Kevin Drum - November 2011

Life Is Grand on Wall Street

| Sun Nov. 6, 2011 4:28 PM EST

The Jets just won their game and I'm in a good mood. So I guess it's time to head over to the ol' computer and see what's up in the world today. I wonder what the Washington Post has for us? Just one short click and—oh, crap:

Do I have the heart to read this? I guess I have to. I am a professional, after all. Let's dig in:

The largest banks are larger today than when Obama took office and are returning to the level of profits they were making before the depths of the financial crisis in 2008, according to government data. Wall Street firms—either independent companies or the high-flying trading arms of banks—are doing even better. They've made more profit in the first 2½ years of the Obama administration than they did during the entire Bush administration, industry data show.

…A recent study by two professors at the University of Michigan found that banks, instead of significantly increasing lending after being bailed out, used taxpayer money to invest in risky securities to profit from short-term price movements. The study found that bailed-out banks increased their returns by nearly 10 percent as a result.

…"The too-big-to-fail banks got bigger profits and avoided failure because of trillions of dollars of loans directly from the Federal Reserve," said Linus Wilson, assistant professor of finance at University of Louisiana at Lafayette. "Today their profits are boosted by lower borrowing costs because their managers and creditors expect a Fed lifeline when markets get jittery."

Banks have also benefited from the massive increase during the recession in unemployment insurance, which is a joint federal and state program. Increasingly, banks offer debit cards to the unemployed to collect their benefits. These debit cards carry a range of fees that bolster bank bottom lines.

That's it. I can't go on. Read the rest yourself if you have the stomach for it.

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Chart of the Day: The Dying of the American Dream

| Sun Nov. 6, 2011 11:57 AM EST

Jared Bernstein directs us to Katharine Bradbury of the Boston Fed, who has done a longitudinal study of income mobility over the past four decades and concludes that Horatio Alger is slowly dying. Today, the rich are mostly staying rich and the poor are mostly staying poor:

By most measures, mobility is lower in more recent periods (1995–2005) than in the late seventies and the eighties (the 1977–1987 or 1981–1991 periods). Comparing results based on pre-government income suggests that an increasingly redistributive tax and transfer system contributed to rising mobility into the 1980s, but that its impact has since waned. Overall, the evidence indicates that over the 1969-to-2006 time span, family income mobility across the distribution decreased, families’ later-year incomes increasingly depended on their starting place, and the distribution of families’ lifetime incomes became less equal.

The study tracks the income of families over a ten-year period, and includes only families that were both independent (i.e., not living with their parents) and not retired for each ten-year period under study. Income is also adjusted for family size. Putting this study together with everything else we know, we can see a grand total of four things happening during the 35-year period from 1970 to 2005:

  1. Income inequality is increasing: the rich are much, much richer today than they used to be.
  2. To deal with this, tax rates on the rich have gone down.
  3. Income mobility is decreasing. If you start out poor or middle class, you're more likely to stay there than in the past.
  4. To deal with this, government assistance to the poor has gone down.

Jared suspects that these things are correlated. I suspect he's right. "The relationship between income concentration and political power is one important link," he says. In other words, more income concentration among the rich has given them more political clout, and that's allowed them to influence public policy in ways that encourage even more income concentration among the rich.

I'd add to that another dynamic: as the poor increasingly stay poor, the public starts to view them not as victims of larger trends, but as a permanent underclass that's not willing to work hard enough to better themselves. And who wants to see their tax dollars spent to support a bunch of shiftless layabouts?

The chart below tells the main story. The number of poor families who move up at all has decreased over the past 35 years, and the number who have moved up more than trivially has decreased even more. The American Dream isn't what it used to be.

Quote of the Day: Blog Fodder as Life Motivation

| Sat Nov. 5, 2011 10:14 AM EDT

From Andrew Sprung, after screeching to a halt in the middle of reading a book review because he thought — incorrectly, it turns out — that he might have caught an error:

This leads me to confront my own bias, which was toward finding a flaw, as in this post. You could call it predatory reading, a reflex triggered or neutralized by all kinds of confirmation biases as I work my way down a page. Not to mention the miracle of internet search and access — its wow factor may be getting long in the tooth, but it's still operative!

It's true. My reading these days is far more directed than in the past. If it doesn't seem likely to provide fodder for a blog post, I skim right past it. If it not only seems like potential blog material, but might even contain an error that I can glom onto, then Eureka!

But congratulations to Andrew for not finding an error and getting a post out of it anyway. That's professionalism, my friends.

Friday iCat Blogging - 4 November 2011

| Fri Nov. 4, 2011 2:02 PM EDT

Today is a very special day of catblogging: these are the first pictures taken with my shiny new iPhone 4s. It's true: I've given in to the dark side. I don't actually have any real use for a smartphone, but a little while back Marian decided she wanted an iPhone, and when we got to the store I somehow got talked into getting one too. That's just the kind of sheep I am.

So, anyway, I've been busy trying to figure out how to use the thing. Setup was a pain in the ass, not really due to anything inherent in the iPhone, but because I could only transfer the contacts from my old phone by downloading a free Verizon app. Unfortunately, even free apps require an App Store account, and setting that up Did. Not. Go. Well. Eventually, after a fair amount of swearing, I gave up and slunk back to my computer to do some work, where I discovered a waiting email telling me to click a link to verify my account. Naturally, the account creation process hadn't told me to expect this, and since email wasn't set up on the phone I didn't know anything was waiting for me. Once I clicked the link, though, my account was activated, I downloaded the app, and I was up and running. Hooray! So far everything seems to be functioning fine except for the battery, which sucks. But I understand that Apple is aware of this problem and has promised a fix real soon now.

Oh — and Siri. It doesn't work quite as well as the commercials lead you to believe, does it? This was my first conversation with Siri:

Call Marian.
I don't see Mariam in your address book.
Call Marian.
I don't see Mariott in your address book.
Call Marian.
I don't see Mary in your address book.
Call Marian.
I don't see Mariana in your address book.
Call Marian.
Which Marian? Marian Drum Work or Marian Drum Cell?
Marian Drum Work.
I don't see Mary and Drum Work in your address book.  

So even on the fifth try, when it finally recognized the word "Marian" and there were only two options for my response, it still translated my sounds literally instead of figuring out which address book entry they were closest to. And later, when I told it to "Call Marc," it told me that it couldn't find "Mark" in my address book. So this is going to take some work. (On the bright side, when I asked it for the weather in San Francisco, it popped right up.)

Anyway, that's that. Now it's time to figure out what nifty apps I should download. So far, all I have is a flashlight app, a barcode reading app, the Opera mini-browser, a Twitter reader, the New York Times, and the Economist. What else should I play with?

Mitt Romney Has a Medicare Plan

| Fri Nov. 4, 2011 1:53 PM EDT

Sarah Kliff reports that Mitt Romney has provided us with a bit more detail about how he'd reform Medicare:

The plan has two major things in common with the Medicare reforms that House budget chairman Paul Ryan (R-Wis.) proposed earlier this year. First, it would provide seniors with a specified amount of money to purchase health benefits. The level of benefits would depend on the recipient’s income, as those with lower incomes would get more money to spend on Medicare. Second, it would allow private carriers into the Medicare space with two key requirements: They would have to provide a set of benefits comparable to the entitlement program and offer coverage to any senior who applied. The argument is that prices would drop as Medicare plans compete for business.

But there’s one big difference between the Ryan and Romney plans: While Ryan would have phased out traditional Medicare completely, Romney would leave it as an option for seniors. “We’d allows providers to compete to provide the best care at lowest cost,” a Romney campaign official told reporters Friday. “One of the choices will be to remain in traditional Medicare.”

Hmmm. That sure sounds a lot like a combination of traditional Medicare and Medicare Advantage. In other words, exactly what we have today. Romney apparently hasn't decided how he'd set premium support for the private plans,1 but that hardly matters if you keep the traditional program around. Premiums either keep up enough to compete with traditional Medicare, or else everyone eventually migrates to traditional Medicare and the private plans go out of business. So I guess I don't really get this.

Romney also wants to raise the Medicare eligibility age to 67. This would be extremely unpopular and it wouldn't really do much to lower Medicare costs. So I think we can safely consider that a nonstarter.

Other than that, Romney's plan sounds great.

1The big criticism of Paul Ryan's premium support plan was that the size of the voucher grew so slowly that within a couple of decades seniors would be paying huge amounts out of pocket for medical care. So as wonky as it sounds, the precise mechanism by which premium supports are calculated each year is really, really important.

Could the Fed Have Saved Us All?

| Fri Nov. 4, 2011 12:47 PM EDT

Matt Yglesias:

I really liked Ezra Klein’s review of Ron Suskind’s book in the NYRB for its wholesome focus on monetary policy errors as the most plausible way the Obama administration could have made things better. Nobody was stopping them from replacing Ben Bernanke with someone more committed to full employment, and it seems likely that they could have filled two existing Board of Governors vacancies with people more committed to full employment. If the chairman and those two empty seats all felt the way Charles Evans feels, we’d be in much better shape today. None of that is to deny that fiscal policy could have been better, but as Klein says the key blocking points on fiscal policy were in Congress.

I liked Ezra's review too, but I'm not sure its focus on monetary policy was really such a strong point. I was opposed to the reappointment of Bernanke from the start, but even so, I really have to ask how likely it is that Obama could have seriously affected Fed policy if he'd only tried harder. A more activist chairman certainly would have helped, and a couple of additional activist board members would have helped too. But even assuming that the Senate would have approved those hypothetically activist Fed members, that's still only three out of 12 members of the FOMC, the committee that sets monetary policy. What's more, the three board members Obama has appointed (and gotten confirmed) haven't exactly been champing at the bit to launch money-laden helicopters over the heartland.

In other words, it strikes me that there were several problems here. The first really is Obama himself: he just isn't inclined to nominate outspoken expansionists to the Fed board. The second is the reality of the applicant pool: there's a limited supply of the kind of person who can plausibly serve on the Fed, and most of them tend to fall within a fairly narrow band of mainstream economic thinking from center left to center right. Third, Congress is still a bottleneck. The Senate will approve moderately liberal folks like Janet Yellen and Daniel Tarullo, but not anyone much further to the left. And fourth, even if Obama had miraculously managed to stack the board with more activist lefties, you still have the five regional bank presidents on the FOMC to contend with. And they tend to be pretty conservative on average.

Maybe I'm protesting too much here, since I'm on board with the need for better Fed governors and I'm on board with the importance of monetary policy. But I think there's always a tendency to be too idealistic when you think about counterfactuals. Even if Obama had been on the side of the angels here, a lot of things would have had to go precisely right for us to end up with a significantly more expansionist Fed than the one we have. And I'm not sure why this would have been more likely to go precisely right than any of the other things that actually did happen and ran into the buzzsaw of real-world politics.

POSTSCRIPT: One caveat: supposedly, it's traditional for the entire board of governors plus the New York Fed president to vote with the chairman. In other words, the chairman always has eight votes out of 12 and carries the day. If this is true — and knowledgeable feedback would be welcome on this — then nothing mattered except appointing a better Fed chairman than Bernanke. That's a far more feasible thing for Obama to have done.

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Europe Sneezes, We Catch a Cold

| Fri Nov. 4, 2011 11:55 AM EDT

Real Time Economics reports on the latest forecast for Europe's economy:

J.P.Morgan was among the first European banks to forecast a euro zone recession, meaning two-straight quarter of economic contraction, back in September. It was supposed to be a modest one, with GDP falling just 0.8% from its peak.

It now looks like things will get even worse. “We now believe that the recession will be deeper and longer lasting, and we are making forecast changes to show a peak to trough move in the level of GDP of just over 1%, with the recession lasting through the third quarter of next year. The risks around this forecast are for a deeper and even longer lasting contraction,” the bank said in its latest research note.

Urk. I'm not even sure what kind of comment to offer on this. But it strikes me as unrealistic to think that Europe can fall into a recession — possibly a deep one — and the United States won't be seriously affected. I know we have an overhang of demand for cars and houses, and that's going to spur more spending, but a recession in Europe is going to affect jobs in America, which affects incomes in America, which means there's no money for cars and houses no matter how much overhang there is.

On the other hand, maybe there's a cheerier scenario (for America, not Europe). It's possible, I suppose, that a recession in Europe will drive down demand for oil, which in turn will lower the price of gasoline, which in turn might stimulate the U.S. economy more than Europe's recession hurts it. Somebody somewhere must have modeled this, right?

The Cost of Tribalism

| Fri Nov. 4, 2011 11:12 AM EDT

Will Wilkinson takes on the conventional wisdom that conservatives think people are responsible for themselves, while liberals think that luck and social forces play a big role in people's fates:

I agree that many people are in dire straits and suffering for absolutely no fault of their own, and that policies ought to be in place to provide meaningful material assistance. Still, I find I want an ethos of effort and individual responsibility to prevail....And this is why I have a hard time seeing eye to eye with some progressives. Progressives are sincerely inclined to impersonal, socio-cultural explanations of success and failure, but I think they're also generally of the opinion that an ethos of initiative, hard work, and individual responsibility will impede the political will to offer assistance to those who ought to get it. I'm not sure that they're wrong. After all, those who tend to oppose progressive transfers tend to do so partly on the basis of their disbelief in the faultlessness of the needy. In any case, it seems to me progressives' deep-seated opposition to victim-blaming and by-the-bootstraps perorations helps keep a lot of suffering people from getting the other, non-material part of what they really need: encouragement to meet the social expectation that they will continue supplying effort on their own behalf, even if that hasn't worked out well so far.

Obviously there are lots of different kinds of lefties, and they have lots of different beliefs. And I don't have an argument with the notion that lefties place more emphasis on the role of luck and social conditions in life outcomes than conservatives do. But seriously: is there really a sizeable chunk of the left that believes an "ethos of initiative, hard work, and individual responsibility" is an actively bad thing?

I don't think so. It's possible, of course, that the segment of the left that believes this is small but loud, but I don't even really believe that either. If anything, the leftiest precincts of the left are mostly shut out of mainstream discourse. They certainly don't dominate it.

Anyway, two comments on this. First, I think this kind of post suggests the dangers of spending too much time on the web, where the loudest and most extreme voices actually do have a disproportionate influence sometimes. That can lead you to believe that their beliefs are far more widespread in the real world than they really are. Second, as Will suggests, to the extent that he's correct it's because of the almost insane levels of partisanship and tribalism that we see in politics today. Speaking just for myself, there are very definitely times when my preferred policy position is some kind of melding of left and right (i.e., social forces are important and an ethos of personal responsibility is important), but I'm not really willing to say so because the American right has become so insane that it simply won't lead to anything constructive. It will just be viewed as a preemptive compromise that's immediately seized upon to move the conversation even further to the right. Supporting compromise positions only makes sense when that might actually lead to both sides compromising.  

Anytime a dominant narrative becomes hardnosed and extreme — as American conservativism has — it starts to feel like even the notion of a competing narrative has been lost. When that happens, those who believe in that competing narrative feel like the best use of their time is not to provide some kind of nuanced argument, but simply to take whatever chance they have to get a bit of airtime for their side. I think that's what the last decade has done to a lot of center lefties, especially on economic issues. Very few of us, I think, have any problem with an ethos of personal responsibility. But the dominant narrative in the post-Reagan era has so thoroughly turned a blind eye to the power of malign social and economic forces that we feel like we simply have to take every opportunity to make them part of the conversation again. What's ironic, of course, is that those malign forces really are both economic (emphasized by the left) and social (emphasized by the right), which means that in a lot of ways conservatives lose out from this dynamic just as much as liberals. Tribalism makes fools of us all.

The Mystery of the Rich

| Fri Nov. 4, 2011 9:59 AM EDT

From Brad DeLong:

The 1% have an interest in full employment, high capacity utilization, and general prosperity just as the rest of us do....The 1% have a strong material interest in the passage of the American Jobs Act. In acting to block it, the Republicans — and Senator Nelson — are betraying the interests of their contributors in the top 1% as much as they are betraying the interests of their constituents.

But here's the thing: this has been true all along. Hell, it's been true for the past decade. Sure, the rich want low taxes for themselves and they want income inequality to rise so they get most of the returns to economic growth. That's in their own self-interest. But they also want — or should want — an end to the recession and a thriving economy, and they should be pressing both Congress and the Fed to do everything possible to make that happen. But they aren't.

Is it just pure blinkered ideology? Ignorance and stupidity? Or do they really not care as long as the brightwork on their yachts stays polished? It is a mystery.

Solar Power's Good News

| Fri Nov. 4, 2011 4:55 AM EDT

The past couple of months have been grim ones for anybody who favors federal support of renewable energy. First, Solyndra declared bankruptcy, providing gleeful conservative skeptics with weeks of anti-solar headlines. Then this week Beacon Power, a flywheel storage company, followed Solyndra into bankruptcy, and an Energy Department watchdog told Congress that the DOE had been ill-equipped to quickly distribute the $35 billion in new funding it got from the 2009 stimulus bill.

So today let's take a break from the gloom and look instead at some good news on the federally funded renewable power front. A couple of weeks ago, the National Renewable Energy Laboratory (NREL) announced a "game changing" new development in solar panel fabrication. It's not sexy: It's called the Optical Cavity Furnace, and it's a new way of manufacturing solar cells that uses optics rather than radiant or infrared heat. There are a couple of big benefits to this new technology.

First, NREL says the new furnace uses around half the energy of traditional manufacturing processes, costs 25 to 50 percent less, and has faster process times. This means that solar panels can be made both faster and cheaper than before.

Second, because its optical technology is more precise, the solar cells it creates have a higher efficiency.  "Our calculations show that some material that is at 16 percent efficiency now is capable of reaching 20 percent if we take advantage of these photonic effects," NREL principal engineer Bhushan Sopori said. "That's huge." Lauren Simenauer and Sean Pool explain what this means:

The White House has challenged the solar industry to produce clean electricity at $1 per watt. It has also set a national goal to achieve 80 percent clean energy use by 2035…The good news is that researchers are racing toward that goal at an impressive rate.

In fact, the cost of photovoltaic, or PV, cells had already fallen 50 percent in the past two years prior to the DOE announcement. A June 2011 projection predicted PV module prices would hit the goal of $1 per watt by 2013; now the finish line of the proverbial "race to the bottom" seems even more imminent.

In a way, this is the quiet silver lining behind Solyndra's highly publicized failure. Solyndra's goal was to produce cheaper, better solar power, and it failed because other companies beat them to the punch. But this is good news. Whether it's Solyndra or someone else, what's important is that stiff competition in the solar sector is producing dramatic gains in solar efficiency. Ramez Naam provides the numbers:

Over the last 30 years, researchers have watched as the price of capturing solar energy has dropped exponentially. There's now frequent talk of a "Moore's law" in solar energy. In computing, Moore's law dictates that the number of components that can be placed on a chip doubles every 18 months…If similar dynamics worked in solar power technology, then we would eventually have the solar equivalent of an iPhone—incredibly cheap, mass distributed energy technology that was many times more effective than the giant and centralized technologies it was born from.

…Averaged over 30 years, the trend is for an annual 7 percent reduction in the dollars per watt of solar photovoltaic cells…If the 7 percent decline in costs continues (and 2010 and 2011 both look likely to beat that number), then in 20 years the cost per watt of PV cells will be just over 50 cents…The cost of solar, in the average location in the U.S., will cross the current average retail electricity price of 12 cents per kilowatt hour in around 2020, or 9 years from now…10 years later, in 2030, solar electricity is likely to cost half what coal electricity does today. Solar capacity is being built out at an exponential pace already. When the prices become so much more favorable than those of alternate energy sources, that pace will only accelerate.

Solar power isn't the answer to all our energy needs. No matter how cheap it gets, we'll still probably need nukes or natural gas to provide baseload power. But even if solar can only provide electricity during daylight hours — and improved storage technology may change even that in the future—daylight hours are when electricity use is highest. Combine cheap solar with hydro, wind, and, maybe, biofuels, and the need for fossil fuels could diminish dramatically over the next few decades. What's more, the need for the worst of the fossil fuels, coal, could diminish even more.

All that depends a lot on how serious we get about this, but it depends even more on solar power getting cheaper than coal. Federally funded basic research, like NREL's work on the Optical Cavity Furnace, is a key part of that.