Kevin Drum - July 2012

The Pain of Bain Falls Mainly on the Reign (of Mitt)

| Thu Jul. 12, 2012 2:19 PM EDT

David Corn has been beating the drum for a while about Mitt Romney's claim that he left Bain Capital in 1999 and therefore can't be held responsible for any of the stuff they did after that. Today the Boston Globe moves this story along:

Government documents filed by Mitt Romney and Bain Capital say Romney remained chief executive and chairman of the firm three years beyond the date he said he ceded control, even creating five new investment partnerships during that time.

Romney has said he left Bain in 1999 to lead the winter Olympics in Salt Lake City, ending his role in the company. But public Securities and Exchange Commission documents filed later by Bain Capital state he remained the firm’s “sole stockholder, chairman of the board, chief executive officer, and president.”

Also, a Massachusetts financial disclosure form Romney filed in 2003 states that he still owned 100 percent of Bain Capital in 2002. And Romney’s state financial disclosure forms indicate he earned at least $100,000 as a Bain “executive” in 2001 and 2002, separate from investment earnings.

If I had to guess, I'd say that when Romney took the Winter Olympics job he hadn't made up his mind to leave Bain permanently. So he took a leave, keeping his ownership and his titles so that he could return later. As for his intentions during his Olympics tenure, who knows? Maybe he planned to keep his finger in the Bain pie but ended up not having the time. Maybe he planned to stay semi-involved. Maybe he did stay semi-involved. It's impossible to say.

But look: it doesn't matter. SEC documents show that he was CEO and owner of the firm between 1999 and 2002. In a political context, there's just no way to weasel your way around that, and Romney is going to look increasingly weaselly if he tries. Your average Joe sees a multi-gazillionaire trying to claim that he was only technically CEO and isn't responsible for what happened during his technical CEO-ship. That's like a Mafia don taking the Fifth. It's not going to fly, especially from a guy who's constantly yammering away about personal responsibility and accountability.

So Romney has a problem, and he'd better figure out a better way of dealing with it than releasing increasingly tortured explanations of the definition of "CEO." Voters want a president who takes responsibility, not one who tries to blame other people when something goes wrong.

And while we're on the subject, check out David's latest piece on Bain's investment in a Chinese manufacturing company that "depended on US outsourcing for its profits—and that explicitly stated that such outsourcing was crucial to its success." This happened in 1998, when Romney was unequivocally in charge. This stuff is piling up, and it doesn't look very salt-of-the-earth to those independent blue-collar voters Romney is so anxious to court. He'd better figure out an answer.

Advertise on MotherJones.com

When It's Raining Money, You Should Put Out a Bucket and Catch Some

| Thu Jul. 12, 2012 12:51 PM EDT

You really can't make this point often enough, and today Ezra Klein makes it again: the federal government can currently borrow money for free. In fact, better than free: inflation-adjusted rates on treasury bonds are negative for maturities of ten years or less, and damn close to negative even for longer-term bills:

Negative! The market will literally pay us a small premium to take their money and keep it safe for them for five, seven or 10 years. We could use that money to rebuild our roads and water filtration systems. We could use that money to cut taxes for any business that adds to its payrolls. We could use that to hire back the 600,000 state and local workers we’ve laid off in the last few years.

Or, as Larry Summers has written, we could simply accelerate payments we know we’ll need to make anyway. We could move up maintenance projects, replace our military equipment or buy space we’re currently leasing. All of that would leave the government in a better fiscal position going forward, not to mention help the economy.

The fact that we’re not doing any of this isn’t just a lost opportunity. It’s financial mismanagement on an epic scale.

Yep. It's worth noting that this money isn't literally free. We still have to pay it back eventually. But we'd have to pay back less than we borrowed in the first place. So we could borrow a billion dollars to build a water filtration system, get the use of that system for ten years, and then pay back $900 million. It's an incredible bargain.

This logic applies to pretty much any project we think we're going to need eventually. If we'll need it someday, the best time to build it is now, when the rest of the world will help finance it for us. This would put people to work, build some critical infrastructure, and effectively do it for less than market prices. What's not to like?

If you're curious, real treasury yields since 2011 are shown in the chart below. 5-year rates went negative in February 2011; 7-year rates went negative in July; 10-year rates went negative in December; and 20-year rates went to zero today. Only 30-year rates are still positive, but just barely.

Random News Quotes Not as Random as You Might Think

| Thu Jul. 12, 2012 11:34 AM EDT

Atrios links today to a Ryan Chittum piece at CJR that revolves around a small businessman named Drew Greenblatt who seems to have a side business as man-on-the-street for news reporters. Just in June alone, he got quoted by the New York Times (three times), NBC Nightly News, PBS Newshour (twice), NPR’s Morning Edition, and The Hamilton Spectator. Earlier in the year he got hits from CNN Newsroom and Fox Business (four times), the Financial Times, Reuters, and the Associated Press.

You will be unsurprised to learn that Greenblatt is not just some random steel wire manufacturer from Baltimore. He's an executive-committee member of the board of the National Association of Manufacturers, a DC trade lobby. Chittum explains:

Here’s how you should assume this works, because it’s how it very often does: A journalist is on deadline on a story and needs an anecdote to make it feel “real” with some color—preferably someone who will add balance and/or support the journalist’s thesis. A speed-dialed call is made to industry flacks to supply a quotable small-business person…and, voilà!

Right. But don't assume this is only the case for industry flacks. Suppose you need an anecdote about credit card fraud. Who ya gonna call? Consumer groups will be happy to hook you up with a fully vetted sob story. An anecdote about malpractice abuse? There are plenty of business groups that can put you in touch with a doctor who has an outrageous story to tell. Someone ripped off by a mortgage lender? You get the idea: just call a group that specializes in lobbying for tougher mortgage regulation. They've got plenty of examples.

Journalists like to talk a lot about ethics and transparency. But here's a transparency rule I'd like to see: when you quote an alleged random man on the street, tell us how you found him. Did you really hoof around until you finally got what you wanted? Is he a friend of your cousin's? Did you call an interest group and ask for someone? Did you ask for contacts via Twitter or Facebook? If reporters were required to tell us, I think you'd be surprised at how few of these random examples turn out to be truly random.

More Healthcare is in Your Future

| Thu Jul. 12, 2012 10:46 AM EDT

The residential housing bust may be over, but commercial real estate remains in the doldrums. With the growing efficiency of online retailing, Matt Yglesias thinks this slump may be permanent:

I think people tend to overstate the level of real resource misallocation involved in the 2002-2005 house-building boom. By now America is already underhoused by historical standards. But commercial real estate is another matter. The current downturn will end, and CRE construction will returm to some extent, but I don't think the business of building shopping centers will ever come back. Retrofitting existing ones as health care facilities, by contrast, should be a booming business.

Yes indeed. See that little shopping center on the right? It's about half a mile from my house. It used to have a Radio Shack, a Chevy's restaurant, a dry cleaners, a chi-chi gift store, an Asian noodle restaurant, and a bunch of other miscellaneous shops. But now? The Irvine Company decided several years ago to turn it into a professional services center, with "professional" defined as doctors and dentists of various kinds. There are still some other kinds of shops there, but I assume that as their leases run out, most of them will be converted into medical space.

The good news for CRE, of course, is that buildings are buildings. Construction companies make just as much money building professional offices as they do shopping centers. In fact, maybe someday they'll start building health malls as big and fabulous as the Mall of America, with plenty of entertainment options to give everyone (and the kids!) something to do while they wait around endlessly for their loved one's latest round of chemo. Welcome to the future.

Romney Courts the White Vote by Talking to the NAACP

| Wed Jul. 11, 2012 5:45 PM EDT

Mitt Romney gave a speech to the NAACP today, and it didn't go well. He was interrupted by periodic booing, got poor reviews from the audience afterward, and was lambasted by NAACP leaders after he had left. This was pretty predictable, so why did Romney bother? I think Jamelle Bouie has it about right:

The point of this address to the NAACP was to send a signal to right-leaning, suburban white voters—that Mitt Romney is tolerant, and won’t represent the bigots in his party. But there’s a sense in which Romney had it both ways: Not only did he reassure hesitant whites, but by pledging to repeal Obamacare—and being booed by the audience—he likely increased his standing with those who do resent African Americans. By going to an audience of black professionals and sticking with his stump speech, there’s a sense in which Romney might receive credit for refusing to “pander.”

It's a pretty easy win for Romney. He gets points for not being afraid to venture into hostile territory, and then gets more points for not tailoring his message to win votes. He had no real chance of winning any of these votes in the first place, which means that sticking with his standard stump speech was something less than a profile in courage, but he probably earns some points anyway.

The Amazing Power of Fed Announcements to Buoy the Stock Market

| Wed Jul. 11, 2012 1:39 PM EDT

Riskier investments generally have higher returns. That's why, over the long term, stocks have higher returns than government bonds. But how much higher should those returns be? There's a problem here. No matter how you figure it, historical returns on stocks seem to be a lot higher than they should be. This is called the "equity premium puzzle."

Today, a pair of economists at the New York Fed, David Lucca and Emanuel Moench, introduce a new study of theirs this way:

In this post, which draws on our recent New York Fed staff report, we deepen the puzzle further.

Great! Let's make everything even weirder! But by God, that's exactly what they do. They examined stock market returns over the past two decades and discovered that virtually all of the excess return occurs in a series of 24-hour periods eight times a year. Take away those 24-hour periods, and stock market returns are about what you'd expect them to be.

So what are these 24-hour periods? They're the periods from noon the day before Federal Reserve announcements until 2:15 on the day of the announcement. During those periods, stocks rise an average of about 50 basis points. That's the red line in the chart on the right. During every other three-day period, stocks do nothing on average. That's the black line at the bottom of the chart.

What does this mean in aggregate? Since 1994, the S&P 500 has risen from about 400 to 1300. If you remove the three-day periods surrounding FOMC announcements, it's barely risen at all.

Does this mean that FOMC announcements are being leaked? Probably not. If that were the case, stocks would go both up and down, depending on the news, and then they'd regain their old level after the leak-receivers had taken their profits. But that's not what happens. Stocks go up, and only up, and then they stay up. What's more, the authors report that this effect occurs only for stocks, not for any other kinds of assets.

So this is just plain weird, and the authors have no explanation. For some reason, the mere expectation of Fed news drives traders into a bullish frenzy.

But not for long. If this effect is for real, I assume it will be arbitraged away instantly by people with much faster computers than you and me. There's no easy money to be made here for us retail schmoes.

Advertise on MotherJones.com

Mitt Romney Should Get Used to Hearing "Swiss Bank Account" a Lot

| Wed Jul. 11, 2012 12:11 PM EDT

Bob Somerby says he "cringed a bit" when Maryland governor Martin O'Malley went to town on Mitt Romney's Swiss bank account during last Sunday's chat shows. But he cringed even more yesterday when he heard Ed Schultz frame the issue like this in a question to O'Malley: "What do you think? Is it unpatriotic to have money overseas after getting the fruits of the land here in America and being successful?"

Like Bob, I'd just as soon not hear liberals questioning other people's patriotism. Last refuge of scoundrels and all that. But politically speaking, there's a bigger sin here: it's just dumb. When you say "Swiss bank account," nobody's thoughts turn naturally to patriotism or its lack. It doesn't even compute. The problem everyone associates with Swiss bank accounts is much simpler: they're for rich people trying to hide dodgy money from the tax man in dodgy ways.

Stick with what works, Ed! Romney is rich. Romney puts his money in tax havens. What's he hiding? That's the ticket.

But wait. Should we cringe at that too? I guess we high-minded types might. But in the real world of politics this really doesn't seem very cringeworthy. Hell, Republicans went after Romney's personal finances during the primaries. They knew exactly what they were letting themselves in for when they nominated the guy. It would be a pretty lame campaign that decided it was too pious to take advantage of a meatball like this sailing right over the plate.

In any case, I guess I'm really more interested in Romney's $102 million IRA. Granted, that doesn't have the immediate resonance of "Swiss bank account," but it raises some excellent, Bain-related-tax-dodginess questions. Nicholas Shaxson explains:

Mysteries also arise when one looks at Romney’s individual retirement account at Bain Capital. When Romney was there, from 1984 to 1999, taxpayers were allowed to put just $2,000 per year into an I.R.A., and $30,000 annually into a different kind of plan he may have used. Given these annual contribution ceilings, how can his I.R.A. possibly contain up to $102 million, as his financial disclosures now suggest?

Shaxson suggests a couple of different ways this could have happened, neither of them likely to make Romney look good. But Romney better come up with something to explain how this happened. I doubt very much that the Obama campaign — or its not-so-pious super PAC — is going to let this meatball sail by either without taking a great big cut at it.

BREAKING: "Repeal and Replace" Just a Big Scam

| Wed Jul. 11, 2012 10:45 AM EDT

You should probably be sitting down before you read this. Ready?

Congressional Republicans, who once promised to "repeal and replace" President Obama's healthcare law, for now have all but given up pushing alternatives to the sweeping legislation the president signed in 2010.

....As the House prepares to take its 33rd vote to repeal all or part of the Affordable Care Act, senior Republicans say they will not try to move a replacement plan until 2013 at the earliest....At the same time, GOP lawmakers are rejecting the notion that any replacement legislation should expand health coverage as much as the current law.

....Republican lawmakers say they have been clear about their broad principles for healthcare, including controlling costs, giving patients more choices and limiting government involvement....But Republican leaders have not brought any of these proposals to a vote.

That has shielded the party's ideas from close scrutiny by independent analysts, a politically risky process that could highlight legislation's costs and its impact on consumers and others. Such scrutiny proved embarrassing for House Republicans in 2009, when they proposed a detailed alternative to the healthcare legislation that Democrats were developing at the time.

The nonpartisan Congressional Budget Office concluded the GOP proposal would have left more than 50 million Americans without health insurance and reduced costs for healthy people while raising them for the sick. Similar study of the House Republicans' 2011 budget plan indicated that a proposal to make Medicare beneficiaries shop for commercial insurance with a government voucher would leave seniors paying thousands of dollars more for their healthcare.

Who could have known that "repeal and replace" was just a scam? It's shocking. Likewise, who could have known that even the vague Republican guidelines for healthcare reform don't actually do much of anything to reform healthcare once they're put into a form concrete enough to score?

But do voters care? I doubt it: this is one of those things that everyone already accepts without ever talking about it. Your average Joe, to the extent he even knows anything about this at all, understands perfectly well that "repeal and replace" is just political schtick, and all that's going to happen if Republicans win is repeal. For the conservative base, of course, that's fine. And for the broad middle it's just something to shrug their shoulders at. Thanks to crappy marketing from Democrats, those folks in the middle probably don't think Obamacare really benefits them in the first place, and thanks to brilliant marketing from Republicans they probably do think it will raise their taxes. Yay politics!

Let's Index Everything for Inflation!

| Tue Jul. 10, 2012 5:18 PM EDT

Andrew Stuttaford is unhappy about the state of the U.S. tax code:

And then there’s capital gains (due to rise, of course, courtesy of Mr. Obama), and still not adjusted for inflation, a deliberate anomaly that means the taxpayer pays real taxes on unreal “gains”. Even the amount of the best-known capital gains tax exemption (on the sale of a primary residence) of $500,000 for a couple, $250,000 for a single person, hasn’t been changed since 1997. That won’t matter for most, for now, but give inflation QE and time: The IRS is waiting.

That's pretty sad. I wonder how he feels about indexing the minimum wage to inflation? In any case, speaking for myself, I'd be willing to level the playing field by adjusting capital gains taxes to inflation just as soon as we level the playing field by increasing the capital gains rate from its current 15% to the rate charged on ordinary income. Oddly, though, rich people seem uninterested in making such a bargain. Inflation and all, I guess they must think the current setup is a fairly sweet deal.

David Brooks' Strange Preoccupation With Single Parents

| Tue Jul. 10, 2012 1:12 PM EDT

David Brooks has returned from Aspen, where he heard a presentation from Harvard political scientist Robert Putnam. According to Putnam, there's a growing gap in the way the rich and poor raise their kids:

Over the past decades, college-educated parents have quadrupled the amount of time they spend reading “Goodnight Moon,” talking to their kids about their day and cheering them on from the sidelines.....A generation ago, working-class parents spent slightly more time with their kids than college-educated parents. Now college-educated parents spend an hour more every day. This attention gap is largest in the first three years of life when it is most important.

Over the last 40 years upper-income parents have increased the amount they spend on their kids’ enrichment activities, like tutoring and extra curriculars, by $5,300 a year....In 1972, kids from the bottom quartile of earners participated in roughly the same number of activities as kids from the top quartile. Today, it’s a chasm. Richer kids are roughly twice as likely to play after-school sports. They are more than twice as likely to be the captains of their sports teams. They are much more likely to do nonsporting activities, like theater, yearbook and scouting. They are much more likely to attend religious services.

It's not 100% clear from Brooks's column, but it sounds as if the problem here isn't that working class families are doing any less than before. The growing gap is caused by the fact that affluent families are doing much, much more. This is similar to the trend of growing income inequality in America: the problem isn't that the working class is making less money than they used to, the problem is that their incomes have been sluggish while incomes of the well-to-do have skyrocketed.

This makes me skeptical of Brooks's favored explanation for the parenting gap: the growing number of single parents in America. This is, he says, primarily a working/middle class phenomenon, and single parents simply don't have the time or money to raise their kids properly. I'm willing to buy the idea that growing single parenthood is a problem, but still, if that were really the cause of the gap then I'd expect to see kids in poorer families doing worse on an absolute scale. But I don't know of any evidence on that score, and Brooks doesn't provide any. In fact, the one piece of evidence he mentions is school test scores, and he very cagily writes of poorer kids only that "Their test scores are lagging." Technically, that's true: poorer kids have always done worse than affluent kids, and they continue to do worse today. But that doesn't mean their test scores have gone down. On the contrary: whether you measure by income level (kids who qualify for free lunches) or by performance level (the bottom decile of test scores), poor kids have improved their scores over the past four decades. That's true for white kids, black kids, and Hispanic kids. It's true for boys and girls. It's true for public school kids and private school kids. On the NAEP test, the supposed "gold standard" of national testing, children of all kinds have improved or, at worst, stayed steady, on every possible metric since the early 70s.

What else can you say about poor and working class neighborhoods over the past 40 years? Well, crime is way down. Drug use is down. Those are positive social indicators. So I'm a little puzzled when Putnam says of working class kids that "virtually all our major social institutions have failed them — family, friends, church, school and community." I won't pretend that our major social institutions are doing a great job with poorer children, but I don't quite see the cataclysmic failure that he does. What I do see is growing income inequality that allows affluent parents to do far, far more for their kids than they could even a few decades ago. That may be a problem, but it's a very different kind of problem than the one Brooks usually talks about.