It's an article of faith among congressional Republicans that, if you repeat a talking point often enough, no matter how inaccurate it is, it will eventually take root in the minds of Americans. Case in point: A new Bloomberg poll finds that 55 percent of Americans believe spending and tax cuts are the best way to lift the US labor market and lower unemployment, now at 9.1 percent, as opposed to more government spending.

That's straight out of House Republicans' "cut-and-grow" playbook, in which the road to economic prosperity entails slashing corporate tax rates and billion-dollar cuts to "job-killing government spending."

Except that's not true.

Alan Blinder, a Princeton economics professor and former Fed vice president, thoroughly debunked the GOP's claims on Tuesday in a Wall Street Journal op-ed titled "The GOP Myth of 'Job-Killing' Spending." Blinder writes:

The generic conservative view that government is "too big" in some abstract sense leads to a strong predisposition against spending. OK. But the question remains: How can the government destroy jobs by either hiring people directly or buying things from private companies? For example, how is it that public purchases of computers destroy jobs but private purchases of computers create them?

Blinder easily knocks down claims that the 2009 federal stimulus—roughly $600 billion in spending and $200 billion in tax cuts—failed to create jobs, pointing to Congressional Budget Office data that shows the net job gain was at least 1.3 million and perhaps as high as 3.3 million. What's more, Blinder debunks the idea that the federal deficit and the uncertainty that comes with it has caused companies to scale back business investments, which in turn impacts hiring and economic growth. Except such investment soared in the past year, increasing 14.7 percent. Ultimately, Blinder argues for another round of stimulus—specifically, giving businesses that grow their payrolls a tax credit—while calling for a serious long-term deficit reduction package.

And Blinder isn't the only expert to dismantle the GOP's economic position. In an interview with Yahoo News' Lookout blog, a former top economic aide to George W. Bush said the GOP's cut-and-grow agenda doesn't make any sense. "That wouldn't square with the way we normally think about economic activity in a depressed economy," said Andrew Samwick, now an economics professor at Dartmouth. Samwick, like so many other economists, points out that increased spending is a proven way to ramp up hiring and spark economic growth. Slashing spending does the opposite.

Yet Republicans have hammered away with their cut-and-grow mantra so much that they've convinced a majority of Americans to believe the unbelievable. You've got to hand it to Republicans: They may be wrong, but they are convincing.

Quote of the Day: Bernanke Not On Board the Austerity Train

| Wed Jun. 22, 2011 4:25 PM EDT

OK, maybe Ben Bernanke isn't willing to do much more to help out our anemic economy, but at least he did say this today:

I don't think that sharp, immediate cuts in the deficit would create more jobs. I think in the short run that we're seeing already a certain amount of fiscal drag coming from state and local governments from the withdrawal of previous federal stimulus, so I think in the short run, you know, the fiscal tightening is at best neutral and probably somewhat negative for job creation.

Am I wrong, or is this the bluntest he's been yet about the idiocy of his fellow Republicans and their austerity agenda?

Fed: The Economy Stinks, Our Work Is Done

| Wed Jun. 22, 2011 2:42 PM EDT

Via the New York Times, the Federal Reserve announced today it's ending efforts to bolster the country's tepid economic recovery:

The nation’s central bank said Wednesday that it would complete the planned purchase of $600 billion in Treasury securities next week as scheduled, and then suspend its three-year-old economic rescue campaign, leaving in place the aid it already is providing but doing nothing more, for now, to bolster growth.

"The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee had expected," the Fed said in a statement. "The committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline."

[...]

The statement offered hope that the pace of growth would increase, noting that many factors restraining the economy are likely to be temporary, including the impact of higher energy prices and the disruptions to manufacturing caused by the Japanese earthquake. Automakers already are planning sharp increases in production to compensate for the lost volume.

So that's it. Apart from sticking with rock-bottom interest rates, the Fed is turning to a hope-and-wait strategy to see if economic growth, job creation, and consumer spending pick up in the coming months. Thanks a lot, Ben Bernanke.

Remember, front and center in the Fed's mission is crafting monetary policy "in pursuit of maximum employment." Right now, twenty-five million Americans can't find full-time jobs. Fourteen million Americans can't find any work. The Fed knows this: "Recent labor market indicators have been weaker than anticipated," the organization said today.

Ezra Klein nailed it this morning on the Fed's failure to fulfill its mission and spark a stronger, faster economic recovery:

[The Fed's efforts have had] a modest impact on the worst economy since the Great Depression. The anger at the Fed isn't coming because people have suddenly developed strong and nuanced views on quantitative easing. It's coming because people are angry about the state of the economy, and the Fed is one of the major forces in the economy. The way to have avoided it wouldn't have been to do less, but to do better, which would've meant doing more.

A growing number of economic policymakers—former Fed vice chairman Alan Blinder, former CEA chair Christina Romer, former associate director for the Fed's monetary affairs division Joseph Gagnon—believe that would've been, and in many cases, still is, possible. They argue that the bank's underwhelming impact on the recovery is evidence not of the Fed's inability to more effectively fight the recession, but its unwillingness to do what was needed to fight the recession. Larger and more aggressive asset purchases, price-level targeting, and various other dips into unconventional measures were and are needed. But all that would've been economically more effective and politically easier a year ago, or even two years ago, than it is today. Today, the Fed is under intense criticism, which limits its freedom of action. Having not done enough, they're now unable to do more.

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On Jose Antonio Vargas, Undocumented Immigrant

| Wed Jun. 22, 2011 1:16 PM EDT
Jose Antonio Vargas.

Kevin is on vacation, so Andy Kroll and I are filling in for a few days.

In April 2008, Jose Antonio Vargas, then a reporter at the Washington Post, shared a Pulitzer prize for the paper's coverage of the Virginia Tech shootings. Last September, he published a 6,200-word profile of Facebook's Mark Zuckerberg in the New Yorker—the result of what he later called his "dream assignment." By any yardstick of traditional journalism, Vargas had made it.

This morning, the New York Times published Vargas' confession: he's an undocumented immigrant, and he's apparently committed a number of fraud-related crimes in order to obtain the documents he needed to stay in the country and keep working. It's hard to summarize Vargas' story—he didn't even know he was undocumented until, at 16, he applied for a learner's permit—so you should read the whole thing.

I'm sympathetic to Matt Yglesias' view that we should empathize with all people who come to the United States in search of a better life, even if, unlike Vargas, they do so knowing that what they're doing is illegal. But I've also worked with foreign-born journalists who've paid thousands or tens of thousands of dollars and waded through miles of red tape and seemingly senseless regulations—including, sometimes, returning to their home countries for a period—in order to work in this country.* (This applies outside of journalism, too, of course.) I wonder how they're feeling about Jose Antonio Vargas this morning.

*UPDATE: As discussed in the comments, these senseless hurdles are a central part of the problem.

Wanted: Better Bank Regulators

| Wed Jun. 22, 2011 12:17 PM EDT

Hello there, Drum readers! I'm Andy Kroll, a reporter here in MoJo's DC bureau. For the next week, I'll be one of the guest bloggers keeping the Drumbeat lively while Kevin lounges on a beach somewhere curled up with a McKinsey report and his new camera. (Kidding—I have no idea where he is.) My email is at the end of every post, so don't hesitate to drop me a note or give me an earful. Onward...

Regulatory capture: It's the wonky name for when an industry co-opts the watchdogs that are supposed to be regulating it. And there's no clearer example of that than the banking industry and the Office of the Comptroller of the Currency (OCC), which oversees about 1,400 US banks. For instance, it was the OCC in 2003 that squashed Georgia's efforts to outlaw the most toxic home loans on the market—think negative amortizing loans, NINJA (no income, no job, no assets) loans, you name it. How prescient.

On Tuesday, the OCC was at it again. Its chief, John Walsh, went before the Senate to testify against new bank capital requirements, calling for a "fundamental rethink" of rules that would force banks to keep more capital on their books to absorb losses and weather crises. "My view," Walsh said, "is that we are in danger of trying to squeeze too much risk and complexity out of banking as we institute reforms to address problems and abuses stemming from the last crisis." Translation: These rules will pinch bank profits.

Capital is the protective cushioning, if you will, that banks keep on hand in case disaster strikes. In the financial crisis of 2008 and 2009, plenty of banks didn't think it was necessary to stash away capital, and when the crisis arrived, they suffered serious enough damage to necessitate a government rescue. Research by the World Bank and the International Monetary Fund shows definitively [PDF] that large banks with too little capital suffered far more during the crisis than those who chose the safer route.

Which is where the new requirements come in. As Kevin noted last fall, the Basel III proposals would hike capital requirements three- and four-fold, depending on the type of capital. There's also a more recent proposal circulating to make larger banks hold still more capital as they grow in size. While technical, these reforms shouldn't be scoffed at: Treasury Secretary Tim Geithner has called higher capital requirements the most important piece of financial reform.

But Walsh's testimony adds to the growing drumbeat to weaken these requirements. He joins JPMorgan Chase exec Jamie Dimon and a host of other banking big-wigs in opposition.

One lawmaker who's unequivocally onboard is Sen. Carl Levin (D-Mich.). A staunch defender of tighter financial regulations, Levin was so angered by Walsh's testimony that he demanded his ouster in the middle of the hearing: "It is past time for the president to nominate new leadership at the OCC to protect American families and businesses from the excesses of Wall Street." However, it'll take more than one angry senator to beat back the banking lobby and put these rules into action.

Vacation Time

| Wed Jun. 22, 2011 7:00 AM EDT

I'll be on vacation for the next week, but fear not for the blog. Nick Baumann and Andy Kroll, who are both great and who you should be following anyway, will be filling in, and a few other MoJo writers will be popping in as well from time to time. I might even pop in myself occasionally, depending on the vagaries of my mood and my WiFi connections. Catblogging, of course, will appear as scheduled.

I'll be back next Thursday. Don't let the world collapse while I'm gone.

Will Obamacare Destroy Private Insurance?

| Tue Jun. 21, 2011 11:54 PM EDT

I haven't been blogging about the great McKinsey Obamacare study flap, but in a nutshell, McKinsey conducted a survey of employers and concluded that 30% of all companies would stop providing health coverage once Obamacare kicked in in 2014. Conservatives immediately sounded the alarm, but McKinsey refused to explain their methodology or divulge anything about either the questions they asked or how they "educated" respondents before getting their answers.

Under considerable pressure, McKinsey finally released a brief summary of their methodology along with a weasely clarification that their report wasn't meant to be a prediction and had only said that 30% of companies "might" stop providing health insurance, not "would." Whatever. It was too late: the 30% estimate had long since become a piece of conservative lore about the dire effects of Obamacare.

But how likely is it to be true? No one can say for sure, but the reason the McKinsey study provoked so much outrage — aside from the peculiar fact that they refused to explain how the study was conducted — is that it was light years away from every other estimate that had been done. In fact, a team of health economists had just recently done a (very well documented) simulation of the effects of Obamacare and came to a very different conclusion: the decrease in private insurance rates would be on the order of 3%, over two decades, not 30% over two years. They looked at the likely effect of three things: (1) the expansion of Medicaid, (2) the creation of subsidized insurance via exchanges, and (3) the Cadillac tax. The chart on the right, kindly sent to me by Steve Pizer, one of the authors of the study, summarizes the results of their simulation. The number of uninsured goes down to nearly zero, the number of publicly insured goes up to about 15%, and the number of people covered by private insurance declines only a smidgen.

Is this estimate correct? Who knows. But it's carefully done and the methodology is open to all for criticism. All things considered, it's probably way more likely to be close to the mark than McKinsey's study. You probably don't have to worry much about your employer suddenly deciding to end your healthcare coverage when Obamacare starts up for real in 2014.