Kevin Drum - October 2011

Why Leveraging the EU's Rescue Fund Won't Work

| Mon Oct. 3, 2011 11:17 AM EDT

This quote from Wolfgang Münchau is getting a lot of attention:

We are now in the stage of the crisis where people get truly desperate. The latest crazy idea, which is being pursued by officials, is to turn the eurozone’s rescue fund into an insurance company, or worse, a collateralised debt obligation, the financial instrument of choice during the credit bubble. This is the equivalent of putting explosives into a can, before kicking it down the road.

That's a pretty punchy quote! But I was happy to read Münchau's full piece anyway, because I've been puzzled for a while over the idea of "levering up" the EU rescue fund. The basic idea is that the fund is too small: rather than its current €440 billion, it needs to be somewhere in the neighborhood of €2 trillion. But nobody wants to pony up that kind of dough, so instead there have been proposals that the €440 billion be used as the equity tranche of a gigantic security that would be sold to private investors. Voila! You have €2 trillion at your fingertips. Europe is saved!

This didn't make much sense to me, but I vaguely figured that maybe I just didn't understand it. Sadly, I think I understood it all too well. The whole point of a rescue fund is that it's so rock solid that everyone breathes a sigh of relief and there's no longer any risk of bank runs or sovereign defaults. But private investors just aren't rock solid enough. As Münchau puts it, "When the eurozone CDO fails, there are no governments that can bail it out because the governments themselves are already the equity holders of the system. This leaves the European Central Bank as the last man standing. But the whole idea of setting up a eurozone CDO is to avoid this outcome."

Right. One way or another, the bailout is going to come from either national governments, the central bank, or both. Or, alternatively, there's not going to be a bailout and all hell will break loose. All the tricks in the financial rocket scientist's toolkit can't change this grim reality. Europe either ponies up eye-watering amounts of money for its teetering banks and teetering countries or faces financial catastrophe and the end of the eurozone. Eventually they'll have to decide which fate is worse.

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Breaking: Good Reviews are Good for Business

| Mon Oct. 3, 2011 10:04 AM EDT

Via Adam Ozimek, here's a handy chart that demonstrates something you probably thought you knew already: a high rating on Yelp is good for business. Harvard's Michael Luca did a clever study that took advantage of "discontinuity effects." Yelp rounds off its rating for public consumption, so a restaurant that crosses the boundary from, say, a rating of 3.2 (rounded down to three stars) to a rating of 3.3 (rounded up to 3.5 stars) gets an extra boost on its Yelp page. There's probably very little difference between 3.2 and 3.3, so if a restaurant's revenue increases it's most likely due solely to its Yelp rating.

Sure enough, that's what happens. As the chart on the right shows, revenue remains fairly flat as ratings go up slightly and then suddenly jumps as a restaurant passes the rounding-off point and gets an extra half star:

I present three findings about the impact of consumer reviews on the restaurant industry: (1) a one-star increase in Yelp rating leads to a 5-9 percent increase in revenue, (2) this effect is driven by independent restaurants; ratings do not affect restaurants with chain affiliation, and (3) chain restaurants have declined in market share as Yelp penetration has increased. This suggests that online consumer reviews substitute for more traditional forms of reputation. I then test whether consumers use these reviews in a way that is consistent with standard learning models. I present two additional findings: (4) consumers do not use all available information and are more responsive to quality changes that are more visible and (5) consumers respond more strongly when a rating contains more information.

How robust is this result? I'm not sure. Luca's regression suggests that revenue actually goes down except around the discontinuity, which is peculiar. Just eyeballing the chart without any lines drawn in, I can imagine instead drawing a simple upward-sloping regression line showing that restaurant revenue increases smoothly as reviews get better. That eliminates the anomalous downward trend, and it's not instantly clear that the standard error would be much bigger than doing it Luca's way. Unfortunately, the Greek-letter section of the paper is over my head, so I'm not sure. Yelp fans demand further research on this crucial topic.

UPDATE: Just to give you an idea of what I'm talking about, here's the chart redrawn with a single upward-sloping regression line:

This is just eyeballed, so don't take it seriously. Still, the data points are really scattered, and the fit looks equally poor on both Luca's version of the chart and mine. It's not clear to me that the discontinuity effect is really there.

Rick Perry's Spectacular Fall From Grace

| Mon Oct. 3, 2011 8:34 AM EDT

Just to recap, in less than two months Rick Perry has:

  1. Suggested that maybe Ben Bernanke should be lynched.
  2. Declined to back off his contention that Social Security is an unconstitutional Ponzi scheme.
  3. Called climate change a "contrived phony mess" that was cooked up by scientists who have "manipulated data so that they will have dollars rolling in to their projects."
  4. Pissed off the conservative base by defending his decision to (in Michele Bachmann's immortal words) give "government injections" to "innocent little 12-year-old girls." Said Perry condescendingly: "What I don't get is what parents don't understand about an opt out."
  5. Further pissed off the conservative base by suggesting that if you disagree with his policy on in-state tuition for illegal immigrants, "I don't think you have a heart."
  6. Mangled a prepackaged debate attack on Mitt Romney so badly, and then followed up with a statement on Pakistan so inscrutable, that even his supporters started to wonder if he has a three-digit IQ.
  7. Proposed that US troops should be used to fight Mexican drug lords. In Mexico.
  8. Had to defend himself against revelations that his family leases a hunting spot called "Niggerhead."

I'm putting this up because you can't truly grasp the full scope of Perry's train wreck campaign unless you see the whole list in one place. It's really pretty stupendous. Has any top-tier presidential candidate in history ever imploded quite this quickly?

Do Our Schools Still Offer Advanced Classes?

| Mon Oct. 3, 2011 12:01 AM EDT

A couple of weeks ago I read Rick Hess's piece in National Affairs complaining that our national mania for "closing achievement gaps" has badly shortchanged our top students. Teachers are now focused so resolutely on getting slower students up to grade level that very little attention is given to high performers who are already above grade level and therefore pose no risk of hurting a school's NCLB goals. As a result, our best students are left to languish in boring classes and are falling ever further behind the best students in other countries.

I didn't entirely understand Hess's argument. There was something missing that I couldn't quite put my finger on. Today, in a Room for Debate roundtable devoted to discussing Hess's piece, Michael Petrilli fills in the missing link:

Over the past two decades, “tracking” as traditionally practiced has been virtually eliminated from the vast majority of America’s schools — with the exception of mathematics at the middle and high school levels. Whereas a typical middle school might once have had three tracks (remedial, regular and honors) for almost every academic subject, most schools have collapsed all this into one class. At the high school level, Advanced Placement courses — once reserved for the academic elite — have now been democratized through open-admissions policies. It’s “all together now,” in a very real way.

Aha! There are no advanced classes anymore? Everyone is just lumped together in a single classroom without regard to ability? I didn't know that, which just goes to show how out of touch I am with modern schooling.

But wait. It only shows that if it's actually true. But is it? There are certainly elementary school gifted programs still alive and well in lots of places. And as Petrilli says, high schools are practically crawling with AP classes these days — and democratized or not, AP classes are still honors classes even if they've been watered down a bit from their original ideal. That leaves only middle school, which I really don't know anything about. But if tracking is, in practice, still alive in elementary school and high school, then there's still quite a bit of tracking left.

So now I'm really confused. If this is really all about the demise of tracked classes, what's the story? I know that placement of kids in "vocational" tracks mostly ended decades ago, but basic academic tracking still seems to be very widespread. So what's the real complaint here? Teachers and parents with kids currently in school are invited to educate me in comments.

Quote of the Day: Rick Perry's Ranch

| Sun Oct. 2, 2011 2:07 PM EDT

From Matt Yglesias, dryly noting the current conservative attitude toward the possibility of lingering racism in our fair republic:

I’ve learned in long years of experience blogging about American politics that there are no racists in the United States. Certainly if there are any, they’re not white people. And certainly if there are any racist white people, they’re not conservatives. So let’s just say that if you’re a Republican county commissioner in Minnesota, this is the kind of thing that might lead you to wonder if Perry’s brand of politics will play well outside the Old Confederacy where people sometimes misunderstand this kind of thing.

"This kind of thing," of course, is the news that the Perry family hunting spot has been known for decades as "Niggerhead." I know I'm repeating myself, but: Does Mitt Romney have a pact with the devil or something? Not only does he seem strangely invulnerable to attacks from his opponents, but his opponents also seem to have an almost uncanny ability to self-destruct. It's just amazing.

Awkward Facts Kill the Regulatory Uncertainty Zombie

| Sun Oct. 2, 2011 12:52 PM EDT

Is a tidal wave of both existing and upcoming new regulation responsible for the sluggish state of the economy? This is one of those arguments that's so transparently dumb that I sometimes think its only purpose is to force liberals to waste time arguing about it. It's like that old story about LBJ spreading a rumor that his opponent was a pig-fucker. You can't say that, it's a lie, Johnson's campaign manager told him. "I know," he replied, "I just want to make him deny it."

Maybe that story is true, maybe it isn't. But it fits. Even when we're denying that regulations are responsible for our poor economy, we're talking about regulations. And the more people hear about regulations, no matter what the context, the more plausible it seems like they might be a problem. And of course, it also distracts us from talking about other stuff. It's a twofer.

Still, you gotta fight it. EPI's Larry Mishel wrote a pretty definitive takedown while I was off in the Bay Area with lousy WiFi reception, and among other things he notes that business investment—which ought to be highly sensitive to the regulatory climate—has recovered considerably better over the past two years than it did during the first two years of the Bush recovery:

The data show that investment has increased more in this recovery than in the prior two recoveries and roughly the same as that of the 1980s recovery. It is interesting to note that there was no growth in investments (as a share of GDP) in the George W. Bush recovery. That means that this recovery, with Obama regulations pending, is far more investment-led than the recovery under the deregulatory Bush administration. So, investment does not look like it is being held back, at least relative to other recoveries and the size of the market.

The chart is below. Bottom line: If demand were high but regulation was holding back recovery, then investment levels would be weak, employer surveys would be full of complaints, and businesses would be making lots of temporary hires in order to sell more stuff now without the danger of adding permanent payroll. But none of these things is true. Our problem is high debt levels and weak demand, not business-deadening regulations.

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The Civil War is No Excuse for Presidential Assassinations

| Sun Oct. 2, 2011 11:52 AM EDT

Writing today about the drone strike that killed Anwar al-Awlaki, Max Boot casually dismisses concerns about the president's authority to target U.S. citizens for execution:

A few civil libertarians are raising questions about whether the U.S. government had the right to kill an American citizen without a trial....That's like asking if it was lawful to kill Confederate soldiers at Gettysburg. Like the rebels during the Civil War, Awlaki and Khan gave up the benefits of American citizenship by taking up arms against their country. They, and other Al Qaeda members, claim to be "soldiers" in the army of Allah; it is only fitting that their avowed enemy, the Great Satan, would take their protestations seriously and treat them just like enemy soldiers. If it's lawful to drop a missile on a Saudi or Egyptian member of Al Qaeda, it's hard to see why an American citizen should be exempt.

I've heard this argument more than once, and I'd just like to point out how chilling it is. One of the reasons that liberal democracies constrain the use of force against their own citizens more than they do against noncitizens is because national governments have a very wide array of coercive powers already available to track and control their own citizens. Since this coercive power is inherent in the state, it's wise to restrain it lest it get out of control. Likewise, national governments don't generally need to execute their own citizens without trial because they have lots of other alternatives available to them. At a practical level, they often don't have this power over noncitizens, so killing them is sometimes the only option available.

But this distinction also applies to location: national governments have far more police power available within their own territory than they do overseas. In Awlaki's case, you might argue that if he had been living in, say, South Dakota, the government would have been constrained from killing him without trial because it has the power to deal with him judicially instead. But since he was living in Yemen, it didn't, and a targeted assassination was the only option open.

But Boot isn't willing to concede even that. The Civil War analogy suggests that even if Awlaki had been living within the United States he would have been fair game for a presidential assassination merely for belonging to a group that calls itself an offshoot of al-Qaeda.

In fact, I doubt that Boot believes this. He does not, in truth, think that President Obama can empower the FBI to roam the country and gun down American citizens who are plotting against us, whether they belong to al-Qaeda affiliates or not. Nor does he think that the 1st Cavalry Division can do this, even though that's exactly what they did during the Civil War. He's merely using the Civil War analogy because it was handy and seemed like it might sound plausible to readers who didn't think about it too much.

As it happens, I don't think the Awlaki precedent means that President Obama is going to go hog wild and start mowing down Americans overseas. I don't think that President Rick Perry would, either. But there are good and sound reasons that presidents are constrained in their ability to unilaterally kill U.S. citizens, regardless of where they live, and we allow these bright lines to be dimmed at our peril. Unfortunately, the war on terror has made poltroons out of every branch of government. The president hides behind the post-9/11 AUMF, using it as a shield to justify any action as long as it's plausibly targeted at al-Qaeda or something al-Qaeda-ish. Congress, which ought to pass a law that specifically spells out due process in cases like this, cowers in its chambers and declines to assert itself. And the courts, as usual, throw up their hands whenever they hear the talismanic word "war" and declare themselves to have no responsibility.

If the president wants the power to kill U.S. citizens who aren't part of a recognized foreign army and haven't received a trial, he should propose a law that spells out when and how he can do it. Congress should debate it, and the courts should rule on its constitutionality. That's the rule of law. And regardless of whether I liked the law, I'd accept it if Congress passed it, the president signed it, and the Supreme Court declared it constitutional.

However, none of that has happened. The president's power in this sphere is, in practical terms, whatever he says it is. Nobody, not liberals or conservatives, not hawks or doves, should be happy with that state of affairs.

Rick Perry Wants to Invade Mexico

| Sat Oct. 1, 2011 6:47 PM EDT

What happens when a Republican candidate for president finds himself on the defensive over a hot button culture war issue beloved of the tea party base? Answer: in an effort to maintain his more-kick-ass-than-thou credentials, he goes completely berserk:

Texas Gov. Rick Perry said Saturday that he would consider sending U.S. troops into Mexico to combat drug-related violence and stop it from spilling into the southern United States. “It may require our military in Mexico,” Perry said in answer to a question about the growing threat of drug violence along the southern border. Perry offered no details, and a spokesman, Robert Black, said afterward that sending troops to Mexico would be merely one way of putting an end to the exploding cartel-related violence in the region.

Black said Perry’s intention is to work with the Mexican government, but he declined to specify whether Perry is amenable to sending troops into Mexico with or without the country’s consent.

Do I even need to spell out why this is such an unconditionally boneheaded idea? Probably not, but Steven Taylor has done the job here just in case. I can't wait to get the official Mexican government reaction to this.

I don't get it. Is Mitt Romney really such a blood-curdlingly terrifying opponent that he scares every other candidate in the field into repeatedly immolating themselves? This is crazy.