Kevin Drum - September 2011

Obama Speech Preview

| Thu Sep. 8, 2011 3:17 PM PDT

This is a family magazine, so I have to watch my language. Besides, my mother reads this blog. But John Cole pretty much does a mind meld with me over at his place today. He's feeling — um, not so optimistic about Obama's speech tonight.

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We Are All Ponzi Schemers Now

| Thu Sep. 8, 2011 3:01 PM PDT

I know I should ignore this. Ignore, ignore, ignore. You can do it, Kevin!

But no. I'm hopeless. Here is Reason's Shikha Dalmia on why Social Security isn't a Ponzi scheme, it's worse than a Ponzi scheme:

A Ponzi scheme collects money from new investors and uses it to pay previous investors—minus a fee. But Social Security collects money from new investors, uses some of it to pay previous investors, and spends the surplus on programs for politically favored groups—minus the cost of supporting a massive bureaucracy. Over the years, trillions of dollars have been spent on these groups and bureaucrats.

Forget the business about the surplus. I happen to agree with Dalmia about that, but it doesn't matter much at this point. Social Security is only generating a small surplus these days, and within a few years it won't be generating a surplus at all. It's not worth worrying about anymore.

No, the real problem with Dalmia's description is the notion that Social Security collects money from new investors and uses it to pay off previous investors. It's easy enough to see why people believe this: it was, basically, the way the program was initially sold. And politicians ever since have found it convenient to continue this fiction. Seniors today are all convinced that the money they paid into the program during their working years was somehow saved up for them and now they're getting it back.

But that's always been a lie. Social Security is actually a much simpler program than that. I'm going to put the rest of this paragraph in bold so you can't possibly miss it. Here's how Social Security works: every month we take in taxes from working people and every month we turn around and distribute those taxes to retirees. That's it. That's how it works, and everyone who actually knows anything about the program knows that's how it works. Taxes come in, benefits go out. And the key to solvency is simple: making sure that those taxes and benefits are in balance.

This is, of course, the way every government program works. Taxes come in, payments to soldiers go out. Taxes come in, payments to NASA rocket scientists go out. Easy!

Now, morally speaking, we certainly have an obligation to keep Social Security running. After all, today's seniors did their bit back in the day and provided benefits to yesterday's seniors. But again, that's true of every government program. For example: we have an obligation to today's seniors to fund the Pentagon and keep them safe from al-Qaeda. After all, they did their bit and funded the Pentagon back when we needed to kick Hitler's butt and stop the commies from taking over the world. We also have an obligation to fund highways for our seniors. After all, they did their bit and paid for the original interstate highway system back in the 50s. Etc. etc. That's just how government works. If Social Security is a "monstrous lie," as Rick Perry says, then the entire federal government is a monstrous lie.1

Social Security is nothing special. It's just another tax-funded program. Taxes come in, benefits go out. As the chart on the right shows — and this is really the only thing you need to know about Social Security — the program costs about 4.5% of GDP today and will eventually top out at about 6% of GDP in 2030 and beyond. You can bring that into balance forever with tiny tweaks phased in over the next two decades. Not only is it not a Ponzi scheme, it's not even a major problem.

1Of course, Rick Perry might very well think that the entire federal government is a monstrous lie. But that's a different discussion.

Amazon Caves In

| Thu Sep. 8, 2011 1:46 PM PDT

Amazon has spent years fighting ruthlessly to avoid having to collect sales taxes on merchandise it sells over the web. When California recently insisted that it do so, Amazon not only refused, but started collecting signatures for a ballot initiative that would nullify the new law. But now Amazon has backed off:

Under the deal, Amazon would delay collecting taxes until September 2012, Assemblyman Charles Calderon (D-Whittier) said. The new law had mandated that Internet retailers start collecting state taxes in July if they had offices, workers or other connections in California.

....If Congress acts by next summer to settle the contentious issue of how online retailers should be taxed, that decision would override Amazon's deal with California. "It's a safe harbor for up to a year," Calderon said of the agreement he helped strike. "If they can't get Congress to act by next July, then they will start to collect the tax in September 2012. If by chance they get Congress to act, then that would trump the state law."

So I wonder what happened? Was Amazon's signature gathering going poorly? Did their lawyers finally conclude that there was a serious chance of a court forcing them to comply with the law and assessing damages? Did public opinion finally get to them? Or do they think that maybe they can get Congress to pass a federal law by next September that addresses the issue nationwide?

It would actually be nice to have a federal law on this issue. But I sure don't see how we can get one. States would go ballistic if a federal law upheld the general exemption of internet retailers from collecting sales taxes, and there doesn't seem to be any path through the Senate for such a bill. On the other hand, the anti-tax jihadists would burst a vein if Congress passed a law that effectively increased taxes by putting e-tailers on a level playing field with brick-and-mortar stores, and the House is controlled by the anti-tax brigade. So there's deadlock.

So I dunno. Either Amazon has some inside-the-Beltway knowledge that I don't have, or else they just caved in because they decided their ballot initiative was going to fail. I'm not sure what else explains this.

Perry and Galileo

| Thu Sep. 8, 2011 10:35 AM PDT

Talking about climate change last night, Rick Perry argued that the science was unsettled: "Just because you have a group of scientists that have stood up and said here is the fact — Galileo got outvoted for a spell." James Fallows explains why Perry is all wet:

Until this evening's debate, the only reason anyone would use the example of Galileo-vs-the-Vatican was to show that for reasons of dogma, close-mindedness, and "faith-based" limits on inquiry, the findings of real science were too often ignored or ruled out of consideration. And Perry applies that analogy to his argument that we shouldn't listen to today's climate scientists? There are a million good examples of scientific or other expert consensus that turned out to be wrong, which is the point Perry wanted to make.

Sure, Perry could have used any of those other examples. But how many people have heard of Alfred Wegener's critics?

If you hang around in crackpot chat rooms occasionally, you'll notice that a common trope is the one about the lonely scientist who was mocked for years but then turned out to be right. Why, just look at Einstein! It doesn't really matter if Einstein really was mocked or not. It just matters that there have indeed been scientists whose work wasn't initially appreciated by the mainstream establishment.

This is also, it turns out, a common trope in the climate denial community. Basically, Perry was saying that Ross McKitrick is a modern-day Galileo. Richard Lindzen is a modern-day Galileo. Lord Monckton is a modern-day Galileo. And Andrew Montford is their prophet. No matter that Perry almost certainly doesn't recognize a single one of these names. They exist, and his fans know them. So while Perry's analogy may seem misguided to you and me, my guess is that he got his point across just fine to the only audience he cares about: potential Republican primary voters. They think of themselves as lonely and oppressed fighters for the truth, just like Galileo. Who better for Perry to invoke?

Higher Retirement Age Already a Reality

| Thu Sep. 8, 2011 9:47 AM PDT

Casey Mulligan notes that among workers aged 25-55, hours worked during the recession has declined about 10%. But for older workers, the decline has been far less. For those over 62, hours worked has actually gone up. Why?

[One] possibility is that the labor market distinguishes, at least in a rough way, among workers according to their willingness to work, and that the stock market and housing market crashes have especially stimulated older people to work more. (Young people, on the other hand, had fewer assets before the recession, so a decline in asset prices has little direct impact on them.) This effect tends to increase with age because the propensity to own assets for current needs and future retirement also increases with age.

If you were thinking about early retirement at age 55, you're going to think again if your 401(k) has tanked, your house has lost 30% of its value, and your kids are still living at home because they can't find a job. You also might be motivated to work harder than before because you've seen what's happened to your friends who have lost their jobs and are now, for all practical purposes, unemployed forever because no one wants to hire a 58-year-old who's been out of work for two years.

Which is just to say, this makes sense to me. Older people are highly motivated to keep working, and that means fewer jobs are opening up for younger people. Welcome to the recession.

The Return of the Boom-Boom Room

| Thu Sep. 8, 2011 9:03 AM PDT

Sallie Krawcheck recently left her job as president of the Global Wealth and Investment Management division of Bank of America. Nathaniel Popper of the LA Times tells the broader story:

The financial industry, long known for its boys-club environment, has only a small fraction of women as top executives. And that small cadre has been thinning out in recent years, with the most recent example Krawcheck's departure as BofA's president of global wealth management. Her departure is part of a broader trend in the financial industry in recent years: Female employees are losing their jobs at a faster clip than men. From 2007 to 2010, 12.5% of women in the financial industry lost their jobs, compared with 8.8% of men, according to an analysis of government statistics by the Economic Policy Institute. By comparison, in the overall economy during the same period, it was men who lost jobs at a higher rate.

....The finance industry has not historically been known as a welcoming place for women. The cigar and strip-club reputation was confirmed by a lawsuit against Smith Barney in the 1990s, which accused it of turning a blind eye to raunchy, sexist behavior. The lawsuit later became the subject of a book called "Tales From the Boom-Boom Room."

The attention brought by the suit spurred wide-scale changes that helped stamp out overt discrimination and open up hiring. A decade ago, the number of women in finance was rising.

Well, that was nice while it lasted, I suppose. The irony here, of course, is that you can make a pretty good case that the entire credit bubble of the aughts — and the subsequent massive recession caused by its bursting — was basically a product of male testosterone run amok. So what's the answer during the cleanup stage? Get rid of the women!

Yes, our world is insane. Why do you ask?

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Terrorists and Airplanes

| Thu Sep. 8, 2011 8:14 AM PDT

I just finished writing a column about our insane post-9/11 security apparatus, so I can hardly believe I'm about to say what I'm about to say. But here's Matt Yglesias on airport security:

One question I always have when I go through airport security is exactly how many planes the relevant authorities think al-Qaeda would be blowing up if planes were no better secured than an intercity bus. My experience of intercity bus travel is that there’s absolutely nothing stopping a person from bringing a bomb onto a bus. And yet, over the past ten years exactly zero buses have been exploded by terrorists. A person with the means and inclination to blow up an airplane, who finds himself stymied by tight airline security, could just go blow up a bus instead. But nobody does this. So my baseline assumption is that approximately zero airplane detonations have been prevented by airline security screening, since were screening preventing suicide bombers from blowing up planes we’d see bomb-displacement onto other transportation segments.

Matt goes on to admit that "terrorists do seem to have a unique fascination with planes," but that only increases his estimate to one saved plane.

And hell, I can't prove him wrong. But seriously? Given everything we know about terrorist attempts to bring down airplanes — the 1995 Bojinka plot, 9/11 itself, Richard Reid, the British plot to blow up 10 airplanes using liquid explosives, the underwear bomber, the cargo plane plot — do we really think terrorists wouldn't have blown up a helluva lot of planes if doing so didn't require a ton of planning and secrecy, but instead was as easy as packing a couple of kilos of C4 into your carry-on luggage and strolling on board? Common sense suggests that most bombing plots never get very far precisely because they have to be carefully planned to evade airport security, something that makes it hard to pack enough punch to do any serious damage. But if getting on a plane were really as easy as boarding a bus, the evidence of the past decade warns us that airplanes would be dropping out of the sky with alarming frequency.

It's worth asking whether the fantastic amount of additional post-9/11 airline security has made air travel much safer. That's a lot harder to say. But Cuban hijackers ended the era of boarding planes like buses. We've all been standing in line at airport security checkpoints since the 70s, and even the pre-9/11 security routine was enough to prevent most airline bombings. Given al-Qaeda's obvious fascination with air travel, it's hard to imagine that any of us would feel especially safe boarding a plane if there were no security at all.

Quote of the Day: We Are All Non-Keynesians Now

| Wed Sep. 7, 2011 9:42 PM PDT

From Rick Perry, riffing on the Obama presidency:

The other thing this president's done, he has proven for once and for all that government spending will not create one job. Keynesian policy and Keynesian theory is now done. We'll never have to have that experiment on America again.

The sad thing is that he's mostly right. Through a combination of Republican truculence and Democratic timidity, pretty much nobody believes any more in the government's ability to stimulate the economy. And why should they? If Republicans keep saying it doesn't work, and in response Democrats sort of shuffle around looking embarrassed, why would anyone doubt that it's a completely discredited theory?

On Economic Forecasting

| Wed Sep. 7, 2011 8:20 PM PDT

From David Leonhardt, wondering whether the economy is headed back into recession:

Perhaps the best sign of how difficult it is to know the economy’s direction is that, as a group, the nation’s professional forecasters have failed to predict all the recessions since the 1970s, according to data kept by the Philadelphia Fed. In the last 30 years, the average probability they put on the economy lapsing into recession has never risen above 50 percent — until the economy was already in a recession.

Not to keep you in suspense, but Leonhardt concludes that the odds of a double-dip recession are now pretty good. I think he's right.

A Short Debate Recap, Because That's All I've Got

| Wed Sep. 7, 2011 7:07 PM PDT

Man, I just don't have anything to say after that debate. Was it just my mood, or was the crazy really amped up to 11 this time around? I could barely pay attention to most of the raving coming from my TV.

I guess Perry is naturally the big news. My take is, I suspect, the conventional one: he didn't do so well. He didn't hurt himself really badly or anything, but he stumbled a lot. I mean, Social Security just isn't a Ponzi scheme. Period. Taxpayers pay taxes, and those taxes get sent to retirees. End of story. It's pretty much the same way we fund the Pentagon, the courts, the FBI, and everything else. Taxes come in, benefits go out. It'll keep working forever with only minor tweaks.

On climate change he was weirdly hesitant. I mean, he must have known this was coming, right? But he couldn't get a grip on himself and give a coherent answer. He just repeated over and over that lots of scientists weren't sure about global warming, which is just flatly wrong, and then flailed around a bit on Galileo — which didn't exactly illustrate his case the way he thought it did — before shifting into some completely irrelevant story about how Texas reduced air pollution. "That's the way you need to do it, not by some scientist somewhere saying, 'Here is what we think is happening out there.'" WTF?

Other than that, Perry just seemed generally unprepared and unwilling to really engage with the issues. I guess now we know why he's been afraid to give any interviews since he announced his candidacy. He's afraid he'll look like a kid who got called on in class after failing to study the night before. He needs to raise his game.

UPDATE: David Frum says Perry seemed "nervous and irritable." Will Wilkinson: "Perry came off halting, slightly confused, and peevish." I thought so too. I'm a little surprised that so many people thought Perry showed off his alpha male qualities tonight. Sure, he was generally aggressive and refused to back down from anything he'd said before, but his overall demeanor seemed a little twitchy and high-strung to me. But then, I'm not exactly the target audience here.