Kevin Drum - September 2011

Peak Oil is Here!

| Tue Sep. 20, 2011 11:01 AM EDT

Well, actually, it's been here for three decades. The chart below, from Stuart Staniford, shows oil use per person on a global basis, and as you can see, it peaked around 1973, took a dive around 1980, and has been at a steady plateau ever since.

There's nothing astonishing about this chart. It's just another way of saying that it takes less oil to produce a dollar of GDP than it used to — and the ratio has been dropping ever since the oil shocks of the 70s. Still, this is a strikingly simple presentation that, oddly enough, I've never seen before in exactly this form. But it's an interesting and dramatic way of looking at it.

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A Little Inflation Can Be a Wonderful Thing

| Tue Sep. 20, 2011 10:14 AM EDT

Should the Fed tolerate higher inflation as a way of tackling our economic slump? Paul Volcker, who's most famous for throwing the economy into a massive recession in order to fight inflation in the 70s, thinks this would be a terrible idea. Karl Smith disagrees:

My point is not simply — as seems to be Ken Rogoff’s — that a jolt of inflation inflation would be good for the economy right now — though I believe it would be.

My case is that 2% inflation is a fundamentally bad idea. I argue that 4% inflation is not merely “OK” it is preferable. It is preferable because even in normal times it produces higher nominal interest rates. Higher nominal interest rates in turn give the Fed more leverage under traditional monetary policy.

As it happens, this has long been my view too. Volcker's response, I suspect, would be strong skepticism that 4% inflation can be maintained. Once it gets that high, there's simply too much temptation to let it get ever higher, and you quickly end up in an inflationary spiral like the one he had to deal with.

Maybe. But I think it's worth keeping in mind that the inflation of the 70s wasn't inevitable. It was the result of oil shocks and uniquely poor Fed policy. Arthur Burns could have kept the inflationary genie in the bottle if he'd had the spine to do it, but he didn't. He was too much of a political hack. And a deliberately chosen one, too: Richard Nixon blamed his defeat in 1960 on tight money engineered by the Fed, so when he had an opportunity to appoint a Fed chairman of his own he made sure to appoint one who would provide him with the easy money policies that would keep the economy roaring. Burns may have had some qualms about this from time to time, but basically he complied.

I suppose Volcker would scoff at this, but times have changed. The Fed has more institutional independence now than it used to, and its mandate to control inflation, though weaker de jure, is stronger de facto. What's more, to the extent that strong unions contributed to a wage-price spiral (about which the evidence is hazy), they no longer do. So the fundamentals are almost all in favor of controlling inflation these days.

But in the spirit of compromise, here's mine. In practice, the Fed doesn't target 2% inflation. If they did, it would sometimes be a bit below that and sometimes a bit above. In practice, they treat 2% as a ceiling, which leads to inflation that's lately been in the neighborhood of 1-2%. So why not adopt a target of 4%, but explicitly make it a ceiling? That would actually be easier to maintain (no more arguing about whether inflation has been above the target for "too long") and would probably produce actual inflation in the 3-4% range. The genie would stay in the bottle and monetary policy would have more bite.

Now all we have to do is get Ben Bernanke to agree. Who wants to be the one to pick up the phone and sell him on this?

A Conservative Medicare Plan Liberals Could Love

| Mon Sep. 19, 2011 8:51 PM EDT

Paul Ryan's Medicare plan has attracted nothing but scorn from liberals. Its basic problem is simple: it provides vouchers to Medicare beneficiaries to buy private coverage — which is basically OK — but it mandates that the value of the voucher will grow only at the rate of inflation. However, the cost of healthcare is almost certain to grow much faster than that over the coming years, which means that a couple of decades from now seniors would receive vouchers that paid for only a fraction of their coverage. They'd have to pay the balance out of their own pockets, and that payment would rise inexorably.

Now, Ryan says that competition between providers would bring down prices, so seniors would come out OK, but he doesn't seem to be willing to put his money where his mouth is. Despite his free-market convictions, his plan sets the value of the voucher by administrative fiat. Not only is this not a market-based solution, but it's a non-market solution we've been experimenting with for years in the form of Medicare Advantage, which allows private plans to compete with traditional Medicare coverage. So far, it's worked miserably: MA plans cost more than traditional Medicare, require higher government subsidies, and don't seem to have spurred any kind of innovation or productivity gains.

What to do? Via Reihan Salam, Yuval Levin proposes a revised version of Ryan's plan that's based on a genuine conviction that market forces can work. Each year, Medicare would define a minimum benefit level, and then providers in each Medicare region (there are four) would bid for business:

The level of the premium-support payment in each region for that year would be set at, for instance, the level of the second-lowest of the bids. Seniors would then be able to apply that amount toward the purchase of any of the plans on offer in their area. Thus, in each region, there would be at least one option that would cost less than the Medicare benefit, and seniors choosing that option would get the difference back as cash in their pockets; there would be at least one plan that cost the same as the benefit, so that seniors could obtain it with only the same out-of-pocket costs they have today; and there would be other plans that cost more (perhaps because they offered more, or because they failed to find ways to drive greater efficiency in their networks of doctors and hospitals) and for which seniors would pay an additional premium if they chose.

....In such a system, the premium-support benefit would grow exactly as quickly as required to provide a comprehensive insurance benefit, since the growth rate would be determined by a market process rather than a preset formula.... If market forces did drive costs down, as conservative health care experts expect, the reform would save the government an enormous amount of money....If market forces did not drive costs down, then we would have to find another way to address our entitlement costs. We would be back where we started, which is where Democrats want to end up anyway. Whether the reform succeeded or failed, seniors would have a guaranteed benefit and essentially no added financial risk.

Generally speaking, there's no reason this idea should offend liberals. In fact, Levin's proposal is ironic: it is, in essence, exactly the way Obamacare works. Within the insurance exchanges set up by PPACA, providers engage in competitive bidding based on a minimum coverage package defined by the government. The size of the federal subsidy for low-income families is set at the value of the second-lowest bid.

And that's not all that's ironic. Levin says that the one thing his proposal lacks is a Republican champion to fight for it. But Democrats actually proposed something very much like this for Medicare Advantage as part of PPACA. Why did it never see the light of day? Because Republican senator Jon Kyl, among others, looked at the estimated cost savings and "used it to argue that Obama was cutting Medicare benefits. The final reconciliation bill substituted administrative pricing methods for competitive pricing and introduced bonus payments for plans that achieved high quality ratings, thereby significantly reducing the size of the cuts to MA plans." In other words, Republicans not only didn't support the idea of competitive bidding, they demagogued it.

But why did they demagogue it? Two reasons, I assume. First, it was politically handy since Democrats had proposed it. Second, it probably would have reduced payments to big healthcare providers, and Republicans routinely support government handouts to big corporations. Both of these varieties of cynicism seem to me to be core parts of the Republican Party, so I have little confidence that we can ever get around either of them. Levin is probably more optimistic on this score than me. But in any case, on the off chance that Republicans actually do adopt a plan like this, one that demonstrates a genuine desire to fairly test whether competition works in the healthcare sector, I'd be on board.

More here on competitive bidding from Austin Frakt, who you should already be reading anyway if you care about healthcare. And yet more here on the basis of all this, the competitive bidding plan proposed by Robert Coulam, Roger Feldman, and Bryan Dowd. It includes a discussion of the massive political difficulties in ever getting this done.

Quote of the Day: Going Galt at Fox News

| Mon Sep. 19, 2011 8:42 PM EDT

From Bill O'Reilly, groaning under the weight of President Obama's proposed tax on millionaires:

If you tax achievement, some of the achievers are going to pack it in. Let's take me. My corporations employ scores of people. They depend on me to do what I do so they can make a nice salary. If Barack Obama begins taxing me more than 50 percent, which is very possible, I don't know how much longer I'm going to do this. I like my job but there comes a point when taxation become oppressive.

Normally, I probably wouldn't support a top marginal rate of 51%. But I have to say, this gives me pause. Maybe it would be worth it, after all. Ed Schultz promises to have some fun with this tomorrow night.

UPDATE: Oops, sorry. Ed's doing it tonight. As in, right this second as I'm typing this.

Obama and the Israel Lobby

| Mon Sep. 19, 2011 6:06 PM EDT

A few days ago, a reader emailed wondering why "all of a sudden there have been stories in the MSM about Obama losing support among Jewish voters, presumably due to insufficient support of Israel. That's odd, because he's been solidly pro-Israel." In my reply, I mentioned a recent poll showing that Obama had lost a lot of Jewish support, but beyond that I brushed it off as just another movement conservative attack line. Obama is weak, Obama wants to raise your taxes, Obama doesn't understand business, Obama hates Israel, etc. etc. It's a useful attack, and it's one that conservatives make about liberals all the time. Obama's just the latest victim.

I'd pretty much stand by this, but if you want a somewhat less cynical explanation, John Heilemann provides it in this month's cover story in New York magazine. It mostly comes down to Obama's pressure on Israel to halt further development of its West Bank settlements, something that right-wingers are flatly opposed to. But Team Obama also screwed up its messaging:

Equally important, Obama’s advisers argue, is that the idea that the administration demanded little of the Palestinians is simply false. “I called it synchronized swimming,” recalls Prince. “The Israelis would do settlements, the Palestinians would do some stuff on incitement [of violence against Israel] and security, and other Arab states would undertake a variety of measures that would be steps to normalization. It could be reopening trade offices. It could be allowing overflights. It could be opening direct cell-phone connections. All stuff the Israelis said they really wanted. We spent many more hours in meetings with Arabs about Arab steps than we did with the Israelis. We had equally tough conversations with Arabs; the president had some hard meetings. But that didn’t get reported.”

Lazy journalism can be cited for the lack of coverage of those efforts, but Obama and his people bear fault, too. “Because no administration had been that clear and unambiguous with Israel on settlements, that was news,” says Emanuel. “But there was a sense that it was one-sided. We had an obligation—and this is where we deserve a yellow card—to explain what we were doing with the Palestinians or Arabs, to put more air in the tires on that side. Not tone down what we said on settlements, but work harder so there was more recognition of the parity that existed with the Arab violations.”

Another blunder, and not a minor one, made by the administration revolved around Obama’s vaunted speech to the Muslim world in Cairo that June—which more than a few Jews perceived as coming at the expense of Israel, especially when Obama failed to visit Jerusalem on the same trip (or at any time thereafter). “We made a mistake,” admits one senior administration foreign-policy adviser. “Nobody thought of it as a big deal at the time, but, I mean, you’re in the neighborhood, you’re right down the street, and you don’t stop by for coffee?”

By the end of 2009, the cumulative effect of these episodes was plain. On the right, the claim that Obama had shown his true colors was de rigueur; as the conservative pundit John Podhoretz put it, “The turn against Israel that so many predicted during the 2008 campaign is coming to pass.”

On a substantive level, Obama has had Israel's back over and over and over since he took office. Heilemann provides chapter and verse in his piece. But for conservatives, this isn't enough. They flatly reject the idea that the United States should ever pressure Israel over anything. The fact that Obama did so was more than enough to confirm their belief that he's anti-Israel at heart.

Of course, as Heilemann and many others have pointed out, Obama's approach is almost certainly in Israel's best interest. One way or another, Israel has to make peace with the Palestinians. They can't absorb the West Bank, since that would make Israel majority Arab within a few years, nor can they occupy it forever. There was at least a chance that Obama's approach could have cut through this Gordian knot. But Benjamin Netanyahu wasn't willing to consider any settlement slowdown of any sort, and the Israeli public has endorsed his hardnosed attitude by keeping him in power. So we're stuck, as usual.

And, really, there's no reason for Netanyahu to budge. He apparently doesn't accept the necessity of making peace anytime soon, and he knows perfectly well he can treat Obama any way he wants and pay no price for it. His public harangue of Obama in May, which should have made any American cringe regardless of partisan affiliation, was proof enough of that. It was a loathsome performance on a bunch of different levels, but it brought cheers from Republicans and nothing but nervously averted gazes from Democrats. So why should he change his tune?

Is Fixing Social Security Easy?

| Mon Sep. 19, 2011 5:22 PM EDT

Erica Grieder took some hits over the weekend for suggesting that "the coming shortfall in Social Security is to some Democrats, in some small way, as climate change is to some Republicans." And deservedly so!  After all, they're nothing alike at all. You may or may not like the typical liberal plan for bringing Social Security into balance, but no one on the left denies that there's a long-term solvency issue.

After conceding this, Erica then falls back to a weaker version of the claim, namely that liberals are too quick to pretend that fixing Social Security is really pretty easy:

This argument that it will be "easy" to fix Social Security has been pushed for several years, even though it's relatively clear that any plan that requires Congress to take coordinated action in pursuit of a measure that inflicts short-term pain in favour of long-term solvency is more accurately be described as "difficult".

I consider myself a prime pusher of this argument, so I guess I should respond. I'd push back in two ways. First, by this definition, practically anything is hard. So I don't think this is really a useful way to think about the issue.

Second, it's not the case that fixing Social Security will require short-term pain. Just the opposite, in fact. Most solutions phase in very slowly, and a lot of them don't even start phasing in for another decade or two. This is really the main reason I keep saying that Social Security is a pretty easy problem to fix: not only is the Social Security shortfall fairly small, but it doesn't require much short-term pain to make up. Most mainstream plans require very small tax increases that start in, say, 2020, and ramp up a tenth of a point at a time through 2040. Ditto for benefit cuts, which usually extend over the course of decades. (We're still working our way through the age limit increase put in place by the Greenspan Commission in 1983.) Most people would barely even notice it.

Now, of course, in one way Erica is right about the non-easiness of addressing Social Security. But I think we should be clear on exactly what the source of the problem is here. It's not "Congress," and it's not "difficulty." It's the Republican Party. They're just flatly unwilling to negotiate the kind of simple, long-term plan that was perfectly acceptable to Ronald Reagan three decades ago. Instead, they insist on private accounts, but are unwilling to consider paying the transition costs. They insist on benefit cuts, but are unwilling to even talk about tax increases. These positions are crazy nonstarters and they know it, but they flatly won't consider anything else. So there's just no negotiation possible right now.

If you let Democrats tackle Social Security on their own, you might not like what you'd get. My guess is that you'd end up with a pretty conventional plan that had a 2:1 ratio of tax increases to benefit cuts. That is, you'd get slowly phased-in tax increases that amounted to about 1% of GDP over the next 30 years, and slowly phased-in benefit cuts that amounted to about 0.5% of GDP over the same period. It would take some haggling to get there, but it could be done.

But for now? Sure: fixing Social Security is hard. Hell, it's impossible. But that has nothing to do with the merits of the case. It has to do with the same thing that prevents anything from getting done these days: a Republican Party that's unwilling to face reality. I'm not really sure what the odds are of that changing anytime in the near future.

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Big News in Ketchup City

| Mon Sep. 19, 2011 1:39 PM EDT

From the Wall Street Journal today:

In 2006, when activist investor Nelson Peltz battled Heinz for board seats, he pushed the company to make a number of changes, large and small, including developing easier-to-open ketchup packets.

This is in a story about — hey. Wait a second. Did I read that right? Back in 2006, a shareholder activist was demanding that Heinz develop an easier-to-open ketchup packet? Seriously? I guess shareholder activism isn't what it used to be.

Anyway, Heinz has finally complied, introducing a ketchup packet that can be opened at one end if you want to squeeze out the ketchup, or the other end if you want to dip your food in ketchup. It's also bigger than the old packets. I don't like ketchup, myself, so I'm not blown away by this news. But maybe you will be.

Taxes and the Crazification Factor

| Mon Sep. 19, 2011 1:13 PM EDT

Does the American public want to reduce the deficit entirely with spending cuts, or does it support a combination of spending cuts and tax increases? Bruce Bartlett has been collecting the results of every poll that asks this question, and the answer is clear. On average, 65% of respondents want a combination of spending cuts and tax hikes. In 27 polls going back nearly a year, there are only two where the number is less than 60%.

So that's that. Only 30% of the country wants to reduce the deficit solely with spending cuts, a number that's suspiciously close to the Crazification Factor. The non-crazies all want some kind of balanced approach. If Obama sticks to his guns on this, he's on solid ground.

Our Automated Future

| Mon Sep. 19, 2011 11:48 AM EDT

Yesterday I wrote about the possibility that a new era of mental automation (as opposed to the Industrial Revolution era of physical automation) might genuinely put people permanently out of work. Matt Yglesias disagrees:

One key is that people like other people. When I was in San Antonio recently, I went on a boat tour of the Riverwalk. It came with a human guide who both piloted the boat and told us about the history of the city and the area. I’m fairly certain the driving of the boat could be automated with existing technology, and at a minimum the guide could have been replaced with a recording. But he wasn’t, because the human guide was funny and warm and because tourists prefer to interact with a human guide.

By the same token, people like to go to group classes at gyms rather than watch instructional videos on the Internet. In really fancy buildings in Manhattan, they use old-fashioned human operated elevators. It’s not that you particularly need human beings to conduct face-to-face interaction with other human beings. Rather, it happens to be the case that most human beings prefer to interact face-to-face with other people and as long as that’s the case there will be demand for human labor. The thrilling world of personal services — restaurants, massages, trainers, interior designers, etc. — could employ many, many, many more people. If less human labor is required to manufacture and transport mass-produced physical goods, then everyone will have more custom-built cabinets, more labor-intensive restaurant meals, we’ll go back to wearing handmade suits, etc.

Maybe. But I find this really, really unpersuasive. For starters, lots of guide operations already use recordings and lots of people already do watch instructional videos on the internet. (In fact, in the context of education reform, replacing teachers with online classes is something Matt writes about frequently.) And as for the elevator operator — well, I suppose that's a possibility. Maybe we're destined for a future dominated once again by a wealthy class that employs dozens of people as personal servants on their estates. But I sure hope not.

In any case, none of this is really related to computers getting smart enough to do cognitive tasks that humans currently do. Tape recordings and ostentatiously unnecessary button pushers are just an entirely different class of phenomenon. The more serious concern on this front is with automation that genuinely performs tasks that formerly required human creativity and responsiveness. My example yesterday was truck driving: That's a complex task by current computer standards, but eventually it won't be. And when it's not, anything else that a truck driver can do will be automated too. So what do the truck drivers do? Lead yoga classes? Make bespoke suits?

Maybe. I'll readily concede that 200 years ago I would have found similar explanations for the wonders of automation wanting. "Sure, farmers will be put out of work," says the optimist, "but machines are going to boost economic growth so dramatically that they'll all find jobs on assembly lines!" I probably would have thought that required a rather improbable rate of economic growth, and I would have been wrong. That's exactly how it played out.

So sure. Maybe in 30 or 40 years most actual production, and even most routine services, will be done by machine. But it won't matter because we'll all be giving each other guided tours and yoga classes. Maybe. But guided tours and yoga instruction actually require a surprising amount of cognitive ability, and I still don't know what the truck drivers are going to do. But perhaps the future will surprise me. It usually does.

The End of Netflix

| Mon Sep. 19, 2011 11:18 AM EDT

I got a personal email from Netflix CEO Reed Hastings this morning:

Dear Kevin,

I messed up. I owe you an explanation.

It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming and the price changes. That was certainly not our intent, and I offer my sincere apology. Let me explain what we are doing.

Well, OK, this wasn't really an email sent just to me. It was sent to me and several million other pissed off Netflix customers. Still, it's nice that Hastings knows we're pissed-off and wants to explain things. So here's the explanation:

It’s hard to write this after over 10 years of mailing DVDs with pride, but we think it is necessary: In a few weeks, we will rename our DVD by mail service to “Qwikster”. We chose the name Qwikster because it refers to quick delivery. We will keep the name “Netflix” for streaming.

Huh? Unlike many internet denizens, I wasn't especially cheesed off when I read this. I was just — bemused. Why should I care if they're changing the name of their DVD service? Why should anyone care? And in what way is this an explanation for a big price increase? This is like breaking your neighbor's window and then "explaining" that tomorrow you're planning to take a trip to the zoo. The two things just don't have anything to do with each other.

Meh. Hastings should have saved his virtual postage. More here, if you're interested. My take is that this is the beginning of the end for the DVD service, no matter what Hastings says. He doesn't want the Netflix brand ruined by the plummeting customer satisfaction that's going to follow the almost certain service and selection downgrades on Qwikster once the smoke has cleared. Oh well. Nothing lasts forever. But with Blockbuster gone, Redbox mostly limited to newer releases, and streaming services offering only a tiny selection, where am I going to go if I want to watch some movie made more than a decade ago? I guess I'll just wait for them to show up on cable until the content providers figure out what to do.