Kevin Drum - November 2011

Newt Gingrich is Now Up to Bat

| Mon Nov. 14, 2011 7:04 PM EST

Newt Gingrich is the latest anti-Romney, so I guess that means we all have to pretend to take him seriously for the next few weeks. Fine. Here is Aaron Blake telling us that Gingrich has nothing but contempt for the debt reduction supercommittee:

Gingrich also discussed his own competing debt-reduction plan. Included in the plan is expanded energy exploration, giving states the authority to determine welfare eligibility, expanding research to search for cures to diseases such as Alzheimer’s, and instituting the “Lean Six Sigma” management program in the federal government.

I estimate that all of these things put together would reduce the federal deficit by.....hardly anything. Hell, even Motorola, which invented the Six Sigma program, only estimates that it's saved about $1 billion a year on $30 billion in revenues. That's about 3%, which sounds almost worthwhile, but it could only conceivably apply to about two-thirds of government, which makes it about 2%. And it's almost certainly wildly inflated even at that, so figure 1%. The rest of his stuff might add another 1% if we were really lucky.

So what else would he do? I headed over to his website to find out, but it turns out that Newt is such a cosmic thinker that he doesn't bother his gray matter with petty details. Instead, he wants you to bother your gray matter with the petty details:

The 21st Century Contract with America is so large and covers so many changes necessary to get America back on the right track that it can't possibly be developed by a small group. Instead, it will be developed with the help and support of the American people. 

So there you have it. Newt has provided the yeasty ideas to get you started, and now it's up to you to come up with a few trillion in savings. Just be sure none of your ideas are stupid, because Newt really, really hates stupid ideas. What's more, Blake informs us that Gingrich "has demonstrated a skilled grasp of policy minutiae," and since Blake is an objective hard news reporter, I guess it must be true. So please offer Newt only your very finest ideas so he can cut-and-paste a plan of his own that will blow everyone's mind. I can't wait.

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Europe's Bank Run Continuing to Get Worse

| Mon Nov. 14, 2011 4:01 PM EST

This chart comes via Felix Salmon from an Exane report on Europe's banking system. Basically, what it shows is that wholesale funding between European banks has dried up. This is, needless to say, a big problem: "The way the banking sector works," he explains, "banks have to be constantly lending to each other: in nearly every country in Europe, the amount of bank debt coming due every day is higher than the total amount of bank capital in the system."

The whole thing is a bit mysterious, though, as bank runs so often are. In the United States in 2008, the same thing happened both to specific banks that were in trouble (Bear Stearns, Lehman Brothers) and to the banking system in general. But the reason was fairly obvious: American banks held huge portfolios of subprime toxic waste, but no one knew exactly who held what or how much it might be worth. This made the entire banking sector suspect, and wholesale funding dried up systemwide.

Europe's case is different. Their problem right now is sovereign debt, and that's much more quantifiable. The value of some sovereign debt (Greece, Italy, etc.) is indeed in doubt, but at least we have a pretty good idea of which banks hold how much debt. So even if you assume a substantial markdown of sovereign debt, you can still have a pretty good idea of which banks are in trouble and which ones are basically fine. So why has wholesale funding plummeted throughout the entire banking system?

This is something I haven't quite sussed out yet. But in one sense it doesn't matter: panic is panic, and if banks are in the middle of a run — which is essentially what a wholesale funding cutoff is — then somebody has to step in and act as lender of last resort. Unfortunately, Europe no longer has anybody to take up this role:

This is a serious structural issue with the way that the European monetary system was constructed: the ECB is tasked only with guarding inflation, and not with ensuring the health of the banking system. Individual national central banks are meant to do that. But they can’t print money — only the ECB can. So when there’s a liquidity crisis, no one’s able to step in and solve it.

....But it’s liquidity crises which are the most violent, and which can kill a financial system — indeed, an entire economy — more or less overnight. Someone in Europe needs to come up with a plan for how to address the current crisis — now. Because if it gets any worse, it could well be too late.

Tick tick tick.

Is Barack Obama a Lousy Manager?

| Mon Nov. 14, 2011 2:43 PM EST

Matt Yglesias:

I have this sense that when history looks back on 2009-2010 in American political history, it’s going to come away with the conclusion that a larger-than-currently-understood share of the problems had to do with poor handling of routine managerial issues. You had a new president who didn’t have a strong management background. You had a new chief of staff who, likewise, had a lot of DC experience but not a ton of management experience. [Etc. etc.]

OK, but what routine management problems are we talking about? I've read plenty of stories about arguments among Obama's top staffers (Geithner vs. Romer, Summers vs. everybody), but that all sounds pretty normal for a presidential administration and Obama seems to have had a pretty good reputation for listening to the arguments and resolving them fairly crisply. I've heard lots of criticism of the decisions Obama has made (public option, lack of housing policy), but that's also par for the course. I've read about occasional specific screwups (poor handling of cap-and-trade, slow response to the Deep Horizon blowout), but not lots of them. And I've read some criticisms of his strategic direction (focusing on deficit reduction too soon, retaining Bush national security policies). But these are all different from day-to-day management issues.

In any case, none of this strikes me as anything more than extremely normal. Overall, my sense is that when it comes to routine management, the Obama White House is clearly better than either the Carter or Clinton administrations in their first couple of years, and probably better than the Bush Jr. administration too. I guess Ron Suskind disagrees, but is it a widespread belief among DC insiders that the Obama White House has been an especially chaotic scene? That doesn't really gibe with my sense.

FWIW, my guess is that when history looks back on 2009-10, it's going to come away with two quite different conclusions. First, that Obama was more productive than his contemporaries gave him credit for. Second, the global financial meltdown was way worse than initially thought, and the response of leaders throughout the world was woefully inadequate. I'm willing to be persuaded otherwise, but I suspect that Oval Office managerial prowess won't even be a footnote.

Raw Data: Who's Working?

| Mon Nov. 14, 2011 2:07 PM EST

Mike Konczal points out today that youth unemployment in the United States is nearly as high as it is in all those Middle Eastern countries where it's considered a "time bomb" of sorts. "Given this," he asks, "how could we ever say youth unemployment in the United States’ Lesser Depression isn’t a 'time-bomb'?" He then posts a chart of the employment-population ratio of 16-24 year olds that "floored" him. As well it should: it's been on a steep downward trend ever since 1990.

But it's not just young people, though they've done worse than older cohorts. Here's the employment-population ratio for everyone over the past 30 years. The trend for men stayed pretty steady through the 80s and 90s, while women joined the labor force in increasing numbers. Then the bottom fell out. The employment ratio for both sexes fell during the 2001 recession, never recovered during the Bush era, and then plummeted again in 2008. The Great Recession has made all of this far more visible, but the problem didn't really start in 2008. It started in 2000. The U.S labor market has been stagnant for over a decade now.

Rhein II and the Tyranny of Time

| Mon Nov. 14, 2011 12:09 PM EST

There's been much talk recently about the record-shattering $4.3 million paid on Thursday for Andreas Gursky’s photograph Rhein II. Via Ezra Klein, Florence Waters takes a crack at explaining why it was worth it:

It could be a long time before a photograph comes along that will top Gursky’s print. This image is a vibrant, beautiful and memorable — I should say unforgettable — contemporary twist on Germany’s famed genre and favourite theme: the romantic landscape, and man’s relationship with nature.

But it is more than that. For all its apparent simplicity, the photograph is a statement of dedication to its craft. The late 1980s, when Gursky shot to attention, was a time when photography was first entering gallery spaces, and photographs were taking their place alongside paintings. Photography “as art”, at the time, was still brave and new, and the simplicity of this image shows a great deal of confidence in its effectiveness and potential for creating atmospheric, hyper-real scenarios that in turn teach us to see — and read — the world around us anew. The scale, attention to colour and form of his photography can be read as a deliberate challenge to painting's status as a higher art form. On top of that, Gursky’s images are extraordinary technical accomplishments, which take months to set up in advance, and require a lot of digital doctoring to get just right.

Well, OK. This is the kind of art-speak that drives me crazy, but I simply don't have an eye for art or enough background to allow me to make a judgment. So I'll just keep my trap shut on the merits of the thing.

But I do have another question. If this photograph was bought purely because the buyer thinks it will rise in value, then fine. Maybe it will. But if it was purchased because, as Waters says, it was groundbreaking enough to be worth $4.3 million, I have to wonder if any piece of artwork so contemporary can legitimately be considered so groundbreaking. Rhein II was created in 1999, which makes it barely a decade old. Plenty of other artwork that new or newer has sold for as much or more. But should it? Isn't there still some merit in allowing a bit of time to pass before we declare pieces of art so exceptional?

I guess that's antediluvian thinking. After all, if Gursky is today's Jackson Pollock, then there's no time to waste. Waiting even 20 or 30 years would mean missing out on the next Jackson Pollock. Hell, waiting two or three years might be long enough. And yet, something about this still seems out of kilter. Any comments from art lovers?

Making Hard Work Fashionable Again

| Mon Nov. 14, 2011 10:12 AM EST

Tyler Cowen writes this weekend that he's temperamentally attached to the traditionalist vision of hard work leading to great wealth. But, he admits, that vision is "showing some wear and tear," which is why the Occupy Wall Street movement is attracting so much support.

Tyler notes three specific problems with this vision: It doesn't distinguish between wealth gained from real production (Model Ts, iPods) and wealth gained from lucrative but socially worthless activity (creating subprime CDOs); it's been undermined by bellicose conservatives who insist on risibly pro-rich policies even when there's no evidence they work; and it's not clear that this vision actually motivates a real-life dedication to responsibility and hard work as much as it used to.

Tyler's first two points are ones that are frequent subjects on this blog. But his third point rings true too, and not just because there's been a steady change in perception, though it's that too. It's the fact that hard work pays off very, very differently for different classes of people these days.

Take me. When I graduated from college and joined the business world, it was clear that hard work could earn me a lot of money. It would mean promotions, it would mean job offers from other companies, it would mean stock options, and more. And it did. I was a tech writer first, then a product manager, then a director of marketing, then a VP of marketing, and finally a divisional manager. My income multiplied nearly 10x over the course of 15 years, and it would have multiplied more if I'd had the ambition to stay where I was and keep moving up the ladder. (Instead I moved into the lucrative world of political blogging.)

But if you work in, say, an Amazon fulfillment warehouse, what does hard work get you? Not nothing, certainly. You probably get to keep your job, for starters. You might get small but steady raises. You might even rise into a supervisory position. Compared to a clock puncher, maybe you'll make 30 or 40 percent more. If you're really lucky, half again as much. And that's it. With rare exceptions, that's about the best you can hope for.

This has always been true, but it's even more true now than in the past. College graduates—the kind who write op-eds and blog posts about the virtue of hard work—are sincere in their promotion of an ethic of work. And they aren't wrong. But they do overrate how much difference it makes for most people. Especially in an era where working- and middle-class wages have been stagnant for over a decade, the rest of the workforce just isn't buying the Horatio Alger story anymore: Working hard barely even gets them a small annual raise these days, let alone the chance for significantly higher wages. So it only barely seems worth it. That's why I suspect Tyler is wrong to say this:

In the future, complaints about income inequality are likely to grow and conservatives and libertarians won’t have all the answers. Nonetheless, higher income inequality will increase the appeal of traditional mores—of discipline and hard work—because they bolster one's chances of advancing economically. That means more people and especially more parents will yearn for a tough, pro-discipline and pro-wealth cultural revolution. And so they should.

It remains to be seen how many of us are up to its demands.

Upper-middle-class parents may well yearn for this. But then, they already do, in deed if not in word. For everyone else, increasing income inequality will likely have just the opposite effect. As those Horatio Alger tales seem increasingly fanciful, and as dreams of even modest wealth become ever more obviously out of reach to the average person, it's going to get harder and harder to keep up the pretense that discipline and hard work are really the key to great wealth for anyone not in the upper middle class to begin with.

There's no easy answer to this. The world is going to keep getting more complex, and the rewards to education and skills are going to keep increasing. But that doesn't mean there's nothing we can do. Maintaining the conviction that hard work matters is obviously important. But we live in a media-saturated age where making every kid read "A Message to Garcia" is nowhere near enough to accomplish that. The reality of the world is simply too hard to camouflage, which means that if we want working- and middle-class high school grads to believe in the vision of hard work and wealth, real life has to match the vision at least tolerably well. This in turn means reducing the amount of absurdly undeserved wealth that goes to casino operators on Wall Street. Ditto for the wildly disproportionate salaries paid to CEOs. It means that even if most middle-class workers are never going to become rich, they should at least see their wages rise steadily through their lifetimes. It means that politicians have to stop handing out massive goodies to the rich for no good reason, and they have to stop insisting that these goodies be paid for by raiding the "unaffordable" benefits of the middle class.

None of this is easy. But the truth is that it's increasingly impossible to sell people transparently self-promoting fairy tales that plainly don't reflect how the real world works. If you want them to believe that hard work and discipline are important, then hard work and discipline have to really be important. Not just modestly helpful. Not mere drops compared to the obviously undeserved piles of so many of the superrich. If we want people to believe, we have to believe too. We have to believe that America should be a country where everyone prospers, not just the cognitive elite and the super lucky. Until we all believe this—until conservatives believe this—the notions of responsibility and discipline that conservatives talk about so much are probably going to continue fading. In recent decades they've simply dedicated too much of their lives and too much of their energy to patent unfairness to be surprised any longer that belief in being fairly rewarded is on the wane.

That's the lesson of Occupy Wall Street.

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In Praise of Simple Regulations

| Sun Nov. 13, 2011 9:06 PM EST

My Friday column on the way that corporations lobby for complex regulations because that makes them easier to evade drew a couple of interesting conservative responses. First up is National Review's Veronique de Rugy, who agrees that corporations do indeed engage in this behavior:

Obviously, this flies in the face of complaints about complexity and uncertainty brought about by the regulatory regime. But we often forget the other side of this equation. The fact that these companies manage to get what they want from regulators also flies in the face of the notion of independent regulatory agencies. It takes two to tango: Some regulators are more than happy to grant exemptions and special rules to given companies that will benefit from the resulting complexity.

Unfortunately, Drum seems to think that this means we shouldn’t take talk about regulatory complexity seriously.

No no no! It's true that I think this problem gets demagogued too often: when you live in a big, complex society — 21st century America, for example — you're inevitably going to have some fairly complex rules. That's just reality, and hauling out a huge stack of agency regs in a wheelbarrow or griping about how many pages Obamacare uses up is silliness. If you think a proposed reg has unnecessary complexity, you should be able to point to the actual complexity you oppose and propose a substitute that's simpler but still accomplishes a similar end. If all you want to do is eliminate regulations en masse, then you're just engaged in special pleading for the interests of the business community.  

That said, the law shouldn't always pander to the complexity of corporate life. If Wall Street creates financial instruments so complex and opaque that no one knows what's inside them, that's no reason to take seriously complaints that blunt regulations will wipe out Wall Street's ability to do this. If a simple rule prevents things from getting too complex, that's a double win.

More broadly, de Rugy and other conservatives are right that regulatory capture is a big problem. My beef with them is that this usually becomes little more than an all-purpose excuse to insist that the corporations hardly need to be regulated at all. I take it to mean something quite different: (a) market capitalism needs effective rules to work well, and we should always try to keep those rules as simple as possible (but no simpler!); (b) we should do our best to set up regulatory structures that are institutionally independent from the sectors they regulate; and (c) we have to accept that nothing is either perfect or permanent. Regulatory capture will always be with us, institutional independence will always erode over time, and both unceasing vigilance and periodic pruning are always going to be necessary.

Tim Carney and Rand Simberg bring up a different issue: the fact that regulatory complexity specifically benefits giant corporations. "This is why it's hard to reform ITAR [International Traffic in Arms Regulations]," tweets Simberg. "Boeing et al view it as barrier to entry. They can afford legal staff to deal with ITAR rules. Startups can't." Carney elaborates:

Drum gets very interesting when he comments: "Complex rules, conversely, are the meat and drink of $500-per-hour lawyers and whiz kid engineers. If the rules are complicated enough, smart lawyers can always find ways around them. And American corporations employ lots of smart lawyers...."

If you're anything like me, right now you're seeing the distinction that Drum is missing, and thus the real reason you sometimes find corporations loving regulatory complexity. Here's the distinction: Some businesses are bigger than others. Some businesses can afford to hire as their lobbyists the very staffers who wrote the bill whose implementation is now being hammered out. Some businesses can afford to hire $500-an-hour lawyers to navigate the rules.

Some businesses cannot.

So, if you're a big business, even if you don't like a law, you can be confident that you'll survive it better than your smaller competitors will. And that's one reason why the biggest businesses often favor regulation in the first place while smaller guys oppose it. I call it "The Overhead Smash."

Agreed! This shouldn't be overstated, since many regulations specifically exempt small businesses. But not all of them do, and unquestionably this creates barriers that small businesses sometimes just can't deal with. It's a real problem, but again, conservatives too often use it as an all-purpose cudgel to oppose all regulation, and that's where I get off the bus. However, I'd get back on if this was a real conversation about how to write sensible regulations that do what we want them to do and can be reasonably followed even by smallish businesses.

Unfortunately, I think that conversation is basically nonexistent these days. Most conservatives simply don't want to talk about it, preferring instead to mindlessly demonize all regulation using whatever criticism comes most easily to hand. Liberals of a certain stripe are more open to different regulatory approaches, but not all of them. Some are every bit as captive to big business interests as conservatives, while others are happy to throw as much sand in the gears as they can possibly get away with. There are lots of places where this creates pathological gridlock, and one of them is the intersection of environmental regs and infrastructure development. I don't have any specific recommendations in this area, but I can't be the only person on the left who thinks that it's just flatly too hard to build stuff in America these days. I don't want to cripple environmental regs, but they should be clear enough and reasonable enough that even large projects can go forward with a reasonable amount of overview and something less than Jarndyce v. Jarndyce levels of legal obstruction.

If we lived in a non-insane political environment, this is the kind of thing that I think could produce a fair amount of common ground between conservatives and liberals. Liberals aren't going to buy into libertarian notions that every regulation is a taking, but many of them are open to the idea that land use regulations are too frequently oppressive and damaging to urbanist growth agendas. Likewise, conservatives might not like intrusive and arguably ineffective business regs like Sarbanes-Oxley, but if they genuinely want to avoid bank bailouts in the future they should be open to the idea that market discipline isn't adequate on its own, but needs to be supplemented with simple and blunt rules that truly force banks to operate in less systemically risky ways. We're not going to reach Kumbaya land or anything, but there really ought to be ways to reach genuine compromises on some of these regulatory fronts.

Unfortunately, like the economist who assumes a can opener, this assumes a non-insane political environment. It's not at all clear if or when we're going to have one of those again. Until then, we can only dream.

We Have a Winner: Rick Perry and the Euro

| Sun Nov. 13, 2011 4:17 PM EST

Last night I posted the tail end of the Republican debate:

PELLEY: How do you prevent the European crisis from becoming a problem on Wall Street?

PERRY: Well, the French and the Germans have the economic forewithal to deal with this. They have the economy. When you think about the Euro and when it was established, it was done to be a competitor to the American dollar. They knew what they were doing. And now they find themselves with their overspending and-- and-- the sovereign debt being built up. And-- 

How, I asked, was Perry planning to finish this up when he got cut off? I believe that Rudy2Shoes is our winner:

"And now they find themselves with their overspending and-- and-- the sovereign debt being built up. And--"

....and then they, you know like Greece and Belljam and, oh, what's that other one, you know, umm, Oh yeah-- Bolivia, I had to kinda look at my diamond-studded Bulova watch a little there to remember that one...., but anyway, getting back to the Euro I just think, well, you know how they left Norway or Sweeden off of the map on the coin and that, well, just sorta made the whole Scandoid Peninsula look just like a big limp penis, so how are you gonna prop up that, that um, currency-- you see what I'm sayin? There just ain't no confidence in the euro bein' able to perform you see because even if you stimulate it there is a risk involved if it stays stimulated for more than 4 hours or somethin' like that, I ain't no ecommonist or nothin, but what has to hap... oooh, ooh, wait a minute..... ENERGY DEPARTMENT!! That's that other agency I would cut, yes indeed-- I bet ya'll thought i'd never think of that didn't ya? Yeah, Energy Department has to go right along with, um, um... oh the Tennessee Valley Authority and um, um oh let me look at my notes here.... oh can't seem to, um.. ah shucks that other agency--, you know the one, that one that is shaped like a boot....um... oh damn-- it's right on the tip of my tongue....

Congratulations, Rudy! Your reward is the admiration of your peers.

The Ultra-Orthodox Blight

| Sun Nov. 13, 2011 3:23 PM EST

There are all sorts of reasons that people like me, who are basically sympathetic to Israel but have never been hardcore partisans, have slowly felt our sympathies wane over time. A lot of the reasons are obvious, but some are a bit less so. The rise of fundamentalism is one of those less obvious ones, as this LA Times piece about the effect of haredim on women in Israel spells out:

Ultra-Orthodox leaders [...] insist that it is the secular and the liberal religious communities that are seeking to impose modern values and prevent the ultra-Orthodox, also known as haredim, from practicing a stricter form of Judaism. Those traditional values typically include restrictions on television and the Internet, modest dress codes and segregation of the sexes, which haredi leaders say is needed to protect women from sexual exploitation and men from temptation.

"Women walk down the street as though they are at the beach," said Rabbi Shmuel Pappenheim, a spokesman and leader for an umbrella group of ultra-Orthodox factions....The conflict is gaining intensity, he said, because of the rising influence and numbers of the haredi community, once a small, scattered minority that today numbers 1 million, about 15% of the population.

....As their political power grows, they are demanding more accommodation for their way of life, Pappenheim said. "We used to be a small minority fighting for survival," he said. "Now we are a huge minority. As the saying goes, with food comes more appetite."

There are plenty of legitimate reasons to dislike Muslim culture in the Middle East, especially its more conservative strains. Among them are its widespread embrace of sexism, theocracy, and intolerance. Watching Israel, once a beacon of modernism, slowly but steadily succumb to a similar set of pathologies is one of the more depressing sights in the world today.

The Rise and Fall of Moneyball

| Sun Nov. 13, 2011 2:41 PM EST

Simon Kuper talks to writer Michael Lewis and Oakland GM Billy Beane about the Moneyball phenomenon and how Lewis discovered it:

The Oakland A’s baseball team were routinely beating teams with several times their budget. Clearly they must be doing something clever. The pre-eminent business writer of our times came to visit. The A’s’ general manager [...] cautiously told Lewis how the A’s were using new statistics to find good players ignored by other clubs....Beane was increasingly letting his twentysomething Harvard-educated statistician Paul DePodesta choose players on his laptop.

....“Moneyball” is [] a phenomenon, which after changing baseball is now sweeping almost all ballgames, from British soccer to Australian rules football. And it’s a phenomenon that reaches beyond sport. With hindsight, what Lewis captures in his book—the triumph of the highly educated over the lesser educated—is exactly what happened in the American economy.

....A year after the book appeared, the Boston Red Sox, with the 30-year-old Yale graduate Theo Epstein as general manager, won the world series of 2004 using Moneyball methods. In 2007 the Red Sox won again. Other teams began hiring Epsteins and Beanes rather than clubbable ex-players. Last season only three of 30 GMs in the major leagues had played professional baseball, none of them very successfully. Beane has ended up restricting job opportunities in baseball for people from backgrounds like Beane’s....The New York Yankees recently hired 21 statisticians, Beane marvels.

All us college graduate types shouldn't get too smug, though. Those highly educated folks Kuper talks about are now mere front ends for Siri and Watson and their spawn, and soon they'll no longer be needed. But all those grizzled old scouts who were put out of work by the Moneyball revolution? They no longer evaluate talent, we're told, but are still needed "for their soft skills." Before long, that's the only thing any of us will be needed for.