Kevin Drum - October 2011

Chart of the Day: Life is Good on Wall Street

| Tue Oct. 11, 2011 8:41 PM EDT

Via Catherine Rampell, this chart shows the growth of Wall Street salaries compared to the salaries of everyone else in New York. It comes from an annual report by the New York State comptroller, and in my continuing quest to add value to other people's charts, I've adjusted the beginning numbers for inflation so you can see the growth rate more clearly. Wall Street salaries have risen 11.2% per year, while all other salaries have risen 1.8% per year.

Note also that after nearly destroying the world in 2008 and seeing their average salaries plummet to a mere $310,000 a year, things have already rebounded nicely for Wall Street. I guess it's because they've done such a great job of getting the economy moving again.

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Team Obama Says GOP Deliberately Tanking the Economy

| Tue Oct. 11, 2011 6:18 PM EDT

A few months ago I mused a bit about the accusation that Republicans are opposing every effort to create jobs because they know their election prospects are better if the economy is in the tank:

No serious person in a position of real influence really wants to accuse an entire party of cynically trying to tank the economy, after all. But it would sure make headlines if Obama decided to take up this ball and run with it. He'll never do it, because it wouldn't be postpartisan or pragmatic.

Obama himself still hasn't quite gone there. But today his campaign manager did, in a fundraising letter that took note of Republican efforts to block Obama's jobs bill:

Their strategy is to suffocate the economy for the sake of what they think will be a political victory. They think that the more folks see Washington taking no action to create jobs, the better their chances in the next election. So they're doing everything in their power to make sure nothing gets done.

I'd still like to see Obama say this directly. After all, he really doesn't need to worry about bipartisan comity anymore since Republicans have made it crystal clear that they aren't voting for any of his proposals no matter how nice he plays. So why not just tell the truth?

Democrats Get Ready to Shoot Selves in Foot

| Tue Oct. 11, 2011 2:42 PM EDT

Greg Sargent rounds up reaction to the possibility that "moderate" Senate Democrats will sink Obama's jobs bill:

Obama has done what skittish Senate Dems and their aides asked him to do — he has waged a public campaign to build support for his proposals. Have we already forgotten that only a few short months ago, the papers were filled with quotes from anonymous Dems complaining that Obama had failed to (a) focus on jobs; and (b) use the bully pulpit to rally public support for job-creation proposals?

By any measure, Obama has addressed those complaints. As ABC News polling director Gary Langer put it the other day, Obama proved that "it’s possible to move the bar” when it comes to public opinion on jobs. And yet, now that Dems have finally made that pivot to jobs and are finally fighting it out on turf favorable to themselves; now that Obama has shown it’s possible to move public opinion in the direction of his proposals, despite his low approval numbers; and now that Obama and Dem leaders are hoping to use GOP opposition to the jobs bill to cast the GOP as the number one enemy of progress on the economy, a handful of moderate Dems are still prepared to help Republicans muddy those waters.

It is truly astonishing. Finally, Democrats have a chance to demonstrate a sharp, clear, popular difference with Republicans, and even then they can't manage to stand together and look like an actual governing party. What's more, this is basically the centrists' dream bill: stimulus now and deficit cutting in the long term. It's what all the folks yelling for a third party say they want. And Democrats are offering it up. 

This is one of the reasons, by the way, that I've never really been on board with the idea that Obama should have fought hard for lots of liberal policies even if they couldn't pass. "At least people would know where he stands," goes the mantra. But looking like a loser just isn't a good political strategy, and looking like you can't even control your own party, as such a strategy would inevitably highlight, is even worse. Even on a purely symbolic bill (since the House isn't going to pass it anyway), Democrats can't manage to get their act together. What a bunch of morons.

Why Aren't Markets Clearing?

| Tue Oct. 11, 2011 2:02 PM EDT

Karl Smith is trying to figure out what the real problem with the economy is:

Prices on the NASDAQ, for example, go up and they go down. That can be good or bad for you. But, the market clears. It doesn’t matter what happens in tech or to Pets.com or if we weren’t as wealthy as we thought we were or all kinds of other junk. The market clears.

Why aren’t markets clearing? This is the question. Why do I have houses piling up for sale? Why do I have workers filling out resume after resume? Why did I at the worst of the recession have inventories of real goods piling up at record rates? Why do I still have 2009 model year cars on my lots? Why do I have assembly lines that are not turning?

Why aren’t my markets clearing?

We lose a bunch of wealth fine. We got the balance sheets wrong fine. There is no new tech fine. There is not enough oil fine. All fine, whatever.

Why aren’t my markets clearing?

One reason, perhaps, is that markets aren't clearing by design. I'm stealing this idea from somewhere that escapes me at the moment, but if a bank is holding, say, equities in its portfolio, it marks those equities to market when the market goes down. Everyone does this. The price of a stock is whatever the stock market says it is on any given day.

Not so for housing. Banks will insist that we're just going through a "rough patch," and eventually housing prices will rebound. So they resist marking their real estate holdings to their true value and accepting the consequences. This is understandable, since in some cases the consequences are insolvency and complete failure. Still, with this toxic waste clogging their balance sheets, credit doesn't flow and markets don't clear.

This, of course, is something that was a hot topic of converstation back in 2008 and 2009, but if I had to guess, I'd say there's still a lot of delusional thinking like this in corner offices all over the financial world. Credit channels are blocked up because we still haven't faced up to the extent of the housing bust. Markets in general aren't clearing because one market in particular isn't being allowed to clear. I don't think that "fixing" the housing mess is the holy grail of getting our economy moving again, but it's probably a big part of it. Mark down the toxic waste, renegotiate underwater mortgages, and recapitalize the banks if necessary. It would be a good start.

Guns in Public

| Tue Oct. 11, 2011 12:18 PM EDT

Yesterday, California governor Jerry Brown signed a bill that prohibits people from openly carrying handguns in public:

California has allowed weapons to be displayed in public, provided they are not loaded. Gun enthusiasts took advantage of that to gather at Bay Area Starbucks outlets last year with pistols on their hips. Police chiefs and sheriffs complained that panicked customers' calls were diverting them from chasing real criminals.

Sam Paredes, executive director of the advocacy group Gun Owners of California, said the ban could lead, paradoxically, to more carrying of handguns...."This situation will be a catalyst to unite all of the gun community in lawsuits," Paredes said. "The probable outcome is you will have far more people carrying concealed loaded guns as opposed to openly carrying unloaded guns.''

Handguns have never been one of my hot buttons, so I don't have a big emotional investment in this issue one way or another. But here's what I don't understand. As near as I can tell, the gun community has won an all but total victory over the past couple of decades. Democrats have almost universally given up on gun control as a losing issue, there's been no serious action on the federal front for years, and the Supreme Court in 2008 handed down the holy grail of gun rights, ruling in Heller that the Second Amendment guarantees a personal right to bear arms and then ruling a couple of years later in McDonald that this guarantee applies to states and local communities as well as the federal government.

So what's been the reaction? Well Heller and McDonald have spurred a rash of lawsuits as gun groups try to force communities to allow possession of handguns. That's entirely understandable, since this is their core issue. Beyond that, though, instead of basically taking a victory lap, gun groups have gotten ever more bellicose. Wayne LaPierre sounds like an utter lunatic with his talk of secret plans from the White House to take away everyone's guns. Alleged UN plots to ban handguns are on every gun owner's lips. And the latest front is for gun enthusiasts to swagger around with guns on their hips when they go to McDonald's to order an iced latte. Hell, the leading edge of this movement is demanding the right to take their guns everywhere: bars, schools, courtrooms, you name it. Not because there's any serious danger in any of those places, but just to show they can.

I dunno. Maybe this is just human nature. Maybe victory always makes people eager for more more more. But why don't they just accept their victory and bask in it instead? Get Heller and McDonald enforced around the country and call it a day. None of them cared about carrying guns around in public twenty years ago, after all. And if there's any way to get a sympathetic public to turn against them, demanding the right to have armed posses of obsessive gun enthusiasts marching around in supermarkets and bars and school corridors sure seems like a good way to do it.

Bottom line: you won. Nobody can take your guns away anymore, and once the Heller/McDonald rulings have been fully adjudicated, you'll have broader rights about the kinds of guns you can own than the kind of car you can drive. Enjoy it.

UPDATE: I originally said Brown had vetoed a bill that allowed open carry. He actually signed a bill that prohibited it. Sorry. The text has been corrected.

Obscure International Regulations are Good for America

| Tue Oct. 11, 2011 11:02 AM EDT

Under the proposed Basel III requirements, banks are required to increase their capital levels, and big banks are required to increase their capital levels even more. The Bank for International Settlements estimates the cost of these new regulations:

Adding together these two components, we find that the impact is again quite small, with GDP at the point of peak impact forecast to have fallen 0.34% relative to its baseline level. Roughly 0.04 percentage points are subtracted from annual growth during this period, while lending spreads rise by around 31 basis points.

Well, that doesn't sound so good. Sure, 0.04% isn't much, but it adds up over time. I wonder if there's any benefit to these new rules?

The benefits of the G-SIB framework relate primarily to the reduction in the exposure of the financial system to systemic crises that can have long-lasting effects on the economy. The LEI estimated the benefits of Basel III by multiplying the degree to which it reduces the annual probability of a systemic crisis, by an estimate of the overall cost of a typical crisis in terms of lost output. Drawing on the [Basel Committee Long-term Economic Impact Study's] results, the MAG estimated that raising capital ratios on G-SIBs could produce an annual benefit in the order of 0.5% of GDP, while the Basel III and G-SIB proposals combined contribute an annual benefit of up to 2.5% of GDP — many times the costs of the reforms in terms of temporarily slower annual growth.

Shazam! A cost of 0.04% per year and a benefit of 2.5% per year. This comes via Dan Drezner, who comments that, of course, "it's not terribly surprising that global regulators will say that they're right and the banks are wrong." True. But this is a massive difference. The BIS modeling would have to be off by an enormous amount for these new rules to be anything less than hugely beneficial. Basically, we're paying a tiny amount each year in order to avoid periodic financial crises like 2008 that wipe out gigantic chunks of GDP at a single crack.

Tim Geithner may have gotten some things wrong, but his insistence on the importance of "capital, capital, capital" has been exactly right. Jamie Dimon can bluster all he wants about the new rules being "anti-American," but the details of his complaints are trivial compared to the benefit of raising global capital levels substantially — which probably won't hurt American banks much at all anyway. Geithner is right to stand up to Wall Street's usual howling and charge full steam ahead with the new Basel requirements.

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Harry Reid Explains the Modern Republican Party

| Tue Oct. 11, 2011 1:16 AM EDT

Harry Reid explains the negotiations over a bill to curb Chinese currency manipulation that finally led Democrats to change the Senate's rules:

The bill — which is supported by business and labor interests — had garnered a bipartisan supermajority not just once but twice. With passage virtually assured, the minority reached for the only tool left to try and derail the bill, confronting us with a potentially unlimited number of votes on completely unrelated amendments. Voting on these amendments would require suspending the Senate’s rules — an obscure procedure that hadn’t been used frequently until this Congress and hasn’t been used successfully since 1941.

....We offered votes on four amendments, and they wanted five. We offered five votes, and they wanted six. Finally, we offered votes on seven amendments, including a vote on an outdated version of President Obama’s American Jobs Act, with which Republicans were seeking to score political points. Still, Republicans refused. They came back with a demand for nine votes that required suspending the Senate’s rules. The same logic that allows for nine unstoppable motions to suspend the rules could lead to consideration of 99 such motions.

I haven't heard Mitch McConnell's side of this, but this sure has the smell of truth. First, because it sounds exactly like something McConnell would do. Second, because McConnell's actions would have to have been pretty outrageous to get the notoriously milquetoast Democratic caucus to unanimously support a rules change. But I guess even a herd of cats can eventually be pushed too far.

Is Healthcare Stuck in a Rut?

| Mon Oct. 10, 2011 7:18 PM EDT

Has innovation stagnated over the past half century? One version of the argument for the prosecution is that your great-grandma from 1900 would be astonished if she were whisked forward in time to 1950. But if your parents from 1950 were whisked forward to 2011, they'd mostly yawn. Aside from the internet, everything would seem pretty familiar.

But Matt Steinglass points out that there's one area where this isn't true:

The situation with health care is almost the reverse of that with most other consumer technology. While someone from 1890 would have found a hospital in 1950 pretty much familiar, with a bunch of tweaks and upgrades, someone from 1950 would find a hospital today unrecognisable and startlingly futuristic. From widespread use of blood banks and antibiotics to defibrillators, epidural anaesthesia during delivery, heart surgery and angioplasty, laboratory diagnosis of viruses and bacterial infections, tumor biopsies and chemotherapy, and of course organ transplants, MRIs, and so forth, most of what we expect to see when we go to a hospital these days was developed in the second half of the 20th century. Not to mention the drugs we buy, both prescription and over the counter: birth-control pills, antihistamines, antidepressants, anti-retrovirals, et cetera.

Is this a good thing? Sure, and yet Matt has reservations: "We celebrate the technological revolutions that shifted us from an economy mainly focused on getting enough food to eat well....I'm happy that people today spend much more on cars, computers, clothes and entertainment than they do on food. I wouldn't be happy with an economy in which people spent more on health care than they do on cars, computers, clothes and entertainment."

I hate to be the one to break the news, but I'm pretty sure we already spend more on healthcare than on those four categories combined. This is a bad thing in a lot of ways, because there really is a lot of waste in the healthcare field. We overpay for services, we demand lots of tests that aren't necessary, and, as Matt points out, we spend a ton of money on end-of-life treatments that are hard to justify.

And yet, I want to argue that there are two reasons the situation isn't quite as bleak as it seems. First: a lot of the innovations of the past 50 years are really, really useful. We're often unhappy because the biotech revolution hasn't given us 100-year lifespans yet, but we obsess too much over lifespan. Hip replacements don't allow you to live longer, but they're pretty damn beneficial. Just ask anyone who's had one. Ditto for heart bypass surgery, which allows you to live a much more active life than otherwise. Ditto again for prescription pain meds, HIV therapies, artificial limbs, blood pressure meds, and a hundred other things. Modern medicine really does allow a lot of people to live far more comfortable and mobile lives than they used to.

Then there's reason #2: I guess I just have more faith in the future of medicine than a lot of people. Right now, I think we're stuck in the early stages of a technological revolution, and early stages of technological revolutions often don't look that great. Steam engines in their first few decades were barely worth operating beause the technology just wasn't good enough or cheap enough to replace very much human labor. Computers in the 50s seemed doomed to highly specialized niches that would benefit the economy only modestly. Even agriculture wasn't really all that promising when it first got started 10,000 years ago.

I think that's where we are with medicine. We understand enough to make some progress, but we don't understand enough to make the jump to truly inexpensive, broad-based therapies that make our bodies fundamentally better than they used to be. It's just a really hard problem. But selective breeding eventually turned wheat into a truly useful staple crop, the separate condenser made steam engines the drivers of the Industrial Revolution, and the development of ICs turned computers into mass-market devices. We haven't gotten there with medicine yet. We're beyond the mechanical calculator stage, so to speak, but not quite past the tube stage. And that stage of development often produces products that are unreliable, expensive, and only marginally useful.

But we'll get past it eventually. And when we do, healthcare will probably once again be a smaller share of the economy than cars (or whatever we use for cars by that point), computers, clothes and entertainment. So there's some reason for optimism. Or, at a minimum, at least some reason not to despair too soon.

Why Rick Perry is Slamming Romneycare Today

| Mon Oct. 10, 2011 2:00 PM EDT

So Rick Perry has a new ad up that slams Romneycare in about the same apocalyptic tones you'd normally use to advertise a movie about a zombie invasion of the world. Perry's ad, of course, is plainly not meant to influence the upcoming primaries, which are still months away. It's meant to create a mini-feud on the day before a Republican debate, thus prompting the debate moderators to mention it, or maybe play a clip, and then demand that Romney address Perry's blast.

I guess this is legit. And it's not as if the subject probably wouldn't come up anyway. But I just thought it was worth a note. This is one of the ways that primary battles are waged in the brave new era of YouTube and the endless debate. Creating teensy little controversies right before each confrontation is all part of the game nowadays.

Chart of the Day: We're Still in a Recession

| Mon Oct. 10, 2011 1:29 PM EDT

Via Felix Salmon, here's a chart put together by economists Gordon Green and John Coder, based on data from the monthly Current Population Survey. It's an index of self-reported income over the past 12 months and it's bad, bad, bad. As you can see, median incomes plummeted during the recession, and as you can also see, incomes continued to plummet during our so-called recovery. Reported income is now down 10% from 2008 levels. More here from the New York Times, including this pithy comment from Princeton economist Henry Farber: "As a labor economist, I do not think the recession has ended."

Indeed not, though perhaps economists who don't care about labor will disagree. In any case, here's your economics lesson for the day: debt implosion ---> reduced spending ---> layoffs and wage cuts ---> plummeting incomes ---> even less spending, more layoffs and wage cuts, and ever lower incomes ---> Zuccotti Park. Republicans and centrist Democrats, please take note.