Paul Krugman alerts me today to the latest argument against the Fed's policy of keeping interest rates low. Unfortunately, I don't get it. It comes from bond king Bill Gross, and his argument is that if the yield on other investments—corporate bonds, stocks, private equity, etc.—is as low as the yield on treasury notes, then no one will bother investing their money and the economy will stall. Here's Krugman:

When I read Gross and others, what I think is lurking underneath is a belief that capitalists are entitled to good returns on their capital, even if it’s just parked in safe assets. It’s about defending the privileges of the rentiers, who are assumed to be central to everything; the specific stories are just attempts to rationalize the unchanging goal.

Interest, classically (and I do mean classically, as in Mr. Keynes and the), is the reward for waiting: there’s supposedly a social function to interest because it rewards people for saving rather than spending. But right now we’re awash in excess savings with nowhere to go, and the marginal social value of a dollar of savings is negative. So real interest rates should be negative too, if they’re supposed to reflect social payoffs.

This really isn’t at all exotic — but obviously it’s a point wealth-owners don’t want to hear. Hence the constant agitation for monetary tightening.

Maybe. But that's not how I read Gross. His complaint doesn't seem to be that risk-free returns are low. His complaint is that returns on risky investments are also pretty low. And if those returns are low, investment stalls and the economy suffers.

I don't understand this. It's backward. Real investment yields aren't low because the Fed is keeping treasury rates low. They're low because the economy sucks and nobody has much confidence in the future. This lack of confidence keeps cash on the sidelines, and this in turn means there's a huge supply of investment capital competing for a small number of good investment opportunities. When this happens, any project that's even halfway promising can demand very low rates because investors are all clamoring to be let in. They bid each other down, which produces low yields even on risky investments.

I suppose Gross has some baroque explanation for why this is the fault of low Fed rates, but if he does, it's nowhere to be found in his investment letter. The boring truth is that if we want higher investment yields, what we need is a stronger economy, one where the middle class is likely to thrive and consumption will increase robustly. In that economy, there are lots of great investment opportunities and yields will increase.

In the meantime, it's hard to see how raising treasury rates would help things. As best I can make out, Gross is supposing that if Fed rates went up to, say, 3 percent, then corporations would have to offer 5 percent on their bonds. If they did that, then investors would pile in and the economy would start to roar. But that makes no sense. If the hurdle rate for new investments goes up, corporations will simply cut back on their bond issues. It doesn't matter if investors would love to give you money at 5 percent; what matters is whether your project makes long-term sense even if you have to pay 5 percent for financing. If it doesn't, the project doesn't get approved; there are fewer corporate bond issues; and interest rates get competed down once again.

At least, that's what Economics 101 says. Maybe I'm missing something here. But my take is that the risk premium depends primarily on whether there are lots of good investment opportunities in the real world. There haven't been for a long time, which is why our economy has been powered by housing bubbles and financial rocket science for the past decade, rather than real-world investment. This investment drought is the problem we need to solve. Fussing over Fed rates is irrelevant.

I didn't realize this, but when the Senate voted a couple of weeks ago to raise the debt ceiling, the legislation included a provision that there would be a second vote expressing approval or disapproval of the first vote. That vote was held yesterday:

Twenty-seven Republican senators voted with Democrats on Oct. 16 to lift the debt ceiling and avert a catastrophic default. And each one of those 27 senators voted Tuesday to "disapprove" of their own votes. The vote Tuesday was a symbolic "resolution to disapprove" of the debt limit hike. It was mandated by the deal thanks to a last-minute provision inserted by Senate Minority Leader Mitch McConnell (R-KY). The motion failed 45-54 because all Democrats opposed it.

WTF? Does this make sense even on craven political grounds? Do these guys really think the tea partiers are going to forgive them as long as they cast a vote saying they're really, really sorry about caving in and saving the American economy from massive default and Armageddon?

I dunno. Maybe this will now be a standard feature of all legislation: a first vote on the legislation itself, followed by a second "apology tour" vote in which you make it clear that you're sorry you did what you did. At a guess, I'd say that voting to apologize for your voting record would only make the zealots—not to mention every other non-comatose human being in the country—even more contemptuous of you, but what do I know? Everything's worth a try.

It's fairly easy to examine tax returns and figure out the share of personal income taxes paid by various groups. But what about the corporate income tax. Who pays that?

One way or another, people ultimately end up paying corporate taxes. Corporate shareholders pay much of it in the form of lower profits and dividends, but not all. So who else? Bruce Bartlett summarizes some new reasearch on this:

Companies may try to raise prices to compensate for the corporate income tax, thus shifting some of the burden onto consumers.

Most economists don’t believe that much, if any, of the corporate tax is shifted onto consumers this way, because corporations face competition from noncorporate businesses, such as sole proprietorships and partnerships, and from businesses based in countries with higher or lower corporate taxes. Competition sets prices for goods and services without regard to the corporate tax rate.

While economists still believe that the bulk of corporate income taxes is paid by the owners of capital, in recent years they have come to believe that workers ultimately pay much of the tax in the form of lower wages. This results from lower capital investment due to a higher cost of capital, which reduces productivity and hence wages, and because capital investment moves to other countries where corporate income taxes are lower.

So when you take all this into account, what's the distribution of corporate income taxes? The Joint Committee on Taxation took a crack at estimating this and came up with the following table:

The numbers in this table represent the total amount of taxes paid by various income groups, in millions. The lowest income group, for example, pays an aggregate of $5.5 billion if you don't count corporate taxes, and $6.5 billion if you do. Thus, corporate taxes increase their federal tax burden by 17.8 percent. Other groups see similar kinds of increases.

Bartlett suggests that this might make a bipartisan deal on corporate taxes more likely. "Politically, it is now easier to show that a cut in the corporate tax rate will have benefits that are broadly shared." That might be true if these estimates are confirmed by other groups. But it would still depend a lot on what kind of tax replaced the lost revenue.

Paul Waldman recounts yet another story of someone allegedly getting screwed by Obamacare. This time the victim is Deborah Cavallaro, profiled yesterday on the NBC Nightly News:

We learn in this story that her insurer is cancelling her current plan, which costs $293 a month, because it doesn't comply with the new law. They've offered her a new plan at $484 a month. That sounds like it sucks!....But wait. Maybe she's not a victim after all. How does the $484 plan her current insurer is offering compare to the other ones she could get? Did she or the reporter go to the California exchange and try to figure that out? Apparently, they didn't. But I did.

It took less than 60 seconds. Let's assume that Deborah has a high enough income that she isn't eligible for subsidies. I put in that I was 45 years old and got nine different choices for a Bronze plan, which in all likelihood most closely resembles what Deborah has now. The average monthly cost was $258, or $35 a month less than what Deborah's paying now for her bare-bones plan....She can get a Silver plan, with more generous coverage, for $316, only $23 more than she's paying now. Congratulations, Deborah!

In a follow-up post, Waldman makes the right point about this:

I want to talk about the thing that spawns some of these phony Obamacare victim stories: the letters that insurers are sending to people in the individual market....There's something fishy going on here, not just from the reporters, but from the insurance companies. It's time somebody did a detailed investigation of these letters to find out just what they're telling their customers.

....If the woman I discussed from that NBC story is any indication, what the insurance company is offering is something much more expensive, even though they might have something cheaper available. They may be taking the opportunity to try to shunt people into higher-priced plans. It's as though you get a letter from your car dealer saying, "That 2010 Toyota Corolla you're leasing has been recalled. We can supply you with a Toyota Avalon for twice the price." They're not telling you that you can also get a 2013 Toyota Corolla for something like what you're paying now.

I'm not sure that's what's happening, and it may be happening only with some insurers but not others. But with hundreds of thousands of these letters going out and frightening people into thinking they have no choice but to sign up for a much more expensive plan, it's definitely something someone should look into. Like, say, giant news organizations with lots of money and resources.

It's true that there are some people who are going to end up paying more for coverage under Obamacare than they're paying now. But Waldman is right: there's something very fishy about these letters. Over the past three years, insurance companies have swapped their plans around so fast and so often that virtually no one today has a plan more than a couple of years old—something that seems an awful lot like a deliberate effort to evade Obamacare's original intent that most individual policies would be grandfathered and therefore remain available to existing customers who wanted to keep them.1 Now, having engineered a situation where most current policies aren't grandfathered, millions of people are getting letters canceling their existing plans and being told that the replacement is far more expensive.

I'm not sure what's going on here, but there's at least one lesson in this for the press: never take these letters at face value. If you find someone who's going to end up paying more thanks to Obamacare, fair enough. Run with the story.2 But first, you'd better perform the due diligence to find out what a comparable plan really costs. That means getting income and coverage details from the subject of your story and then doing a detailed search of the local exchange to find out what's on offer. We're not seeing enough of that.

1Plans in existence before March 23, 2010, are grandfathered, which makes them exempt from most of the new requirements of Obamacare. However, if your insurance company switched you into a "better" plan after that date, it's not grandfathered and can be canceled at any time.

2Of course, it would be nice if you also ran some stories about people who are benefiting from Obamacare, especially since they probably outnumber the other folks by 100:1 or so.

The NSA Strikes Back

The great European spying scandal just got a little more complicated. There's been an uproar in France and Spain over reports that the NSA has collected millions of phone records in those countries, but today brought this news:

Leaked U.S. documents appearing to show that the National Security Agency collected data on tens of millions of European phone records, an issue that has sparked outrage among U.S. allies, actually represented data handed over to the NSA by European intelligence services as part of joint operations, U.S. officials said Tuesday.

Hmmm. What records were involved? Why were they turned over?

Army Gen. Keith Alexander, director of the NSA, said reports to the contrary, based on revelations by former NSA contractor Edward Snowden, were “completely false.” He said European intelligence services collected phone records in war zones and other areas outside their borders and shared them with the NSA.

“This is not information that we collected on European citizens,” Alexander told the House Permanent Select Committee on Intelligence. “It represents information that we and our NATO allies have collected in defense of our countries and in support of military operations.”....The French and Spanish intelligence agencies have had extensive, long-running programs to share millions of phone records with the United States for counterterrorism purposes, according to current and former officials familiar with the effort.

And what do Spain and France have to say about this?

The NSA declined to comment, as did the Spanish foreign ministry and a spokesman for the French Embassy in Washington. A spokesman for Spain's intelligence service said: "Spanish law impedes us from talking about our procedures, methods and relationships with other intelligence services."

Roger that. The NSA, aka "current and former U.S. officials," is also fighting back on a different front, saying that European countries have targeted the communications of U.S. citizens in the past. The obvious implication is that European leaders should cool it on the feigned outrage over NSA wiretapping of their citizens.

Will this work? Or will it simply piss off the European public even more? I can't decide. Wait and see.

Neil Irwin notes today that consumer confidence took a sharp downward turn in October. But it's not clear if this will have any real effect on the broader economy:

Turns out, shutting down the government for 16 days while using the threat of a government debt default to battle over the nation's budget isn't great for peoples' psyche

....It's worth remembering that measures of confidence are always far more volatile than the actual amount of money Americans spend....So there are no guarantees that the plummeting consumer confidence will materialize into worse economic results for October. Still, coming off of a slew of weaker-than-expected data, it's hard to imagine that the wallop that consumer confidence took in October will help matters.

Yep. If Republicans get down to business and agree to pass a simple budget by the end of the year, the effect of the October debacle will probably be limited. But if we go through the exact same thing again in January? Then all bets are off.

Brad Plumer takes a look today at recent research on overfishing:

Ideally, we'd have in-depth stock assessments for the entire world, but those are difficult, expensive, and fairly rare. So, in their paper, Pitcher and Cheung review a number of recent studies that use indirect measurements instead. For example, they note that recent analyses of fish catches suggest that about 58 percent of the world's fish stocks have now collapsed or are overexploited.

Note that 91 percent of all fish stocks today are either fully exploited or overexploited. There are some success stories of fish stocks being rebuilt, but that's the almost invisible dark green line near the top. It represents less than 1 percent of all global fish stocks.

But all is not lost. Most of these success stories are in advanced economies, including the U.S., Australia, Canada, and Norway, which is exactly where you'd expect progress to begin. Low-income countries lag behind, but that may change as the success stories start to percolate downward:

Yet many low-income countries lack the resources to monitor their fisheries. And even richer nations struggle to enforce the laws they have: In Europe, regulators have consistently set lax fishing quotas — in part due to lobbying from the fishing industry. ("Europe is not one of the places that's doing well," says Pitcher, "with a few exceptions like Norway.") Meanwhile, as climate change warms the ocean and disrupts ecosystems in unpredictable ways, regulating fisheries may become even more difficult.

"Attempts to remedy the situation need to be urgent, focused, innovative, and global," the paper concludes. But that's harder than it sounds.

Yes it is.

Jim Tankersley has a fine piece in the Washington Post today about the anger that people in conservative communities feel about both the stagnant economy and the man they blame for it: President Obama. One guy in Rome, Georgia, obviously lost his specialty butcher shop business because of the recession and a new supermarket opening down the street, but apparently his bank decided to tell him they wouldn't extend him another loan due to Dodd-Frank. This was almost certainly just a convenient fib, but he believes it. Another guy is shutting down his wholesale produce business because of the recession and the loss of a big contract to another bidder, but he blames Dodd-Frank too. Needless to say, both these folks would be better off if conservatives in Congress had permitted a stronger response to the financial crisis. Instead they blame Obama and praise their congressman for shutting down the government this month.

And then there's Donald Rizer:

Rizer did not have a new job lined up. He had come down to Rome after leaving a carpet factory several years ago. He needs shoulder surgery but can’t afford insurance. And because of a quirk in the health-care law, and the fact that Georgia declined to expand Medicaid coverage for low-income people like him, Rizer can’t qualify for a subsidy to buy coverage on his own.

When he visited the federal health insurance exchange Web site, he found the cheapest policy available to him cost $200 a month — one quarter of his current salary. “Obama,” he said, “he thinks that he’s helping things, but he ain’t.”

As Tankersley points out, Rizer should soon qualify for free health coverage thanks to Obamacare's expansion of Medicaid. The reason he's not getting it is because (a) conservatives on the Supreme Court made Medicaid expansion optional, (b) Georgia's conservative governor has refused to be "bullied" into joining the expansion, and (c) conservatives in the Georgia legislature supported him.

But who does Rizer blame? Obama, of course.

The whole piece is worth a read. It places a small spotlight on the real-world consequences of Obama Derangement Syndrome, and it's both a little bit sad and a little bit enlightening.

Was President Obama truly unaware that the NSA was spying on leaders of friendly foreign countries? The LA Times reports that the intelligence community is pretty peeved at White House denials:

The White House and State Department signed off on surveillance targeting phone conversations of friendly foreign leaders, current and former U.S. intelligence officials said Monday, pushing back against assertions that President Obama and his aides were unaware of the high-level eavesdropping.

....Precisely how the surveillance is conducted is unclear. But if a foreign leader is targeted for eavesdropping, the relevant U.S. ambassador and the National Security Council staffer at the White House who deals with the country are given regular reports, said two former senior intelligence officials, who spoke on condition of anonymity in discussing classified information.

....Some U.S. intelligence officials said they were being blamed by the White House for conducting surveillance that was authorized under the law and utilized at the White House. "People are furious," said a senior intelligence official who would not be identified discussing classified information. "This is officially the White House cutting off the intelligence community."

Does the intelligence community really have good reason to feel like it's being thrown under the bus? Or is this kind of plausible deniability just the way things go in spook land? I'm not sure. But John McCain wants to find out: "Obviously, we're going to want to know exactly what the president knew and when he knew it," he told reporters in Chicago. In related news, however, the New York Times seems to have confirmed my guess about the timeline for this story:

[The spying program] was not suspended until sometime last summer after the theft of the N.S.A. data by Mr. Snowden was discovered. “At that point it was clear that lists of targeted foreign officials may well become public,” said one official, “so many of the interceptions were suspended.”

So the programs were indeed suspended "this summer," but only after it became clear that they were highly likely to become public. If it weren't for Edward Snowden, they'd be continuing to this day with no one the wiser.

This morning I braved the horror show of Steve Benen's newly redesigned site—Obamacare isn't the only IT project with problems!—and came across the right's latest infatuation: Dianne Barrette, a 56-year-old resident of Winter Haven, Fla., "who’s made a flurry of television appearances after Blue Cross/Blue Shield informed her that her old plan is being replaced with a new one, and her new coverage will be more expensive." Erik Wemple investigated, and discovered that Barrette's old coverage was pretty crappy. Benen summarizes:

If this woman had a serious ailment and was forced to stay in the hospital for a while, her old plan would have likely destroyed her financial life permanently, leaving her bankrupt. Now, thanks to “Obamacare,” in the event of a disaster, she’ll be protected with coverage her insurer can’t take away — with no annual or lifetime caps.

In other words, the new horror story for critics of the health care law features a middle-aged woman trading a bad plan for a good plan, and health care insecurity for health care security.

I think we're going to be seeing a lot of shiny new television stars like Barrette whose stories don't really check out. On the other hand, a couple of regular readers emailed to tell me that the stories aren't all bunk. Here's JG:

I stopped employer-subsidized insurance last year and went with a Blue Cross high-deductible plan for my family of four. $5,000 individual deductible, $10,000 family deductible, and $330/month in premiums....A couple of weeks ago, I got a letter from Blue Cross that my policy was not being offered next year....Similar benefit plan is $750 a month premium with a $12,500 family deductible.

Another wrote that his premium will be increasing from about $600 to $1,300. These are both nontypical cases that represent extremes, and both readers have incomes high enough that they don't qualify for any subsidies. On the other hand, neither is selling some kind of conservative doomsday story. They may eventually discover that things are a little better than they thought once they navigate the exchanges in more detail, but they're facing pretty big increases regardless. As one of them wrote:

I was and am for Obamacare, recognizing that my income allows me to pay more to make sure others have health care. But over 100% increase in monthly premium is kind of shocking. I have no idea if my situation is representative, but if it is, that's going to be the real story going forward. I think people certainly contemplated 20-30% increases in premiums for the same health care plan, but more than 100%?

How many people like this are really out there? We don't know yet. Stay tuned.