Kevin Drum - August 2011

Can We Fix the Economy?

| Mon Aug. 22, 2011 12:36 PM EDT

I don't really have anywhere to go with this post, but I've been musing for the past few days over all the theories floating around that imply — or are used by others to imply — that we really can't do much of anything to help the economy recover, so there's not much point in pursuing either monetary or fiscal stimulus. Here's a brief list:

  • The basic Rogoff/Reinhart observation that financial collapses due to asset bubbles just take a long time to work through. Given the size of the 2008 collapse, historical evidence suggests that it's going to take five or six years to recover, and that's that.
  • The Tyler Cowen "Great Stagnation" hypothesis. We've picked through all the low-hanging economic fruit over the past century, and like it or not, we're now entering an extended period of low productivity growth because we're not inventing lots of cool new stuff.
  • The related (I think) investment drought hypothesis. Ben Bernanke famously ascribed the housing bubble partly to a "savings glut" from overseas, and the flip side of that is an investment drought. The reason financial assets became so popular is that, even with all that money sloshing around the system, there simply weren't very many high-quality investment opportunities available in firms that make real-world goods and services, and that hasn't changed.
  • The peak oil theory. Production of oil has pretty much maxed out, which means that every time the economy gets moving it will create a spike in oil prices, which will send the global economy back into recession. We're now in a continual oil-fueled boom/bust cycle that limits our long-term growth rate.
  • The Michael Mandel contention that increased consumption simply leaks out of the economy to China and other countries. Stimulating consumption in the U.S. just won't do much for the American economy if all those extra dollars mostly get spent on overseas goods and services.
  • Various structural explanations that suggest the United States has an increasing number of workers who flatly don't have the skills to do anything useful in the modern economy — a problem that was temporarily masked by the housing bubble and was only fully exposed when the economy collapsed. This takes various forms, both weak (workers can be retrained but it will take a while) and strong (forget it, they're simply useless).
  • The self-serving group of partisan hack theories: regulatory uncertainty is the real problem, taxes are too high, the EPA is strangling America, hyperinflation is just around the corner, markets are cowering in fear of future deficits, etc. etc.

Please note that I don't mean to suggest that Reinhart, Rogoff, Cowen, or Mandel are themselves arguing that fiscal and monetary policy are pointless. I'm just using their names for some of these ideas because they're the ones most associated with them.

Anyway, as I said, I'm not really going anywhere with this right now. I'm just collecting theories. Any others to add to the list?

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Rick Perry's Unfortunate Book

| Mon Aug. 22, 2011 11:49 AM EDT

From Rick Perry, on August 14th:

Have you read my book, "Fed Up!" Get a copy and read it.

From Rick Perry's communications director, Ray Sullivan, on August 18th:

The book, Mr. Sullivan said, “is a look back, not a path forward.” It was written “as a review and critique of 50 years of federal excesses, not in any way as a 2012 campaign blueprint or manifesto,” Mr. Sullivan said.

This has been making all the usual rounds today, and why not? It's unusually dumb. Given the amount of — well, let's call it inconvenient bluster in the book — I guess Sullivan has to give this a try, but does he really think Perry can disown a book that he released nine months ago? That's not very swaggering and tea partyish. Sounds like Mr. Perry is all hat and no cattle.

Which of course makes this the perfect time for Sarah Palin to enter the race. We could use a common sense conservative who doesn't kowtow to the lamestream media. There's a real shortage of that in the Republican contest right now.

Repealing the 16th Amendment

| Mon Aug. 22, 2011 1:07 AM EDT

Does Rick Perry really think we should repeal the 16th Amendment and completely eliminate the income tax? This has been making the rounds, so I got curious. Here's what he says in his book:

This leads me to the great milestone on the road to serfdom: the passage of the Sixteenth Amendment....This was the birth of wealth redistribution in the United States.

....[One] option would be to repeal the Sixteenth Amendment [] and then pursue an alternative model of taxation such as a national sales tax or the Fair Tax....America needs a fairer, flatter, and simpler system, one which working families can complete without having to hire a bevy of professionals to assist them.

So that's the skinny. Obviously Perry doesn't think very highly of the 16th Amendment and believes that repealing it is an "option." That's pretty loopy, but it's actually what comes next that's really loopy: he'd like to replace all federal taxes with the Fair Tax, a proposal that basically levies a 30% sales tax on all goods and services — including housing, healthcare, food, and everything else. Mike Huckabee was touting this nitwit idea back in 2007, and Bruce Bartlett shredded it here pretty conclusively. My comment at the time:

What's really amazing is that Bruce can write a thousand words on this subject and maintain a calm and even demeanor throughout. After all, among serious tax analysts a national sales tax ranks right up there with eliminating the Fed and putting the United States back on the gold standard. It's crankery. And yet it keeps rearing its ugly head, like a vampire that just won't die. Anybody got a silver bullet handy?

This is really scary. At the time, I assumed that eliminating the Fed and putting the United States back on the gold standard were so obviously stupid that they were good examples of transparent economic crankery. But guess what? Both of those cretinous ideas have gained a lot of traction among Republicans lately. So it's hardly any wonder that at least one of their candidates has reanimated the zombie Fair Tax proposal too. I wonder what's next? No one's mentioned fluoride in the drinking water lately, have they?

Are the Nature vs. Nurture Wars Over?

| Sun Aug. 21, 2011 6:33 PM EDT

Matt Ridley has an odd column in the Wall Street Journal this weekend called "A Truce in the War Over Smarts and Genes." He's optimistic that a recent discovery in molecular genetics conclusively demonstrates that intelligence does indeed have a genetic basis but also that it doesn't matter that much:

The immediate cause of this optimism is a recent paper in Molecular Psychiatry, which confirms that genes account for about half of the difference in IQ between any two people in a modern society, but that the relevant genes are very numerous and the effect of each is very small.

....It turns out the genetic differences may have been all just below the measurement radar. A new technique, which can now detect very slight genetic influences, has succeeded where the old techniques failed. The genes for intelligence are there, but there are thousands of them and each has only a tiny impact....So the old terror, which so alarmed many psychologists and educationalists, that one day people—or governments—would use genes to decide whom to kill, sterilize or prevent being born because of their intelligence, suddenly looks a lot less scary. There are just too many genes.

I don't get this. First, it's been a very long time since I've read anyone suggesting the existence of "an IQ gene." The proposition that intelligence and other cognitive traits are the product of lots of different gene complexes has been pretty well accepted for decades, even if definitive proof was lacking. So although this new result may be important, it doesn't seem all that earthshaking in the context of the nature/nurture wars.

Second, the reason that nature vs. nurture has been such a nasty battle hasn't really been due to fears of a new eugenics movement breaking out. It's been due to fears that if intelligence has a genetic basis, then it's also conceivable that different races have different inherent IQs. That's where the emotional core of the war has resided since at least the 50s and 60s, and it remains there whether intelligence is the result of one gene or thousands.

But I confess that I haven't paid very much attention to the nature/nurture debate over the past decade or so. So maybe I'm wrong about this. Anyone care to weigh in on the current state of the controversy?

Why Maps Are So Annoying

| Sun Aug. 21, 2011 4:54 PM EDT

Quick: does this diagram have more blue squares or more red squares?

Time's up! There are more red squares. But according to Berkeley's Eduardo Andrade, most people overestimate the number of blue squares when they're lumped in the middle like this. Scatter them around in different ways and you can reliably get people to guess that there are more red squares or that there are the same number of both. This makes the visual display of information important:

It is relatively easy to bias people’s visually-based estimates. As experiment 1 demonstrates, estimations of the actual proportion of winning squares differed by almost 30 percentage points when the winning-on-the-edge vs. winning-in-the-middle formats were contrasted (30.7% vs. 57.6%). Surprisingly, people are often tempted to rely on the costless and apparently ‘‘infallible’’ visual input. Experiment 2 showed that an astonishing 75% of participants in the ‘‘pictorial format only’’ condition acknowledged that they did not systematically compute the actual probabilities before making a betting decision that involved their own participation fee.

I don't know if this is really all that surprising or not, but there you have it. In any case, this reminds me of the old chestnut about why, when you look up something in a map book, the thing you're looking for always seems to be right on the edge, forcing you to flip back and forth between two pages. Answer: because most of the map is on the edge. The outermost 15% of a page contains half the map. The outermost 20% contains two-thirds. So the odds of finding something near the center seems like it ought to be high but in fact is surprisingly low. Thus the annoyance factor.

Via Kevin Lewis of the Boston Globe.

Endgame in Libya

| Sun Aug. 21, 2011 2:28 PM EDT

Multiple media reports suggest that Libya's rebels are close to victory over Muammar Qaddafi. This isn't due solely to fighters from eastern Libya — who have been the focus of most of the combat until now — moving west and surrounding Tripoli, either. It's apparently been largely due to an uprising within the city itself, something that Juan Cole is pleased about:

Those who were expecting a long, hard slog of fighters from the Western Mountain region and from Misrata toward the capital over-estimated dictator Muammar Qaddafi’s popularity in his own capital, and did not reckon with the severe shortages of ammunition and fuel afflicting his demoralized security forces, whether the regular army or mercenaries. Nor did they take into account the steady NATO attrition of his armor and other heavy weapons.

This development, with the capital creating its own nationalist mythos of revolutionary participation, is the very best thing that could have happened. Instead of being liberated (and somewhat subjected) from the outside by Berber or Cyrenaican revolutionaries [from central and eastern Libya], Tripoli enters the Second Republic with its own uprising to its name, as a full equal able to gain seats on the Transitional National Council once the Qaddafis and their henchmen are out of the way. There will be no East/West divide. My hopes for a government of national unity as the last phase of the revolution before parliamentary elections now seem more plausible than ever. Tellingly, Tunisia and Egypt both recognized the TNC as Libya’s legitimate government through the night, as the Tripoli uprising unfolded. Regional powers can see the new Libya being born. 

From the New York Times:

With turmoil inside Tripoli, and a vaunted line of defense outside the city appearing to have done little to contain the rebel advance, the events suggested a possibly decisive shift in the six-month uprising against Colonel Qaddafi, which has already become by far the most violent of the Arab Spring uprisings. 

....Of particular note on Sunday, the rebels seemed to meet little resistance from the 32nd Brigade, a unit NATO had considered one of the most elite in Libya, commanded by Khamis Qaddafi, one of Colonel Qaddafi’s sons. The so-called Khamis Brigade was one of the key forces enforcing the defense lines around the capital, extending about 17 miles outside Tripoli to the west and about 20 miles outside the capital city in the south.

I've been a skeptic of the Libyan operation from the start, but if this keeps up — and if the revolutionary government goes on to establish a decent regime — then it looks like President Obama's judgment in this matter may indeed have been better than mine. At a modest cost in dollars, virtually no cost in coalition lives, and no requirement for postwar occupation or rebuilding, we've backstopped an indigenous uprising against a brutal dicatator who was on the verge of slaughtering thousands of his own people. Not bad.

There are still some big ifs here, but at the moment things look better than I imagined they would. Keep your fingers crossed.

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Bargaining vs. Hostage Taking

| Sun Aug. 21, 2011 1:14 PM EDT

When it comes to the temporary Bush tax cuts on the rich, Republicans insist that allowing them to expire would be a tax increase that they're flatly unwilling to even consider. However, when it comes to the temporary Obama payroll tax cut on the middle class, they say that letting it expire is OK. It's not a tax increase in this case, and our looming budget deficit is so critical that we can't afford to keep it in place. Steve Benen comments:

If I had to guess, I'd say Republicans probably support an extension of the payroll tax cut, but just aren't willing to say so. Why not? Because then they lose leverage — GOP officials know the White House wants this, and if they simply agree to pass the measure, they won't get anything extra out of the deal. Hostage strategies have become an instinctual norm for Republicans.

I think I'd take issue with this in two ways. First, I'm honestly not sure Republicans do support an extension of the payroll tax cut. Historically, their focus has always been on upper-income marginal rates, and they've never brought quite the same fervor to middle class levies like the payroll tax or the gasoline tax as they have to things like capital gains taxes and estate taxes. They're just really, really focused on keeping taxes on the rich low.

But even if this is just a bargaining ploy, it's not fair to call it a "hostage strategy." In the case of the debt ceiling fight, that was appropriate language because Republicans were genuinely threatening fiscal Armageddon if they didn't get their way. That's hostage taking. The payroll tax debate, conversely, is just garden variety politics. Presidents and members of Congress have bargained over stuff like this forever, and it's perfectly normal to play hardball in order to seek the strongest advantage for your own side. This is logrolling and dealmaking and favor trading, not hostage taking.

What's more, it's a good thing. Frankly, we could use a little more logrolling and dealmaking and favor trading, not less. The fact that Republicans these days are so unwilling to make compromises of any kind is a major cause of our current legislative paralysis. I'd like to see more of it, not less, no matter how shrewdly the game is played.

Our Brave New Marketing World

| Sun Aug. 21, 2011 12:37 PM EDT

Nearly every day I find myself thinking that we're slipping closer and closer to the dystopian marketing world that was mere satire half a century ago in The Space Merchants.1 Here's the LA Times today:

Picture this: You stop in front of a digital advertising display at a mall and suddenly an ad pops up touting makeup, followed by one for shoes and then one for butter pecan ice cream. It seems to know you're a woman in your late 20s and, in fact, it does. When you looked at the display, it scanned your facial features and tailored its messages to you.

....Kraft said it's in talks with a supermarket chain, which it would not identify, to test face-scanning kiosks. "If it recognizes that there is a female between 25 to 29 standing there, it may surmise that you are more likely to have minor children at home and give suggestions on how to spice up Kraft Macaroni & Cheese for the kids," said Donald King, the company's vice president of retail experience.2

What's most unnerving about this to me isn't the technology itself, which is inevitable. It's not even the obvious next step beyond just age and gender targeting, which has been common practice forever. It's the fact that I know most people don't even object to this. It's just a better way of making sure that you only see ads for stuff you're interested in, after all. And what's wrong with that? We're busy people, you know.

But I am a dinosaur and I already dislike the fact that virtually every major chain store — and really, what other kind of store is there these days? — demands that I pay an artificially jacked up price unless I agree to let them maintain a database of every item I've ever bought from them. They've fooled most of their customers into believing that this is actually a discount program, but I remain a heretic on this score. I'm decidedly unexcited by the prospect of every marketing broker in the country having access to my lifetime purchasing history for a small fee. And I'm even more decidedly unexcited by the prospect of this purchasing history following me around from POS display to POS display wherever I go.

But I'm losing this war and I know it. I'm rich enough that I can afford to refuse to play just out of sheer cantankerousness, but most people can't. They just can't afford to pay 10% more for everything they buy as the price of a bit of privacy. I only wish that all these people at least felt aggrieved about this state of affairs instead of being cheerfully convinced that it's all being done for their glorious benefit by the generous and civic-minded purveyors of America's retail emporia.

1Double criminally left off NPR's list of the 100 best SF and fantasy books. ("Double" because not only is it a great book, but it kills two birds with one stone by getting both Fred Pohl and Cyril Kornbluth onto the list.)

2Vice president of retail experience? Seriously?

The Great Capital Gains Charade

| Sun Aug. 21, 2011 1:50 AM EDT

Whenever you buy an asset — a house, say, or a share of stock or some other investment instrument — and then sell it later for more than you paid for it, the profit is a capital gain. And unlike you and me, whose income mostly comes from wages, a big part of the income of rich people comes from capital gains. Naturally, then, rich people are extremely interested in having low tax rates on capital gains.

However, since "rich people deserve to pay low tax rates" is not a very persuasive argument, the justification for low capital gains tax rates is usually couched in the language of "capital formation." This is a concept that's perfectly legitimate in theory but, in the hands of the Wall Street Journal editorial page, has been corrupted over the past couple of decades into an all-purpose excuse for low tax rates on pretty much everything related to the income of rich people. In fact, a pretty good rule of thumb these days is that any time you see the phrase "capital formation" in an op-ed page anywhere, you should ignore everything that comes after it. It's just bollocks.

Still, it's worth having some hard data about this too. In the context we're using here, capital formation refers to capital used for investment purposes, so in its nickel version the argument for low capital gains rates is that it encourages capital to be invested. This is a good thing, and if it were true it would be a powerful argument for low taxes on capital gains. But it's not. Jared Bernstein provides the chart below, which shows the growth of investment over time (blue line) and the capital gains tax rate (red line):

There's pretty much no correlation at all. Investment increases over time at a steady rate regardless of what the capital gains tax rate is. Bernstein comments:

There are a few economic principles that we consistently get wrong in ways that do lasting damage to our economy and diminish our future. At the top of this list are arguments about large behavioral responses to changes in tax rates. I don’t think it’s zero, but I’ve simply never seen compelling evidence that tax increases significantly hurt growth, labor supply, jobs, wages, or that rate decreases provide much of a boost the other way. And when you factor in the benefits of the investment and services government provides—something the literature tends to ignore—the hyper-responsiveness arguments are even less compelling.

Yep. All taxes have deadweight losses, and all taxes affect incentives, but the bulk of the research suggests that the size of the incentives is pretty modest. It's handy for rich people to pretend otherwise, and in particular to pretend that investment levels will skyrocket if capital gains tax rates are reduced, but the evidence for this is very slim. Still, it is a handy argument for rich people, and that's why it will never die.

Personally, I've always been sympathetic to the argument that capital gains should be adjusted for inflation before they're taxed. If you invest $100 and ten years later it's become $150, it's unfair to tax the full $50 if a chunk of that is merely the result of inflation and the real profit is smaller. But indexing for inflation is complex, and as a substitute it might make sense to simply set the capital gains tax rate a bit lower than the normal income tax rate. Aside from that small adjustment, however, keeping all tax rates at similar levels prevents a lot of useless and distortionary tax arbitrage, and is usually the best course unless there's a really compelling reason for a difference. In the case of capital gains, there isn't, regardless of how often the Journal editorial page tries to hoodwink us into believing differently.

On Persuasion

| Sat Aug. 20, 2011 1:24 PM EDT

Here is a brief Twitter conversation from this morning:

Actually, I think Steve is right, which just goes to show that Steve is right. My own experience, which I think is fairly generalizable, is that within the course of a single conversation hardly anybody ever changes their mind — including me. Arguing is a dominance game, and in a face-to-face confrontation over anything of significance (virtual or otherwise) we hairless apes will go to considerable lengths to avoid conceding dominance. So if we find ourselves on the losing end of a confrontation, we end up simply switching to new arguments, trying to redefine the terms of debate, cherry-picking our evidence a little differently, burrowing down into ever more trivial sub-arguments, or reverting to mockery and then walking away. In other words, pretty much anything other than actually conceding that someone else is right and that our worldview might need to be updated.

However, that's only the immediate dynamic. With some frequency — 10% of the time? 20%? In any case, certainly more than 1% — arguments will start to sink in maybe a day or a week later when the emotional charge has worn off. You'll probably never know that you've successfully persuaded your adversary, since it's a gradual change that happens offstage and is rarely acknowledged (dominance games again), but it happens. That's especially true if the arguments get repeated over time, and even more especially true if they get repeated by people in positions of respect. The number of people who refuse to change their minds regardless of the evidence is still large, since evidence isn't really what underlies most of our beliefs, but it's less than 99%.

Thus politics.