Kevin Drum - November 2011

Grover Norquist's Eerie Influence, Continued

| Wed Nov. 9, 2011 3:28 PM EST

Grover Norquist explains to Politico how he keeps everyone in the Republican Party toeing the anti-tax line:

Sometimes, he said, he has to yank a wandering leader back into line, as he said he did with Senate Minority Whip Jon Kyl (R-Ariz.) in May. Kyl publicly ruled out raising tax rates to bring in revenue, which was interpreted by some observers as leaving the door open to a variety of tax increases that wouldn’t involve rate changes.

“So, I call Kyl. ‘What did you say? What did you mean? How can we work together on this?’” Norquist said, adopting the tone of a teacher scolding a second grader as he recalled the conversation. “Yes, I said rates,” Kyl said, as Norquist recalled.

“And then,” Norquist said, “he went down on the floor, and he gave a colloquy about how we’re against any tax increases of any sort. Boom!”

Is Norquist exaggerating to make himself look good? Maybe. But this is a two-edged sword. In public, Norquist usually likes to pretend that he plays a modest personal role, and that's served him well. This kind of boasting probably doesn't. Even a bunch of anti-tax Republicans might start to rebel if they start hearing stuff like this from him a little too often.

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Ohio Just the Opening Volley in Coming Pension Wars

| Wed Nov. 9, 2011 2:09 PM EST

In a referendum last night, Ohio voters decisively repealed a law that curbed collective-bargaining rights for public-sector workers:

AP has declared Issue 2 (as the law was called on the ballot) dead. As of this writing, with about 75 percent of precincts in, repeal led by a whopping 62 to 38 percent margin.

Gov. John Kasich (R) took office in January vowing to curb unions’ power. But he appears to have overstepped his hand in curtailing the rights of 350,000 public workers — including firefighters and police officers — to negotiate over benefits, equipment and other issues....By including firefighters and police officers in the legislation, Republicans in Ohio set themselves up for a far more difficult fight. Wisconsin’s collective bargaining law made exceptions for both.

This is a real dilemma for conservatives—and frankly, for liberals too. Kasich may have gone too far, but at the same time, there are real problems with public-sector pensions in a lot of states. One way or another, voters are going to have to decide how to handle this, but here's the dilemma: The biggest abuses come from the very public safety professions that voters are most sympathetic toward. Right-wing governors get a lot of mileage from attacking teachers and "chair-warming" bureaucrats, but it's not teachers who get to retire at age 50, it's not teachers who get to retire at upwards of 90 percent of their working-age salaries, and it's not teachers who engage in "spiking" that can raise their retirement pay well above their working-age salaries. That stuff mostly happens in the public safety arena.

Pension reform is already close to impossible because you can't legally change contracts for existing workers without their agreement, and for obvious reasons existing workers aren't likely to give up their lucrative pension deals. But those pension deals are going to cost taxpayers a lot of money over the next few decades, and in some states that cost is going to be impossible to deal with. That's two impossible things colliding, and the third impossible thing is the public's support for the very occupations that are costing them the most.

I'm not sure how this is going to play out over the coming years. But it's going to be tough sledding for everyone: liberals, conservatives, public sector workers, and taxpayers. Ohio was just the warmup.

UPDATE: The first sentence has been changed. Sorry for the confusion. Issue 2 was a ballot measure that asked for approval of Senate Bill 5, an anti-union bill. The "no" vote garnered 61 percent and SB 5 was repealed.

Yet Another Descent Into Madness

| Wed Nov. 9, 2011 1:30 PM EST

For a while it was sort of interesting watching Victor Davis Hanson's years-in-the-making fall from idiosyncratic conservative to frothing-at-the-mouth loon, but I gave up the entertainment of watching his descent some time ago. Today, though, Adam Serwer directs me to his latest bizarre screed, and I see that Hanson has just continued getting crazier even while I wasn't watching.

Anyway, read Adam's post for the whole story, but I'll just highlight one little piece of Hanson's latest. A couple of nights ago I was explaining to Marian that we liberals are terrified of Herman Cain because he's a strong, conservative black man — an authentic black man, not some deracinated offspring of a Harvard-educated Kenyan — and that's why we have to destroy him. She looked at me funny, and I told her I was just kidding — but that apparently a lot of tea-partyish conservatives are quite convinced of this. Don't believe me? Ladies and gentlemen, I give you Victor Davis Hanson:

Cain also wins greater scrutiny, not exemption, because he is black — or at least a certain sort of black. In addition to his conservatism, his voice, bearing, grammar, and diction, even his showy black cowboy hat, bother liberals in much the same way that Joe Frazier was not Muhammad Ali and Clarence Thomas was not Anita Hill. Black authenticity, as defined by Southern mannerisms and darker complexion, amplified by conservatism or traditionalism, earns liberal unease....The comparison with Obama is volatile: Cain is authentically African-American and of an age to remember the Jim Crow South; Obama, the son of an elite Kenyan and a white graduate student, came of age as a Hawaiian prep-schooler, whose civil-rights credentials are academic.

And now, if you'll excuse me, I need to get back to work destroying Herman Cain. Because I know that he's the only man who could actually beat Barack Obama next year and I'm terrified of him. As Cain explained yesterday, the Democrat Machine is out to get him. But luckily for you, it's no secret. To see our plans unfold in real time, just follow @DemocratMachine on Twitter.

Italy Is Now the Biggest Story in the World

| Wed Nov. 9, 2011 11:37 AM EST

Well, that was quick. When I wrote about Italy's unsustainable bond yields on Monday, rates stood at about 6.8 percent, just below the Oh Shit threshold of 7 percent that's unanimously believed to spell certain doom. Above that point, even higher yields aren't enough to attract buyers, Europe's main clearinghouse will start to require higher collateral for Italian bonds used in repo trades, and traders will start panic selling, which would send rates spiraling even higher. That kind of panic is self-fueling, and once it starts it can destroy its target within days. And now it's started:

Another surge in Italian bond yields to euro-era records has spooked investors…Adding to the angst is the decision on Wednesday by LCH.Clearnet, the clearing house, to raise the initial margin required to trade Italian bonds. Such a move makes it more expensive to hold a position and may encourage investors to quit trades, putting further downward pressure on prices and forcing yields higher.

Italian 10-year yields hit a fresh record of 7.48 per cent shortly after the European open. They are currently up 49 basis points at 7.26. Crucially, the yield curve has inverted as 5-years trade at 7.49 per cent, a condition that speaks of real investor fears about a potential default.

Unless the European Central Bank (ECB) steps in, Italy will be shut out of the bond market very quickly. It will be unable to roll over its debt, and default will follow. This is basically Greece on steroids, since Italy is something like six times bigger than Greece. The eurozone deal announced a couple of weeks ago might have been big enough to handle a Greek collapse—though even that's not a sure thing—but it's not even close to being big enough to handle an Italian collapse.

It's not easy to figure out what happens next. The ECB seems to be dead set against an unconditional backstop of Italy, which is probably what it would take to calm investors. And yet, an Italian collapse is unthinkable to European leaders. The rock and the hard place have truly started their final destructive squeeze.

Forget Herman Cain. This is the biggest story in the world right now.

Herman Cain Knows Nothing and Nobody, Nohow

| Tue Nov. 8, 2011 10:16 PM EST

Here is Herman Cain a few minutes ago, responding to Sharon Bialek's accusation that he once demanded sex from her in return for help getting a job:

I saw Ms Allred and her client yesterday in that news conference for the very first time. As I sat in my hotel room with a couple of my staff members, as they got to the microphone, my first response in my mind and reaction was, I don't even know who this woman is.

Roger that. But here is WIND radio host Amy Jacobson describing a backstage encounter between Cain and Bialek five weeks ago at a tea party convention:

Jacobson described their encounter as ‘intense’, that you could ‘cut it with a knife’, saying that she knew not to interrupt them. Jacobson had wanted to get a photo with Cain and said she was bum-rushed by Bialek who beat her to Cain and then had his ear for 2-3 minutes. She said it was clear Bialek had something she wanted to tell Cain and “by God she was going to tell him what she came there to tell him”....She affirmed she had no idea what they were actually talking about, only that Cain was saying “uh huh” several times throughout their brief encounter.

If Cain wants to claim that nothing ever happened and his accusers are all pathological liars, that's fine. I have a feeling he's not going to win that fight, but whatever. But to claim that he had no idea who Bialek was when she bent his ear for several minutes just a few weeks ago in front of witnesses? That's not going to fly.

On the bright side, denying allegations of sexual harrassment might actually be Cain's strong suit. Here he is talking substance in an interview with ABC's Jonathan Karl:

On foreign policy, asked about Iran having nuclear weapons and how he would respond, Cain says he'd go for ... energy independence. But what if it's your first day in office, asks Karl? I'm not going to wait until my first day in office, responds Cain.

That's so incoherent that it justifies the line: not even wrong. Cain then refuses to answer any further on the grounds that it's a hypothetical question. Duh.

That's from the Guardian's Richard Adams, whose dry British sensibility seems just about perfect for this kind of story.

Republicans Are Not Offering $300 Billion in New Taxes

| Tue Nov. 8, 2011 9:04 PM EST

I know that constantly complaining about newspaper headlines can get old, but seriously, what's up with this?

This is just flatly wrong. If you read down to the fifth paragraph, you'll find this:

However, the tax increases would be offset by permanently extending the George W. Bush-era tax cuts past their 2012 expiration date, a move that would increase deficits by about $4 trillion over the next decade.

In other words, the net effect of the Republican deal would lower tax revenue by $3.7 trillion over the next decade. Even if you assume that only the top-end tax cuts are really on the table, extending them would cost $700 billion, which means the Republican deal nets out to negative $400 billion.

The headline itself is bad enough, suggesting that Republicans have made some kind of serious deficit reduction offer. But the subhead — which is taken directly from the story's lead — is wildly misleading. The Republican deal doesn't increase tax revenue by $300 billion. It just doesn't.

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Sabotaging the Economy, Part 3

| Tue Nov. 8, 2011 6:13 PM EST

Does the public really believe that Republicans in Congress are deliberately trying to sabotage the economy in order to hurt President Obama? Two polls have suggested that about half the country thinks so, but with considerable disagreement about how widespread this belief is. Obviously liberals and Democrats believe this, but do conservatives and Republicans? A Florida poll last week suggested that a surprising number of them do: about a quarter of Republicans and a third of conservatives. But a Washington Post poll that asked a similar question garnered only 9% agreement from Republicans.

Today we have a tiebreaker, courtesy of a PPP poll commissioned by Daily Kos. This is a nationwide poll and asks the question directly:

Until something better comes along, this strikes me as fairly definitive. The question is straightforward and difficult to misinterpret, and the results aren't limited to a single state. Basically, about half of independents — mostly Dem-leaning independents, I'd guess — believe that Republicans are deliberately sabotaging the economy, and about 15% of Republicans believe this about their own party.

In a way that's a surprisingly high number, but it's probably not high enough to really have a big impact. Obama still has some work ahead of him if he wants to push this number high enough to really make a difference.

Smart Cards, Dumb Rules

| Tue Nov. 8, 2011 4:36 PM EST

Matt Yglesias, vacationing in Paris, notes that nobody in Europe uses old-fashioned credit cards with magnetic stripes on them anymore. He tweets:

The answer is actually sort of interesting, and gives me a chance to grumble about one of my longtime hobbyhorses. Basically, smart cards (aka "EMV cards" or "Chip and PIN" cards) are better at fraud prevention. Instead of signing your name on a credit card slip, you put the card into a terminal, enter your PIN number, and off you go. This is better for you because the card never leaves your presence (restaurants, for example, equip their servers with portable card readers), which means nobody can steal your card information. And it's better for the banks because PINs are more secure than signatures and smart cards are harder to forge than old-style cards.

So why don't we have them in America? Well, it's expensive, because merchants would all have to replace their old terminals with shiny new smart terminals. But this is obviously not a very satisfactory answer. After all, you could phase in the new terminals over a period of years, making it part of the usual equipment maintenance cycle. In Europe they seem to think this cost is worth it in order to reduce fraud, so why not in the United States? Here's an article written a few years ago on the subject, prompted by complaints from U.S. travelers that they sometimes have trouble using their credit cards overseas:

In addition to the number of terminals that would need to be changed, many experts say that the cost of fraud in the United States is considered manageable right now, taking away further incentive to change. "I don't think, based on my discussions with big banks that issue most credit and debit cards, or with card associations, that they envision rolling out so-called chip-and-PIN in the U.S. today," [says Don Rhodes, director of risk management policy at the American Banking Association].

But why is the cost of fraud considered "manageable" in the United States? Partly it's because fraud rates have long been lower in the U.S. than in Europe thanks to the nature of our payment network. But there's more to it. It's also because American banks and card companies have successfully pushed a great deal of the cost of fraud onto merchants and consumers. Stricter rules prevent this in most European countries, which means that banks and card companies have a stronger incentive to cut down on fraud and identity theft.

This is the price we pay for loose regulation of the credit/debit card industry. Card companies don't really have much incentive to reduce fraud since they don't pay the bulk of the price for it. In Europe they do, and voila! With profit as an incentive, they figured out a way to reduce fraud significantly. The result is lower costs for consumers and less risk of identity theft.

Wouldn't that be great to have in America too? As a bonus, it would also allow American cards to be used in Europe without hassle. The good news, such as it is, is that Visa and MasterCard might finally be getting on board the smart card train in the U.S., and the Fed could help things along if it were so inclined. New Durbin amendment rules allow card issuers to charge higher interchange fees if they comply with the Fed's fraud standards, and the Fed could make adoption of smart cards part of those standards. If they do, card issuers would have a real financial incentive to make the switch. Stay tuned.

How Wall Street Turned Income Inequality Into Gold

| Tue Nov. 8, 2011 1:17 PM EST

Steve Randy Waldman has a post today which, to simplify a bit, suggests that we're seeing negative real interest rates today because (a) the rich have all the money, (b) there's only a limited number of yachts the rich can buy, so (c) there's a huge amount of money sloshing around the financial system looking for a home. When there's a lot of supply and not much demand, prices go down, and that's what's happening to the price of money.

Paul Krugman objects, and shows us this chart of the national savings rate:

Krugman explains his objection like this: "I have a problem with this [story], for one simple reason: any such story, basically an underconsumptionist story, would seem to depend on the notion that rising inequality has led to rising savings. And you just don’t see that....Obviously it jumped up after the housing bust, but until then it was actually declining, and even now it’s below historic highs. I just don’t see how to make the underconsumption story work."

I guess I see something different. Starting around 1980, which is exactly when income inequality in America started to gap out, savings steadily fell. Fundamentally, what this represents is two things: the rich accumulating most of the gains of economic prosperity while the middle class suffered from sluggish wage growth. The rich couldn't really use that gusher of new money, so for 30 years they loaned it out to the middle class in increasingly Byzantine ways, and the middle class used these loans to sustain the steadily improving lifestyle they had gotten accustomed to. In 2008, this game of musical chairs came to a sudden end and the middle class stopped borrowing. And guess what? The rich still couldn't spend all that extra money. If they could, the savings rate would have stayed low. Instead, it shot up. The middle class was borrowing less, and the rich, left with no customers for their money, couldn't find anything to spend it on either. So now they're saving it. In other words, the underconsumptionist story starts in 2008, not 1980.

I don't want to pretend that this is the whole story. Yes, trade deficits play a role in all this. Demographics play a role. Oil plays a role. It's crankery to insist on monocausal explanations for complicated problems. But I think that growing income inequality plays a role too. The rich are continuing to collect huge sums of money, but they can't spend it all; they can no longer loan it all out; and there aren't enough good real-world investments out there to sop it all up either. So it's piling up and driving down real interest rates.

But this raises another question: why aren't there enough good real-world opportunities to soak up all this money? Answer: Because there's not enough expected future demand to justify expanding factories and hiring more workers. And why is that? Because for the past decade middle-class wages haven't just been growing sluggishly, they haven't been growing at all. But with wages stagnant and the great credit machine now turned off, middle-class consumption is necessarily going to be flat. That's just arithmetic. And without growing consumption from the middle class, consumption just isn't going to grow much.

For 30 years, the rich could ignore all this because Wall Street magically recycled income inequality and turned it into gold. That couldn't last forever, though, and 2008 turned out to be the year the train ran off the rails. At this point, then, the rich have only a few choices. They can lose interest in the United States and find other countries to invest their money in. They can let the middle class wilt and just hang on to their riches. Or they can understand the dynamics of a mixed capitalist economy and figure out a way to return to an era of shared prosperity, where everyone gets richer at about the same rate and the middle class provides a growing market for the investment dollars of the wealthy.

I'd like to think that eventually the rich are going to choose Door #3. Unfortunately, there's very little sign of that. It's not clear to me how this story ends.

Quote of the Day: Sarkozy Unloads on Netanyahu

| Tue Nov. 8, 2011 11:52 AM EST

From French president Nicolas Sarkozy, overheard talking to Barack Obama about Israeli prime minister Benjamin Netanyahu during last week's G-20 summit:

Sarkozy: I cannot stand him. He is a liar.

Obama: You're fed up with him but I have to deal with him every day.

Netanyahu, unsurprisingly, has declined to comment.