Kevin Drum - 2012

LA Times Joins the Paywall Brigade

| Sat Feb. 25, 2012 2:33 PM EST

I see that the LA Times will soon be putting in place a paywall — oops, I mean a "membership program" — for its online readers:

Starting March 5, online readers will be asked to buy a digital subscription at an initial rate of 99 cents for four weeks. Readers who do not subscribe will be able to read 15 stories in a 30-day period for free. There will be no digital access charge for subscribers of the printed newspaper.

....Other news outlets that have begun charging for online journalism include the New York Times, the Wall Street Journal and the Dallas Morning News. Gannett, the nation's largest newspaper company, this week announced plans to launch a similar program at 80 publications, saying it could boost earnings by $100 million in 2013.

After the first month, the price goes up to $3.99 per week, which seems a wee bit steep to me. The New York Times charges me $2.60 per week and the Wall Street Journal charges me $3.99 per week, and meaning no offense, those are much better papers with far more content. It doesn't really matter to me, of course, since I already subscribe to the print edition, but I have my doubts that there are thousands of new subscribers itching to pay that kind of money for the LAT.

As it happens, the trend toward paywalls is a particular problem for me, since I'm a blogger and rely on access to lots of news sources on a regular basis. But I already subscribe to the Times and the Journal, since they provide content that's genuinely unique/valuable, and also to the LA Times, mostly out of habit and residual loyalty. But that's about all I can afford. I'd like to read the Financial Times more regularly too, but $700 per year in newspaper subscriptions has me tapped out. As other papers start erecting paywalls, it's going to make my job ever harder.

At the same time, although I think the LA Times is overpriced, I don't really blame them or anyone else for putting up a paywall. The conventional wisdom among the digerati, as near as I can tell, is that paywalls are always and forever bad things, but why is that? I'd say just the opposite: I've never entirely understood why most newspapers offer online editions at all. I've heard dozens of strained arguments about how online editions don't cannibalize sales of the paper edition, but come on. Of course they do. There's always been a strong whiff of special pleading to these arguments: we don't want to pay for news, therefore it must be bad to charge for news. Online editions are good PR! They draw in new readers! Etc. We heard the same arguments for years in the music biz, and guess what? Online piracy/sales cannibalized the hell out of existing channels.

The same thing is almost certainly true of newspapers, and as the digital generation grows up cannibalization will increase. But what do do? Even after more than a decade of dotcom experience, online advertising still doesn't cover the cost of producing your average metro daily. Not even close. I'm not sure online advertising even covers the marginal cost of running a website. So you either charge or die.

Of course, "die" is going to be the choice for a lot of news outlets. Most of them do a crappy job of reporting national and international news, and sports and gossip are available from a million places. That leaves purely local news, which is a pretty tiny niche.

But they might as well try. It's not like there's some cosmic law that says news outlets are required to give away their products for free. The advertising model isn't working, and maybe no other model will either, but they might as well start experimenting. It's either that or give up.

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Raw Data: How Registration Affects Comments

| Sat Feb. 25, 2012 12:51 PM EST

A few weeks ago we started requiring registration with email verification for commenters. So how has that worked out? Here are the basic stats from our tech wizards:

  • 22% decrease in total comments
  • 22% increase in Twitter logins
  • 257% increase in Facebook logins
  • 45% decrease in comments our moderators decided to delete

So there you have it. We're getting fewer comments, but not a lot fewer, and anecdotally, the tone of the comments section seems much more civil.

The moral of the story is: Register today! You can use your Twitter or Facebook login, but you don't have to. Just submit your name, you'll get an email address with a verification link to click, and you're good to go. You only have to do it once.

Friday Cat Blogging - 24 February 2012

| Fri Feb. 24, 2012 3:54 PM EST

This week doesn't really have a theme. Just a couple of cats enjoying the nice weather. On the left, Domino is rolling around in the sunshine and peering out from behind a potted plant on the patio. On the right, Inkblot obviously has some serious business on his mind as he strides purposefully toward the camera. As it turns out, that serious business was jumping down off the fence and going inside to see if the food bowl had been magically replenished. Sadly, it hadn't been. Maybe next time.

Obama Takes on the Private Equity Industry

| Fri Feb. 24, 2012 3:35 PM EST

As we all know, corporations are allowed to deduct the interest they pay on loans from their taxable income. This often makes borrowing a more attractive way of raising money than an equity offering. Barack Obama would like to put debt and equity on a more even footing, so he's proposing to reduce the deductibility of interest expenses. Dan Primack digs in:

Obama's basic framework is to lower the corporate rate from 35% to 28%....Private equity firms would uniformly support the lower rate, since it would benefit every one of their portfolio companies. But Obama also wants a reduction in the deductibility of interest payments on corporate debt....And for PE-backed companies with major leverage loads, this is not an even trade-off.

For example, take a look at hospital chain HCA Holdings (HCA), whose private equity sponsors include Bain Capital and Kohlberg Kravis Roberts & Co. (KKR). For 2010, it reported $2.23 billion in income before income taxes, and nearly $2.1 billion in interest expenses. Let's imagine everything else is equal, except that the corporate rate is now 28% and there is no deductibility for interest payments. HCA's tax bill would climb by $587 million ($156m in savings plus $734m in new taxes).

....Obama argues that reducing the deductibility of corporate debt interest "will reduce incentives to overleverage and produce more stable business finances, especially in times of economic stress."....On the other hand, I happen to still believe that private equity is a net positive for the economy — more good than evil — and much of the model is based on this particular tax quirk.

The question, therefore, becomes how big of a reduction to the deductibility is Obama looking for? If he's just looking to reduce the deduction from 100% to 80%, then HCA would actually save money under Obama's plan (again, based only on these two variables — excluding other "lost" deductions). But it would lose money at a 70% deductibility threshold. Wish I could give you an answer on his thinking here, but all I have is a source at Treasury telling me that they haven't yet gotten into that level of detail.

For me, my initial bias would be to go to around 65% or so — thus achieving the goal of reducing leverage while not making the tax hike so onerous as to destroy the profit potential of debt-heavy LBOs. And probably add in an exemption for companies with revenue below a certain level ($20m?), so as not to discourage the creation of capital-intensive small businesses in markets like manufacturing.

I don't have a settled opinion on the goodness vs. evilness of private equity financing. But I do have a bias against the tax code heavily favoring one type of financing over another — not a huge bias, mind you, but still a sizeable one. So if leveraged buyouts make sense only because of quirks of the tax code, they'd have to be enormously beneficial to make it worth supporting those tax quirks. And the evidence suggests to me that it's a close call. Private equity might be a net benefit to society, but not by a whole lot compared to other ways of financing corporate growth and acquisition.

So I'd probably go further than Primack. If a deal makes no financial sense unless Uncle Sam gives you a big writeoff, then maybe it just doesn't make sense. Lowering the writeoff to 50% would still keep moderately leveraged buyouts profitable, but it would probably kill off the most heavily leveraged ones, which are also generally the most destructive. I think I could live with that.

Barack Obama Has Consistently Defended Religious Freedom

| Fri Feb. 24, 2012 1:45 PM EST

Is President Obama waging a war on religion? Just typing the words is enough to make slitting my wrists seem like a fairly reasonable life choice. But Steve Chapman, obviously a stouter man than me, takes the time to dissect just how dumb this argument is:

Amid all the uproar, it's easy to overlook something equally important: the administration's many battles for religious liberty.

....The most conspicuous surprise involves government rules for faith-based organizations that get federal funding for social services. President George W. Bush issued an executive order allowing such groups to hire only people who share their faith—exempting them from the usual ban on religious discrimination....In his presidential campaign, [Obama] said his view was simple: "If you get a federal grant, you can't use that grant money to proselytize to the people you help and you can't discriminate against them—or against the people you hire—on the basis of their religion." But it hasn't worked out that way. Obama has left Bush's rule in place, infuriating many groups that expected a reversal.

....His commitment is also on display in defending churches against municipal governments that would prefer to do without them....It filed a brief in support of a Hasidic Jewish congregation's lawsuit against the city of Los Angeles, which had forbidden it to hold services in a private home. A federal court ordered the city to back off.

The administration has also intervened in cases where prisoners are denied religious literature. After a South Carolina sheriff prohibited inmates from getting devotional materials and other publications in the mail, the Justice Department sued. In the end, the county agreed to let inmates receive Bibles, Torahs, Korans and related fare.

....In doing all this, the administration isn't simply doing the politically appealing thing....The congregations victimized by zoning regulations are too small to matter. Prison inmates generally can't vote. There is no detectable political gain in anything Obama is doing here.

No detectable political gain? I suppose. But look: we're dealing with people who think the reason Obama has left gun laws alone is because he wants to "lull gun owners to sleep and play us for fools in 2012." So he's probably doing the same thing here. Reelect the guy on November 6th, and on November 7th he'll begin his war on the Catholic church. There's really no arguing with this, is there?

Republicans Determined Not to Get Fooled Again

| Fri Feb. 24, 2012 12:34 PM EST

Steve Benen points out that the Republican candidates are finally talking about the Bush years. But they aren't big fans:

We've reached the point in Republicans politics at which GOP candidates are considered too liberal if they sided with the Bush/Cheney administration on most key areas of domestic policy.

Indeed, as Jon Ward added, Rick Santorum felt the brunt of these criticisms because he was, by 2012 standards, too loyal to the conservative Republican president in office during his congressional career.

The message to the American electorate is therefore rather striking: "Vote Republican in 2012: We won't be moderate like that Bush guy was."

What to make of this? For starters, I actually have some sympathy for this position. I won't repeat chapter and verse here, but I've argued a few times before that although George Bush was a temperamental conservative, he actually governed pretty moderately, especially on domestic issues. With the exception of tax cuts and judicial appointments, most of his legacy is either centrist or actively liberal.

This is an old argument that I won't rehash except to say that conservatives unquestionably believe it's true. And this explains a lot about the current race. In 2000, conservatives were determined to avoid another George H.W. Bush, so they picked a candidate whose dedication to conservatism seemed unassailable. And as far as they're concerned, even that didn't work out. Not because of Katrina or the wars or the economic collapse — all the stuff the rest of us hold against Bush — but because of NCLB and Sarbanes-Oxley and the Medicare prescription bill and the inexorable rise in spending during his watch. So what are you going to do? If even George W. Bush turned out to be a poser, this time around you're going to demand absolutely ironclad guarantees of orthodoxy. Thus the right-wing game of one-upmanship that's turned the Republican primary into such a clown show.

It all makes sense, in a weird kind of way. After all, you know the old saying: Fool me once, shame on you. Fool me twice, can't get fooled again. No one's going to get fooled this time around.

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Santorum: Higher Education a Plot to Secularize America

| Fri Feb. 24, 2012 11:42 AM EST

So here's a dilemma: yesterday I suggested that Rick Santorum's candidacy was useful for the spotlight it shined on the movement conservative id, something that America might do well to confront directly. So does this mean I should highlight (as a public service, of course) every outlandish paranoid theory that issues forth from Santorum? That would keep me pretty busy, and I really don't think I can commit to it on a long-term basis. But here's the latest:

On the president’s efforts to boost college attendance, Santorum said, “I understand why Barack Obama wants to send every kid to college, because of their indoctrination mills, absolutely ... The indoctrination that is going on at the university level is a harm to our country.”

He claimed that “62 percent of kids who go into college with a faith commitment leave without it,” but declined to cite a source for the figure. And he floated the idea of requiring that universities that receive public funds have “intellectual diversity” on campus.

Now, this is a new one to me. It's commonplace for movement conservatives to believe that universities are dens of depravity and radical left indoctrination. So far, so normal. But as far as I know, most of them don't believe that efforts to get more kids into college are motivated by a desire to destroy their faith. That's a step beyond even normal wingnut land.

This stuff leaves me kind of speechless. I already know what hardcore conservatives think of academia and university life in general. Nothing new there. And let's face it: the political mood at most universities is pretty liberal. So fine. But what kind of person actively believes that the president of the United States favors more access to higher education as a plot to secularize the country? This is 10-page-single-spaced-crank-letter-to-the-editor territory. I wonder if even one single real conservative (not the apostates or the RINOs — and you know who you are) will step up and suggest that this is just a wee bit crackpottish?

Gay Marriage Now a Reality in Maryland

| Fri Feb. 24, 2012 2:29 AM EST

It's official:

Maryland will join seven states and the District in allowing same-sex marriage, ending a year-long drama in Annapolis over the legislation and expanding nationwide momentum for gay rights. The Senate passed the measure by a vote of 25 to 22 Thursday night, and Gov. Martin O’Malley (D) has vowed to sign it into law.

But will this turn into an election year headache for the White House?

To win some of the final votes needed for passage in the House of Delegates last week, backers agreed to conditions that could help opponents place the new law on the November ballot....[This] presents a potential dilemma for President Obama. He has been heavily courting the gay community for donations and votes in his reelection campaign but has stopped short of fully embracing marriage rights. Obama has said his views are “evolving,” a statement viewed by many supporters in that community as a strong hint that he will soon endorse the cause, perhaps if and when he is safely reelected.

Gay rights activists can be expected to pressure the president to publicly support the Maryland law in November. At the same time, however, Obama will probably be pressured by many African American leaders in Maryland to join them in opposing the measure.

If it ends up on the ballot, it will be hard for Obama to avoid taking a position. Perhaps it's finally time for his evolution to turn into an epiphany.

The Death Star Is a Surprisingly Cost-Effective Weapons System

| Thu Feb. 23, 2012 10:44 PM EST

There's been a lot of loose talk about the Death Star lately. I want to put it into a bit of perspective.

As background, some students at Lehigh University have estimated that it would be a very expensive project. The steel alone, assuming the Death Star's mass/volume ratio is about the same as an aircraft carrier, comes to $852 quadrillion, or 13,000 times the world's GDP. Is this affordable?

Let's sharpen our pencils. For starters, this number is too low. Using the same aircraft carrier metric they did, I figure that the price tag on the latest and greatest Ford-class supercarrier is about 100 times the cost of the raw steel that goes into it. If the Death Star is similar, its final cost would be about 1.3 million times the world's GDP.

But there's more. Star Wars may have taken place "a long time ago," but the technology of the Star Wars universe is well in our future. How far into our future? Well, Star Trek is about 300 years in our future, and the technology of Star Wars is obviously well beyond that. Let's call it 500 years. What will the world's GDP be in the year 2500? Answer: Assuming a modest 2 percent real growth rate, it will be about 20,000 times higher than today. So we can figure that the average world in the Star Wars universe is about 20,000 times richer than present-day Earth, which means the Death Star would cost about 65 times the average world's GDP.

However, the original Death Star took a couple of decades to build. So its annual budget is something on the order of three times the average world's GDP.

But how big is the Republic/Empire? There's probably a canonical figure somewhere, but I don't know where. So I'll just pull a number out of my ass based on the apparent size of the Old Senate, and figure a bare minimum of 10,000 planets. That means the Death Star requires .03 percent of the GDP of each planet in the Republic/Empire annually. By comparison, this is the equivalent of about $5 billion per year in the current-day United States.

In other words, not only is the Death Star affordable, it's not even a big deal. Palpatine could embezzle that kind of money without so much as waving his midichlorian-infused little pinkie. If it weren't for the unfortunate breakdown in anti-Bothan security and the shoddy workmanship on the thermal exhaust ports, it would have been a pretty good investment, too. In other words, yes: totally worth it.

UPDATE: Rewritten once, then twice, to make it absolutely crystal clear that Star Wars took place "a long time ago" but that its technology is quite a ways into our future. Everyone happy now?

UPDATE 2: Apparently the canonical figure for the size of the Republic/Empire is 1.75 million full member worlds. Needless to say, this makes the Death Star even more affordable.

Editors' Note: This post spawned a number of high-caliber comments from our readers, and we've been nerding out on the great gags and trekkie humor. Here's a few you should not miss, lightly edited for clarity:

1. Stephanus Mark Van Schalkwyk

"Come on! They built one for the movie! That didn't cost 1.3 billion times the planet's GDP! Or did it? Is that what caused the housing crisis?

On that same note, the Death Star is not something we'd need while we have bankers. Just infiltrate a couple of bankers onto a planet and kablam! whazoop! the planet is destroyed. "

2. kgnova:

"Build the Death Star you will.  With workers from Tatooine who unemployed they are.  But Jedis's health care coverage -- even those for the Dark Side -- covers contraception.  Difficult will it be to provide a sufficient work force to maintain your weapon."

3. Hittheroad.ca: DUDE. This is completely faulty logic. Star Wars happened "a long time ago...." Duh.

Kevin Drum: Yeah yeah. Fine. I've cleaned up the language. And now off to the sand pit of the Sarlacc with you.

4. Toby Scott:

"There may be a bit of a PR problem here: Death Star isn't testing well as a name. Given that it's the size of a moon, why not build in some leisure facilities from the start. You're more likely to get funding if you market it as a great holiday destination that will end unemployment and just happens to be capable of blowing up planets."

5. Snarki, child of Loki:

"'If it weren't for the unfortunate breakdown in anti-Bothan security and the shoddy workmanship on the thermal exhaust ports, it would have been a pretty good investment, too. In other words, yes: totally worth it.'

Well, that's what happens when your procurement rules require going with the lowest bidder.

SOME things are eternal."

6. pjcamp:

"Have you SEEN The Corbomite Maneuver? Kirk already won that battle."

American Households Not as Reckless as You Think

| Thu Feb. 23, 2012 7:37 PM EST

Everybody knows that household debt in America has increased dramatically over the past few decades. But why? One possibility is that we've all been borrowing recklessly and living wildly beyond our means. But there are other possibilities too. Your debt-to-income ratio will go up if (a) your debt increases or (b) your income declines, and that can happen in several ways:

 

  • If you borrow more, your debt burden goes up.
  • If interest rates go up, your debt burden goes up even if you're borrowing the same amount as before.
  • If your income goes down (or grows more slowly than it used to, preventing you from paying down your debt at previous rates), your debt-to-income ratio increases.
  • If inflation falls, your debt level doesn't erode as quickly and your debt-to-income ratio may increase.

So which is it? Josh Mason and Arjun Jayadev recently decided to take the standard formula for decomposing public-sector debt changes and apply it to household debt over the past century or so. What they discovered was that although households did increase their borrowing during the housing bubble era (2000-06), that hasn't been a general trend over the past few decades. It's the other stuff that's changed:

If interest rates, growth and inflation over 1981-2011 had remained at their average levels of the previous 30 years, then the exact same spending decisions by households would have resulted in a debt-to-income ratio in 2010 below that of 1980, as shown in Figure 2. The 1980s, in particular, were a kind of slow-motion debt-deflation, or debt-disinflation; the entire growth in debt relative to earlier periods (17 percent of household income, compared with just 3 percent in the 1970s) is due to the slower growth in nominal income as a result of falling inflation.

....Neither the 1980s nor the 1990s saw an increase in new household borrowing — on the contrary, the household sector in the aggregate showed a primary surplus in these decades, in contrast with the primary deficits of the postwar decades. So both the conservative theory explaining increased household borrowing in terms of shorter time horizons and a general lack of self-control, and the liberal theory explaining it in terms of efforts by those further down the income ladder to maintain consumption standards in the face of a falling share of income, need some rethinking.

In some sense, you can say that people got accustomed to a certain level of borrowing in the immediate postwar era and then kept it up in the Reagan-Volcker-Greenspan era. Unfortunately, they didn't realize that the world had changed. Or, more accurately, they didn't realize how much it had changed. In particular, they didn't realize that growth was going to be permanently slower, inflation was going to be permanently lower, and wage growth was going to slide inexorably toward zero. So even though household borrowing went down over time, it didn't go down nearly enough. The chart below shows how much the debt-to-income ratio has increased in real life (black line) vs. how much it would have increased with the same level of borrowing but under the financial conditions of the postwar era (red line):

Based on this, Mason and Jayadev conclude that hectoring households about their borrowing habits isn't going to have much effect:

Going forward, it seems unlikely that households can sustain large enough primary deficits to reduce or even stabilize leverage....As a practical matter, it seems clear that, just as the rise in leverage was not the result of more borrowing, any reduction in leverage will not come about through less borrowing. To substantially reduce household debt will require some combination of financial repression to hold interest rates below growth rates for an extended period, and larger-scale and more systematic debt write-downs.

At a guess, more systematic write-downs are not in the cards. Deleveraging is thus going to be a very slow, very painful slog that will depress economic growth even below the sluggish rates we've gotten used to over the past 30 years. Welcome to the future.