Kevin Drum - July 2011

Chart of the Day: We Have a Taxing Problem, Not a Spending Problem

| Wed Jul. 13, 2011 11:49 AM PDT

"We have a spending problem, not a revenue problem." This is the usual Republican mantra, but is it true? As Jared Bernstein points out, a simple look at spending and revenue really doesn't back this up:

There’s obviously much more to this analysis then a couple of lines on a graph, but the history of structural [] deficits in recent decades is that they are largely the result of cutting revenues rather than raising spending.

....That doesn’t imply that spending shouldn’t be on the table in the budget talks—though the real pressures come in the future, through health care—whacking food stamps, education, and so on is just plain mean. But it’s awfully hard to look at this graph and see support for that Republican mantra.

I've added some handy lines to show the general trajectory of spending and taxes over the past three decades. Putting aside the Great Recession, which has temporarily cratered revenues and imposed a burst of stimulus spending, the trend is clear: spending has generally gone down, but so have taxes. Future healthcare expenses are a big issue, but the current deficit just hasn't been primarily a spending problem. It's been a tax cut problem.

Advertise on MotherJones.com

Yes, the Tea Party is Insane

| Wed Jul. 13, 2011 11:29 AM PDT

Jon Chait points me to Robert Draper's profile of Republican Whip Kevin McCarthy in the New York Times today. The subject at hand is the hardline group of tea party freshmen elected last November:

McCarthy informally polled them when they first came to town in November for orientation. All but four of them said they would vote against raising the ceiling, under any circumstances....The whip recognized that it would be counterproductive to lecture the freshmen about the economic hazards of not raising the debt ceiling.... And so McCarthy has urged them to consider raising the ceiling under certain conditions and thus to view this moment as a golden opportunity to force significant changes from the White House. “We all ran for a reason,” he tells them. “What’s most of concern to you? What is it that we think will change America?”

As a result, the freshmen have begun to move away from a hard “no” on raising the debt ceiling to a “yes, if.” In the conference room, several freshmen have said they’ll vote to raise the ceiling only if the president agrees to repeal his health care legislation. Or if Obama signs into law a constitutional amendment to balance the budget, after all 50 states have ratified it. Or if he’ll agree to mandatory caps on all nondefense spending. Or if he’ll enact the Ryan budget. The whip writes down all their ideas on a notepad.

None of these things, of course, are even remotely within the realm of reason, so they don't provide Republicans with any kind of improved negotiating position. As Chait says, "the evidence that's leaked out about internal Republican deliberations suggests the Republicans are not shrewdly trying to maximize their leverage. They're just barking mad." It's hard to disagree.

The Rise and Fall of Sarah Palin

| Wed Jul. 13, 2011 10:57 AM PDT

Paul Waldman on the slow but steady demise of Sarah Palin:

I'll go so far as to predict that this issue of Newsweek is the last time she'll appear on the cover of a news magazine. Ever. The "Gosh, what's Sarah Palin gonna do?!?" period has come to its end. She'll probably try to produce the same media interest four years from now, but it won't be nearly as successful. There are only so many times you can write that story.

It's been a crazy and often fascinating ride, but Palin really has little more to offer as a politician or cultural figure. What's she going to do next — say something ignorant? Complain about liberals? Provide some unseemly family drama? We've seen it all before, and it gets less interesting every time. Unless she goes on trial for murder, most Americans just aren't going to care.

Since Paul was agreeing with something I said yesterday, obviously I agree with him as well. But with a caveat: Joe McGinniss's book about Palin, The Rogue, comes out in September. Maybe it'll be great, maybe it'll be crap. Who knows? But it's possible it will be good enough to rekindle a momentary, if unflattering, last hurrah for Palin. The fat lady might not have quite sung her last note yet.

Statistical Wonkery and Grandma's Social Security Check

| Wed Jul. 13, 2011 9:50 AM PDT

Economists on both left and right mostly agree that the current standard measure of inflation, CPI-W, slightly overstates the actual growth in the cost of living. The reason is something called "upper level substitution bias," which means that instead of always buying a standard basket of goods and services, people change their buying habits over time as prices change. When the price of hamburger goes up, they eat more chicken. When the price of chicken goes up, they switch back to hamburger.

A version of CPI that takes this into account is called chained CPI, and overall it's considered a more accurate reflection of actual inflation. But technical merits aside, there are always winners and losers when you make changes to statistics like this. One big loser would be Social Security beneficiaries. Initial Social Security benefits upon retirement are calculated based on wage levels, so they'd be unaffected by a switch to chained CPI. But annual COLA increases would be affected, and they'd be lower than they are now. Michael Hiltzik suggests two reasons this is unfair. First:

It's not at all certain that elderly persons on fixed incomes can make the sort of lifestyle changes contemplated by the chained CPI....That's because a larger portion of seniors' spending is concentrated in medical goods and services, which aren't as amenable to substitution as, say, oranges for apples.

....Indeed, the BLS has recognized that elderly consumers are a special case by developing an experimental CPI, known as the CPI-E, just for those 62 and older. Among other differences, the index overweights medical care as a factor in seniors' spending....The CPI-E rose nearly 7% faster than the standard CPI from 1998 through 2009, according to government estimates. It also tells you why, from the standpoint of seniors' real cost of living, the chained CPI is a rip-off.

No measure of CPI is perfect for everyone: if the price of gasoline is skyrocketing and you have a long commute, then your personal cost of living will rise faster than official inflation figures. Likewise, because healthcare costs are rising faster than most other goods, people with a lot of medical problems face higher inflation than those who are healthier. From a statistical point of view, then, the best you can do is choose a measure of CPI that's most accurate in general.

Still, the CPI-E issue is a serious objection: it applies to a very large group, and it applies to a large group that typically has modest incomes. Ideally, it would be handled by broadening the scope of Medicare, not by deliberately using an innacurate measure of general inflation, but broadening the scope of Medicare is hardly on the table right now. Given that reality, the net result of this change would be to cut Social Security benefits by calculating inflation less accurately for seniors.

The second objection to chained CPI is more frivolous:

If you use the chained CPI instead of the standard CPI for the annual adjustment in income tax brackets, over time that will create an effective tax increase, especially for wealthier taxpayers....What do the agents of the wealthy say about that? Let's ask the right-wing Cato Institute, which cherishes both a sedulous admiration for free enterprise and a long-standing hostility to Social Security. Cato last year called switching to the chained CPI for Social Security a "sound and overdue reform." But when it came to using the chained CPI to adjust tax brackets, Cato called that "a very bad idea."

....It's a measure of the cynicism that guides debate in the nation's capital that an "overdue reform" that would take $112 billion from the needy can be regarded as "a very bad idea" if it costs the rich $72 billion — and that no one pauses to ponder the rank injustice involved. Must be that they can't make out their own words over the purring of those Mercedes engines.

Obviously Michael is right about this. If BLS adopts chained CPI as its new official measure of general inflation, then the change should be global throughout the government. Anything else is just obvious special pleading.

On a broader note, regular readers know that I'm generally in favor of Social Security reform. But I'm in favor of it only in the context of a broad-based reform that includes a mix of small, phased-in benefit cuts and small, phased-in revenue increases. A move to chained CPI could be part of that — one that has the benefit of also affecting the current elderly, instead of dumping the entire burden only on future generations — but no one should favor it in isolation. If this is something we end up doing, it has to be done as one piece of a complete package. Otherwise we'll get the benefit cuts, Republicans will refuse to pass the corresponding revenue increases, and Social Security will remain fiscally unbalanced and endlessly under attack. A complete deal to fix Social Security all at once is the only kind of deal anyone should countenance. Piecemeal "reform" is a chimera.

Has Wall Street Given Up on Boehner?

| Wed Jul. 13, 2011 8:58 AM PDT

A friend sends me an interesting email:

I spoke to some (very) conservative investment bankers yesterday on some deals we are handling and asked about the debt ceiling as an aside. They were very concerned about the ceiling and seemed very favorable to McConnell's offer. Europe is really, really spooking the investment community. Thus, they would like to tamp down the uncertainty here in the hopes that some sense of normalization here will help the sanity over there and otherwise across the board.

They said it was common knowledge that McConnell was taking very serious back-channel heat from Wall Street because the conclusion was that there was no reliable leadership in the House with Boehner unable to control his caucus and Cantor making his leadership play now. They view Boehner as out. In other words, McConnell is Wall Street's only viable player and so he is taking all the calls. And those calls are not saying to insist upon cuts only come hell or high water. They are saying raise the F-Ing ceiling NOW.

Have no idea if this was true. It's in their interests to say all is well because the players in their deals want that to be the case, so who knows.

I think the issue to watch is how commentators who came out against McConnell's plan more toward begrudging agreement on the theory that there is an unreasonable authoritarian socialist in the WH and, contrary to said President who seems happy to send the country into default and cut off entitlements, they'll be the responsible party, take their lumps and move on. For the good of the country.

This sounds sort of plausible to me, but your mileage may vary. In any case, the final paragraph of this email amused me because I noticed the same thing yesterday, and it's a testament to the efficiency of the conservative messaging machine. Literally within a few hours, I swear that every single conservative politician and pundit had adopted the line that talks had broken down because it was just impossible to negotiate with a socialist thug who was obviously dealing in bad faith. (The "bad faith" in question, of course, was Obama's continuing insistence that modest revenue increases be part of any deal.) The speed with which this talking point made the rounds was truly impressive.

Bernanke: Fed Not Out of Ammo Yet

| Wed Jul. 13, 2011 8:21 AM PDT

Ben Bernanke told Congress today that the economy is still pretty shaky, and the Fed will take action if it turns down:

Bernanke said that the Fed could start new purchases of securities....his clearest indication to date that a third round of so-called “quantitative easing” is in the realm of possibility. Another option would be to provide “more explicit guidance” about how long the Fed’s current policy of ultra-low interest rates will remain in place....The Fed chief also said that the central bank could lower the rate it pays banks to park money at the Fed, currently 0.25 percent.

That's reassuring, I guess. In related news, Cate Long reports that Ron Paul continues to be a gold bug:

Ron Paul to Bernanke: "Is gold money?" Bernanke: "No it's a precious metal". Paul: "Why do central banks hold it?" Bernanke: "Tradition."

Roger that. Time to grow up, Ron.

Advertise on MotherJones.com

Europe Starting to Look Ever More Wobbly

| Tue Jul. 12, 2011 9:23 PM PDT

The Wall Street Journal reports that European banks are getting very, very nervous:

As the crisis deepens, even European central banks are considering the possibility that one or more countries could leave the currency bloc, according to people familiar with the matter, a scenario that until a week ago seemed to many as implausible.

Overall, European banks appear to be growing increasingly wary of lending to each other, even on a short-term basis. Deposits parked at the European Central Bank's overnight deposit facility jumped Tuesday to €90.5 billion....While the amount of funds parked in the ECB facility ebbs and flows over the course of each month for technical reasons, it has historically been a good proxy for how fearful banks are about lending to each other—and about the financial crisis intensifying.

....The defensive moves have the potential to put further pressure on those economies by reducing the already limited supply of credit. This occurred at the outset of the U.S. financial crisis in 2008, deepening the recession. One official said the situation in Italy is being monitored "moment by moment."

This is really not good. Banking crises tend to move slowly at first and then gather speed seemingly from nowhere before finally imploding. That's how, say, Lehman Brothers can be just a wee bit shaky one week and then a week later be close to bringing down the entire global financial system. When the breakdown of trust happens, it happens very, very quickly.

And just to add an American spin here, this is really not the time to be dicking around with Treasury's ability to sell U.S. bonds. Maybe this is all just a false alarm, but then again, maybe not. And if it's not, America needs to be ready and able to provide a financial backstop to the world without a bunch of squabbling congressmen getting in the way. That's part of the responsibility that comes with being a superpower.

The Great Netflix Shaft

| Tue Jul. 12, 2011 7:03 PM PDT

The latest from Netflix:

Netflix Inc. boosted by 60% the price of its cheapest movie-rental plan that includes streaming and DVD rentals, triggering an outcry among customers who still use the disc format despite the growing popularity of online movies.

Am I missing something here? Of course there's an outcry from customers who still — still! — use prehistoric disc technology. I've been a Netflix customer for about a year, ever since the last DVD rental place around here pulled up stakes, and the reason I still rent discs is because the selection of streaming movies on Netflix is pathetic. At a guess, I'd say that when I go to look for a title, it's available in streaming format about 10% of the time. The other 90% of the time I have no choice but to get the disc.

So how can anyone, least of all Netflix themselves, supposedly be surprised that discs remain popular? Again, am I missing something here?

On a related topic, this is a crappy way to treat customers. When I signed up for Netflix, I remember thinking that they were just trying to lure customers in with a low price that would suddenly jump when enough people had gotten used to the service and would either (a) not notice the price hike or (b) just shrug and keep their subscriptions due to inertia. But I confess that it never occurred to me that Netflix would suddenly jack up their price 60%. Credit for moxie, I guess.

On the other hand, I imagine it's going to work great. They'll get some griping and some cancellations, but nowhere near enough to eat into the higher revenue from the price hike. Whether they'll continue to grow at a decent clip at this new price point is another question.

UPDATE: Interesting comments. The most common is that I shouldn't be blaming Netflix, I should be blaming the studios, who are in the process of jacking up their contract demands in order to get their hands on a bigger piece of the distribution pie.

Class Warfare Boomerangs on the GOP

| Tue Jul. 12, 2011 3:00 PM PDT

When I came in from lunch and read about Mitch McConnell's debt ceiling proposal, my jaw dropped. The cynicism of the thing was enough to leave my tongue hanging out of my mouth the entire time I was writing the post below. So that's all I wrote about.

But I suppose there's a bigger picture here than just McConnell's cynicism. And the bigger picture, obviously, is that McConnell wouldn't have proposed giving Obama his debt ceiling increase with only political strings attached unless he was convinced that Republicans were losing the PR battle for a more comprehensive deal. And since the only real stumbling block to a comprehensive deal was Obama's insistence on revenue increases, McConnell must have felt that they were losing the PR battle even there. After years of owning the tax issue, this must have come as something of a tectonic shock.

Which is.....interesting. Obviously, Obama has been positioning himself all along as the reasonable, centrist guy, willing to agree to trillions in spending cuts as long as Republicans are willing to close a few modest tax loopholes. Last week Republicans derided Obama's repeated focus on tax breaks for corporate jets as class warfare etc., but you know what? It must have been working. Somewhere down in the bowels of the GOP's polling operation, they must have discovered that the public was buying Obama's pitch that "the wealthy need to pitch in too."

Which, in a way, isn't surprising. Raising taxes on the rich has always polled well, and Republicans may have recently figured out that this support was more than just theoretical. Eventually Obama would have made his detailed proposals public, and apparently McConnell had started to realize that shutting down the government over tax breaks for hedge fund billionaires and shorter depreciation schedules for corporate jet owners was really, really, not going to go down well, even among Republicans. So he pushed the eject button and tried to bail out.

It probably won't work, though. The political cynicism of his proposal is almost certainly too much for some Democrats, and giving up on spending cuts will be too much for most Republicans. Still, it provides a hint about who has the upper hand in the debt ceiling negotiations right now. And it ain't McConnell.

It's Now Official: The GOP is a Party of Sixth-Graders¹

| Tue Jul. 12, 2011 1:38 PM PDT

When John Boehner said earlier today that the debt ceiling was 100% Obama's problem, I took it as political hyperbole. But apparently it was much more than that. A couple of hours ago Boehner's Senate doppelganger, Mitch McConnell, proposed a truly bizarre plan that would, literally, make the debt ceiling 100 percent Obama's problem. It goes like this:

  1. Next month Obama would receive approval to raise the debt ceiling $700 billion.
  2. A "resolution of disapproval" would then be taken up by Congress on an expedited basis (i.e., no filibusters allowed).
  3. If the resolution passes, Obama can veto it.
  4. If he vetoes it, it requires a two-thirds vote of both houses to override.
  5. If there's no override, the debt limit is increased, but Obama would be required to lay out a "hypothetical" set of budget cuts totaling $700 billion.
  6. This would be repeated (in $900 billion increments) in the fall of 2011 and summer of 2012.

WTF? This is possibly the most juvenile, most buck passing, most transparently mendacious proposal I can recall from any party leader in recent memory. The bright idea here is to force Democrats to repeatedly vote to raise the debt ceiling during campaign season, and to repeatedly force Obama to lay out enormous budget cuts that have no purpose except to piss off interest groups. The whole thing is so patently, ridiculously political that it's breathtaking. It ought to be named the "Gratuitous Embarrassment of Barack Obama and the Democratic Party Act of 2011."

Does McConnell really think that he's being clever here? That his purpose isn't plain to everyone? The Republican Party has now passed from Alice in Wonderland to Lord of the Flies. It's like dealing with a bunch of kids on a playground. Are McConnell and Boehner trying to prove Obama's point that he's the only adult at the table right now?

1No insult to actual sixth-graders intended.