Kevin Drum - November 2011

Republicans Get Even Weirder

| Tue Nov. 8, 2011 11:43 AM EST

We have a shiny new offer on the table from the supercommittee Republicans:

Under the proposal, Republicans would agree to limit certain itemized tax deductions in return for a permanent reduction in marginal tax rates. This would not just extend the 2001 and 2003 tax cuts, but reduce the rates that apply to each additional dollar of a taxpayer’s income.

In other words, its net effect would be to lower tax rates on the rich and, almost certainly, reduce revenue and make the deficit worse. In return for this, Democrats would get — what? Bigger spending cuts to make up for handing over more money to the rich?

It's easy to be snarky about this, but seriously: what's the deal here? Republicans can't possibly think this would be a more attractive deal than simply doing nothing, can they? So what is this? Evidence of a Michael Corleone-style of negotiation? Plain ignorance of what their own plan would mean? Open contempt for Democrats? A rational belief that Democrats are terrible negotiators and might buy their plan out of desperation?

What's going on here?

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The Spotlight Moves to Italy

| Tue Nov. 8, 2011 2:35 AM EST

In a sense, the problem with Greece has never really been about Greece. A Greek collapse, even a total one, would be bad news for Europe but it would be manageable bad news. Greece is small enough that the EU could bail them out completely they had to.

(Whether they'd want to is another question entirely. But they could afford to if push came to shove.)

The bigger problem is that problems in one wobbly country make investors freshly nervous about Europe's other wobbly countries too, and last week's psychodrama in Athens has made them very nervous indeed. In particular, it's made them nervous about Italy, which has tons of debt and a clownish prime minister who makes Herman Cain look like a statesman. As a result, nobody wants to buy Italian bonds, which means that Italy has to offer higher and higher interest rates to attract buyers. But higher interest rates make it even harder for Italy to ever pay off its debt, which makes investors even more nervous about getting repaid, which sends interest rates even higher, etc. etc. This eventually leads to collapse, and Italy is big enough that the EU can't easily bail them out even if they want to.

But wait! There's more. The Wall Street Journal explains what happens when Italian bond rates go up and the spread between Italian rates and German rates widens:

In some ways, the widening of that spread has caused a vicious selling cycle thanks to rules that govern the use of government debt as collateral for borrowing money, otherwise known as repurchase, or repo, agreements.

Analysts point to the rules set by LCH.Clearnet Group Ltd., the main clearinghouse for repurchase agreements. LCH.Clearnet requires higher collateral for repo trades involving government bonds that yield 4.5% more than a basket of triple-A-rated European sovereign bonds for five consecutive days. Market watchers said Italy is on the cusp of falling into that riskier bucket....Should the collateral requirements be triggered, it would make Italian debt less attractive for banks and investors who use their holdings as a cheap way to borrow money. Some market watchers said there has been selling of Italian debt in anticipation of the stricter guidelines.

This is sort of a special case of the more general vicious cycle described above. Basically, it's like a run on the bank, and it's the same dynamic that brought down Bear Stearns and Lehman Brothers. The vicious cycle in cases like this tends to accelerate toward the end, which is why Bear and Lehman collapsed within a week once their weakness became apparent. Sovereign countries are a little better off in this regard, but not a lot. If investors become convinced that Italian bond yields are going to continue widening, it becomes, first, a self-fulfilling prophecy, and then a full-scale panic. Last week was all about Greece. This week might be all about Italy.

Where the Money Is

| Tue Nov. 8, 2011 12:59 AM EST

As a public service for readers who are planning to enter college soon, here's a list of the 25 top-paying majors. If you want to make a lot of money, it turns out your choices are pretty simple. You can major in business and roll the dice on becoming a top trader/rainmaker on Wall Street, or you can just buckle down and major in some kind of engineering. It doesn't matter much what it is, though petroleum engineering is surprisingly lucrative. And be sure to stay away from being a high school guidance counselor. The full sortable list is here.

The Great Rocketfish Power Adapter Mystery

| Mon Nov. 7, 2011 10:58 PM EST

Apple Computer seems to think that $50 is a fair price for a spare iPhone charger, so I headed off to Best Buy today to see if I could find something more reasonably priced. And I did. But can anyone explain this?

On the left, you can buy a power adapter plus a cord for $21.99. On the right, you can buy just the cord — the exact same cord — for $24.99. Surely there's a breakdown of the free market at work here. But of what nature, exactly?

Solar Power and its Discontents

| Mon Nov. 7, 2011 7:34 PM EST

Can solar power ever get cheap enough to compete with fossil fuels on a level playing field? Photovoltaic solar cells are getting cheaper a lot faster than most people realize, and last week I posted this chart originally constructed by Ramez Naam:

Naam refers to this as "Moore's Law" for solar: in the same way that electronic components get steadily cheaper every year, so will the cost of solar. He estimates that the price of solar has declined at a fairly steady 7% per year for the past three decades, and if that continues, then solar will compete with fossil fuels by 2020 or so and will be significantly cheaper by 2030. This sounds great, but Joshua Gans urges caution:

Think about what that means for environmental policy. If we believe Moore’s Law in solar, then the safe bet in terms of behavioural reactions is not to react. Within a decade or two, energy will be socially as cheap as it is privately as cheap now. That means that changing habits for environmental austerity is not the way to go.

In other words, why bother conserving if solar is going to get so cheap that we'll have all the clean electricity we need within a couple of decades? This comes via Tyler Cowen, who makes a different point:

If a solar breakthrough is now likely, in which market prices do we see it reflected?....Is there any reason, based in industry-wide market prices, to be optimistic about the near-term or even medium-term future of solar power? I don’t see it.

I don't see it either, but I think the correct answer to both of these objections is the same: everything is uncertain. The reason we should keep pushing on conservation and efficiency is because solar might not follow a Moore's Law of its own. The progress so far can make us hopeful on this score, but it can't make us so certain that we're willing to put all our eggs in a single solar basket.

That same uncertainty is the answer to Tyler's point as well: the power industry hasn't reacted to the drop in solar prices because the industry is still uncertain it will happen. And there's more. The price of solar has been dropping exponentially for 30 years. That's not a prediction, it's a historical reality, and yet the power industry hasn't so much as blinked. So why should we expect them to react to it now? The fact is that industries routinely fail to react to technological competition until it's literally on their doorstep — or even tromping through the door and plonking down on the sofa to make itself comfortable. Hell, IBM stock continued to rise all through the 80s. It wasn't until 1987 that investors finally figured out what technologists had known for years, namely that those newfangled PC things might put a serious damper on the growth of big proprietary systems.

Solar power looks likely to get a lot cheaper over the next decade or two. That's good news for residents of planet Earth and bad news for fossil fuel suppliers, but neither group should bet the ranch on it happening. For Earthlings in general, this means we should stay focused on lots of different ways of reducing carbon emissions just in case solar doesn't pan out. For fossil fuel suppliers, it means they should spend some time hedging their bets, but not much more for now. For investors it means — well, different things for different investors. If you think it's likely that the price of solar will keep falling, you should figure out ways to invest in solar. If not, not. Right now, price parity is far enough off that only a few far-sighted investors with lots of appetite for risk are likely to spend significant sums betting on it, which in turn means that broad markets aren't yet affected.

And they might never be. It all depends. But the fact that they aren't reacting yet to something that's at least ten years off doesn't really tell us much about how promising the solar market is. All it tells us is that most investors don't really have very long time horizons.

A New Look at Poverty Statistics

| Mon Nov. 7, 2011 3:36 PM EST

A few weeks ago I mentioned that the Census Bureau planned to release a new report that would assess poverty using a newer and more comprehensive measure. The "official" poverty threshold dates back to 1964 and was very simple: it was calculated as the cost of a minimally adequate diet multiplied by three. The new measure is more complex and takes into account both government benefits (EITC, SNAP, housing subsidies, etc.) and higher costs in some areas (payroll taxes, medical bills, etc.).

The bottom line is simple: using the new formula, more people are in poverty than we thought. By age, there are fewer kids living in poverty, more adults living in poverty, and a lot more seniors living in poverty. Unfortunately, this is only moderately interesting. You can always make the threshold go up or down by fiddling with the formula a bit, so this doesn't actually tell us that much. But assuming the new formula is a good one, what would be interesting is to see the trend over time. Has poverty gone up or down over the past 40 years? Over the last decade? Since the start of the Great Recession?

We don't know because the report doesn't tell us. Instead, I'll leave you with this chart, which explains fairly well how the new formula works. It shows the effect of various elements of the formula on the poverty rate. For example, on the far left, when you account for the Earned Income Tax Credit the poverty rate goes down by two points. Accounting for SNAP (food stamps) lowers the poverty rate about 1.5 points. On the far right, when you account for the rise in Medical Out of Pocket costs, the poverty rate goes up by more than three points. (Since seniors have high medical bills and kids tend to have low ones, this goes a long way toward explaining why fewer kids are in poverty and more seniors are in poverty under the new formula.)

One other note: if you take this report seriously, it's a pretty good argument against reducing Social Security benefits by fiddling with the official inflation calculation. Rising out-of-pocket costs are hitting seniors harder than most of us, which suggests that the official inflation rate understates the actual inflation rate faced by the elderly. Reducing it even further would be a substantial blow.

If you're interested in diving into this in more detail, the whole report is here.

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In Healthcare, It's Public/Private vs. Private/Public

| Mon Nov. 7, 2011 2:44 PM EST

Consider two healthcare plans sponsored by the federal government:

  • Plan A depends on private insurers. Liberals think a public option should be added to the mix in order to discipline the private market. Conservatives oppose a public option.
  • Plan B is already a public insurance scheme. Conservatives think private insurers should be added to the mix in order to discipline the public sector. Liberals aren't especially keen on the idea.

Question: is there anything odd or hypocritical about this? I don't see why. In broad terms, liberals prefer the public allocation of healthcare, and given any particular starting point they'll argue for greater public participation. Conservatives are just the opposite: they prefer the private allocation of healthcare, and given any particular starting point they'll argue for greater private participation.

Why bring this up? Because Plan A is Obamacare. Plan B is Medicare. When Obamacare was being debated, liberals argued in favor of a public option to discipline the private market. Plan B is Mitt Romney's proposal for Medicare, which conservatives favor as a way of disciplining the current public plan.

This all comes from Austin Frakt, who also points out that liberals sometimes argue that Medicare would experience adverse selection (i.e., all the really sick people being shunted into the public plan) if private plans were allowed to compete. Conservatives ignore this argument. It's pretty much the opposite when the subject is Obamacare: conservatives occasionally bring up adverse selection concerns and liberals mostly ignore them.

Again: is this hypocritical? I guess so. But on a scale of 1 to 10, I'd rate it about a 3. Liberals mostly prefer an entirely public plan, similar to the national healthcare plans in Europe, so they highlight arguments in favor of it while soft-pedaling possible issues during the transition. Conservatives do the opposite. Diogenes would be more meticulous about this kind of thing, I suppose, but most of the rest of us aren't quite ready to adopt his rigorous standards yet.

And it's worth noting that this really is a transition problem. A fully public system has no adverse selection issues, and neither does a fully private system. What's more, in a mixed system, adverse selection problems can actually accelerate the transition to a fully public or private system, which means that proponents might welcome them as politically useful. That's not something you can actually say in public, though.

Anyway: Mitt Romney wants private insurers to compete with Medicare. I'm actually OK with that in principle: as Austin reminded me last week, there's evidence that competitive bidding for Medicare contracts could lower costs by around 8% in urban areas that have lots of providers. That won't save the republic, but it's nothing to sneeze at either.

At the same time, private insurers already compete with Medicare. It's called Medicare Advantage, and so MA has mostly fallen flat: it costs more than traditional Medicare and provides only slightly better benefits. Romney hasn't yet explained how his version of MA is going to be better than the current version of MA, and until he does I don't see much reason to be interested in his proposal as anything more than boilerplate rhetoric to demonstrate that he's a free market kind of guy.

Pro Tips From the Blogosphere

| Mon Nov. 7, 2011 1:22 PM EST

Would you like to know the secret of successful political blogging? Tanni Haas, a journalism professor at CUNY, asked a bunch of bloggers and then put all the interviews together into a book. Here's my deathless advice:

You have to enjoy writing. You really have to enjoy sitting down at a keyboard and typing words. If you don't, then you might as well forget about it.

This thought is not original to me. In my first real job out of college I was a technical writer for a computer hardware company. When I interviewed for the job, the department manager made something like this comment to me. At first it sounded kind of dumb, but it stuck with me for a long time. Because he was right: if a job requires a fairly high volume of writing — as both blogging and technical writing do — you're not going to be happy at it unless you're the kind of person who just constitutionally enjoys the act of putting your fingers on a keyboard and making words come out. If you don't, you might do it anyway because you have to put food on the table, but you won't enjoy it and you'll likely never be all that good at it. And if you don't have to do it in order to put food on the table, you won't stick with it for long.

Pretty profound, huh? And I suppose that actually knowing something helps too, though that theory hasn't really been seriously tested yet in the blogosphere. (Or in human history, some cynics might say. Though not me, of course.) In any event, Haas also interviewed lots of smarter people than me, including Tyler Cowen, Digby, Juan Cole, Jane Hamsher, and quite a few others. So there's probably some smart stuff in the book too. Amazon, of course, will let you dip into the book a little bit for free if you want to test this assumption. Enjoy.

Are Republicans Deliberately Sabotaging the Economy?

| Mon Nov. 7, 2011 12:47 PM EST

On Thursday I wrote about a poll in Florida in which half the respondents agreed that "Republicans are intentionally stalling efforts to jumpstart the economy to insure that Barack Obama is not re-elected." Remarkably, even a lot of Republicans and conservatives agreed with that statement.

But how about nationally? None of the big polling outfits has asked the question quite that pointedly yet, but the Washington Post recently asked a Statement A/Statement B question in which half of all respondents agreed with Statement A: "President Obama is making a good faith effort to deal with the country’s economic problems, but the Republicans in Congress are playing politics by blocking his proposals and programs." Not quite the same, but in the same ballpark.

But is that mostly just Democrats and Dem-leaning indies who agree with that? Greg Sargent took a look at the internals and found that moderates and independents poll a bit higher than 50%, but Republicans are bringing down the average: "The overall number is lower, at 50 percent, because a hilarously meager nine percent of Republicans believe this to be the case." I can think of two ways to interpret this:

  • The Post question was more partisan than the Florida poll question because it starts out with "President Obama is making a good faith effort...." Lots of Republicans are going to choke on that even if they agree that congressional GOP leaders are indeed trying to sabotage Obama. This explains why the Post numbers are lower than in the Florida poll.
  • The Post question was tamer than the one in the Florida poll, since it only suggests Republicans are "playing politics," not "intentionally stalling" efforts to revive the economy. But even at that, most Republicans in the Post weren't buying it. This suggests that the Florida poll is an outlier.

For now, I'm going with the second explanation. But I'd still be interested in seeing some more national-level polling on this with the question worded more directly. If I see one, I'll let you know.

Quote of the Day: Europe's Bellwether

| Mon Nov. 7, 2011 11:57 AM EST

From Dan Drezner, commenting on the latest twists and turns in the eurozone saga:

I've said it before and I'll say it again: any time the global economy is counting on Silvio Berlusconi to do the right thing is not a good time.

I think Berlusconi is an object lesson for America. This is what could happen if we actually elected someone like Sarah Palin or Herman Cain president. It's just a bad dream for us, but the Italians actually did it.

More here from Gavyn Davies via Paul Krugman, who says the best way to think about the eurozone mess is that it's fundamentally a trade deficit problem and nobody is even pretending to know what to do about it.