Kevin Drum - October 2011

Bernanke to GOP: Stop Sabotaging the Economy

| Tue Oct. 4, 2011 2:50 PM EDT

From Ben Bernanke, in testimony before Congress today:

The recovery is close to faltering.

It's good to see that someone is noticing. In Bernanke's prepared remarks, after noting tight credit, slow consumer spending, financial stress in Europe, and other problems likely to hurt the economy, he got to this:

Another factor likely to weigh on the U.S. recovery is the increasing drag being exerted by the government sector. Notably, state and local governments continue to tighten their belts by cutting spending and employment in the face of ongoing budgetary pressures, while the future course of federal fiscal policies remains quite uncertain....In setting tax and spending policies for now and the future, policymakers should consider at least four key objectives. One crucial objective is to achieve long-run fiscal sustainability....A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery.

This isn't really new. But every time Bernanke says it, he edges slightly closer to calling GOP members of Congress idiots for obsessing about short-term austerity and spending cuts when they should be obsessing over how fast they can shovel money out the door. What's more, he's being as clear as he can that if Congress does this, the Fed's monetary policy won't get in the way.

But poor old conservative Ben Bernanke is now, in the view of most current Republicans, a dangerous radical lefty hellbent on debasing the currency and getting his Kenyan pal in the White House reelected. I wonder if he ever sees any humor in this?

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The High Price of Hidden Costs

| Tue Oct. 4, 2011 1:21 PM EDT

Austin Frakt read my defense of debit card fees on Friday and says today that it all makes perfect sense. But he's still annoyed by them. "That I feel this way is irrational, but I don’t care....The irrational, feeling part of me wants things to go back the way they were, even as the economist in me knows things are better now."

Right. Even though we won't admit it, most of us are far more likely to accept hidden costs than transparent costs. After all, they're hidden! We don't really know about them. Austin says there's a lesson here for healthcare:

Many policy experts and economists think it’d be far better if people knew the cost of health care, if they were aware what their full, employer-sponsored premiums cost, etc. I agree. Transparency is the right way to go.

But make no mistake, people will be annoyed. No, that’s not right. A $5/month debit card use fee is annoying. Suddenly learning that your income is lower than it would otherwise be by $10,000 because of your “employer-paid” premium is not annoying. It is enraging.

What will Americans do when they finally recognize the full cost of health care?....I think many people will be furious at how much of their paychecks are, effectively, being piped into the pockets of health insurers, health care providers, drug manufacturers, health IT gizmo creators, massive radiology machine developers, other device makers, and government programs. Some will think the return is worth the price. Many will not, particularly those who think insurers are wringing them dry.

Once you start thinking about it, you'll be surprised at just how addicted we all are to hidden costs. There are all the hidden bank fees, of course, which become enraging when they turn into transparent fees and we realize just how high they actually are. There's the hidden cost of healthcare that Austin points to — hidden because, in the American system, employers pay for most of it and most of us never really realize just how much we're really paying.

There are hidden taxes, too. If we want to reduce greenhouse gases, the single best way to do it is via a carbon tax. But that's transparent and produces a gigantic political battle. So instead we end up with direct EPA regulation, something that every economist in the world agrees is less efficient, less effective, and ultimately more costly than a tax. But the cost is hidden, so we all put up with it.

Ditto for tax expenditures, all those subsidies that we give people via breaks on their taxes. They don't seem like government spending, but they are — and they're less efficient than simply flattening the tax code and then making the subsidies directly.

Or there's Matt Yglesias's favorite hobbyhorse, zoning and construction regulations that hide the actual cost of keeping neighborhoods the way current residents like them. Or the hidden cost of supermarket "loyalty" programs, which fool us into providing retailers with valuable information in return for the mere illusion of lower prices.

We hairless apes have a seemingly infinite capacity to enjoy being fooled. But it's worth reminding ourselves every once in a while just how the high the cost really is for preferring inefficient hidden costs to the more efficient transparent kind.

Our Persecuted CEOs

| Tue Oct. 4, 2011 12:30 PM EDT

Ezra Klein is in Cleveland at a conference filled with corporate CEOs. He reports back:

Business types really hate Barack Obama. Everybody sort of knows that, but it’s hard to get a sense of it if you’re not in the room listening to them laugh bitterly at questions like, “Does Obama understand the damage regulations are doing to business?”

....These folks really, really feel persecuted and unappreciated. The common response to this, of course, is that corporate profits have hit record levels in recent years and the top 1 percent has never been richer. But if you need more evidence that money doesn’t buy happiness, you should sit with some CEOs for an hour.

The fact that lots of blue-collar workers gave up on Democrats long ago and now vote mostly on cultural issues has been the subject of dozens of books and magazine articles. It's even easy to understand: In FDR's day, Democrats really did do a lot for these kinds of workers. Today, Democrats don't really do that much at all for them. So why shouldn't they just forget about economic issues and vote for the pro-gun guy?

Corporate CEOs are a different story. For decades, Republicans were the pro-business party and it made sense for business executives to vote for them. But what about now? Republicans are formally dedicated to blocking anything that might even remotely have a chance of improving the economy and thereby improve business prospects as well. And yet, CEOs show no sign of wavering loyalties. Just the opposite: they've largely bought the austerity/regulation/deficit fable hook, line, and sinker even though it makes not the slightest sense.

There's nothing really new about that, I guess, but it's still sort of freshly gobsmacking every time I see it in action. These are, supposedly, some of the smartest folks in the country. But they don't have a clue. You can't even say they're slaves of some particular defunct economist, as Keynes suggested. They're just slaves of folk economics at its folksiest and most vacuous — and most damaging. And they have every intention of taking the rest of us down with them.

Time to Take #OccupyWallStreet Seriously?

| Tue Oct. 4, 2011 11:22 AM EDT

Ezra Klein says it's not the protests themselves that have caused him to take Occupy Wall Street seriously. It's a Tumblr called, “We Are The 99 Percent,” full of personal stories of people who have, seemingly, done everything right but are still struggling with debt, unemployment, and a stagnant future:

This is why I’m taking Occupy Wall Street — or, perhaps more specifically, the ‘We Are The 99 Percent’ movement — seriously. There are a lot of people who are getting an unusually raw deal right now. There is a small group of people who are getting an unusually good deal right now. That doesn’t sound to me like a stable equilibrium.

The organizers of Occupy Wall Street are fighting to upend the system. But what gives their movement the potential for power and potency is the masses who just want the system to work the way they were promised it would work. It’s not that 99 percent of Americans are really struggling. It’s not that 99 percent of Americans want a revolution. It’s that 99 percent of Americans sense that the fundamental bargain of our economy — work hard, play by the rules, get ahead — has been broken, and they want to see it restored.

I haven't followed OWS super closely, but I started taking it seriously when the right-wing media started sounding a little scared. That was sometime last week after several unions joined the movement, and while I can't point to anything specific, it felt as though the tone at Fox and its allies changed a bit from lighthearted mockery to something a little more serious, as if OWS was a real threat that needed to be put in its place.

Anyway, we'll see. To be truly effective, OWS will have to get a lot bigger and lot more persistent. It's still not clear if this is something that can grow to a million+ people and stay active for multiple years. Because that's what it will take. For more, Lauren Ellis and Tasneem Raja have a roundup of OWS activities, coverage, and an interactive map of ongoing and planned protests.

CEO Pay: Still Skyrocketing, Still Undeserved

| Mon Oct. 3, 2011 11:59 PM EDT

Over the past three decades, the growth rate in justifications for skyrocketing executive compensation has been nearly as high as the growth rate of executive compensation itself. Globalization makes a great CEO more valuable than ever. Tournament theory makes high pay inevitable. Companies are bigger these days. The skill sets of modern CEOs dwarf those of past eras. Pay is more closely linked to performance. Blah blah blah.

All of these things have a kernel of truth (aside from pay for performance, which is mostly a myth), but even collectively they don't explain much. What does explain a lot is two things: (a) stagnating worker pay has made a much bigger pool of money available for executive compensation, and (b) peer group comparisons inexorably ratchet up CEO pay. Because nobody wants to admit that their company is merely average, every company wants to pay its CEO more than average. But if every company wants to pay above the average, guess what happens?

Today, Peter Whoriskey of the Washington Post tells us that the practice of peer group comparison is widespread:

It wasn’t until recently, however, that its pervasiveness and impact on executive pay became clear. Companies have long hid the way they set executive pay, but in late 2006, the Securities and Exchange Commission began compelling companies to disclose the specifics of how they use peer groups to determine executive pay.

Since then, researchers have found that about 90 percent of major U.S. companies expressly set their executive pay targets at or above the median of their peer group. This creates just the kinds of circumstances that drive pay upward.

The chart on the right tells the familiar tale. Adjusted for inflation, cash compensation for line workers has actually decreased over the past few decades, and even when you include healthcare compensation it's grown only about 30% or so. In contrast, executive compensation over the same period has more than quadrupled.

Do they deserve this? Almost certainly not. There's simply no good reason that a CEO of 2011 is worth 4x more than a CEO of 1970. The reason their pay has gone up is simple: for all practical purposes, CEOs set each other's pay. And they keep raising each other's pay because they can. It's a pretty nice racket.

GOP Announces It Doesn't Care About the Economy

| Mon Oct. 3, 2011 9:05 PM EDT

Rep. Eric Cantor, to the surprise of exactly no one, announced today that Republicans had summarily rejected President Obama's jobs bill. But all is not lost:

Mr. Cantor announced the House would consider elements of Mr. Obama’s jobs agenda in the coming month, including trade agreements the White House sent to Congress Monday and a tax break for government contractors.

So there you have it. The sum total of what the GOP is willing to consider is a trade pact with South Korea and a tax break for government contractors. Hold on a second while I perform a sophisticated econometric analysis of how many jobs this will create.

[Hold music playing.....]

OK, I've got it. None. This will have no noticeable impact on the economy at all. But then, that's the plan, isn't it?

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ECRI Says New Recession Now Inevitable

| Mon Oct. 3, 2011 6:39 PM EDT

Karl Smith looks at the latest housing and manufacturing data and feels optimistic:

There is no indication at the moment that construction is headed for contraction and the probability that manufacturing is contracting is headed downward. Thus, I believe a double-dip becoming less likely.

The Economic Cycle Research Institute looks at "dozens" of leading indexes and gets ready to slit its wrists:

The U.S. economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off....In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not “soft landings.”

So, who do you want to believe? I'd like to believe Karl, but unfortunately, I suspect ECRI has the better of the argument. There's just too much government stimulus coming to an end soon that plainly won't be replaced thanks to Republican unwillingness to do anything that might help the economy before next year's election. Obviously the stalemate in Europe isn't helping things either. As Greg Ip says, "A global economy with decent cyclical fuel and no obvious imbalances is being betrayed by politics. Policy has pushed us over the brink in the past when it was for our own good (ie, inflation was threatening). If it happens now, it will be the first recorded instance of it happening by obduracy instead of by choice."

We are deliberately creating a new recession. It is truly an amazing thing.

Obama's Tax Proposals are Pretty Easy on the Rich

| Mon Oct. 3, 2011 2:40 PM EDT

It's Greg Sargent Day here at the blog! Today he posts a chart that was worked up for him by the Tax Policy Center. The question it answers is this: if you applied various tax policies to estimated 2013 income, how would different income groups fare? Here's the answer for the very tippy top of the income spectrum:

The dark blue bar at the left represents Clinton-era policies. The light blue bar at the right represents the effects of healthcare reform plus Obama's current set of tax proposals: Letting the Bush tax cuts mostly expire for the rich, limiting the value of itemized deductions and some exclusions to 28 percent, taxing carried interest at regular rates, and eliminating tax breaks for oil and gas companies and for corporate jets.

So what happens? The well-off do better under Obama than under Clinton-era policies. The even-more-well-off also do better. The really-well-off also do better. And the genuinely rich? They do ever so slightly worse: their after-tax income is maybe 2-3% lower under the Obama proposals than under the tax rates of the Clinton era.

Class warfare! There's more at the link.

The Media and the Left

| Mon Oct. 3, 2011 1:40 PM EDT

Greg Sargent says:

The left faces an institutional barrier: The attention to Occupy Wall Street notwithstanding, news orgs tend to find right wing demonstrations of popular unrest inherently more newsworthy and deserving of sustained coverage than left wing ones.

True or false? Is there actual evidence on this score from, say, the past 30 years?

It seems to me that the nuclear freeze movement of the 80s got a fair amount of attention. So did the anti-globalization protests of the late 90s. And the Iraq war protests of the aughts. And various gay rights marches and protests. Maybe they've gotten less coverage than the tea party has gotten, but that's not immediately clear.

My sense is that when the left actually mounts a sustained popular movement, it gets a decent amount of coverage. Maybe not as much as we'd like, but that's probably what everyone who mounts a protest thinks. The problem, I suspect, isn't that popular movements of the left get ignored, but that the left hasn't been mounting any big, sustained popular movements lately. The fault, dear Brutus, etc. etc.

Yes, Advanced Classes Are Alive and Well

| Mon Oct. 3, 2011 1:23 PM EDT

Last night I asked if our schools still offered advanced classes. In comments, the overwhelming answer is yes. Here are some snippets:

Here in San Mateo county, the kids are tracked from middle school into the AP classes....Virtually every Massachusetts city and town has fully funded and very much active advanced classes....There are plenty of gifted programs at the middle school level. My daughter's (N.J.) school has them. And there are certainly more now than when I was in middle school (early '70s), when there were none....I'm a parent of a middle school student in a NYC public school. She had to apply to middle schools, and was admitted based on her grades, test scores and an interview. So the tracking goes on according to school, not class.

....NYC has G&T programs from kindergarten up — each of the 31 or so districts has its own district-wide G&T program, and there are citywide G&T programs....Tracking, regulars-honors-AP still exists and generally AP programs are far tougher than they were back in my day....In my daughter's middle of the pack public high school there are AP options for multiple classes in every subject as well as an honors track....I grew up in one of the richest counties in America in the 1970s and now my child is in school in a DC suburb. There is definitely much more tracking now than at that time....Advanced courses and tracking are as alive and well in affluent Montgomery County, Maryland, as they are in Singapore....I am a middle school teacher. It is true that tracking still exists.

A few commenters did report that honors/gifted/AP tracks are in danger, but mostly because of budget cuts, not pedagogical changes.

Some obvious caveats: my readership is almost certainly nonrepresentative. I probably have lots of readers who are middle-class and above and not too many who hail from the inner city. So this doesn't tell us much about practices at low-income schools. And of course, a few dozen responses is not the same as an actual survey.

Still, I'm now even more skeptical of the idea that tracking has gone the way of the dodo. In most areas, I think that G&T classes don't start until fourth grade, but that's been the case for a long time. Thus, it's entirely possible that teacher energy in grades K-3 is now devoted disproportionately to the slower children, which means that the more advanced kids get shortchanged. But hell, that was true in my second grade class in 1965, where my teacher just gave up and had me run one of the reading groups because I already read plenty well enough. In any case, it's not clear that this is really a very big deal in early grades anyway.

I don't plan to spend a ton of time on this subject, but if I run across further data I'll pass it along. For now, though, it looks to me as if academic tracking is alive and well at grades four and above, pretty much the same as it's always been.