Kevin Drum - March 2013

Any Way You Cut It, We've Got Big Economic Problems

| Sun Mar. 10, 2013 6:40 PM EDT

The war between Paul Krugman and Jeffrey Sachs continues this weekend with a long column from Sachs contending that: the 2009 stimulus was useless; high debt levels are going to stangle us; and the only thing that matters is fixing our structural problems. Tyler Cowen says he agrees with Sachs "at least two-thirds," but it's not clear which third he disagrees with. Conversely, Mark Thoma delivers an epic beatdown, saying that Sachs "can believe whatever he wants, but the evidence is against him."

I have mixed emotions. Thoma has much the better of the argument on the question of whether the 2009 stimulus was helpful. The bulk of the evidence suggests that, along with ordinary countercyclical spending, it did a lot of good. It might not have been structured ideally—Sachs is right about that—but it's better than he gives it credit for, as Ryan Cooper points out. There's not much question that we live in an imperfect world, but to say that the stimulus spending was literally useless, simply because it wasn't as good as it could have been, goes far beyond any reasonable read of the evidence.

Still, that leaves us with the question of what to do going forward. This is where I'm a little more wobbly. My rough take on the Great Recession is that it was about one-third structural and two-thirds cyclical. If you apply that ratio to unemployment, which went up from 5 percent to 10 percent, it means—again, roughly—that maybe 3.5 points of that were cyclical and 1.5 points were structural. If that's close to true, we've got about 1 percentage point left to go before we've eliminated all the cyclical unemployment caused by the financial crash. The rest is accumulated structural problems.

Obviously these numbers are just guesses, and no, I have no grounding in economics to back them up. Still, I don't think they're way off the mark. And they suggest that, although some modest additional stimulus would be helpful—certainly more helpful than the idiotic anti-stimulus of the sequester—our biggest problem going forward is indeed structural.

Unfortunately, I have my doubts that we have any solutions for the structural problems that bedevil us. Sachs offers up a fairly conventional liberal prescription—lots of investment in infrastructure and education, paid for by carbon taxes and various taxes on the rich—and I don't have any problem with that. I don't think Krugman does either. Unfortunately, I suspect that our bigger structural problems are twofold:

I'm all for rebuilding our infrastructure, and a strong focus on renewable energy would certainly help reduce our vulnerability to oil shocks. But it will happen only slowly, and only if the entire rest of the world does the same thing. At the same time, improvements in technology will be good for productivity, but are going to put increasing numbers of people out of work for good. Better infrastructure won't really help that.

I'm not sure what the answers are. A Manhattan Project level of commitment to renewable energy might help with the oil problem, but there's no political will for that. Stronger programs of income redistribution would help with the technology problem, but there's pretty obviously no political will for that either right now. So I guess we just keep plugging along until either (a) it turns out these problems aren't as calamitous as I think they are, or (b) it becomes so obvious they are calamitous that everyone finally agrees they have to be addressed.

1I'm reluctant to call this a "problem," since technology is obviously a huge driver of economic growth. But it's certainly a big problem at a human level until we figure out what to do with workers who are permanently displaced from the job market by advancing technology.

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Atrios Has a Question

| Sat Mar. 9, 2013 12:18 PM EST

And I have an answer: because it would have meant raising taxes. St. Grover would not have given his blessing.

Friday Cat Blogging - 8 March 2013

| Fri Mar. 8, 2013 4:05 PM EST

Don't worry: during the festivities revolving around the 10th anniversary of Friday Catblogging, ordinary Friday Catblogging will continue as usual. Today we're back to quilts. This one is called "Tessellated Pinwheels," and it was made from reproduction 1930s fabrics that were left over from the Wedding Ring quilt. It's machine pieced and hand quilted. The cat was manufactured in the usual way.

By the way, like all good origin stories, the tale of Friday Catblogging comes in three parts. Yesterday was the 10th anniversary of the inspiration. Monday is the 10th anniversary of the decision to start doing it. And next Thursday is the 10th anniversary of the first actual instance of Friday Catblogging. We're going to celebrate by chaining me to the computer for a Reddit Ask Me Anything session about catblogging. If you've ever had any burning questions about this, save 'em up until then.

In other cat news, my sister sends me this article showing that even medieval monks had to put up with cats climbing onto their keyboards. Plus ça change etc.

Here's Why I Don't Think Republicans Will Reach a Sequester Deal With Obama

| Fri Mar. 8, 2013 3:47 PM EST

Greg Sargent is doing yeoman's work trying to convince me that some kind of deal to replace the sequester is possible. You can read his full argument here, but I think this is a fair summary:

  • Republicans really, really want to replace the sequester. They don't like the defense cuts; they don't like the prospect of taking blame for the economic damage the sequester does; and they want more entitlement cuts.
  • Democrats will never, ever agree to a deal that's pure entitlement cuts. They'll insist on some new revenue as well, and they're not going to cave on this. Republicans know this.
  • So if Republicans want to end the sequester and make progress on entitlement cuts, they're going to have to agree to some tax increases.

I've already gotten myself into trouble over this issue, so I'm going to keep my response restrained. But basically it's this: Republicans know all this, and they don't care. There have long been a few Republican senators who are willing to entertain tax increases as part of a bigger deal, so there's a bare chance that something could pass the Senate. But the House? Not. Gonna. Happen. Even if John Boehner, in his heart of hearts, wants to make a deal like this—something I'm skeptical about—his caucus won't let him.

Here's where I think Greg's argument, and other similar ones, go wrong:

  • Republicans don't actually hate the sequester all that much. It's a trillion dollars in spending cuts! What's not to like?
  • I don't think public pressure to repeal the sequester is going to be that strong, especially in red districts. Republicans can ride it out for the next few months, and the specific cuts will all be renegotiated in the next budget cycle.
  • I don't think Republicans really care that much about entitlement reforms. Sure, they're in favor of them, sort of, as long as there's bipartisan cover, but it's mostly just big talk. They're keenly aware of the political danger of cutting Social Security and Medicare, especially since seniors are part of their core base. Besides, Obama is offering fairly modest entitlement cuts and they're mostly not the kind conservatives are interested in.
  • In any case, who cares? Even if they hate the sequester; even if public pressure is strong; even if they do want entitlement reforms—even if all those things are true, they come in a distant 83rd place to Republican hostility toward tax increases. It doesn't matter if the tax increases come from raising rates or limiting deductions, either. They're opposed to them no matter what.

Call me simplistic if you want, but I see no evidence that Republicans are ready to accept tax increases under any circumstances where they have a choice. Maybe someday they will. Certainly logic and basic arithmetic suggest that someday they'll have to accept the need for higher revenues. But remember what Keynes supposedly said? "The market can stay irrational longer than you can remain solvent." The same is true for Republicans. Someday is still a long way away.

That said, Greg's argument is easy to understand, and so is mine. You can all decide for yourself which one seems more likely. In a few months, we'll all know the answer.

Some Advice For Our Next Financial Crisis

| Fri Mar. 8, 2013 2:29 PM EST

I've long believed that the core problem with our modern banking system is that it relies on too much leverage. Way too much. Banks with less debt and more capital are far more stable, which means that even if they're too big to fail, they're just a lot less likely to fail in the first place.

Basel III has improved capital requirements a bit, raising them from around 8 percent to around 10 percent and stiffening up the kinds of assets that count as capital. In the U.S., Dodd-Frank mandates a blunt 3 percent minimum leverage ratio as a backstop. Those are both good things, but nowhere near enough. I'd like to see risk-based capital requirements on the order of 20 percent and minimum leverage requirements of around 10 percent.

Anat Admati of the Stanford Business School and Martin Hellwig of the Max Planck Institute think even that's too low, and they make their case in the recently published The Bankers’ New Clothes. I haven't read it because (a) I'm already convinced, so why bother? and (b) although I hate to admit it, I guess I'm a little tired of reading about financial regulation since it's obvious we're not going to get any new regs in the near future. Matt Yglesias just finished reading it, though, and although he was skeptical going in, he says the book makes a pretty persuasive case:

Borrowing in order to lend or invest is the core of banking, but while 19th-century banks regularly raised around half of the funds from equity, recently adopted international rules proposing that banks finance no more than 97 percent of their investment with debt are being treated by the industry as the end of the world as they know it....Admati and Hellwig say instead we should make them fund a much larger share of investment—20 to 30 percent—with equity. Speculative losses that would bankrupt a financial institution with 3 percent equity would simply push a bank with 20 to 30 percent equity into the danger zone, where it would be banned from paying dividends or engaging in share buybacks until retained profits have gotten it out of danger.

....The idea that this would be an economy-killer lacks any real basis. The Federal Reserve sets economy-wide interest rates through monetary policy and could offset the overall macroeconomic impact of tighter lending standards. The difference is that some kinds of borrowing—by consumers and small businesses from banks—would get more expensive, while it would get cheaper for large firms and governments to borrow in bond markets. That’s not a free lunch, and in the short-term at least it might make some people pretty unhappy. But it’s not an unattractive vision either. The aughts’ experiment in substituting cheap consumer credit for rising incomes didn’t have a happy outcome, and while nobody likes to stand up for big business, the fact is that large-firm investment activity is an important driver of long-term productivity.

Unfortunately, I don't see any hope of this happening in the near term. Basel III is going to take years to implement, and neither Democrats nor Republicans in Congress have any appetite for stiffer U.S. requirements. Maybe regulators will finally listen to Admati and Hellwig after the next financial crash.

10 Years Ago Today I Came to My Senses

| Fri Mar. 8, 2013 1:35 PM EST

Friday Catblogging isn't the only thing that's 10 years old this month. It's also the 10th anniversary of the Iraq War. However, if I'm going to memorialize anything about this, I figure I should memorialize the 10th anniversary of when I finally came to my senses about the war. It happened on March 8, 2003, after we learned that documents showing that Saddam Hussein had tried to buy uranium yellowcake from Niger were forged. And not just forged, but forged so badly as to be jokes. Here's my mea culpa:

For a variety of reasons related to post-war planning and Bush's seeming indifference about tearing down international institutions in order to get his way, I've been on the fence about war with Iraq for several weeks now. Basically, I figured that all it would take is one more thing to send me into the anti-war camp, and I think this is it. If we're planning to start a war based on intelligence from the same guys who made this mistake, it's time to take a deep breath and back off.

The next day I explained a little more about what I meant by "a variety of reasons related to post-war planning":

Originally, my skepticism about Bush's goals was due to the fact that he never spoke about them. Then, over the past couple of weeks, when he started addressing the problem, he just made things worse. First a "blueprint" for a military occupation was presented to Congress, but it reassured no one with its vision of a U.S. military governor and a solidly U.S. occupation force. Then there was his AEI speech, where he had a chance to rally the country behind a long-term vision, but instead just spoke a few platitudes and promised that we'd get out as soon as possible. Then there was the sellout of the Kurds. And the decision that we wouldn't support any kind of federal government in Iraq.

....Put all this together with things like Paul Wolfowitz's fanciful testimony before Congress last month and it's simply become wishful thinking to believe that Bush is really committed to any kind of serious effort to promote democracy in Iraq…Without that, the war isn't worth it. Saddam's direct threat to the U.S. is marginal, and while I'd rather get rid of him now instead of later, I don't think it's worth the risk if we do it by demolishing the collective security system that, flaws and all, has served us pretty well for the past 50 years.

Paul Wolfowitz's "fanciful" testimony before Congress, of course, had come a week earlier, when he told Congress that Eric Shinseki's postwar troop estimates were "wildly off the mark"; that there was no history of ethnic strife in Iraq; that Iraqi civilians would welcome an American-led liberation force; that "even countries like France will have a strong interest in assisting Iraq in reconstruction"; and that published estimates of the costs of war and rebuilding were way too high. It was an epic tour de force of wrongness, quite possibly the wrongest war prediction since Allied generals figured that troops would be "home by Christmas" after the start of World War I.

So why, to my eternal regret, did I support the war in the first place? The truth is that it's been so long I have a hard time remembering. Part of the reason is that at that point I had been blogging for only a few months, and before that I simply hadn't given a great deal of thought to questions of when military intervention was justified. That made me an easy mark, I suppose. I also recall that I was strongly influenced by Ken Pollack's The Gathering Storm, one of the ur-texts of liberal hawkishness. Beyond that, I also underestimated just how badly the Bush administration was lying to us and how inept their postwar occupation planning was. In retrospect, none of that should have made a difference: The war was a bad idea, full stop, regardless of how competent the Bush administration's planning was. At the time, though, it made a difference to me.

On March 8, 2003, I obviously didn't know that the forged Niger documents would one day become a scandal in their own right during the Valerie Plame affair. All I knew was that it was the last straw. So I turned.

But you know what surprises me the most about all this? The fact that so few people did, in the end, change their minds about the war. I have the same sense of astonishment over the 2008 financial crash. Both of them were epic disasters, and yet very few people, especially on the right, saw them as catastrophes that might require them to revisit their views on military intervention and financial regulation respectively. But if those two things don't cause you to update your priors, what will?

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Hockey Stick Graph Now Even More Stickish

| Fri Mar. 8, 2013 12:33 PM EST

Everyone is familiar with the "hockey stick" chart of global warming. It's called that because it shows relatively flat global temperatures over the past millennium followed by a sudden sharp rise over the past century.

Well, here's the latest version, based on a reconstruction of enormous amounts of data over a much longer time frame. It very dramatically shows how different the past century is from the past 12,000 years. Over that period, global temperatures gradually rose as we exited our last ice age and then gradually started to fall about 5,000 years ago. But there's nothing gradual about what happened next: Starting around 1900, global temperatures suddenly spiked almost straight up. The LA Times reports:

New research into Earth's ancient climate is providing a clearer, more detailed view of how the planet's average surface temperature fluctuated over the period known as the Holocene epoch, which continues today.

....In a study published in Friday's edition of the journal Science, researchers used eight indirect temperature indicators — such as pollen and shells from marine organisms — to chart long-term global warming and cooling trends....“By the year 2100, we will be beyond anything human society has ever experienced,” said study leader Shaun Marcott, a postdoctoral researcher at Oregon State University's College of Earth, Ocean and Atmospheric Sciences.

Michael Mann, a climate researcher who has endured a blizzard of attacks from climate deniers over his original hockey stick graph, figures the team who published this work will suffer the same fate. "I am certain that professional climate-change deniers will attack the study and the authors, in an effort to discredit this important work," he told the Times.

No doubt. Tim McDonnell has more here.

Quote of the Day: Obamacare is Practically a Stealth Initiative These Days

| Fri Mar. 8, 2013 11:41 AM EST

From Republican up-and-comer Marco Rubio, talking to Hugh Hewitt about the upcoming vote in the Senate on the continuing resolution to fund the government through the end of the year:

I think it’s coming next week....and I think it’s a perfect opportunity for us to have a debate once again on Obamacare. I don’t think there’s been enough attention paid to it

Right. Obamacare hasn't gotten enough attention from Republicans who want to repeal it. What planet are we talking about here?

Via Dave Weigel.

Chart of the Day: Net New Jobs in February

| Fri Mar. 8, 2013 11:23 AM EST

The American economy added 236,000 new jobs last month, but about 90,000 of those jobs were needed just to keep up with population growth, so net job growth was closer to 146,000 jobs. That's not bad. The headline unemployment number went down to 7.7 percent, also not bad.

On a slightly less cheery note, the December jobs number was revised upward by 24,000 jobs but the January number was revised downward by 38,000 jobs. In addition, February's low unemployment number was partly due to a declining labor participation rate, which continued its long slide from a high of 67.3 percent in 2000 to 63.5 percent last month.

In other words, mixed news, though generally better than in the past year. But we haven't yet seen the effects of the sequester. That's likely to have a noticeable and negative impact on new job creation over the next six months. Fasten your seat belts.

New York Times is a Killjoy Over Obama's Dinner Party

| Fri Mar. 8, 2013 1:38 AM EST

In the New York Times today, Jeremy Peters delivers some major buzzkill about President Obama's friendly little dinner with all those Republican senators last night:

Lawmakers in both parties say the president’s efforts may make him a few new friends, but he is not going to change ideologies. Others privately complained that convening such a high-profile meeting seemed like an effort to distract from his failure to help forge a solution to avert the automatic budget cuts that went into effect last week.

Asked Thursday morning about the president’s new social schedule, Speaker John A. Boehner chuckled before saying he hoped the talks would produce real compromise....“I think it’s a sign, a hopeful sign. And I’m hopeful that something will come out of it. But if the president continues to insist on tax hikes, I don’t think we can get very far.

Those who have studied the relationship between presidents and Congress doubt seriously whether Mr. Obama’s latest outreach will yield much. “It’s a rather shallow notion,” said George Edwards, a political scientist at Texas A & M University and an expert who has written extensively on presidential power. “You’re not going to get committed conservatives to change their long-held ideological commitments because you play a round of golf or invite them to the White House.”

Roger that. And how did Phase 2 go on the other side of Capitol Hill today?

On Thursday, Obama's charm offensive set the table for one of the hardest nuts to crack — the top Republican budget expert, Rep. Paul D. Ryan of Wisconsin, who as the GOP vice presidential candidate tried to evict Obama from the executive mansion where he was invited to lunch.

Ryan, chairman of the House Budget Committee, and his Democratic counterpart, Rep. Chris Van Hollen of Maryland, sat down with Obama for lentil soup and sea bass in a meeting that Ryan described as a "frank" and the White House called "constructive."

We all know what "frank and constructive" means, right? Usually it means that no fistfights broke out, but only barely.

We've been through a dotcom bubble, and then a housing bubble. Right now, I feel like we're in a presidential schmoozing bubble. I don't think there's much question that Obama could stand to improve his social skills, just as there's no question that he might do himself some good by making sure his positions—and his concessions—are better understood in the halls of Congress. But the boomlet of excitement we're seeing over a few dinners and lunch meetings with the opposition is hard to fathom. Maybe we're all so desperate for something—anything—to convince us that our political system isn't completely broken that we're willing to latch on to even a routine bit of socializing as a lifeline of hope. Unfortunately, I suspect this says more about how miserable we all feel than it does about the possibility of Republicans ever agreeing to higher taxes.