Kevin Drum - September 2012

Ben Bernanke's Great Inflation Coverup

| Thu Sep. 20, 2012 11:55 AM EDT

This is what Ben Bernanke is up against:

Federal Reserve Bank of Dallas President Richard Fisher said the central bank’s third round of bond purchases will probably fail to create jobs while risking higher inflation. “I do not see an overall argument for letting inflation rise to levels where we might scare the market,” Fisher said yesterday.

....“A sustained increase” in inflation expectations “would suggest incipient doubts about our commitment to the Bernanke doctrine of sailing on a course consistent with 2 percent long- term inflation,” Fisher said in a speech in New York.

Bernanke's problem is pretty simple here: he almost certainly wants higher inflation, but he can't say he wants higher inflation. He simply doesn't have enough support for inflation tolerance among his Fed colleagues.

Nonetheless, higher inflation would be good. The simplest way to see this is to look at interest rates. Once the Fed has reduced interest rates to zero, it can't go any further. But what if the economy is so bad that all the standard models suggest you need negative interest rates to get the economy back on track? The only answer is higher inflation. If inflation is running at 2% and interest rates are at zero, the real interest rate is -2%. If you borrow money, you're effectively being allowed to pay back less than you borrowed, which provides a big incentive to buy a house or expand your business.

But if even that's not enough, then how about inflation of 4%? As long as you promise to keep interest rates at zero, the real interest rate is now -4%. The Fed is making it almost irresistable to take out a loan and buy new stuff. And there's a virtuous circle here: businesses understand that negative borrowing rates stimulate consumption and demand, so not only is it super cheap to expand production, but they have good reason to think it will pay off as demand increases in the future.

But this all depends on tolerating higher inflation for a while, and inflation is a major hot button in American politics, as guys like Fisher demonstrate. So Bernanke has to pretend that he's still dedicated to 2% inflation even though he's probably not. This is unfortunate, since it blunts the power of his policies. If he could come right out and make it clear exactly what he's doing and how long he plans to keep it up, it could have a big impact. But he can't, and so his policy loses about half its power. All because inflation is such a boogeyman. This is the price we pay for our mindless fears.

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Barack Obama's Radical Socialist Pop Business Bafflegab

| Thu Sep. 20, 2012 10:57 AM EDT

I don't really blame Republicans for desperately trying to change the subject after the release of the secret Romney fundraising video, but it cracks me up that they're trying to make hay out of this 1998 statement from Obama:

I think the trick is figuring out how do we structure government systems that pool resources and hence facilitate some redistribution because I actually believe in redistribution, at least at a certain level to make sure that everybody's got a shot. How do we pool resources at the same time as we decentralize delivery systems in ways that both foster competition, can work in the marketplace, and can foster innovation at the local level and can be tailored to particular communities.

It's not just that this is 14 years old. It's not just that Obama extols competition, the marketplace, and innovation. It's the fact that this is basically buzzword central. I mean, this is a guy who's obviously trying to make it sound like he has some kind of actual governing philosophy, and tossing in every piece of MBA-speak he can think of to hide the fact that he's saying nothing. If he had immediately followed this up with a reading of "Jabberwocky" I wouldn't have been surprised.

And this is supposed to be the evidence that Obama is some kind of radical socialist who hates the free market? Sure. In reality, it's evidence that he was spending a little too much time back then in the pop business aisle at Barnes & Noble.

Breaking: You Should Always Tell Your Employer That You're an Honest Person

| Thu Sep. 20, 2012 12:49 AM EDT

The Wall Street Journal reports that more and more companies are turning to software to make hiring decisions for them, rather than using human interviewers:

It isn't just big companies that are turning to software for hiring help. Richfield Management LLC, a Flint, Mich., waste-disposal firm that employs 200 garbage collectors, was looking for ways to screen out applicants who were likely to get hurt and abuse workers' compensation.

About a year and a half ago, Richfield turned to an online test developed by a small firm called Exemplar Research Group. It asks applicants to pick between statements like "When I'm working for a company I take pride in making it as profitable as possible" and "I'm only concerned with how well I can do financially in my job," then rate how strongly they agree or disagree.

The goal is to gauge an applicant's emotional stability, work ethic and attitude toward drug and alcohol. Those who score poorly are considered high disability risks. Richfield said its workers' comp claims have fallen 68% since it has used the test.

Honestly, this just seems like an IQ test to me. Do I take pride in making my company as profitable as possible? Yes sir, I sure do! Do I consider myself a clock watcher? No sir, I sure don't! If you can't figure out that these are the right answers, you might not be bright enough even to be a garbage collector.

Of course, these tests might be trickier than I think. Retail outlets ask questions that test for honesty, and according to one retailer who uses software to screen new clerks, "People who are trying to fool the system are going to get tripped up." Maybe so.

On a more policy-centric note, if this kind of thing becomes genuinely widespread, I wonder if it will create a new class of the permanently jobless. It's a law of nature that there will always be a certain number of people who just don't have good temperaments. Still, even if you're basically a lousy worker — unreliable, quick-tempered, etc. — you can still find jobs here and there since human interviewers won't always figure this out. But if screening software becomes hard to beat (especially among those who aren't too bright), then lousy workers will simply never be able to find jobs. They'll be turned down every time. So then what happens?

Republicans and the 47 Percent: A Case Study

| Wed Sep. 19, 2012 4:20 PM EDT

Mitt Romney's complaint that lots of people pay no federal income tax has become a familiar conservative lament over the past few years. But how did this become such a staple of tea party conservatism? Here's a case study that gives us a clue.

The main target of Republican ire on the zero-tax front isn't the elderly or the temporarily unemployed. It's poor people. And one of the reasons that so many poor people pay no income tax is the Earned Income Tax Credit, which can reduce your tax bill to zero or less. To qualify, though, you need a minimum income (i.e., you need to have a job), which makes the EITC an incentive to work—and this is why it's an anti-poverty program that Republicans used to support. Reihan Salam tries to figure out why they don't anymore:

A more parsimonious explanation is that cohort replacement and a lack of a sense of history is doing all of the work: many of today's Republicans are unacquainted with the case for the EITC and the child tax credit and the exclusion of Social Security benefits, or they fail to connect these initiatives to the narrowing of the tax base. This isn't a sinister plot.

Maybe. But let's do a quick history review first. Back in the '60s there was a groundswell of support for a negative income tax, a concept that held some appeal as a simple mechanism that could replace the complex alphabet soup of existing New Deal and Great Society anti-poverty programs. But Mr. Great Society himself, Lyndon Johnson, objected to it because it doled out money even if you weren't working. (FDR probably would have opposed it for the same reason.) Republicans agreed that it undermined incentives to work, and the NIT died.

However, after several years of political haggling, Sen. Russell Long (D-La.) won passage of the EITC in 1975. Because it was available only to those with earned income, it provided a positive incentive to work and enjoyed bipartisan support. It was made permanent in 1978, again with bipartisan support.

But then things changed. EITC was expanded in 1986 with support from Ronald Reagan but with far less support from congressional Republicans, most of whom fought the expansion. Another expansion in 1990 enjoyed even less Republican support, and in 1993, when Bill Clinton included a further expansion of EITC in his budget bill, it passed with no Republican votes at all. It was at this point that the EITC became associated exclusively with Democrats, and after the Gingrich revolution of 1994 the EITC became a frequent target of attacks from the GOP. House Republicans pushed for major cuts, and Clinton eventually managed to buy them off only by setting up a special $100 million IRS fraud unit targeted specifically at the working poor.

Roughly speaking, then, Republican support for the EITC has steadily declined since the mid-'80s, and the majority of the party has been actively opposed to it since the mid-'90s. So I don't think you can really blame the current antipathy toward EITC on the historical ignorance of modern Republicans. This all started 30 years ago, when Republicans were still keenly aware of both the program's origins and its conservative policy underpinnings. They just decided they didn't like the idea of giving money to poor people anymore. Now they've gone even further, and Mitt Romney's echo of his wealthy donors' disdain for the nontaxpaying poor is merely the next step along a logical path. Here's the path:

1975-1985: Support for work-oriented anti-poverty programs like the EITC

1985-1995: Mixed emotions toward EITC

1995-2005: Opposed to EITC

2005-present: Not just opposed to EITC, but actively in favor of making the poor start paying income taxes

The EITC hasn't been a bipartisan program for a long time, and its current sorry state within the GOP isn't just due to youngsters who have forgotten their party's past. As the EITC's history demonstrates, for the past several decades the core of the Republican Party has simply become steadily more hostile toward the working poor. They're no longer fellow citizens who deserve some help as long as they're willing to work, they're parasites who are mooching off the sweat of the productive classes. You can decide for yourself if this is sinister or not.

Is the Fed Really Buying Three-Quarters of All Treasury Debt?

| Wed Sep. 19, 2012 1:10 PM EDT

The Federal Reserve building.

Here's Mitt Romney responding to a rich donor worried that the United States is heading toward bankruptcy:

Audience member: The debates are gonna be coming, and I hope at the right moment you can turn to President Obama, look at the American people, and say, "If you vote to reelect President Obama, you're voting to bankrupt the United States."…

Romney: Yeah, it's interesting…the former head of Goldman Sachs, John Whitehead, was also the former head of the New York Federal Reserve. And I met with him, and he said as soon as the Fed stops buying all the debt that we're issuing—which they've been doing, the Fed's buying like three-quarters of the debt that America issues. He said, once that's over, he said we're going to have a failed Treasury auction, interest rates are going to have to go up. We're living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who's loaning us the trillion? The Chinese aren't loaning us anymore. The Russians aren't loaning it to us anymore. So who's giving us the trillion? And the answer is we're just making it up. The Federal Reserve is just taking it and saying, "Here, we're giving it." It's just made up money, and this does not augur well for our economic future.

Italics mine. So is this true? Is the Fed really buying three-quarters of all Treasury debt?

The short answer is no. The longer answer is that the Fed has engaged in two rounds of quantitative easing and just recently announced a third. The first one, which started at the end of 2008, mostly involved the purchase of mortgage-backed securities. Purchase of Treasury debt was fairly small. The second round, which took place in the first half of 2011, did consist mostly of Treasury debt. It amounted to $600 billion, and led to a spate of horror stories about how the Fed was purchasing 61 percent of all Treasury issues. Since then, however, the Fed has maintained a steady level of Treasury debt, and the third round of quantitative easing, like the first, is mostly focused on the purchase of mortgage-backed securities. This year, as CNBC reports, the Fed has been a modest player in the market for Treasury debt:

Mom-and-pop investors, and not the Federal Reserve, have been the ones most responsible for driving the mad dash to government debt, according to newly released data…The demand among average investors has swelled so much, in fact, that they bought more Treasurys in the first quarter than foreigners and the Fed combined.

Households picked up about $170 billion in the low-yielding government debt during the quarter, while foreigners increased their holdings by $110 billion. The Fed, meanwhile, actually slightly decreased its net holdings.

So Romney is, once again, plucking a scary number he seems to have heard from a tea party symposium somewhere and mindlessly regurgitating it to a receptive audience. But he's wrong. There was a period of about six months during 2011 when the Fed really was hoovering up a big share of all Treasury debt. But that was a one-time deal more than a year ago, and since then the big buyers of Treasury bonds have mostly been the usual suspects: foreigners and US households.

Read the full transcript of Romney's remarks at the private fundraiser.

It Turns Out That Mitt Romney Really Does Enjoy Firing People

| Wed Sep. 19, 2012 12:29 PM EDT

Reading a bit more through the full transcript of the Romney fundraiser, we come to this passage:

Audience member: The government in Washington right now is just permeated by cronyism, outright corruption....And I think people are fed up with that....Nancy Pelosi was supposed to give us an honest Congress and has given us just the opposite as speaker. And I think that's a campaign issue that can work well. I'm optimistic that you'll be elected president. And my recommendation would be clean house, immediately. The SEC, the CFTC are disaster areas.

Romney: I wish they weren't unionized, so we could go a lot deeper than you're actually allowed to go. Yeah.

Sadly, Romney didn't elaborate on just which civil service slackers he wishes he could fire with the stroke of a pen, but this might be a fruitful area for someone to explore further. Does he specifically want to fire lots of people at the SEC and the CFTC? Or just fire lots of low-level workers in general? Inquiring minds want to know.

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And Now, the Weirdest Excerpt From the Romney Video

| Wed Sep. 19, 2012 12:15 PM EDT

You've seen all the damaging parts of the secret Romney video. Now watch and be amazed at the weirdest part:

Audience member: How are you going to win if 54 percent of the voters think China's economy is bigger than ours? Or if it costs 4 cents to make a penny and we keep making pennies? Canada got it right a month ago. Why isn't someone saying, "Stop making pennies, round it to the nearest nickel?" You know, that's an easy thing, compared to Iran. I want to see you take the gloves off and talk to people that actually read the paper and read the book and care about knowing the facts and acknowledges power. As opposed to people who are swayed by, you know, what sounds good at the moment. If you turned it into like, "Eat what you kill," it'd be a landslide. In my humble opinion.

See? This is the kind of stuff you have to put up with at these events. I mean, what the hell is this guy even talking about? It's a mystery. But whatever it is, I'll bet he thinks it's the wisdom of ages. And since Romney wants his $50,000, he has to smile and pretend it makes sense. Welcome to politics.

Obama is Killing It on Intrade

| Wed Sep. 19, 2012 10:59 AM EDT

Is the release of Mitt Romney's secret fundraising video likely to affect the race much? Conventional journalistic wisdom says yes. Conventional political science wisdom says no. I don't have any wisdom of my own, but here's a single data point to toss into the pot. The chart below shows the Intrade trend over the past couple of weeks, and so far it appears that the video is having about the same effect as Romney's flub after the Cairo attacks. The Cairo gaffe sent Obama's odds of winning from 58% to 67% over the course of a week, and the secret video is on a similar track, boosting Obama from 67% to 69% in a couple of days. Take it for what it's worth.

What's Behind the EPA's New 4-Gallon Minimum Purchase Mandate?

| Tue Sep. 18, 2012 11:11 PM EDT

Rep. Jim Sensenbrenner (R–Wisc.) is fuming:

The latest mandate handed down from the Environmental Protection Agency (EPA) is so ridiculous, even I was shocked. The EPA has now mandated how much gasoline you must buy at certain gas stations. Say hello to the Obama Administration’s four gallon minimum.

So what's this all about? Well, the ethanol industry has been lobbying for a quite a while to sell E15 — a blend of 85% gasoline and 15% ethanol. Why? Because they want to sell more ethanol, and E15 contains more ethanol than the current E10 blend. But they're not the only ones in favor of E15. The Renewable Fuel Standard, passed in 2007, requires ever greater use of ethanol, and refineries are afraid that before long they won't be able to meet the RFS standards unless they can sell the E15 blend.

But if the ethanol industry is in favor of E15, you can probably guess that the petroleum industry is against it. And you'd be right. After all, 5% more ethanol means 5% less petroleum. Gasoline sales have been declining for the past few years anyway, and the petroleum industry is none too happy about losing even more market share if E15 blends come onto the market.

Both the ethanol and petroleum industries are so odious that it's hard to pick sides here. As it turns out, though, the anti-E15 crowd has some intriguing arguments. The primary one is that E15 only works in cars manufactured after 2001. It doesn't work in older cars, it doesn't work in boats, and, as the Outdoor Power Equipment Institute will tell you, it doesn't work in devices like chain saws, utility vehicles, and lawn mowers. In fact, it can destroy those things if you use it accidentally.

But it gets worse. Most gas stations don't want to install new tanks just for E15. Instead, they're installing blender pumps, which mix the ethanol and gasoline together in the right proportion depending on which one you want. But there's a problem: if you pump E15 into your car, about a third of a gallon remains in the fueling hose when you're done. If someone comes along, switches to E10, and buys a single gallon for their lawnmower, they'll get a third of a gallon of E15 and two-thirds of a gallon of E10. That comes to about 11.7% ethanol, and that might be enough to set your lawnmower on fire.

So the EPA produced a new rule: if you sell E15, you have to require your customers to buy at least four gallons of gas regardless of what blend they're buying. That's a big enough purchase that the residual fuel in the hose is too small to matter. So let's count up the problems here:

  • Generally speaking, corn ethanol isn't any better for the environment than petroleum. So forcing more use of ethanol doesn't make much sense in the first place.
  • E15 can destroy small engines. The EPA requires gas stations to post a warning sign, but we all know how much attention people pay to warning signs in gas stations. We're probably going to end up with a fair number of fried snowblowers and ATVs before this is all over.
  • People who buy gasoline for outdoor equipment usually only need a gallon or two. Ditto for motorcycles, many of which have gas tanks smaller than four gallons. So at gas stations that sell only E15/E10, these folks won't be able to fill up at all because they won't be able to meet the four-gallon minimum.

These aren't actually gigantic problems, and if ethanol truly had a lower carbon footprint than gasoline I might figure that it was worth going through some minor growing pains to encourage greater use of it. But it's really not. So to my surprise, I find myself agreeing with Sensenbrenner. If we ever get to the point where we can mass-produce ethanol that's truly better for the environment than petroleum (cellulosic ethanol, cane ethanol, etc.), then it might be worth going through all this. Until then, it's probably not.

And the Renewable Fuel Standard that started all this? It wasn't such a great idea in the first place, and as long as it mandates increased use of corn ethanol it never will be. It deserves a thorough revision.

Complete Romney Video Now Online

| Tue Sep. 18, 2012 3:20 PM EDT

I've gotten several queries about whether we plan to release the entire video of Mitt Romney's Boca Raton fundraiser. Answer: yes we do. And yes we have. If you want to watch it, click here.