Kevin Drum - January 2012

Jobless Claims Take a Tumble

| Thu Jan. 19, 2012 10:03 AM EST

We got some tentatively good news today:

The number of people seeking new unemployment benefits in the U.S. fell last week to the lowest level since April 2008, a signal that the labor market is continuing the improvement than began late last year. Initial jobless claims fell by 50,000 to a seasonally adjusted 352,000 in the week ended Jan. 14, the Labor Department said Thursday. The decline was the largest in a single week since Sept. 24, 2005.

It's only a single report, but it's consistent with other improving economic news. If Europe can avoid a complete implosion, perhaps soon we will all be Smithians. The chart below, stolen from Steve Benen, shows the long-term trend.

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Thursday Night is Popcorn Night

| Wed Jan. 18, 2012 9:59 PM EST

Marianne Gingrich, a woman who has said she could destroy Newt with a single interview, might have decided to do exactly that:

An ABC News executive tells The Associated Press that the network has interviewed Newt Gingrich's second wife and is likely to air the segment Thursday on "Nightline."

This should be good. You can tune in to the Republican debate tomorrow from 8-10 pm on CNN knowing that 90 minutes later you watch Brian Ross talk to Mrs. ex-Gingrich for half an hour in a possibly devastating interview. Everyone on the stage will know it too. That should certainly add a fillip of tension to things, shouldn't it?

Better Health Care Turns Out to Be Really, Really Hard

| Wed Jan. 18, 2012 3:27 PM EST

Today the CBO released a study of various demonstration programs designed to improve care and reduce costs for Medicare patients. One category of program, disease management and care coordination, attempts to get patients with chronic illnesses to understand their treatment better and take better care of themselves. The goal is to reduce hospital admissions. So how did that work out?

On average, the 34 care coordination and disease management programs had little or no effect on hospital admissions or regular Medicare spending…

Bad news! But maybe not. As the chart on the right shows, there was a very wide variance in the effectiveness of the programs. So while the average may have been zero, having lots of different programs allows us some insight into which ones worked and which ones didn't. For example:

The programs used nurses as care managers to educate patients about their chronic illnesses, encourage them to follow self-care regimens, monitor their health, and track whether they received recommended tests and treatments. In most programs, the care managers were not integrated into physicians’ practices, and their contact with patients was primarily by telephone. In some programs, however, the care managers either were employed in physicians’ officesHospital admissions fell by an average of 7 percent and regular Medicare spending declined by an average of 6 percent for programs in which care managers had substantial direct interactions with physicians. In contrast, there was no effect, on average, on hospital admissions or spending resulting from programs in which care managers had little or no direct interaction with physicians.

So perhaps we've learned something. These kinds of program can reduce costs, but it turns out that financial incentives didn't make much difference. What did make a difference was allowing the nurses doing the care coordination to spend a lot of time with the primary physicians.

Unfortunately, there's some additional bad news. First, even the programs that worked didn't reduce overall costs because their savings were less than the fees they were paid to implement the program in the first place. Second, it's not clear that outcomes improved much: "Although the programs increased the percentage of beneficiaries who reported being taught self-management skills, they had little or no effect on the percentage who reported that they were adhering to prescribed self-care regimens." Back to the drawing board.

Newt Gingrich, the Yacht Club Candidate

| Wed Jan. 18, 2012 1:18 PM EST

Was Newt Gingrich's comment about Barack Obama being a "food stamp president" a racist dog whistle? For chrissake. Of course it was. But I'm a little curious about why he's only now getting so much attention for it. Back in October 2010 Gingrich said that Democrats are "earning the title of the party of food stamps." In May 2011 he called Obama "the most successful food stamp president in American history" (and David Gregory called him out for using "coded racially-tinged language.") I don't know if it goes back even farther than that, but this has certainly been a well-honed applause line of his for at least the past year or so. It was no off-the-cuff zinger.

The World Bank's Worst Case

| Wed Jan. 18, 2012 12:32 PM EST

The World Bank is pessimistic. They've reduced their 2012 growth forecast for Europe by 2.1 percentage points and for other rich countries by about a point. But this is only their mildly pessimistic scenario, and it assumes that the crisis in the eurozone is reasonably well contained. But what happens if it isn't? Here you go:

In a second scenario (box table 4.2) the freezing up of credit is assumed to spread to two larger Euro Area economies (equal to around 30 percent of Euro Area GDP), generating similar declines in the GDP and imports of those economies. Repercussions to the Euro Area, global financial systems and precautionary savings are much larger because the shock is 6 times larger. Euro Area GDP falls by 6.0 percent relative to the baseline in 2013. GDP impacts for other high-income countries (-3.6 percent of GDP) and developing countries (-4.2 percent ) are less severe but still enough to push them into a deep recession. Overall, global trade falls by 2.6 percent (7.5 percent relative to baseline) and oil prices by 24 percent (5 percent for food).

So there you have it. If the eurozone crisis turns out to be worse than we think, growth in the EU will be nearly 6 points below their last forecast and growth in other rich countries — including us — would be more than 3 points below their last forecast. That's enough to send us skittering back into a recession regardless of whether our economic fundamentals are in good shape or not.

How likely is this? That's more a political question than an economic one, which makes it more than usually difficult to forecast. Against all odds, I still think that European leaders understand the stakes and will avoid the worst once they run out of all other choices. But I'm not sure what odds I'd put on that.

On Second Thought, Saudi Opinions About Oil Prices Might Matter After All

| Wed Jan. 18, 2012 11:59 AM EST

Yesterday I wrote that Saudi Arabia has very little spare oil production capacity, which means it also has very little ability to affect world oil prices. On Twitter, Ed Crooks of the Financial Times took issue with that, suggesting that Saudi Arabia has spare capacity of 2 million barrels per day, about what the Saudi oil minister says. (He actually claims 2.2 million barrels of immediate spare capacity and another 700,000 barrels that could be brought online in a few months.) Unfortunately, there's no way to resolve this definitively since the Saudis simply don't share enough information publicly to judge whether they're telling the truth. My own guess, not to put too fine a point on it, is that the Saudis are lying. They may have a million barrels a day of spare capacity right now (mostly in heavy crude), but I'd be surprised if it were much more than that.

I might be wrong about that, of course. Regardless, though, Stuart Staniford points out that Saudi Arabia still has pricing power, it's just that they don't have much power to move prices down. They do have the power to move prices up:

If you are betting on oil prices falling at the moment (for example if you judge that a European recession and a Chinese slowdown will put a crimp in demand), then you've got to be very aware that during the last recession Saudi Arabia (with a few key OPEC allies) cut production sharply at the end of 2008. After falling as low as $40 in the aftermath of the financial crisis, the Saudi production cuts brought them back to around $70 give or take — fairly consistent with the $75 that King Abdullah had said was a fair price in November 2008.

So, now, in betting against oil prices you'd have to worry that the one power Saudi Arabia does have is to make sure that oil prices don't go far under $100 for very long. Since Brent is about $110 as of this writing, that leaves a lot more room for it to increase than to decrease.

The point of the original Brad Plumer post that I linked to was that the Saudis (and some other OPEC countries) are now addicted to high prices and probably have an incentive to keep them up. And that's true. Even if they're mostly pumping flat out, they still have the ability to cut production if they think prices are falling too low. Given the leakiness of OPEC production "quotas" in recent years, it's not clear how long they could keep this up, but they could probably keep it up for a while. So if Saudi Arabia says it doesn't want oil prices to fall below $100, that might be meaningful after all. In my haste to pour scorn on the Saudi oil minister last night, I lost track of that.

(At the same time, when the Saudis say they can make up for any reductions in Iranian oil supply, I'd be very skeptical. Maybe they can, but I think the bulk of the evidence suggests that they simply don't have the production capacity they say they have. Hopefully we won't have to find out anytime soon.)

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Barack Obama and the Long Game

| Tue Jan. 17, 2012 11:19 PM EST

Is President Obama playing a "long game," as Andrew Sullivan says, or mostly just reacting to political realities, as I think? A Democratic staffer emails to take issue with me on one particular topic:

The big place where I think Sullivan is right and you’re wrong is on deficits/ jobs/ confrontationalism. After the 2010 elections, I think any spending whatsoever, on jobs or anything else, paid for or not, would have been literally laughed out of town and had Senate Democrats racing to the microphone to denounce it. Obama therefore dove into the deficit fight. It was virtually certain, regardless, that there were going to be long-term deficit cuts, and for that matter that House Republicans were not going to give in on revenue without major concessions. So Obama began a process that inch by inch, day by day, painted Republicans into a hated obstructionist corner, and in the end Obama basically gave up what he was going to have to give up all along.

The end result was that spending cuts happened, which I actually think in the long term there’s a sound progressive policy rationale for; they were backloaded so they wouldn’t hurt the economy in short term; the deficit debate was largely taken off the table; a half-trillion dollar stimulus package became a potent weapon rather than a laughable liability; and after years of Republicans obstruction without consequence they are suddenly paying a price for it every time and it has becoming a defining tenet of the Republican brand. As a result, Obama can bash the crap out of them while not sacrificing the mantle of being a guy who means what he says rather than being a cheap partisan.

Obama actually pivoted to talking about deficits a year earlier than this, during the 2010 State of the Union address, which was likely a mistake even if you buy this staffer's argument. I'm not entirely convinced myself, but he makes some good points that I thought were worth passing along.

Saudi Arabia's Opinion About the Price of Oil No Longer Matters

| Tue Jan. 17, 2012 9:00 PM EST

Brad Plumer reports that Saudi Arabian officials used to say they wanted oil prices to be around $75, but now they say they prefer $100. What's up with that?

In a word, spending. Over the past few years, the Saudi government has taken advantage of sky-high crude prices to spend lavishly on public works and social programs to stave off the unrest that’s capsizing parts of the Middle East. As a result, the country now needs prices of at least $80 per barrel to balance its budgets....It’s not just the Saudis, either. A 2011 report from the International Monetary Fund found that the “break-even” point for the world’s major oil producers has been rising at a shocking rate. Russia now needs crude prices at roughly $110 per barrel to shore up its finances. Iraq, Bahrain, Algeria, Iran and the United Arab Emirates all need prices between $80 and $100 per barrel.

This is a bit of a pet peeve of mine, so I'd like to offer an alternative explanation. Here it is: Neither the Saudis, nor anyone else, control the price of oil anymore. Saudi Arabia has very little spare capacity to speak of, and couldn't open the taps to bring the price of oil down even if it wanted to. So no matter what the price of oil is, that's approximately the price the Saudis say is fair. That way they don't have to admit that they no longer have the ability to seriously affect oil price movements.

This, by the way, is the same dynamic at work in OPEC meetings. They meet, they talk, and then they release a statement saying that they aren't going to increase production quotas because the current price is fair and "customers aren't asking for more oil." Well, of course they aren't. By definition, customers aren't asking for more oil as long as oil is selling at the market-clearing price. Which it is. Because if it's not, then the price goes up, and guess what? Markets clear and customers aren't asking for more oil. Nonetheless, this charade regularly gets played out anyway, because OPEC doesn't want to admit that their production quotas are mostly meaningless these days. With occasional exceptions (when the 2008-09 recession temporarily cratered oil demand, for example) OPEC countries are all pumping flat out and couldn't deliver much more oil if they tried.

Bottom line: be suspicious of any explanation that suggests OPEC or Saudi Arabia or anyone else "wants" oil prices to be at a particular level. There was a time when they really did, and when their opinions mattered. But that time is long gone.

President Romney vs. President Obama: The Cage Match

| Tue Jan. 17, 2012 6:34 PM EST

Karl Smith doesn't care if Mitt Romney is a liar, a cad, or a prick. He just wants to know what concrete things would be different under a Romney presidency compared to an Obama Presidency. My list is so conventional that I'm afraid it's pretty boring, but here goes. All of this is based on the assumption that if the electorate is pro-Republican enough to elect Romney, it will also be pro-Republican enough to give Republicans control of the Senate.

  • Obamacare gets repealed via reconciliation. And even if that turns out not to be possible, it will be gutted enough to make it all but dead in practice.
  • The judicial system gets packed with a lot more conservative, business-friendly judges.
  • The Bush tax cuts are made permanent.
  • Corporate tax rates are cut substantially. There's a slim chance that this would be done via a 1986-style tax reform bill that's a net positive, but since Republicans wouldn't need any Democratic help to pass it, probably not.
  • The estate tax might very well be eliminated.
  • Overall, for reasons of basic arithmetic, spending cuts will be much smaller than Romney and the GOP are promising, and the deficit will be substantially higher than it would be under Obama.
  • We might stay in Afghanistan significantly longer than we would otherwise — though I'm not sure about this.
  • Tightening of environmental regs would come to a halt. (Though it's unclear how much of the existing regulatory infrastructure would get rolled back. Probably not that much.)
  • If another financial crisis hits, Romney would be very constrained in how he could deal with it. (So would Obama, but probably somewhat less so.)
  • Although congressional Republicans will be less successful than they'd like at slashing social welfare programs, they'll still make some cuts. Life will get tougher for the poor.
  • The NLRB would become toothless once again.

For the record, there are also several things I think won't happen. Norman Ornstein and Thomas Mann argue in the Washington Monthly that Republicans would eliminate the filibuster, but I doubt it. (And I'd count it as a long-term benefit in any case.) Romney has talked tough on China, but that's just campaign bushwa. He'd quickly find out that his options are extremely limited on this score. On foreign policy more generally, Obama is actually fairly tenacious, despite Romney's bluster to the contrary, and I doubt that Romney would be able to move much further to his right. Dodd-Frank is a question mark. I suspect some would get repealed (or effectively repealed) but not all of it. This couldn't be done by reconciliation, after all. Social Security privatization is a nonstarter no matter who's president. Substantial cuts to Medicare are probably unlikely too. Ditto for comprehensive immigration reform. And Romney's appointments to the Fed probably wouldn't be a lot different that Obama's.

Among big ticket items, what have I missed?

There's No Shortcut to Getting Great Teachers

| Tue Jan. 17, 2012 5:28 PM EST

Dana Goldstein grabs my attention with this sentence about a new study showing that teachers with high "value-added" ratings have a genuine impact on the life outcomes of their students:

In a rare instance of edu-wonk consensus, both friends and skeptics of standardized tests are praising the study as reliable and groundbreaking.

The cynic in me wants to say that it's precisely when everyone agrees on something in the education arena that we should be double-plus skeptical, but I'll restrain my worst instincts and go along with this. After all, common sense suggests that good teachers are better than bad teachers, and I don't have a hard time believing that success on standardized tests provides at least some indication of who's better and who's worse. Still, there are reasons to be cautious. Dana points out one of them:

The policy implications of the Chetty, Friedman, and Rockoff paper are, however, far from clear. As the researchers note in their conclusion, their study was conducted in a low-stakes setting, one in which student test scores were used neither to evaluate nor pay teachers. In a little-noticed footnote (#64) on page 50, the economists write: "even in the low-stakes regime we study, some teachers in the upper tail of the VA [value-added] distribution have test score impacts consistent with test manipulation. If such behavior becomes more prevalent when VA is actually used to evaluate teachers, the predictive content of VA as a measure of true teacher quality could be compromised." [Emphasis added.] The importance of this caveat cannot be overstated.

I'd offer a broader reason to be cautious, though. The usual policy response to this kind of study is to support pay-for-performance, where high-ranking teachers get paid more. But does that really improve the quality of teaching in public schools? That's a little tricky. Here's the best case for what happens:

  1. In the short term, good teachers get paid more and that's it. The pool of teachers stays the same but overall costs go up.
  2. In the medium term, if we get comfortable with the validity and reliability of value-added scores, we might start using them to fire the very worst teachers. This would increase the average quality of the teaching force.
  3. In the long term, higher salaries for top teachers would (a) attract better students into the teaching profession, and (b) put the fear of God into the lousy teachers and motivate them to improve their performance.

How likely is this to happen? I'm not optimistic. #2 will be very difficult to implement for reasons both good (are value-added scores really reliable enough to wreck people's careers over?) and bad (there's always savage pushback against firing people). And #3 just seems dubious to me. Will a one-in-ten prospect of making, say, $80,000 instead of $60,000 really attract more bright kids into teaching? That doesn't seem very likely. And on the opposite end of the spectrum, my experience, at least, is that truly terrible employees rarely improve much no matter what motivation they have. They might improve just barely enough to avoid the axe, but that's about it. (Does that sound harsh? Sorry. But I doubt that anyone with very much management experience will seriously disagree. Feel free to school me in comments about this if you disagree.)

So in the end, I suspect that pay-for-performance will do little to attract better students into the teaching profession, will do little to motivate bad teachers to get better, and will therefore succeed only to the extent that it forces bad teachers out of the system entirely. Maybe it will do that, and maybe that's worthwhile all by itself. But I'd need to be convinced.

If we really believe that good teachers make a substantial difference, then our policy response needs to be something that either (a) attracts better students into the teaching profession on a mass scale or (b) improves the performance of the existing teaching force on a mass scale. (Or both.) Unfortunately, I'm not sure there's any way to accomplish (a) except to increase starting salaries significantly and then wait 40 years for the teaching force to turn over, and I'm not sure there's any definitive way to accomplish (b) at all. It's just a very gnarly problem.