Kevin Drum - April 2012

Delevering in Europe Remains a Threat to World Economy

Eurozone leverage levels are as high today as America's was at the peak of the housing bubble.

| Wed Apr. 18, 2012 7:11 PM EDT

Among the several ways that recession in Europe could hurt the global economy is via the specter of bank deleveraging. As you may recall, one of the proximate causes of the Great Panic of 2008 was the fact that American banks had run up huge amounts of leverage, something that makes the banking system extremely vulnerable to sudden shocks — like, say, a housing bubble bursting.

Well, European banks were even more leveraged than American banks. The top chart on the right, courtesy of a new IMF report, shows that American bank leverage peaked in 2008 at a ratio of about 25:1, and since then has dropped to a much more sustainable 15:1. European banks, even after four years of deleveraging, are still at 25:1. This means they remain vulnerable to sudden shocks — like, say, Spain going bust — so they'll need to continue deleveraging for several more years.

There are basically two ways they can do this. First, they can raise money by selling off assets. This is OK unless it turns into a fire sale, which is always a possibility. Second, they can reduce the amount of credit they make available. The bottom chart on the right shows the IMF's estimate of credit contraction over the next couple of years.

The good news for Americans is that this probably won't affect us directly very much: Most of the credit contraction will happen in Europe, and American corporations have deep access to capital markets to replace whatever they lose from European banks. There is, however, a potential indirect effect via derivative exposure, and also some more general exposure at a macro level if bank deleveraging keeps Europe's economy in a rut.

Still, the IMF doesn't think the credit contraction in Europe is likely to be all that severe: "The implied decline in the credit-to-GDP ratio [] sits between the relatively moderate experience in Japan in the 1990s and the more pronounced credit contraction in the United States in the earlier part of the financial crisis." As long as European banks avoid a "synchronised and large-scale deleveraging" — i.e., a fire sale of assets — things will likely stay under control.

In other words, the big danger remains not sluggish growth in Europe, which everyone has already priced in, but the possibility of panic. And with sovereign debt still extremely wobbly in the south, monetary policy still too tight, austerity still the order of the day, and bank leverage still high — with all that still in front of us, panic remains a distinct option. A eurozone crackup is still a real possibility.

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It's Time to Let Momgate Die a Natural Death

Keeping it going just isn't going to do the left any good.

| Wed Apr. 18, 2012 3:23 PM EDT

Our story so far: Last week Hilary Rosen said Ann Romney had "never worked a day in her life." Republicans erupted in faux outrage. Being a mother is work! Rosen apologized. The outrage continued. Then Chris Hayes dug up a video of Mitt Romney saying that mothers on welfare needed to get out of the house: "Even if you have a child 2 years of age, you need to go to work....It'll cost the state more providing that daycare, but I want the individuals to have the dignity of work." Hah! So Republicans think that raising kids is only work for wealthy housewives, not for poor single mothers. Heartless bastards.

So now we have this:

A handful of House Democrats, encouraged by the recent bipartisan agreement that stay-at-home moms should be considered just as hard working as anyone in the workforce, will introduce legislation to apply that standard to mothers on welfare as well.

Under current law, raising children does not count toward the required "work activity" that must be performed by recipients of Temporary Assistance to Needy Families, the federal program that emerged from the 1996 welfare reform....The Women's Option to Raise Kids (WORK) Act, a copy of which was provided to HuffPost in advance of its introduction, would allow mothers with children ages 3 and under to stay at home with their children and continue receiving benefits.

I'm no expert on political theater, but this sure sounds dumb to me. Like it or not, my guess is that a substantial majority of Americans support the idea of work requirements for welfare recipients. And America's stay-at-home moms — many of them persuadable Democratic voters — do not like the idea of being compared to single mothers getting welfare checks. Not one bit.

Maybe this is fair, maybe it isn't. It doesn't matter. Politically it's tone deaf. Liberals would do well to let this whole idiotic affair die a natural death.

Austerity Not Working in Italy Either

All it's doing is killing growth, just as it's doing in Greece and Spain.

| Wed Apr. 18, 2012 2:26 PM EDT

A few days ago it was Spain. Now it's Italy. Prime Minister Mario Monti announced a new 3-year economic plan today that — surprise! — shows that austerity has been bad for Italy's economy:

The plan, which must be ratified by Parliament and sent to the European Commission in Brussels by the end of the month, forecasts that Italy's gross domestic product will contract by 1.2% this year, almost three times the forecast in December.

....Yet, Italy's fiscal policy is tightening, Deputy Economy Minister Vittorio Grilli said. Rome will post a budget surplus of 0.6% of GDP next year in structural, cyclically adjusted terms....The International Monetary Fund reached a similar conclusion, saying Tuesday that Italy won't balance its budget until 2017, but that next year it will achieve a structural balance—suggesting Italy wouldn't have a fiscal shortfall if the economy were performing at its full potential.

For those who argue that austerity is choking growth, the underlying rigor isn't something to boast about.

No, it's nothing to boast about. After all, lots of countries would have balanced budgets, or something close, if their economies were cranking along at full potential. But that's the whole point: austerity economics is stifling growth, which makes it hard to balance the actual, real-life budget. If the answer to that is even further austerity, you can expect even lower growth.

But austerity is the plan anyway. Hang on tight.

Drilling for Oil and Then Burning it is Peculiarly Efficient

How is that in over a century of looking, we haven't come up with anything better?

| Wed Apr. 18, 2012 1:17 PM EDT

Yesterday I wrote a post about how expensive car batteries are. Today Brad Plumer has a post about clean energy subsidies and how they're fading out. These two things together reminded me about an energy factoid that's always struck me as slightly odd: virtually every form of energy seems to be almost as efficient as burning oil, but not quite.

For example, on either a power/weight basis or a cost basis, batteries are maybe 2x or 3x bigger and less efficient than an internal combustion engine. Not 50x or 100x. Just barely less efficient. And you see the same thing in electricity generation. Depending on how you do the accounting, nuclear power is maybe about as efficient as an oil-fired plant, or maybe 2x or 3x less efficient. Ditto for solar. And for wind. And geothermal. And tidal power.

I'm just noodling vaguely here. Maybe there's an obvious thermodynamic explanation that I'm missing. It's just that I wouldn't be surprised if there were lots of ways of generating energy that were all over the map efficiency-wise. But why are there lots of ways of generating energy that are all surprisingly similar efficiency-wise? In the great scheme of things, a difference of 2x or 3x is practically invisible.

It's tantalizing as hell, too. It doesn't seem like there ought to be a reason that during a century of looking we haven't been able to find a single energy source more efficient than either water wheels or burning oil, but we haven't. I think God is playing games with us.

Is it Science or is It Fraud?

More and more, apparently, the answer is fraud.

| Wed Apr. 18, 2012 12:26 PM EDT

A couple of weeks ago I published a chart showing that conservative trust in science has plummeted over the past few decades, while liberal and independent attitudes have remained fairly steady (liberals with high trust levels and indies with low trust levels). However, several commenters pointed out that this result was derived from GSS survey data, and the actual question was about institutions:

I am going to name some institutions in this country. As far as the people running these institutions are concerned, would you say you have a great deal of confidence, only some confidence, or hardly any confidence at all in them?

So conservatives were becoming less confident in the people who run the scientific community, which is not quite the same as becoming less confident in science as a discipline. This is fair up to a point, though I suspect that most people answering the question don't generally make distinctions quite that fine. What's more, in the aftermath of the 70s liberals had plenty of reason to lose confidence in some aspects of the scientific community too — this was a period in which corporate sponsorship of science was a growing flashpoint — but that didn't cause them to change their general level of trust. The Reagan-era decline was solely a conservative phenomenon.

All that said, though, the New York Times reported a couple of days ago that over the past decade or so there might well be reason for all of us to be a little more skeptical of scientific results than we have been. A couple of years ago, Dr. Ferric Fang, editor in chief of Infection and Immunity, discovered that one of his authors had doctored several papers:

Dr. Fang became curious how far the rot extended. To find out, he teamed up with a fellow editor at the journal, Dr. Arturo Casadevall of the Albert Einstein College of Medicine in New York. And before long they reached a troubling conclusion: not only that retractions were rising at an alarming rate, but that retractions were just a manifestation of a much more profound problem — “a symptom of a dysfunctional scientific climate,” as Dr. Fang put it.

....Last month, in a pair of editorials in Infection and Immunity, the two editors issued a plea for fundamental reforms. They also presented their concerns at the March 27 meeting of the National Academies of Sciences committee on science, technology and the law. Members of the committee agreed with their assessment. “I think this is really coming to a head,” said Dr. Roberta B. Ness, dean of the University of Texas School of Public Health. And Dr. David Korn of Harvard Medical School agreed that “there are problems all through the system.”

....Critics like Dr. Fang and Dr. Casadevall argue that science has changed in some worrying ways in recent decades — especially biomedical research, which consumes a larger and larger share of government science spending.

It's not clear how far this extends outside the biomedical community, and it's also not clear if this is genuinely new behavior, or if bad papers are simply more likely to get caught than in the past. Either way, though, the research community in general had better listen to Fang. Declining public trust in science may be primarily a conservative phenomenon right now, motivated by hostility toward evolution and climate science, but independents have had low trust levels ever since the 70s, and there are plenty of liberals who could probably be tipped into the anti-science camp pretty easily too. Time to clean house, folks.

Guess What? Pretending That Everyone Should Go to College Turns Out Not to Work

All it does is create more "dropouts."

| Wed Apr. 18, 2012 11:45 AM EDT

Several years ago the Los Angeles Unified School District decided that every high school student should take and pass college prep classes in order to graduate. Most infamously this included an algebra requirement, but it was much broader than just that. Would this produce more dropouts? Sure, but everyone was told we'd just have to bite the bullet and accept that.

Well, it's now bullet-biting time as the new requirements finally take effect, and guess what? Bullets aren't really all that tasty:

On Tuesday, district officials backtracked, offering details of a proposal to reduce overall graduation requirements and allow students to pass those classes with a D grade. They must change course, Los Angeles Unified School District officials said, or they would open the doors to scores of dropouts and others who can't pass the more rigorous requirements. The new plan, which still must be approved by the board, would allow students to graduate with 25% fewer credits.

"If we don't do something, we have to be prepared to be pushing out kids as dropouts," said Deputy Supt. Jaime Aquino at a school-board committee meeting Tuesday. "We face a massive dropout rate in four years."

The idea, apparently, is that by requiring fewer credits, struggling kids will have more opportunity to repeat classes that they failed the first time around. That doesn't sound like much of a plan to make staying in high school more attractive.

I know this is an argument that's been played out thousands of times in hundreds of places already, but it just seems crazy to me. Encouraging everyone to take college prep classes is fine, but college prep just isn't the same thing as high school graduation. At least, it shouldn't be. There has to be some societal recognition of an achievement level in between "dropout," as traditionally conceived, and being prepared to attend college. We can pretend all we want, but not every 18-year-old is ready and able to attend even a community college, and effectively labeling all of these kids as dropouts is nuts. If politics weren't enough to make me think we've gone collectively crazy already, stuff like this would do the trick.

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Is Healthcare Just a Large-Scale Accounting Issue?

Sure, but then again, isn't everything?

| Wed Apr. 18, 2012 10:52 AM EDT

Karl Smith has an odd response to my post last night about Abbott Labs and its efforts to make sure that a generic version of TriCor would never see the light of day:

This is a part of a longer point but it's important to note that it's not clear that health care costs were raised as a part of this....Mostly it seems that at worst money was transferred from consumers and taxpayers to TriCor. This is not an economic cost. It is simply redistribution.

....However, as generally used the phrase “high health care costs” doesn’t refer to anything that makes any economic sense and so it's not clear what the appropriate remedy is. I would like to encourage people to be more explicit about the real problems that they perceive rather than extensive references to large scale accounting issues.

Just for the record, then: when I say "high healthcare costs," what I mean is "lots of money flowing to heathcare entities." I'm pretty sure that's what everyone else means too. I know that Karl likes to be contrarian, but calling this a mere large-scale accounting issue is surely a little bit too Olympian even for him, isn't it?

A Wee Bit of Navel Gazing

Different bloggers, different linking behaviors

| Wed Apr. 18, 2012 10:21 AM EDT

What follows is navel gazing of the worst kind, so there's no need to remind me of this in comments. But the chart below is sort of weirdly fascinating anyway. Based on data from Andy Baio, it represents the linking behavior of the Washington Monthly's Political Animal blog over time. Positive numbers indicate that a blog links mostly to stories favored by liberals, and my linking behavior, from January 2007 through August 2008, was moderately biased to the left (a value of .05 places you in about the leftmost 20%). Then Steve Benen took over, and the blog immediately began linking overwhelmingly to stories favored by liberals. But over time, Steve became more ecumenical, and by January of this year he was favoring liberal stories only slightly more than I had.

I have no conclusions to draw from this. It's just pure wankerific navel gazing. Do with it what you will.

How To Keep Healthcare Costs High In One Easy Lesson

The answer is lawsuits, and plenty of them.

| Tue Apr. 17, 2012 10:51 PM EDT

Today, Aaron Carroll tells us the story of TriCor, aka fenofibrate, a cholesterol drug licensed by Abbott Labs in 1998. Unfortunately, TriCor's patent was due to run out in 2000 and a maker of generic drugs was all set to produce a generic version. So Abbott sued, which delayed the generic version by 30 months:

In the interim, Abbott sought and obtained FDA approval for Tricor-2. That drug was nothing more than a branded reformulation of Tricor-1. Tricor-1 came in 67-mg, 134-mg, and 200-mg capsules; Tricor-2 came in 54-mg and 160-mg tablets. No new trials involving Tricor-2 were submitted to the FDA. But Tricor-2 came out while the generic company was still waiting to make Tricor-1, and thus Tricor-2 began selling with no direct competition.

Six months later, Tricor-2 evidently accounted for 97% of all fenofibrate prescriptions. By the time the generic copies of Tricor-1 came out, no one was taking it anymore, and they couldn’t penetrate the market.

Wash, rinse, repeat. The generic companies petitioned to make generic Tricor-2. Abbott filed a patent infringement suit buying them a 30 month delay. They got to work on Tricor-3. That tablet came in 48-mg and 145-mg doses. No new studies. They got approval. Evidently, 70 days after Tricor-3 was introduced, 70% of users were switched to the new branded drug. By the time the other companies got generic Tricor-2 out, Tricor-3 had 96% of the market.

I swear I’m not making this up. Wash, rinse repeat.

The cost to American consumers of not having access to a generic version of TriCor is on the order of $700 million per year, money that (presumably) accrues to Abbott Labs instead. All of which goes to show that America's pharmaceutical companies are still the most innovative in the world, no matter what the naysayers claim. Unfortunately, their innovation seems to reside mostly in their legal and packaging departments, not their R&D departments.

POSTSCRIPT: Although Abbott Labs is the main culprit here, fairness dictates that blame be shared. Aaron abstracted this account from a journal article in Archives of Internal Medicine, and he notes that one of the authors of the article takes doctors to task too: "Why didn’t we prescribe the bioequivalent generics for our patients? What was the advantage to our patients of the more expensive proprietary drug? Did we let down our patients and society?" Fair enough. Abbott did everything it could to keep everyone confused, but generics were still available. So why didn't physicians prescribe them?

BREAKING: Car Batteries Are Really Expensive

Apparently we weren't supposed to know that until now.

| Tue Apr. 17, 2012 6:22 PM EDT

This is interesting:

One of the auto industry's most closely guarded secrets—the enormous cost of batteries for electric cars—has spilled out.

Speaking at a forum on green technology on Monday, Ford Motor Co. Chief Executive Alan Mulally indicated battery packs for the company's Focus electric car costs between $12,000 and $15,000 apiece. "When you move into an all-electric vehicle, the battery size moves up to around 23 kilowatt hours, [and] it weighs around 600 to 700 pounds," Mr. Mulally said at Fortune magazine's Brainstorm Green conference in California.

"They're around $12,000 to $15,000 [a battery]" for a type of car that normally sells for about $22,000, he continued, referring to the price of a gasoline-powered Focus. "So, you can see why the economics are what they are."

What's interesting isn't the fact that the batteries cost so much. What's interesting is that this was apparently such a closely guarded secret. I had no idea. And I still have no idea why this was such a closely guarded secret. It's hardly big news that batteries are a huge part of the cost of electric cars, is it?