Kevin Drum - September 2012

The Backstory Behind QE3

| Fri Sep. 28, 2012 1:10 AM EDT

I suppose this is a sign that I've been well and truly pulled down the rabbit hole, but I'm sort of excited that today brings a behind-the-scenes tick-tock from Jon Hilsenrath about the September 13th Fed meeting. These kinds of pieces are three-a-penny for decisions made in the White House or on Capitol Hill, but not so common for decisions made in the inner sanctums of the Eccles Building. But as you'll recall, September's meeting is the one where the Fed finally decided to implement QE3, and Hilsenrath has the skinny about how it happened:

For weeks, Mr. Bernanke made dozens of private calls on days, nights and weekends, trying to build broad support for an unusual bond-buying program he wanted approved during the Fed's September meeting, according to people familiar with the matter.

....Interviews with more than a dozen people involved in the Fed decision, both supporters and opponents, show how Mr. Bernanke won over skeptics to advance his policy—a distinction in a Washington era marked by rancor and gridlock. These people also gave a rare view of the low-key persistence of the former economics professor.

Mr. Bernanke didn't see inflation as a threat but viewed unemployment as a deeper problem than he had realized. The central bank, in his view, needed to act. The Fed chairman listened to colleagues' concerns during the calls, people familiar with the matter said, drawing out their reservations and probing for common ground. He eventually seized on a compromise that came from a little-known Fed governor.

....Drawing broad support for the plan was important to Mr. Bernanke in part because the policies he was formulating could outlast him. His term as Fed chairman ends in January 2014. Seeing a return to U.S. full employment as a distant goal, Mr. Bernanke needed the support of officials who might remain at the Fed after he left.

That last bit is an important point. Part of the September 13th announcement included an effort to persuade the market that Fed policies will remain relaxed for many years, even after the economy has started to pick up steam, and to do that Bernanke knew that he needed near unanimity. If the FOMC were bitterly split, after all, who would believe that Bernanke's policies would genuinely last through 2015 and beyond? So he spent weeks working on his colleagues and fashioning a compromise.

And that, I think, is the key takeaway from Hilsenrath's piece. Bernanke may not be managing monetary policy as aggressively as a lot of us would like, but he's really not the roadblock here. His colleagues on the FOMC are.

BY THE WAY: The "little-known" Fed governor who produced the winning compromise turns out to be Elizabeth Duke, a Bush nominee. Go figure.

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Silicon Valley Is Still Slightly Less Powerful Than the Federal Reserve

| Thu Sep. 27, 2012 5:58 PM EDT

One of the knocks on the digital ecosphere is that it doesn't really employ very many people. Facebook might be cool, but it doesn't do much for the real economy. Ezra Klein grabs my attention today with a suggestion that this might be about to change:

Square, a company led by Twitter co-founder Jack Dorsey, has the potential to be a gamechanger. It wants to do nothing less than change how we pay for everything. In doing so, it has the potential to vastly lower transaction costs for businesses that accept credit, and to significantly increase the number of transactions that happen, period. If it works, that could be a transformative advance.

Wait. Seriously? Is that what people are saying? So I clicked on the Farhad Manjoo piece in Slate that Ezra was referring to:

If you study Square’s products and its pricing, and if you talk to Dorsey about his plans, you’ll find that the company’s real mission is to alter the psychology of consumption. Dorsey is bent on creating frictionless commerce....Its pay-by-name system is so much of an improvement over the current way we pay that, over time, Square believes it will raise transaction volumes—people will buy more stuff because buying stuff is easier.

The ability of Silicon Valley entrepreneurs to hold reporters in some kind of satanic thrall as they spin their mesmerizing tales is nothing short of awe-inspiring. Square might very well be a great company. Making it easier to pay for stuff is a terrific idea. But will this actually cause us all to buy more stuff?

In a word, no. Putting aside changes in fiscal and monetary policy, consumer expenditures are constrained by (a) net income and (b) our desire to save for the future. That's it. Right now, the personal savings rate is around 4%, which means we collectively spend about 96% of what we earn. Nothing that Square does will change that.1 It might be a great company — maybe even a game changer on a number of levels — but it's not going to increase consumer spending at a macro level. Even Silicon Valley doesn't have quite that much clout.

With that off my chest, however, I recommend clicking on both links above. They have interesting things to say.

1You can, perhaps, spin a tale about dramatically lower transaction costs putting more money in the hands of consumers and small business owners and less in the hands of Wall Street banks. This would be a good thing, and might even be a net positive for economic growth. But it's a stretch, and I don't think it's the story Dorsey is telling anyway.

Quote of the Day: Romney Is Ruining Things For All the Other Rich Guys

| Thu Sep. 27, 2012 4:41 PM EDT

Today's QOTD comes from Stephen Breitstone, co-head of the taxation and wealth preservation group at Meltzer, Lippe, Goldstein & Breitstone LLP, commenting on one of the tax avoidance schemes that Mitt Romney used in the $100 million trust he set up for his children and grandchildren:

It’s going to be harder to do tax planning in the future. He’s bringing attention to things that weren’t getting attention.

This comes from a Bloomberg story about Romney's use of an "I Dig It" trust, which Breitstone says is so important to the wealthy that ending its tax benefits "would put an end to much of estate planning as we know it." Here's how it works:

The person setting up the trust, like Romney, contributes assets such as an interest in a fund or shares in a company. If he makes that contribution before those assets appreciate — particularly when they are privately held and difficult to value — he can claim the gift tax obligation is low or non-existent since the declared value is low or zero.

If the trust generates any income — such as by selling stock — the eventual tax bill is the responsibility of Romney, not the trust. By paying the capital gains tax, which was 20 percent in the late 1990s and is now 15 percent, he can avoid depleting the funds in the trust — in essence making an additional donation that’s free of gift taxes....Gains in the trust for Romney’s heirs remain free of gift taxes and potential estate taxes.

Very cool, no? First, Romney undervalues the assets he puts into the trust so he owes little or no gift tax. Then, later, when the assets appreciate, he pays only the capital gains tax, which is considerably lower than the gift tax. And to make it even better, he pays the capital gains tax out of his own pocket, so the trust owes nothing. It's like making a second gift to his kids free and clear.

Bloomberg says Romney did this with some DoubleClick shares he got in 1997, back when he was CEO of Bain Capital, but that's undoubtedly just the tip of the iceberg. The DoubleClick payday amounted to a piddling $674,000 out of a trust worth over $100 million. Sadly for our nation's ultra-wealthy, though, the spotlight Romney is shining on stuff like this might spur Congress to close some of these loopholes. Maybe.

Why You Should Always Account for Inflation: A Case Study

| Thu Sep. 27, 2012 2:51 PM EDT

Ryan Chittum points out a good example today of how misleading news reports can be when they fail to account for inflation. Here's a sentence from a recent Wall Street Journal piece on cell phones:

Americans spent $116 more a year on telephone services in 2011 than they did in 2007, according to the Labor Department, even as total household expenditures increased by just $67.

And here's what that sentence would look like if those numbers were adjusted for inflation:

Even as total household expenditures plummeted by $4,146, spending on phones continued to rise, with Americans shelling out $22 more a year on telephone services in 2011 than they did in 2007, according to the Labor Department.

So the Journal missed a bet. The gist of their piece is that phone bills are eating up a bigger chunk of middle-class incomes, and for my money, the inflation-adjusted figures make that point a lot better. After all, which is more dramatic? Spending $116 more while incomes are flat, or spending $22 more even as your income falls through the floor? Your mileage may vary, but I'd choose the latter.

Not that it really matters. The inflation-adjusted figures are the more accurate ones. Whenever possible (and with occasional exceptions for specific reasons), they're the ones you should always use.

4 Years After Meltdown, Wall Street Still Calling the Shots

| Thu Sep. 27, 2012 1:41 PM EDT

The New York Times reports today that other countries are way ahead of us when it comes to regulation of high-frequency trading. So why are we so far behind? There are "many" reasons, says the Times. Let's count them up:

There are many explanations for the slower pace of reform in the United States, including the crush of work the S.E.C. has had to deal with in completing regulations under the Dodd-Frank financial overhaul law. In addition, many of the largest American market participants, including the big banks, have built high-speed trading desks and dark pools and as a result have a vested interest in protecting them against new regulations.

Hmmm. That's two reasons. And while I don't doubt that the SEC is pretty busy these days, I'm going to go with Door #2 here. I think we all know perfectly well why no one is seriously trying to regulate HFT in the United States. Sure, we don't really understand HFT — just like we never really understood all those synthetic CDOs and naked CDSs — and sure, there might be a big tail risk that could someday do worse than put Knight Capital out of business. But in the meantime, there's money to be made! And who wants to get in the middle of that?

Today's Economic Rorschach Test

| Thu Sep. 27, 2012 12:26 PM EDT

Good news today! The economy was stronger than we thought in the first quarter:

In accordance with usual practice, the Bureau of Labor Statistics (BLS) is announcing the preliminary estimate of the upcoming annual benchmark revision to the establishment survey employment series....The preliminary estimate of the benchmark revision indicates an upward adjustment to March 2012 Total nonfarm employment of 386,000 (0.3 percent).

Also: bad news today! The economy was weaker than we thought in the second quarter:

The Commerce Department said Thursday that the United States economy grew at an annual pace of just 1.3 percent in the second quarter of the year, showing that the recovery came close to stalling in the spring. The revision was down from the 1.7 percent rate the government reported in August.

We can now all go about our usual practice of citing whichever statistic either (a) proves we were right all along, or (b) is best for our favored presidential candidate. Alternatively, we can shrug our shoulders and (c) accept that economic data is messy, and not draw any major conclusions from any of this. I don't expect this to be a popular option.

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Voucherizing Medicare Turns Out Not to be a Brilliant Political Proposal

| Thu Sep. 27, 2012 11:07 AM EDT

The Washington Post reports — surprise! — that putting a guy on your ticket who proposes to end Medicare as we know it isn't such a brilliant strategic move after all:

Voters in three critical swing states broadly oppose the sweeping changes to Medicare proposed by Republican vice presidential candidate Paul Ryan and, by big margins, favor President Obama over Mitt Romney on the issue, according to new state polls by The Washington Post and the Kaiser Family Foundation.

Among seniors, the issue rivals the economy as a top voting issue, undercutting Romney’s appeal in Florida, Ohio and Virginia. Generally, the more voters focus on Medicare, the more likely they are to support the president’s bid for reelection....Sizable majorities of voters in each of these three states — as well as those across the country — say they prefer to keep Medicare as a defined benefits program, rather than moving to a system of fixed payments to seniors to buy coverage from private insurance or traditional Medicare.

Really, it's pretty amazing. Just two years ago, Republicans walloped Democrats in the midterm election, at least partly due to a tsunami of ads accusing them of taking money away from Medicare. And Republicans have been on the receiving end of Medicare attack ads too. So they know perfectly well just how sensitive this issue is and how much damage it can do. And yet, somehow they convinced themselves that Paul Ryan had some kind of magic fairy dust that would make the American public sit up and suddenly say to themselves, "He's right! We do need to turn Medicare into a voucher!"

I dunno. The entire Republican Party seems to have fallen into some kind of Svengali-like trance, convinced that Paul Ryan, alone among men, can deliver the bracing tonic that will convince voters to do away with program benefits they've loved and supported for decades. The self-delusion here is inexplicable.

You Hate Me, Now With a Colorful Chart!

| Wed Sep. 26, 2012 8:41 PM EDT

Earlier today I wrote about a recent study showing that Americans are a lot more agitated than they used to be about the prospect of their daughter marrying someone from the other political party. Normally I wouldn't revisit this, but a reader sent me a copy of the full study and I found the actual figures pretty fascinating. 

After wrestling with Excel to figure out how to get a scatterplot to work properly, I created the chart on the right. With only three data points I suppose it's best not to get too worked up about this, but what struck me is the gigantic recent jump. Between 1960 and 2008, the number of upset partisans went up by 16 points among Democrats and 22 points among Republicans. Then, between 2008 and 2010, the number went up by 13 points among Democrats and 22 points among Republicans. That's as much in two years as in the previous 48.

That's....astonishing. I'm not sure whether to write this off as an obvious statistical fluke, or to accept it at face value and try to figure how it's possible. I mean, sure, we had the tea party and all that after Obama was elected, but the previous half century had the John Birch Society, the 60s counterculture, the Reagan era, the anti-Clinton jihadists, the Gingrich Revolution, and the Iraq war. It's a little hard to believe that the past couple of years have been that uniquely spleen-inducing. Comments?

By the way, I noticed that a number of commenters were aghast that I wouldn't necessarily mind if my (hypothetical) daughter married a Republican. I think this might be the result of watching too much Fox News and assuming that every Republican is like Sean Hannity. Well, I wouldn't want my daughter to marry Sean Hannity either. But among the rank and file there are lots of different kinds of Republicans, a great many of whom are perfectly decent folks even if I happen to disagree with them about the optimal top marginal tax rate. It's a big world out there.

Todd Akin's Rehabilitation Project is Now Underway

| Wed Sep. 26, 2012 7:05 PM EDT

For the past few weeks I've been keeping half an eye on Todd "legitimate rape" Akin's Senate race in Missouri. This is mostly for reasons of personal vanity: I want to see if my three-part Akin prediction pans out. Yesterday was the last day he could withdraw from the race, and he didn't, which means that prediction #1 is now safely in the bank. Prediction #2 is that once Akin is definitively the Republican candidate, Republicans will grudgingly start to offer him their support. So how's that going? Well, the head of the NSRC has now switched from insisting that Akin will never get a dime to saying that he will "continue to monitor this race closely in the days ahead." Dave Weigel explains:

"Monitor this race closely" is Washington-speak for "maybe spend money on it." Basically, Republicans bluffed and threatened Akin with a total cut-off because they wanted to replace him with a similar but less unpopular candidate. Akin, who owed national Republicans absolutely nothing — even Sarah Palin endorsed somebody else! — called the bluff. Now that the national spotlight has swung away, Republicans are looking for the least embarrassing way to help out Akin again, because it's tough to lose Missouri and win the Senate. Today's double-team Akin endorsement from Rick Santorum and Jim DeMint was part of that. So was Newt Gingrich's campaign swing. The margin between Akin and Claire McCaskill is only as big as a $500,000 Super PAC check from Foster Friess or Sheldon Adelson.

Prediction #3, of course, is that Akin will eventually eke out a close victory.1 There's nothing new to report on that front, though, since there haven't been any recent polls in Missouri. But the RCP average has Akin behind by about five points, which isn't a lot for a guy fresh off a major gaffe and short of money. Let a little time go by, and give his campaign a cash infusion, and that's not an insurmountable deficit. Not in Missouri, anyway. We'll see.

1I assume this goes without saying, but this is a prediction, not a hope.

Our Bipartisan Apathy Toward Civilian Drone Deaths

| Wed Sep. 26, 2012 5:06 PM EDT

On Monday night I read a couple of news articles about a new study of drone warfare in Pakistan, but I couldn't find the report itself, which was apparently still embargoed at the time. For that reason I held off on blogging about it. However, Glenn Greenwald reminded me about this today, so I went looking again. And here it is. Here are the raw numbers for the total number of strikes and estimated civilian casualties:

At the time of this writing, the US is believed to have conducted 344 total strikes in Pakistan, 52 between June 17, 2004 and January 2, 2009 (under President Bush), and 292 strikes between January 23, 2009 and September 2, 2012 (under President Obama).

....The Long War Journal, a project run by the Foundation for the Defense of Democracies, claims that 138 civilians have been killed between 2006 and the present....New America Foundation’s Year of the Drone project—the most widely cited in the US of the three strike-tracking sources—currently estimates that 152 to 191 civilians have been killed by drones since 2004....TBIJ estimated that between 482 and 849 civilians have been killed by drones in Pakistan since 2004.

So the number of drone strikes has increased from about 11 per year under Bush to about 80 per year under Obama. The chart below, which I cobbled together from three pages of the report (trying to keep the scale approximately the same for all three years), shows the number of drone strikes and the minimum number of casualties they've caused since 2010:

It appears that drone activity has declined in 2012, although that may be an artifact of the time it takes to gather data. Aside from the raw numbers, though, Glenn draws particular attention to this passage from the report:

The US practice of striking one area multiple times, and evidence that it has killed rescuers, makes both community members and humanitarian workers afraid or unwilling to assist injured victims. Some community members shy away from gathering in groups, including important tribal dispute-resolution bodies, out of fear that they may attract the attention of drone operators. Some parents choose to keep their children home, and children injured or traumatized by strikes have dropped out of school. Waziris told our researchers that the strikes have undermined cultural and religious practices related to burial, and made family members afraid to attend funerals.

Glenn comments: "In the hierarchy of war crimes, deliberately targeting rescuers and funerals — so that aid workers are petrified to treat the wounded and family members are intimidated out of mourning their loved ones — ranks rather high, to put that mildly. Indeed, the US itself has long maintained that such 'secondary strikes' are a prime hallmark of some of the world's most despised terrorist groups."

There's no question that fighting a counterinsurgency is hard. And it's fundamentally different from fighting a conventional war because it's difficult to separate militants from civilians — something that insurgents explicitly count on. But even if you accept drone strikes as a legitimate part of counterinsurgency, and even if you accept that civilian casualties are an inevitable part of that, "double tap" strikes are simply heinous. They're also far more likely to turn the indigenous population against you, which makes them counterproductive as well as immoral. After all, it's not as if top al-Qaeda leaders are the ones likely to be conducting rescue operations. At best, you might get a few foot soldiers but nothing more.

The most depressing part of all this is that you can't just blame this on one guy, and hope that it might change once he's out of office. Bush started it, and Obama has ramped it up. What's more, there's no partisan pushback at all. To repeat something I said last year, Republicans are in favor of anything that kills more bad guys, regardless of collateral damage, and Democrats are unwilling to make trouble for a president of their own party. Put those two things together, and drones have become stealth weapons both politically and technologically. Everybody is in favor of them.