Kevin Drum - April 2013

Fun and Games in the Bluegrass State

| Fri Apr. 12, 2013 10:39 AM EDT

As we all know, a few days ago MoJo's David Corn scored yet another scoop based on a secret recording when he published a story about an oppo meeting held by Sen. Mitch McConnell's staff back when Ashley Judd was considering running against him. As it happens, the meeting wasn't really a big bombshell unless you've been living in a serious state of innocence about how politics is conducted in America—the participants mostly talked about using material from Judd's own autobiography against her—but it created a firestorm among McConnell and his supporters, who immediately charged that someone had bugged their campaign headquarters.

(QUICK DISCLAIMER: I know nothing more about this stuff than you do. The first time I learned about it was when it appeared on the MoJo website, and I haven't spoken to anyone at MoJo about it since.)

Anyway, it turns out that the recording was apparently made by one or two (it's not entirely clear) guys from ProgressKY—a "heaping pile of uselessness," in Dave Weigel's words—who stood outside the door of the meeting room and recorded the conversation. Or maybe they stuck their iPhones down near a vent. Or something. It's not totally clear yet. But they were ratted out by a Democratic Party operative who didn't want to be tarred by their amateur-hour theatrics, and the two guys have now apparently turned on each other. It's a real soap opera, and Ed Kilgore makes an interesting comment:

It's illuminating, of course, to see liberals in and beyond Kentucky distancing themselves from the would-be guerillas of Progress Kentucky; you rarely see conservatives do that when a Breitbart-inspired stunt backfires. Some people on the left see that as a sign of weakness. But I'd say it's better understood as a sign of understanding that what you get from skullduggery is rarely as effective as publicizing the outrages committed by people like McConnell every day, in public, as proud examples of everything they believe in and represent.

True dat. Conservatives love them some James O' Keefe-style guerrilla warfare, but liberals more often seem vaguely embarrassed about it. Not always, though: certainly there was nothing but praise for the Romney 47% video last year. Still, there's definitely a difference. Whether it's a sign of weakness or something else is your call.

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The Rock and the Hard Place of Future Economic Growth

| Fri Apr. 12, 2013 10:04 AM EDT

Responding to Lane Kenworthy, who thinks that the Fed is unlikely to pursue full employment policies anytime in the near future, Jared Bernstein pushes back:

I’ve often stressed that progressives cannot give up on the “primary distribution”—market outcomes—and hope to fix everything with redistribution. Not only is that an incredibly hard lift, but as market outcomes continuously deteriorate from the perspective of the middle class and the poor, we’ll have to continuously ratchet up the redistributive function. Good luck with that.

This is one of the key economic questions—maybe the key economic question—for liberals these days. On the one hand, it's plain that the best way to raise middle class wages is to engineer a tight labor market. It's best for the workers themselves, who would prefer to earn wages rather than receive handouts, and it's best for the economy, since it keeps our productive capacity at its peak. But over the past 30 years, we've only managed to engineer an unemployment rate under 5 percent twice—both times during bubbles, and both times for only a couple of years. There's very little reason to think we know how to do this on a sustainable basis going forward absent some kind of massive change in our fundamental approach to economic policy. That level of change is pretty unlikely on its own merits, and when you factor in the headwinds from steadily improving automation, it's all but inconceivable.

On the other hand, the prospect of simply accepting that (a) full employment is no longer a policy goal, (b) median wages will therefore be stagnant for the forseeable future, and (c) we should therefore massively ramp up redistribution—well, as Bernstein says, good luck with that.

But those are the alternatives. There is a third alternative, of course: shrug our shoulders and decide that stagnant or falling living standards for the working and middle classes is just one of those things that we can't do anything about. This is Paul Ryan's alternative, and I assume it has no takers among my readership.

So that leaves us with two choices: figure out how to engineer full employment (unlikely) or figure out how to persuade the top 20 percent to subsidize the rest of the country on an ever increasing basis. Anyone have any good ideas on this score?

Regulatory Arbitrage Once Again a Growth Industry

| Thu Apr. 11, 2013 7:55 PM EDT

A Wells Fargo analyst says that investors remain wary of big banks:

So-called universal banks such as Bank of America Corp., Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) are trading at a 25 percent to 30 percent discount to more-focused competitors, analysts led by Matthew H. Burnell wrote in a research report today.

....“Given the challenges posed by increasing regulation, higher capital requirements, and well-publicized trading/market challenges, it’s not surprising that investors remain reluctant to assign a ‘full’ valuation to the universal banks,” the analysts wrote. “If regulators and/or legislators don’t demand it, shareholders could also intensify demands to ‘break up the banks.’ ”

As capital requirements become more stringent, big banks need to do something to improve their capital ratios. One way to do this is to accumulate more capital. Alternatively, since the ratio in question is capital / assets, you can reduce your asset base. And since safer assets require less capital, one way to do this is to sell off your risky assets and replace them with safer assets.

Unfortunately, as the Wells Fargo report points out, this reduces your potential profits and makes investors sad. So instead of actually improving the safety of your asset base, maybe it would be better if you could just pretend to improve the safety of your asset base? In other words, why not engage in some good old-fashioned regulatory arbitrage instead? Here's the New York Times today:

Banks have been shedding risky assets to show regulators that they are not as vulnerable as they were during the financial crisis. In some cases, however, the assets don’t actually move — the bank just shifts the risk to another institution.

This trading sleight of hand has been around Wall Street for a while. But as regulators press for banks to be safer, demand for these maneuvers — known as capital relief trades or regulatory capital trades — has been growing, especially in Europe.

....The buyers are typically hedge funds, whose investors are often pensions that manage the life savings of schoolteachers and city workers. The buyers agree to cover a percentage of losses on these assets for a fee, sometimes 15 percent a year or more.

....Some regulators say they are concerned that in some instances these transactions are not actually taking risk off bank balance sheets....Critics point to other reasons to worry. Most of these trades are structured as credit-default swaps, a derivative that resembles insurance. These kinds of swaps pushed the insurance giant American International Group to the brink of collapse in September 2008. Another red flag is that banks often use special-purpose vehicles located abroad, frequently in the Cayman Islands, to structure these trades.

What a great idea! Just package up a bunch of risky assets, wrap them around a credit default swap, and voila! AAA rated, baby. What could go wrong?

A Lesson in Pension Return Math

| Thu Apr. 11, 2013 3:38 PM EDT

CalPERS, the giant California state pension fund, says it expects future investment returns of 7.5 percent on its holdings. Andy Kessler says this is "fiction." He figures 3 percent is more like it. Dean Baker brings the math:

This is a case where Mr. Arithmetic can provide a big hand. Pension funds like Calpers typically invest around 70 percent of their assets in equities, including the money invested in private equity. The expected return on stock is equal to the rate of the economy's growth, plus the payouts in dividends and share buybacks.

....The long-term growth of nominal GDP is projected at around 4.8 percent, 2.3 percent real growth and 2.5 percent inflation....Companies typically pay out about two-thirds of their earnings as either dividends or share buybacks. With a current ratio of price to trend earnings, the yield is around 7 percent. Two thirds of this yield gives us a payout of 4.7 percent. Adding the two together we get 4.8 + 4.7 = 9.5 percent.

The problem, as near as I can tell, is that Kessler is unaware (?) that pension funds don't invest their money entirely in treasury bonds and other fixed-income securities. They invest lots of it in equities, which have a higher return. And indeed, if you get Baker's 9.5 percent return on 70 percent of your holdings and Kessler's 3 percent on the rest, your average return is....

7.5 percent.

It wouldn't surprise me in the least if CalPERS is being a wee bit optimistic in its forecasts. Maybe they really ought to be assuming 7.25 percent or something like that. But 3 percent? Give me a break.

Update on the Manchin-Toomey Background Check Bill

| Thu Apr. 11, 2013 1:04 PM EDT

Ed Kilgore on the prospect for passage of the Manchin-Toomey background check amendment:

I've gotten a bit of flack from a progressive friend or two who think I've been insufficiently enthusiastic about Manchin-Toomey. To be clear, I think if it were actually to become law, it would indeed be an important step forward towards sane gun regulation, particularly given the stranglehold the NRA has possessed on the issue for so long. But surviving a filibuster on the motion to proceed to a debate in the Senate is at the very most a baby step, so we don't know yet whether Manchin-Toomey represents a breakthrough or just another compromise on a road to ultimate defeat.

Hey, I've gotten a bit of flack too! Maybe we have the same friend?

I should probably update my post of yesterday on this subject. At the time I wrote it, there were few precise details available about what Manchin-Toomey does, and these kinds of compromise deals are really, really sensitive to the actual legislative language that's agreed on. That's still not available, but the fact sheet released later in the day put a bit more meat on the bare bones that were outlined at the press conference. In particular, it clears up their approach to the infamous "gun show loophole":

Under current law, if you buy a gun at a gun show from a licensed dealer, you have to undergo a background check by that dealer. But you can go to a nondealer table at the gun show, or into the parking lot, and buy a gun without a background check. Our bill ensures that anyone buying a gun at a gun show has to undergo a background check by a licensed dealer.

Manchin-Toomey also extends background checks to online sales within a state (interstate sales already require a background check). However, private sales are exempted:

As under current law, transfers between family, friends, and neighbors do not require background checks. You can give or sell a gun to your brother, your neighbor, your coworker without a background check. You can post a gun for sale on the cork bulletin board at your church or your job without a background check.

This represents progress. Instead of going out to the parking lot of a gun show, you'll have to go a bit further—or maybe agree to meet the next day somewhere else. That's an extra hurdle, and that will make it a little less convenient for felons and the mentally ill to get hold of guns. However, it only make it a little bit less convenient, and the data is decidedly mixed on just how much effect this will have in the real world.

Bottom line: I'm a little more bullish on this than I was yesterday, but only a little. This is a baby step indeed. And it's telling that despite its very modest ambitions—and despite the fact that it offers up several goodies for gun owners to make up for expanded background checks—the NRA has announced that they're officially opposed to Manchin-Toomey and that this will be a scorable bill. If you vote for it, your NRA report card will suffer. This makes it worth supporting just for the symbolic value of demonstrating the NRA's extremism, but it also makes it a lot less likely that even this baby step will ever see the light of day.

Raw Data: The Deficit is Shri-i-i-i-nking

| Thu Apr. 11, 2013 11:54 AM EDT

Over at Calculated Risk, Bill McBride quotes a Goldman Sachs analyst about the rapidly shrinking federal deficit—down from 10.1 percent to 5.7 percent last year, and then down again to 4.5 percent following the fiscal cliff deal—and notes that this hasn't gotten much attention:

It shocks people when I tell them the deficit as a percent of GDP is already close to being cut in half (this doesn't seem to ever make headlines). As Hatzius notes, the deficit is currently running under half the peak of the fiscal 2009 budget and will probably decline further over the next few years with no additional policy changes.

It's true that this doesn't get much attention. So how about a simple chart instead? This isn't from a Goldman Sachs report that only a select few have access to, it's from the most recent CBO budget outlook. Anyone who cares just needs to click the link to see it. Pass this along to your friends when they ask you about the monstrous federal deficit and how we're bankrupting our children.

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Quote of the Day: On the Usefulness of Stable Currencies

| Thu Apr. 11, 2013 11:12 AM EDT

From Felix Salmon, on the usefulness of Bitcoin:

Bitcoin only works for payments if you can be reasonably sure that its value will remain reasonably steady for at least the next hour or so.

Quite so. Two hours would be even better.

Republicans Now Officially Opposed to Confirming Any Democratic Nominees for the DC Circuit Court

| Thu Apr. 11, 2013 10:42 AM EDT

Last week I mentioned that I had once dug into the subject of filling vacancies on the DC Circuit Court. I wanted to find out what the official objection to Obama's nominees was:

The party-line answer, it turned out, was pretty straightforward: The DC Circuit doesn't really have a very heavy caseload, so it doesn't need any more judges. As you can imagine, this is a very handy argument indeed, since it means that Republicans don't really need to cast around for a pretend reason to oppose Srinivasan or any of Obama's other nominees. They can just oppose them all.

But that was a couple of years ago. Is it still the official party line? Yes! Ian Millhiser reports today that Sen. Chuck Grassley (R–IA) has introduced a bill that would simply slash the number of seats on the DC Circuit and put a stop to any further Obama nominees completely. Here's Grassley:

As most of my colleagues know, the D.C. Circuit is the least busy circuit in the country. In fact, it ranks last or almost last in nearly every category that measures workload....Given this imbalance in workload, today I am introducing the Court Efficiency Act. A number of my colleagues are co-sponsoring the legislation, including Senators Hatch, Sessions, Graham, Cornyn, Lee, Cruz and Flake.

This legislation is straightforward. It would add a seat to the Second and the Eleventh Circuits. At the same time, it would reduce the number of authorized judgeships for the D.C. Circuit from 11 to 8.

So there you go! Just cut the size of the court from 11 to 8 and there's no need to confirm any more pesky Democratic nominees. The court can continue handing off its overflow caseload to its retired senior judges, almost all of whom are safely Republican.

You can (and should) go read Millhiser for more detail about the reality of the DC court's caseload and why Grassley and his little gang of cosponsors are full of shit. Or you can just accept the obvious: this has no basis in fact or policy. It's simply another transparent Republican power play designed to maintain their stranglehold on the federal bureaucracy.

But I think it does answer a question. It's possible that Republicans will agree to confirm Sri Srinivasan to the DC Circuit. He'd be the eighth judge, and he's practically a gift to them anyway. But after that they haven't the slightest intention of allowing any further vacancies to be filled. Not by Obama, anyway.

Immigration Reform About to Finish First Mile of Marathon

| Thu Apr. 11, 2013 9:57 AM EDT

The big sticking point in the Gang of 8 negotiations over immigration reform has been border enforcement. Hardliners want some kind of firm metric that demonstrates a sharp drop in illegal immigration before anyone currently in the country is allowed to apply for citizenship. Reformers generally consider this a trap, and want to legislate a softer set of goals. The New York Times reports today that the Gang's "delicate compromise" avoids specific measurements:

Instead, the bill allows a period of 10 years for the Department of Homeland Security to make plans and use resources to fortify enforcement at the borders and elsewhere within the country before it sets several broader hurdles that could derail the immigrants’ progress toward citizenship if they are not achieved.

During the first decade after passage, the bill sets ambitious goals for border authorities — including continuous surveillance of 100 percent of the United States border and 90 percent effectiveness of enforcement in several high-risk sectors — and for other workplace and visa enforcement measures. It provides at least $3 billion for Homeland Security officials to meet those goals during the first five years, with a possibility of additional financing.

That all sounds fine, and it's probably the best that can be done if we want to get a bill started through the legislative process. But there's no way that any kind of delicate compromise will survive the crucible of debate. It's going to get amended to death almost instantly, and that might or might not kill the entire bill.

In other words: it's a nice start. But we're only about 10 percent of the way there. Immigration reform still has a helluva long way to go.

Obama's Chained CPI Offer is a Bad Idea

| Wed Apr. 10, 2013 9:46 PM EDT

This is a bit of an obvious point, but I want to make it anyway: pretty much every liberal, even those who generally support the idea of adopting chained CPI as a more accurate measure of inflation, should be opposed to President Obama's proposal to adopt chained CPI.

The reason is simple: chained CPI represents a cut in the growth rate of Social Security benefits. It's arguably something that's worth accepting as part of a larger bargain that would cut benefits a bit and raise taxes a bit in order to improve Social Security's finances, but it makes no sense on its own. Social Security is separate from the rest of the federal budget, and its benefits should never be horse-traded away for miscellaneous changes elsewhere.

If Republicans are ever in a mood to consider a serious Social Security deal that's designed to improve its solvency in a balanced way, that's fine. I'm ready to listen. But that's not on the table. Until it is, chained CPI shouldn't be on the table either.