Kevin Drum - July 2011

Sunday Campaign Blogging: A More Presidential Inkblot

| Sun Jul. 24, 2011 2:26 PM EDT

Inkblot's senior campaign staffers have decided that Friday's campaign poster didn't show the candidate at his presidential best. Too squinty-eyed. So here's their second bite at the apple, a truly visionary and inspiring Inkblot dedicated to winning the future. How could you not vote for him?

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Republicans and the Deficit Narrative

| Sun Jul. 24, 2011 1:10 AM EDT

God only knows what offers Obama really made to John Boehner last week and what offers Boehner might have been willing to accept. Reporting is all over the map on this. Like nearly every liberal, though, I'm pretty stunned by White House confirmation that Obama offered to raise the Medicare eligibility age to 67 — a truly terrible idea that wouldn't even save very much money. If this is true, it means either (a) Obama really is willing to sell out the left almost completely, or (b) he's trying to demonstrate how completely instransigent Republicans are. I can't even guess which at this point. Maybe both.

Frankly, though, the endless "inside" reporting of offers and counteroffers isn't very interesting any more. I think we've seen pretty much every permutation possible. Details aside, what's obvious is that Obama is willing to concede a helluva lot while a big chunk of Republicans are not only unwilling to concede anything, but think it would be great to just go ahead and default. So what if the economy goes kablooey? It'll help defeat Obama! And anyway, it's only a bunch of long-haired economists saying so, and they're probably just making stuff up, the same as the long-haired climate scientists and the long-haired biologists.

But here's what I am curious about. Up until very recently, Republicans were mostly taking a hard line on the deficit and weren't shy about making sure everyone knew it. The hard line itself hasn't changed since then, but over the past few weeks they've come to realize that it doesn't make for very good PR. So now their enablers in the media are furiously pushing the story that it's really Obama who's completely intransigent and insincere, rejecting deal after deal no matter how much Republicans try to accomodate his crazed desire to punish the rich. This narrative, as near as I can tell, is now virtually unanimous among conservative commenters.

So the question is, will anyone buy this? It's so self-evidently preposterous that it doesn't seem possible, but then, I wouldn't have figured that they could successfully make the world so quickly forget that they were responsible for the deficit in the first place, nor that they were also responsible for the most epic financial meltdown since the Great Depression. But they have. Their ability to shape popular narratives can hardly be overestimated.

Even now, House Republicans are apparently readying a plan that appears to have no purpose except to be so obviously outlandish that it will get rejected out of hand, thus helping their storyline. Conservative pundits will spin it in lockstep as yet another example of Obama's obduracy, and the rest of the media will.....

What? Slowly buy into it? I don't know. The American press, as long as it's bound by its usual standard of objectivity, just isn't set up to deal with a two-party system in which one of the parties has gone completely off the rails. So we'll see. They might yet pull it off.

Friday Campaign Blogging: Would You Buy a Used Car From This Cat?

| Fri Jul. 22, 2011 3:02 PM EDT

In the last election cycle, Inkblot announced his candidacy for president ten days before the election. Too late! He's learned his lesson, though, so today he's throwing his whiskers in the ring for 2012. His official campaign poster is below.

My mother says he looks shifty. I say he looks tough-minded but visionary. On a policy note, he's running on a promise not to raise the debt ceiling, which should go over well with his core tea party supporters. However, instead of cutting spending, his plan to balance the budget involves extremely punitive taxation against dog owners. I've advised him that this sends a muddled message to his followers, but he's a cat of principle and refuses to back down. He also plans to release much-needed supplies from the Strategic Cat Food Reserve and to break off diplomatic relations with Germany because they invented the German Shepherd. More details and white papers to follow.

The Fog of War Budgeting

| Fri Jul. 22, 2011 1:44 PM EDT

Gordon Adams says that rumors that a budget deal will include $1 trillion in defense cuts is just smoke and mirrors:

Right now, the adminstration's budgets assume that war costs will be $50 billion a year over the next ten years. That is not a real number; it is what budget folks (like me) call a "plug" — we know something will go there, but we don't know what it is.

By contrast, the Congressional Budget Office uses its own "plug" in forecasting future war costs. Theirs is based on what was the last appropriation for the war, or $159 billion in fiscal year 2011. Then CBO just mechanically projects that number out over ten years, regardless of what policy might be.

So if the deal assumes that by, say, 2014 our wars all wind down to a mere $50 billion per year, that's a savings of $109 billion for eight of the next ten years compared to the CBO estimate. That comes to $872 billion over ten years, or, roughly speaking, $1 trillion.

And you never know: maybe this will actually happen. But simply saying so doesn't make it any more likely, nor does it make it any more likely that we'll avoid future wars. And it certainly doesn't force any serious cuts in the Pentagon's operating budget.

If it ends up making a budget deal more likely to pass the House, I guess I'm OK with it. But no one should mistake this for any kind of serious spending cuts. Those, apparently, are being saved for the poor and the elderly.

Chart of the Day: Manufacturing Back on Top

| Fri Jul. 22, 2011 12:17 PM EDT

This chart, inspired by Larry Summers, comes from Felix Salmon. Roughly speaking, it shows the relative valuation of tech companies vs. industrial companies. For the first time in two decades (and possibly the first time ever), the PE ratio of tech companies is lower than the PE ratio of industrial companies. In other words, given a choice between a tech company with earnings of $1 billion and an industrial company with earnings of $1 billion, investors today would pay a higher price for the industrial company. Generally speaking, this means that investors think the industrial company has better long-term growth prospects than the tech company.

So why has this happened? I can take a few guesses:

  • The ratio was fairly flat from 2004 until 2009 and then nosedived. For some reason, the recession had a bigger impact on tech companies than industrial companies.
  • Older tech companies, like Microsoft, aren't high flyers anymore, and new tech companies haven't gone public in big numbers. If tech companies like Facebook and Twitter were holding IPOs in normal numbers, average tech valuation would be higher.
  • Investors are still nervous about the dotcom bust and are afraid it could happen again.
  • Most of the manufacturing sectors that were in danger of losing their business to overseas competitors have already been decimated. The ones that are left are pretty healthy and unlikely to fall prey to competition from China or Malaysia.

I suspect the real answer is something else, but I don't know what it is. In any case, I'd like to see this chart decomposed so it's more obvious why these relative valuations have changed. Has it mostly been because tech PEs have gone down or because industrial PEs have gone up?

NATO Running Low on Blow-Uppable Sites

| Fri Jul. 22, 2011 11:40 AM EDT

NATO commanders in Libya have asked the United States to provide more drones. That's not too surprising, I guess. But the explanation for the request startled me a little bit:

NATO commanders requested the sophisticated surveillance aircraft after concluding that they were running out of military targets in Libya after four months of bombing and missile strikes against Kadafi's military forces and command facilities, U.S. and NATO officials said.

...."It's getting more difficult to find stuff to blow up," said a senior NATO officer, noting that Kadafi's forces are increasingly using civilian facilities to carry out military operations. "Predators really enable you study things and to develop a picture of what is going on."

Modern wars certainly present brand new kinds of challenges, don't they?

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Amazon's Scorched-Earth War Against the Rest of Us

| Fri Jul. 22, 2011 5:55 AM EDT
How could we NOT use this image?

What is Amazon.com's biggest advantage over its competition? One-click ordering? The ability to go shopping in your pajamas? Its enormous selection? Those all play a role, but Christopher Caldwell thinks the real answer is the fact that Amazon's customers mostly don't have to pay state sales tax:

It is the tax exemption, not the technology, that most distinguishes Amazon from its rivals. Its price advantage is the most important thing about it. The ruthlessness with which Amazon is resisting tax reform might be a measure of the centrality of tax-privilege to its business model. One can look at the collapse of Borders, not to mention independent booksellers, and ask whether government policy has undermined the bricks-and-mortar retail economy to protect a will-o'-the-wisp.

At first glance this seems silly. Can a 5-to-10-percent price difference really be such a deal breaker for Amazon? But Caldwell has a point: Amazon's ferocious response to recent attempts to get it to collect sales taxes suggests a company that thinks its life depends on not paying them. So what's going on here?

The story starts in 1992, when the Supreme Court ruled that companies didn't have to collect state sales tax unless they had some kind of physical presence in the state: a warehouse, say, or the company's headquarters. At first this applied only to mail-order houses and nobody cared much. Then online retail started to take off, but as long as it was in its infancy nobody cared too much about that either. But the online world is no baby anymore: It accounts for upwards of $150 billion in sales each year, nearly 10% of the total in the United States.

With that much at stake, and growing fast, states have started to panic. Sales tax revenue is one of their main funding sources, and as more and more business goes online, that revenue starts to dry up. So they've started fighting back, only to run into an implacable buzz saw of opposition from Amazon.

Texas, where Amazon does have a physical presence, billed them for back taxes earlier this year and Amazon promptly announced that it would pull up stakes and leave. When South Carolina voted against giving Amazon a special tax exemption, Amazon announced that it would abandon a new warehouse near Columbia that was already half built. Tennessee is getting the same treatment for refusing to play ball. And when Illinois passed a law demanding tax payments based on the fact that Amazon has thousands of affiliates in the state, Amazon ruthlessly severed every one of its affiliates' contracts. In New York, which also passed a law requiring tax payments based on Amazon's affiliate program, Amazon is paying up, but only so it has standing to sue in federal court.

The latest state to insist that Amazon collect state sales taxes is California. Amazon's response? As in Illinois, they summarily severed the contracts of every one of its affiliates in the Golden State. But that's not all. Like mafia goons going to the mattresses in a gang war, Amazon immediately announced that it would spend millions of dollars to place a referendum on the ballot to nullify the new California law. And in the meantime? Law or no law, they won't be collecting sales tax in California, and that's that. Los Angeles Times columnist Michael Hiltzik explains why a ballot measure is so alluring to Amazon:

In court, Amazon would have to painstakingly muster credible legal arguments and present them to a judge who, more often than not, is no fool. In a California ballot campaign, one can try to mislead voters by deploying half-truths, outright lies and flagrant deceit. Lie to a judge, and you might end up with a stiff fine for contempt and maybe jail. Lie to the California electorate, and you might win an election. Amazon hasn't ruled out challenging the California law in court, and it might do so if the referendum fails. But is there any mystery why it preferred to start with a ballot measure?

And what is Amazon's response to all this? Their CEO, Jeff Bezos, says that they support a federal law to streamline and harmonize state sales taxes. This is, needless to say, a transparent dodge: Bezos knows perfectly well that a Republican-dominated Congress will never pass such a law. In the meantime, state treasuries are slowly but steadily being bled dry thanks to Amazon's take-no-prisoners approach to paying taxes. With most states still hammered by depressed tax collections thanks to the poor economy, this means that Amazon's remorseless resistance to collecting taxes is in direct conflict with funding for schools, parks, medical care, and street repairs.

Why wage a brutal, unpopular, scorched-earth campaign like this over a few percentage points? Probably because Caldwell is right: For all its talk of technology and convenience and selection, Amazon basically stays in business because it can charge slightly lower prices than brick-and-mortar stores. A level playing field might be good for state coffers and the schools and police officers they support, but to Amazon that doesn't matter. It's nothing personal, mind you. Just business.

Money in Politics

| Fri Jul. 22, 2011 12:20 AM EDT

Why do tabloid press barons have so much power in Great Britain? The Washington Post offers an explanation that never really occurred to me before:

In Britain, money plays a smaller role in politics than it does in the United States, and politicians have few ways to communicate effectively with the public outside the media filter. Television advertising plays no significant role in campaigns; for the most part, it is not allowed.

An American politician who feels aggrieved by the media can buy television spots to answer them. His British counterparts have no such option. Elected officials must depend on the good graces of newspapers for favorable coverage.

File this under "watch what you wish for," I guess. In America, vast pools of money in politics give the business community enormous power to influence elections. That's bad. But the alternative, apparently, is to get the money out and instead give media moguls enormous power to influence elections. Pick your poison.

Four Programs

| Thu Jul. 21, 2011 6:22 PM EDT

A reader points me to a critic who thinks that in yesterday's post about the debt ceiling I played fast and loose with budget numbers:

To me, the most damning part of this article was what the Author determined that our Government would fund. Mainly, Social Security, Medicare, interest debt, and some defense spending. According to the article, these items would take up the entire revenue stream? Yet, by the design of the programs, Social Security and Medicare are supposed to be self sufficient....The truth of course, is that the left is simply being loose with the facts. Social Security and Medicare do not use up as much revenue as this article would like you to believe.

Actually, they use up more. In fact, this whole post is worth a response since most people don't have a very good understanding of where federal revenue comes from and where it goes. But the basic figures are all easily accessible from the OMB and a few other sources, so here's a quickie summary for 2011:

  • Social Security: Roughly speaking, Social Security is self sufficient. So yes, we can assume that even if the debt ceiling isn't raised, dedicated payroll taxes will be enough to keep the program going.
  • Medicare: Medicare gets about half its financing from dedicated payroll taxes and premiums. However, the non-hospital portion, which costs about $250 billion per year, comes out of the general fund.
  • Defense + Veterans Benefits: Using the narrowest definition of national defense, this costs about $900 billion per year.
  • Interest on the debt: About $200 billion per year.

So excluding the parts of Social Security and Medicare paid for out of dedicated payroll taxes, here's what comes out of the general fund: $250 + $900 + $200 = $1,350 billion.

Now for taxes. Excluding dedicated payroll taxes for Social Security and Medicare, here's roughly where our money comes from:

  • Individual income taxes: $950 billion.
  • Corporate income taxes: $200 billion
  • Other taxes: $200 billion

That comes to $1,350 billion. In other words, aside from payroll taxes, our entire tax base — income taxes, excise taxes, estate taxes, customs duties, everything — is just barely enough to pay for our military, the non-hospital part of Medicare, and interest on the debt. Finis. If you want to fully fund those parts of government, as most tea partiers do, and if you also want to force an immediate balanced budget by not raising the debt ceiling, as most tea partiers do, you literally have to zero out the entire rest of the federal government. No Medicaid, no FAA, no border patrol, no FBI, no embassies, no highways, no disaster relief, no SEC, no court systems, no prisons, no national parks, no CIA, no school lunches, no medical care for children, no SNAP, no flood control, no student loans, no medical research, no nothing. You get Social Security, Medicare, the military, and interest on the debt. That's it.

Capiche?

Gridlock on Greece

| Thu Jul. 21, 2011 2:46 PM EDT

Tyler Cowen takes a look at the latest European stitch-up for saving Greece:

If you had told me it was an Onion-like satire of all the previous plans, and not an actual serious plan at all, I would have believed you.

And here's Paul Krugman:

The Serious People are determined to destroy all the advanced economies in the name of prudence.

I don't really have the heart right now to go through the entire plan and try to make sense of it. Others can do a better job than me anyway. Broadly speaking, though, it demonstrates yet again that European leaders simply aren't willing or able to deal with the eurozone's problems, and probably won't be until something genuinely catastrophic happens. There's really no partial restructuring that has the slightest chance of helping Greece, but as the difficulty of getting this agreement shows, even partial restructuring is a tough sell. At some point everyone is going to have to come to grips with an all but total default from Greece, but apparently we're still some ways off from that day of reckoning.

Watching both the United States and Europe careen recklessly toward fiscal oblivion simultaneously is not something I thought I'd see in my lifetime. Just goes to show my lack of imagination, I guess.