Kevin Drum - October 2011

Quote of the Day: The Masses Start to Get Scary

| Mon Oct. 10, 2011 12:21 PM EDT

From E.J. Dionne, possibly the nicest guy in the whole world, telling George Will he's a bounder and a cad for treating Elizabeth Warren badly:

This is a tour de force. My colleague has brought out his full rhetorical arsenal to beat back a statement that he grants upfront is so obviously true that it cannot be gainsaid. Will knows danger when he sees it.

Here's the backstory. Elizabeth Warren gave a speech a few weeks ago making the unremarkable—almost banal—point that businesses depend on roads and schools and courts and police protection and lots of other products of our tax dollars. They don't just spring out of Zeus's forehead. George Will, obviously in a cold sweat over the possibility that the ragamuffins in Zuccotti Park might take this to heart, admitted that Warren was obviously right but then sprang for her throat, accusing her of not merely making a case for fair levels of taxation, but of wanting to convert the United States into some kind of Leninist collectivist hellhole. It went downhill from there.

I haven't bothered blogging about any of this before, since Will long ago allowed his sense of nightmarish panic over creeping lefty totalitarianism to destroy whatever decent instincts he used to have. But Dionne's column does give me an excuse to post Warren's video, which I haven't done before. So here you go. This is for my sister, who's not especially political but finds Warren an inspiration nonetheless. Bankers beware.

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Jobs, the Rich, and Other Economic Myths

| Mon Oct. 10, 2011 11:07 AM EDT

Hey, waddayaknow. My print piece for the magazine this month, "Five Six Myths About the Economy," is now up on the website. That's handy timing, what with Occupy Wall Street in full swing, isn't it? It's not quite as magisterial as Ezra Klein's take on Obama's economic policy this weekend (which I highly recommend), but it makes up for that with several lovely charts.

The chart below illustrates Myth #3, Lower taxes are the best way to grow the economy. I'm all in favor of low taxes if we can afford them, but in the moderate range that we set tax rates in the United States, their effect on economic growth and productivity is practically nothing. All the hot air in the world from our Republican friends just can't change that basic fact.

Anyway, there are more myths where that came from. Just click the link to bone up on what you need to know before you visit the relatives this Thanksgiving.

Fukuyama

| Mon Oct. 10, 2011 9:13 AM EDT

I just finished Francis Fukuyama's The Origins of Political Order, so I was curious to see what Thomas Meaney had to say about it in his review in The Nation. But I hardly think this is a fair description of the book:

The Origins opens with a chapter on the social life of chimpanzees, which Fukuyama uses as a guide to the state of nature of humans....To encounter this newfound reverence for sociobiology at the onset of the book is disappointing. When Fukuyama relies on neuroscience or evolutionary biology to explain how political institutions develop, he confuses the answer to a second-order natural question (why do people build political institutions?) with the answer to a first-order normative question (what sort of institutions should people build?). One gets the sense that he is willing to enlist just about any explanation of human behavior to combat the economic-centric historical theories of Locke’s laissez-faire descendants such as Friedrich Hayek and Mancur Olson.

Meaney is viewing Fukuyama's thesis through the lens of a decades-long disagreement over basic philosophical questions, but I think this leads him astray. Fukuyama does indeed ask why people build political institutions and why different people build different ones, but the bulk of the book really isn't especially concerned with the kind of institutions they should build, even if Fukuyama's own preferences are plain. To a reader who comes in largely cold, as I did, the book is far more descriptive than it is prescriptive.

In any case, Fukuyama's basic thesis isn't really all that novel. States, he says, basically exist on a continuum of central authority. If you have a strong central authority unchecked by other actors (local nobility, independent cities, religious leaders, etc.) you end up with despotism. If you have a weak central authority and lots of competing power centers, you end up with a state too feeble to get very much done. Western Europe, he says, largely via accidents of history, ended up somewhere in the middle and prospered.

But how do strong central authorities evolve in the first place? Fukuyama spends a great deal of time talking about kinship structures and the way they interfere with state building (thus the brief foray into primate psychology at the beginning of the book). Loyalty to family and tribe is naturally strong, he argues, and tearing down that loyalty is crucial to building an effective state with adequately strong central authority. This, again, isn't an especially novel observation, but his application of this observation to early Christian history was new to me. "The Catholic church," he writes, "took a strong stand against four practices: marriages between close kin, marriages to the widows of dead relatives (the so-called levirate), the adoption of children, and divorce." All of these are things that help kinship groups keep property within the group, and by systematically cutting them off, and then promoting the voluntary donation of land and property to the church itself, the Catholic church enhanced its own power. Later on, rules like priestly celibacy were designed to prevent kinship groups within the church from interfering with the central power in Rome. All of this strengthened the power of the church at the expense of kinship ties, and while undermining the family may or may not have been a deliberate strategy, that was the end result. Tribal and family connections in Western Europe became (and remain) much weaker than in much of the rest of the world.

Fascinating! I'd be interested in learning whether other scholars agree with this interpretation, but unfortunately Meaney doesn't tell us. Instead we get this about Fukuyama's broad comparisons of the rule of law (a necessary precursor to a non-despotic state) under various historical regimes:

Despite Fukuyama’s assurances to the contrary, these sorts of forced comparisons create the impression that The Origins of Political Order is gamed from the beginning, with the book—and history—reaching its foregone climax in the Western European states that avoided Chinese and Indian excesses.

Well, sure it's gamed. But that's not because Fukuyama isn't playing fair, it's because he knows how history turned out. Like it or not, Western Europe did develop a globe-spanning empire before anyone else, and Fukuyama is quite legitimately interested in trying to figure out why. Maybe his conclusions are right, maybe they're wrong, but he doesn't really have any choice other than to seek answers to the question of how things actually turned out rather than how they might have turned out. It's like complaining that Einstein cheated when he developed General Relativity because he knew the real-world observations he had to explain before he started.

So what is Meaney's real problem? I think he gives himself away here:

Fukuyama curiously glides over the major historical problem in The Origins, which is, quite simply, that liberalism, capitalism and democracy have always been uneasy bedfellows. In its raw form, the principle of democracy—rule by and for the people—sits awkwardly with the defining principle of capitalist organization, which necessitates political arrangements that encourage unequal concentrations of wealth. Democracy has prospered in the West largely because its capitalist economies have redefined what democracy means.

Fukuyama may well be too convinced of the historical superiority of market-based democracy — though this hardly tallies with his supposed allergy toward economic-centric historical theories — but Meaney may be making more of this than he should. That there are tensions inherent in late capitalism is hardly an esoteric observation, and it's just not true that Origins "curiously glides over" the subject. It deliberately glides over it because it's a book about pre-Malthusian state building and halts around 1800. Volume 2 will tackle the past 200 years, which is where you'd expect Fukuyama to take up the interplay of liberalism, capitalism, and democracy in the modern world.

It's inevitable, I think, that any account of something as complex and contingent as state building runs the risk of sounding like a just-so story. But if there's a defect to Origins, it strikes me that it's just the opposite: the book is full of fairly dense historical description and fairly light on overarching theory. And Fukuyama spends several chapters, totaling nearly a hundred pages, describing several European states in a deliberate attempt to illustrate just how fortuitous and chancy successful state building is. So, yes, one of his messages is that the subject is more complex than a simple economic-centric model can account for. But that's a feature, not a bug. After all, if you want to understand why human beings do things, you need to understand human behavior, and in a lot of ways we're all still just hairless apes. So bring it on: primate psychology, tribal loyalties, religion, kinship structures, economic and geographic factors, the interplay of interest groups, and ever so much more. Whether Fukuyama can eventually produce a coherent model of state building from all this remains to be seen. But Volume 1 isn't a bad start.

Robert Samuelson Poor Mouths the Super Rich

| Mon Oct. 10, 2011 1:46 AM EDT

Robert Samuelson writes today about the "backlash against the rich." It's actually a fairly evenhanded column, but at the end he just can't help himself. The super rich just have to be defended:

The trouble is that the wealthy don’t fit the stereotypes: They aren’t all pampered CEOs, hotshot investment bankers, pop stars and athletes. Many own small and medium-sized companies. Half the wealth of the richest 1 percent consists of stakes in these firms. That’s double their holdings of stocks, bonds and mutual funds, according to figures compiled by economist Edward Wolff of New York University. Reid would pay for Obama’s jobs plan by taxing the people who are supposed to create jobs. Does that make sense?

"Many own small and medium-sized companies." Well, sure, if you're talking about really successful doctors and lawyers, who make up about a quarter of the top one percent. Most of the rest are corporate executives and financial professionals.

"Half the wealth of the richest 1 percent consists of stakes in these firms." Hmmm. I clicked the link to the Edward Wolff paper that Samuelson cites, and Table 6 shows that top earners hold 25% of their wealth in stocks and other securities, and 52% in "unincorporated business equity and other real estate." This is indeed double, but what does that category mean? According to a footnote in Table 5, it's "Net equity in unincorporated farm and nonfarm businesses and closely-held corporations."

Does this mean that 52% of the wealth of top earners consists of stakes in "small and medium sized companies"? I suppose it might, but that's not what Wolff's paper says. It just says that 52% of their wealth consists of stakes in non-public businesses. Those could be Koch-sized megacorporations, private equity funds, legal and medical partnerships, real estate trusts, or a hundred other things. Nothing about them has to be small, and they probably aren't. We're talking about people who earn upwards of a million dollars a year, after all. You don't get that from taking a minority stake in your brother-in-law's auto shop.

More than two-thirds of both the top 1% and the top 0.1% consists of corporate executives, financial professionals, doctors, and lawyers. Small businesses of the traditional variety just aren't a big part of this, and it's time to stop pretending otherwise.

Live Reporting from Occupy Wall Street

| Sun Oct. 9, 2011 6:54 PM EDT

I don't know how many of you have seen this already, but I just scrolled through Josh Harkinson's reporting from the Occupy Wall Street site, and it really gives you a great sense of what things look like there. His own reporting is there, updated continuously, plus loads of links to photos and videos and various related rants around the internet. It's all here, along with links to other MoJo reporting from downtown Manhattan. If you'd like to get a better feel for what's going on and how it's unfolding, take a look. And come back periodically to see the latest updates.

And for the rest of you, who just want the whole thing summarized in one quick chart, here you go:

Obama Defends the Awlaki Assassination

| Sun Oct. 9, 2011 12:43 PM EDT

The Obama administration remains unwilling to release the legal memo that gives them the authority to assassinate U.S. citizens abroad, but apparently they are willing to selectively leak it to the press. As a result, it was "described" to Charlie Savage of the New York Times, who passes along the description to us.

It's hard to know what to do with this, since the administration is obviously eager to leak the parts that it thinks are strong but withhold the parts that might not make it look so good. Still, the overall tenor of the memo is quite clear: it's all about Anwar al-Awlaki being an enemy combatant, allied with al-Qaeda, in a declared war against the United States:

Based on those premises, the Justice Department concluded that Mr. Awlaki was covered by the authorization to use military force against Al Qaeda that Congress enacted shortly after the terrorist attacks of Sept. 11, 2001 — meaning that he was a lawful target in the armed conflict unless some other legal prohibition trumped that authority.

It then considered possible obstacles and rejected each in turn. Among them was an executive order that bans assassinations. That order, the lawyers found, blocked unlawful killings of political leaders outside of war, but not the killing of a lawful target in an armed conflict.

A federal statute that prohibits Americans from murdering other Americans abroad, the lawyers wrote, did not apply either, because it is not “murder” to kill a wartime enemy in compliance with the laws of war.

....Then there was the Bill of Rights: the Fourth Amendment’s guarantee that a “person” cannot be seized by the government unreasonably, and the Fifth Amendment’s guarantee that the government may not deprive a person of life “without due process of law.” The memo concluded that what was reasonable, and the process that was due, was different for Mr. Awlaki than for an ordinary criminal.

As a non-lawyer, I can't say too much about this. But I'll say this much: the war against al-Qaeda simply isn't your grandfather's war, and we really need to face up to this. Of course the military has the right to kill an enemy combatant in a war zone, and in a conventional war this is both obvious and generally easy to adjudicate. But in the war against al-Qaeda? A war with no set geography, no boundaries in time (the AUMF is more than ten years old now), no clear enemy, and no way of deciding if and when it's ever over?

The old rules just don't apply to such a war, and Congress needs to actively decide what rules should apply. This isn't a question of whether you, personally, trust President Barack Obama or President Mitt Romney or any other president. It's a question of whether, in an open-ended conflict authorized in the vaguest possible terms over a decade ago, we should allow any president to unilaterally decide on a case-by-case basis whether an American citizen is an enemy soldier who can be targeted for killing.

Maybe he can. But I'd sure feel better about it if Congress set some rules for this and the court system had some oversight over the president's decisions. Hell, even requests to eavesdrop on U.S. citizens at least have to go through the rubber-stamp FISA court, which has to give its OK based on statutory law. In an open-ended global conflict against a steadily redefined enemy, what possible justification can there be for requiring less of targeted killings outside of obvious battle zones?

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The Great Investment Drought

| Sun Oct. 9, 2011 11:49 AM EDT

David Leonhardt writes today that if we expect the economy to eventually rebound the way it did after the Great Depression of the 1930s, we're sorely mistaken. There's obviously something to this: after World War II, which finally ended the Depression for good, the United States had (a) a huge pool of savings that people were eager to put to use, and (b) a strong potential export economy since the rest of the world had been blown to smithereens. We didn't need to import goods from Japan or China, and we didn't need to import oil from OPEC. We had all we needed right here at home.

Today, even after we crawl out of our current malaise, things will be just the opposite. Our debt overhang will probably be a drag on growth for a long time to come, our trade balance is persistently negative, and the price of oil acts as a significant constraint on economic growth. So some pessimism is warranted. But I'm not so sure about this:

Three giant industries — finance, health care and housing — now include large amounts of unproductive capacity. Housing may have shrunk, but it is still a bigger, more subsidized sector in this country than in many others. Health care is far larger, with the United States spending at least 50 percent more per person on medical care than any other country, without getting vastly better results....The contrast suggests that a significant portion of medical spending is wasted, be it on approaches that do not make people healthier or on insurance-company bureaucracy.

In finance, trading volumes have boomed in recent decades, yet it is unclear how much all the activity has lifted living standards....Wall Street has captured a growing share of the world’s economic pie — thereby increasing inequality — without doing much to expand the pie. It may even have shrunk the pie, given that a new International Monetary Fund analysis found that higher inequality leads to slower economic growth.

The common question with these industries is whether they are using resources that could do more economic good elsewhere. “The health care problem is very similar to the finance problem,” says Lawrence F. Katz, a Harvard economist, “in that incredibly talented people are wasting their talent on something that is essentially a zero-sum game.”

I'd treat these three things separately. Housing is a purely short-term issue. There's really no reason to think that it will act as a permanent drag on the economy. Sometime in the next few years it will return to its trend rate of growth and that will be that.

Healthcare is different. There's unquestionably some waste, both in human and economic terms, and this really is a misallocation of resources. At the same time, the big reason we pay more for healthcare than other countries is simply because we pay doctors more, we pay hospitals more, we pay insurance companies more, and we pay pharmaceutical companies more. I happen to think this is a bad thing, but it's not as if the money falls through a sieve and disappears. It all stays in the economy and gets spent one way or another.

And then there's high finance, which as near as I can tell, really has turned into a huge leech on the economy. If I had to guess, I'd say that upwards of a quarter of all financial activity today is actively damaging to the economy, and reforms like Dodd-Frank will have only the slightest impact on that.

So what's my beef with Leonhardt? Just that I think he's overstating things a little bit? No. My beef is with the bolded sentence above. The problem is that there's very little evidence that housing and healthcare and finance are actively sucking away investment dollars that could be better used elsewhere. Rather, the problem seems to be a drought of good investment opportunities, which leaves lots of money idle and looking for something else to do. The result is the same — lots of money going into unproductive sectors — but the arrow of causality is different. If there were lots of great, high-yield investment opportunities in the real world of consumer goods and services, money would flow there instead of blowing up housing bubbles and enriching a bunch of testosterone-fueled Wall Street traders.

A couple of days ago I argued that our capacity for innovation might be healthier than it's often given credit for. But if there's a strong counterargument, I think this is at the core of it. If we really are innovating at the same pace as in the past, why are the world's investment dollars flowing so heavily into useless crap instead? It might be, as I sort of argued on Friday, that present-day innovations are as great as they've ever been, but simply don't cost very much and don't employ very many people. Maybe. But in any case, the great investment drought of the past decade is, I think, at the core of everything. One way or another, we need to figure out why it happened and why it seems to be persisting.

The Best Piece About the Recession You'll Read This Month

| Sat Oct. 8, 2011 6:04 PM EDT

Ezra Klein has a really, really good piece in the Post today that looks back at the Obama administration's response to the Great Recession and explains why it wasn't enough. It's so good that I almost hate to excerpt anything, but you guys are spoiled and might not click the link just because I tell you it's well worth 15 minutes of your time to do it. So here's an excerpt that explains why Team Obama did so little about mortgage debt even though it was clear from the beginning that debt was a key difference between this recession and every other postwar recession:

On first blush, there are few groups more sympathetic than underwater homeowners or foreclosed families. They remain so until about two seconds after their neighbors are asked to pay their mortgages. Recall that Rick Santelli’s famous CNBC rant wasn’t about big government or high taxes or creeping socialism. It was about a modest program the White House was proposing to help certain homeowners restructure their mortgages. It had Santelli screaming bloody murder.

“This is America!” he shouted from the trading floor at the Chicago Board of Trade. “How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills? Raise their hand.” The traders around him began booing loudly. “President Obama, are you listening?”

Thus was the Tea Party born. And it's an important point: one way or another, taxpayers are always going to be on the hook for any kind of debt relief. They can be on the hook directly, by shoveling dollars to homeowners so they can pay down their mortgages, or they can be on the hook indirectly by bailing out all the banks that would fail if courts were allowed to unilaterally slash the principal on underwater mortgages via cramdown. Taxpayers aren't going to be happy about this either way, and like it or not, that constrains the responses available to politicians.

Economist Carmen Reinhardt gives Obama a lot of credit for what he did. "The initial policy of monetary and fiscal stimulus really made a huge difference," she says. "I would tattoo that on my forehead. The output decline we had was peanuts compared to the output decline we would otherwise have had in a crisis like this. That isn't fully appreciated." The combination of the stimulus bill, the auto bailout, and the bank rescues really did make a big difference.

But it wasn't enough. Partly that was because of political timidity. Partly it was because of genuine disagreements over which policies were likely to work best. And partly it was because we didn't know how truly bad things were in early 2009. As Ezra reminds us:

To understand how the administration got it so wrong, we need to look at the data it was looking at. The Bureau of Economic Analysis, the agency charged with measuring the size and growth of the U.S. economy, initially projected that the economy shrank at an annual rate of 3.8 percent in the last quarter of 2008. Months later, the bureau almost doubled that estimate, saying the number was 6.2 percent. Then it was revised to 6.3 percent. But it wasn’t until this year that the actual number was revealed: 8.9 percent. That makes it one of the worst quarters in American history. Bernstein and Romer knew in 2008 that the economy had sustained a tough blow; they didn’t know that it had been run over by a truck.

Anyway, click the link and read the whole thing. Really. This is one of the best roundups I've read of just what the Obama administration did right, what they did wrong, and whether they could have done better.

And if you're looking for a bottom line, mine is this: Despite everything, Team Obama actually did pretty well. Maybe 70-80% as well as anyone could have done. Housing was their single biggest area of failure, but even there, taxpayer and congressional resistance to bailing out "reckless" borrowers constrained them more than critics usually admit. Our failure to adequately address the Great Recession wasn't really rooted in the Obama administration, it was rooted in the fact that virtually no one, faced with an economic crisis, ever has the guts to truly unleash the proper amount of firepower. It's a very human problem, but for now anyway, humans are all we have. So a human response was what we got.

Friday Cat Blogging - 7 October 2011

| Fri Oct. 7, 2011 3:04 PM EDT

On Tuesday, John Cole foolishly baited me with a video of his cat, Tunch, purring for the camera. "Can Inkblot make noise like that?" he asked from the safety of his home 3,000 miles away in West Virginia.

Skeevy oppo researchers make insinuations like this all the time, since they know America won't elect a cat president who doesn't have a presidential purr. So today is movie day, proof positive that Inkblot has just the right timbre and resonance we demand from our presidents in this media age.

The bad news, of course, is that this means His Mightiness1 has now pushed Domino off the blog for two weeks running. But have no worries. She's plotting her revenge. She'll be back next week.

1Back in 1789, this was one of the original suggestions for how we should address the president. Inkblot is considering reviving this if he's elected.

Quote of the Day: We Must Suffer for the Sins of Others

| Fri Oct. 7, 2011 2:43 PM EDT

From Karl Smith, responding to outgoing ECB President Jean-Claude Trichet's continuing insistence on choking off the economy with tight money:

Obviously the European Central Bank (ECB) has nearly unlimited power to inflict suffering on the people of the Eurozone. And, from the looks of it they it intend to use it.

Read the rest for some wonkery to fill in the details. But really, the two sentences above pretty much tell the story.