Kevin Drum

Economic Growth Looks Pretty Grim These Days

| Sun Jul. 13, 2014 11:16 AM EDT

Via James Hamilton, the Atlanta Fed is now making its GDP forecasts publicly available. As you can see, they've gotten steadily more pessimistic since April and are now predicting a growth rate of 2.6 percent in the second quarter.

Now, there are two way to look at this. The glass-half-full view is: Whew! That huge GDP drop in Q1 really was a bit of a blip, not an omen of a coming recession. The economy isn't setting records or anything, but it's back on track.

The glass-half-empty view is: Yikes! If the dismal Q1 number had really been a blip, perhaps caused by bad weather, we'd expect to see makeup growth in Q2. But we're seeing nothing of the sort. We lost a huge chunk of productive capacity in Q1 and apparently we're not getting it back. From a lower starting level, we're just going to continue along the same old sluggish growth path that we've had for the past few years. All told, GDP in the entire first half of 2014 hasn't grown by a dime.

I am, by nature, a glass-half-empty kind of person, so feel free to write off my pessimism about this. Nonetheless, the GHE view sure seems like the right one to me. It's just horrible news if it turns out that during a "recovery" we can experience a massive drop in GDP and then do nothing to make up for it over the next quarter. It's even worse news that the unemployment rate is going down at the same time. I know that last month's jobs report was relatively positive, but in the longer view, how can unemployment decrease while GDP is flat or slightly down? Not by truly decreasing, I think. It happens only because there's a growing number of people who are permanently left behind by the economy and fall out of the official statistics.

But hey. This is just a forecast. Maybe the Atlanta Fed is wrong. We'll find out in a couple of weeks.

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Friday Cat Blogging - 11 July 2014

| Fri Jul. 11, 2014 2:53 PM EDT

For a variety of reasons, fresh catblogging just didn't happen this week. So I'm going to do what everyone else does when they fail to meet an editorial deadline: run some old stuff and pretend it's an extra-special feature. So here you are: rarely seen archival footage from January 14, 2007, Domino's first day at home after we picked her up from the shelter. As you can see, she immediately made her way to a book about a magical cat who refrains from eating its shipmate. This was a good influence, I think.

A Progress Report on "Reform Conservatism"

| Fri Jul. 11, 2014 12:40 PM EDT

Does the new generation of "reform conservatives" represent real change for the Republican Party? In policy terms, not really. They've offered up a few variations on popular conservative themes (reducing taxes via child tax credits instead of cuts in top marginal rates, for example), but for the most part they've just nibbled around the edges. David Frum, however, says this is still a good start:

What matters most about the reformers is not the things they say but the things they don’t. They don’t abuse the long-term unemployed. They don’t advocate tighter monetary policy in the midst of the worst slump since the 1930s. They don’t urge an immigration policy intended to drive wages even lower than they have already tumbled.

They don’t pooh-pooh the risks of a government default on its obligations, as many conservatives did when radicals in the GOP forced debt-ceiling confrontations in 2011 and 2013. They don’t blame budget deficits for the slow recovery from the crisis of 2009. They don’t shrug off the economic and social troubles of 80 percent of the American nation.

Fair enough. At the same time, there have always been successful conservatives who were tonally distinct from the tea party. Paul Ryan is the best-known example. He's mild-mannered and speaks in the language of an accountant. He always seems reasonable and willing to engage. He doesn't participate in tea party histrionics. In short, he doesn't say any of the things Frum mentions above.

And yet, Ryan remains a tea party darling, and for good reason: his budget is a radically right-wing enterprise. Perhaps the most genuinely radical, genuinely right-wing enterprise in all of Washington.

So the question for the reform conservatives is: What's next? Are they trying to build credibility with conservatives so they can later nudge them in a new direction? Or are they mostly just trying to put a friendly veneer on an essentially tea partyish agenda? We don't know yet, because so far they haven't been willing to take many risks. And with good reason. As a friend emailed just a few minutes ago, "The reformers are one bad suggestion away from being fully Frumanized out of the party."

I wish the reformers luck. And I don't really blame them for their timidity so far. Still, it's far too early to tell how serious they are. We'll just have to wait and see.

Does Financial Literacy Matter?

| Fri Jul. 11, 2014 11:56 AM EDT

We recently received the grim news that American schoolkids are behind their international peers when it comes to financial literacy. We can add this to the pile of grim news about American schoolkids being behind their international peers in math, science, reading, and every other subject imaginable.

Is this actually true? Well, it depends on which tests you rely on and which countries you compare to. And when you disaggregate by income and race you often end up with different results. Still, it's a good horror story, and one we can't seem to get enough of. The financial literacy debacle fits right in.

But forget for a moment whether American high school students really suck at financial literacy. The Economist raises an entirely different question: does it even matter?

Perhaps most important, courses in personal finance do not appear to have an impact on adult behaviour. As Buttonwood has pointed out, the knowledge that students acquire in school when they are in their teens does not necessary translate into action when they have to deal with mortgages and credit-card payments later in life. One study, for example, found that financial education has no impact on household saving behaviour. As a paper by Lewis Mandell and Linda Schmid Klein suggests, the long-term effectiveness of high-school classes in financial literacy is highly doubtful. It may simply be the case that the gap in time is too wide between when individuals acquire their financial knowledge, as high-school students, and when they're in a position to apply what they have learned.

Now, I've long had my doubts whether any of the actual knowledge I learned in high school matters. Habits matter. Basic skills matter. The ability to figure out how to figure out stuff matters. Learning to sit still and concentrate for half an hour at a time matters. But trigonometry? Catcher in the Rye? The history of the Gilded Age? That's not so clear. Maybe financial literacy falls into the same category.

Alternatively, it may be that education has little impact on our behavior in general. We all know that the way to lose weight is to eat less and exercise more, and yet that knowledge does us little good. Most of us overeat anyway. Likewise, even if we know that interest charges on credit card debt can eat us alive, we might just go ahead and buy that snazzy new big-screen TV anyway.

Who knows? Maybe education outside of (a) basic skills and (b) highly specific skills used in our professions really doesn't matter much. If that turned out to be true, I can't say it would surprise me an awful lot. Being a Renaissance Man may be overrated.

Prior Experience Doesn't Matter (Much)

| Fri Jul. 11, 2014 10:53 AM EDT

Tyler Cowen points to yet another story today about how HR departments are using big data to hire and manage employees, and it's fairly interesting throughout. However, my appreciation for the power of this approach was certainly enhanced when I read the following:

For Xerox this means putting prospective candidates for the company’s 55,000 call-centre positions through a screening test that covers a wide range of questions....The results are surprising. Some are quirky: employees who are members of one or two social networks were found to stay in their job for longer than those who belonged to four or more social networks (Xerox recruitment drives at gaming conventions were subsequently cancelled). Some findings, however, were much more fundamental: prior work experience in a similar role was not found to be a predictor of success.

This was something I always scratched my head about back when I was a hiring manager. Obviously you want someone with work experience that's related to the job you're trying to fill, but an awful lot of my fellow managers seemed pretty obsessed with finding candidates with almost identical experience. I understood the attraction of hiring someone who seemed like they could be slotted in immediately and hit the ground running, but it still seemed misplaced. Which would you rather hire? Someone fairly good with exactly the right experience, or someone really good who might take a month or two to learn some new things? I'd choose the latter in a heartbeat.

On the other hand, I suppose valuing experience highly might be a good idea if you really had no faith in your ability to distinguish good from really good. And the truth is that most of us probably don't. So maybe finding perfect fits makes more sense than I gave it credit for. After all, back in the Middle Ages we didn't have access to Xerox's whiz-bang big data.

Boehner's First Lawsuit: Obamacare is the Lucky Winner

| Thu Jul. 10, 2014 8:25 PM EDT

I am pleased to report that John Boehner has taken my advice. He introduced a House resolution today that would give him authority to sue the president, and here's what it says:

Resolved, That the Speaker may initiate or intervene in one or more civil actions on behalf of the House of Representatives...to seek appropriate ancillary relief...with respect to implementation of (including a failure to implement) any provision of the Patient Protection and Affordable Care Act....

Blah blah blah.

And just which provision of Obamacare does Boehner plan to target? Here you go:

"In 2013, the president changed the healthcare law without a vote of Congress, effectively creating his own law by literally waiving the employer mandate and the penalties for failing to comply with it," Boehner said in a statement. "That's not the way our system of government was designed to work. No president should have the power to make laws on his or her own."

Well, Obama didn't "literally waive" the employer mandate, he just delayed it for two years. But close enough!

Now, there are two sides to this. On the positive side for Boehner, it's fairly defensible as these things go. It's not a slam dunk, but you can make a decent case that Obama really did overstep the plain text of the law. However, the downside is that Obama probably doesn't care much about this. It's a fairly minor provision of the law, and if he loses the case it doesn't do any serious damage to Obamacare. In fact, the only damage it does is to the small employers who asked for the delay. So really, Boehner is only setting himself up to oppose the interests of small businesses.

But here's the really interesting thing about this: Boehner is suing over a provision of the law that's been delayed until 2016. But a lawsuit like this takes a while. It'll take a while to file the documents, and then a while longer to get on the calendar of a district court. Then another while for a hearing and a ruling, and then yet another while for an appeal. Then yet another while if the White House asks for an en banc review. And then finally yet another while as it goes up to the Supreme Court. How long altogether? I'd guess a minimum of a year and a half, and probably more like two years. So the best case for conservatives is that the Supreme Court takes it up in late 2015. By the time they're ready to rule, it's moot because the mandate has taken effect and Obama is out of office.1

Boehner is smart enough to know all this perfectly well. In other words, he knows that this is purely a symbolic gesture. Not only does Obama not really care much about it, but it's vanishingly unlikely that the Supreme Court will ever hear the case. That makes it an almost perfect piece of theater. Neither side cares much, and it will never be decided. Boehner gets to say he's doing something, Obama gets some mileage out of mocking him, and that's it. The real-world impact is literally zero.

And that might be just what Boehner wants.

1This assumes that any court is willing to grant Boehner standing to sue in the first place.

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Fine. I Retract My Defense of Optics.

| Thu Jul. 10, 2014 5:21 PM EDT

On Wednesday morning, conservatives were all atwitter over the fact that President Obama had been photographed playing pool and drinking a beer the previous night in Denver. A mere thousand miles away, there was a humanitarian crisis on the border! How out of touch can a guy get? Clearly this was Obama's Katrina moment.

This combined two of the right's favorite Obama-era tropes. First, it was about his millionth Katrina moment. Conservatives still can't get it through their heads that George Bush's Katrina moment was never really about those famous photographs of him mugging with a guitar while the levees were being breached in New Orleans and later staring moodily out an airplane window at the flooding below. It was about "heckuva job, Brownie." It was about his casual near-destruction of FEMA over the previous four years. It was about the startling contrast between his laggard response to Katrina and his near-frenetic response to the Terri Schiavo panderfest just a few months earlier. But conservatives simply refuse to believe this. They're convinced it was all about an unfair photographic comparison, and they're determined to make a Democratic president suffer the same fate.

Second, it's become practically a parlor game for conservatives to chastise Obama for engaging in some kind of social activity while there's a serious crisis somewhere. This is an evergreen faux complaint. After all, there's almost always something serious going on somewhere, which means you can always figure out an excuse to haul out this chestnut.

Now, to some extent none of this matters as long as it's just a partisan response from the professional right. But yesterday it metastasized into something more over Obama's answer to a question about why he wasn't heading down to the border to see the refugee crisis for himself. "I'm not interested in photo-ops," he said. "I'm interested in solving a problem." This almost instantly turned into a misquote: "I don't do photo-ops." And with that, the mainstream press started piling on too.

This was, obviously, ridiculous. First of all, Obama didn't say that he doesn't do photo-ops. That would have been idiotic. What he very plainly said was that in this particular case he wasn't interested in doing a photo-op. He had introduced a plan to address the crisis and he was in Texas to discuss it with state officials. That's where he wanted to keep the focus.

And with that, as if to mock me, the whole thing exploded into a moronic national conversation about the optics of shooting pool in Denver but not going to the border to have his photograph taken with wistful-looking Latin American children. This came just a couple of days after I had defended the word optics against Jamison Foser, and plainly Foser had turned out to be right. The mere availability of the word seemed to change the whole tone of the coverage. As Dave Weigel put it, "The president is the star of most D.C. political stories, obviously, so many stories end up being about whether they help or hurt him. The problem is that the press can't be sure if they will, or won't." So they just guess.

Now, I suppose I still have a feeble defense to offer. I did say there were good and bad uses of optics, and this just happened to be one of the bad ones. But the speed with which one photograph and one misquote saturated the punditocracy and morphed into an inane conversation about optics surely makes Foser's case for him.

So I give up. There are still good uses of the word optics, but as long as the press remains so addicted to dumb uses that have obvious roots in transparent partisan nonsense, it's probably best to insist that they go cold turkey. No more optics, guys. Not until you demonstrate an ability to use the word like adults.

Americans Are Surprisingly Stressed Out About News and Politics

| Thu Jul. 10, 2014 2:26 PM EDT

Via Wonkblog, here's a fascinating little chart courtesy of the Robert Wood Johnson Foundation. They just released a survey about the causes of stress, and things like health and money problems are predictably the biggest sources. But how about all those niggling little daily causes of stress? What are the biggest routine things that send you into conniptions?

Well, it turns out that two of the biggest contributors to high blood pressure are watching the news and hearing about what politicians are up to. And boy howdy, does this beg for a follow-up. I really, really want to know what news sources cause the most stress. Is it listening to NPR? Watching Fox News? Getting your daily Limbaugh fix? Reading Kevin Drum's blog?

Perhaps the mere act of making you think about this is, at this very moment, making you red in the face. Then again, maybe not. I want to know more. Who's most stressed out by the news? Liberals? Conservatives? Everyone? And what outlets cause the most stress? Obviously my money is on the Drudge/Fox/Limbaugh axis, but maybe I'd be surprised. I want to hear more about this.

Republicans Love Obamacare!

| Thu Jul. 10, 2014 12:59 PM EDT

Here's an additional tidbit from that recent Commonwealth Fund survey about Obamacare:

That's a lot of Republicans who are satisfied with their Obamacare coverage. They might not realize it's Obamacare—perhaps they know it as Kynect or Covered California—but they like it. And if you take it away, they're going to be unhappy. That's several million potentially unhappy Republicans if the national GOP continues its anti-Obamacare jihad. Just saying.

Who's Afraid of an Itsy Bitsy Bit of Inflation, Anyway?

| Thu Jul. 10, 2014 12:19 PM EDT

Why are so many people obsessed with "hard money"? Why the endless hysterics about the prospect of inflation getting higher than 2 percent? Paul Krugman, like many others, thinks it's basically a class issue. If you have a lot of debt, inflation is a good thing because it lowers the real value of your debt. But if you're rich and you have lots of assets, the opposite is true. Here's Krugman using data from the Census Bureau's SIPP database:

Only the top end have more financial assets (as opposed to real assets like housing) than they have nominal debt; so they’re much more likely to be hurt by mild inflation and be helped by deflation than the rest.

Now, it’s true that some of these financial assets are stocks, which are claims on real assets. If we only look at interest-bearing assets, even the top group has more liabilities than assets.

But the SIPP top isn’t very high; in 2007 you needed a net worth of more than $8 million just to be in the top 1 percent. And since the ratio of interest-bearing assets to debt is clearly rising with wealth, we can be sure that the truly wealthy are indeed in the category where they have more to lose than to gain by a rise in the price level.

Brad DeLong isn't buying it:

It is true that the rich do have more nominal assets than liabilities....But it is also true that America's rich have a lot of real assets whose value depends on a strong and growing economy.

I find it implausible to claim that the net gain is positive when we net out the (slight) real gain to the rich from lower inflation with the (large) real loss to rich from lower capital utilization. It's not a material interest in low inflation that we are dealing with here...

I don't think I buy Krugman's claim either. He's basically saying that hard money hysteria is driven by the material interests of the top 0.1 percent, but even if you grant them the clout to get the entire country on their side, do the super rich really love low inflation in the first place? Do they own a lot of long-term, fixed-interest assets that decline in value when inflation increases? Fifty years ago, sure. But today? Not so much. This is precisely the group with the most sophisticated investment strategies, highly diversified and hedged against things like simple inflation risks.

Plus there's DeLong's point: even if they do own a lot of assets that are sensitive to inflation, they own even more assets that are sensitive to lousy economic growth. If higher inflation also helped produce higher growth, they'd almost certainly come out ahead.

So what's the deal? I'd guess that it's a few things. First, the sad truth is that virtually no one believes that high inflation helps economic growth when the economy is weak. I believe it. Krugman believes it. DeLong believes it. But among those who don't follow the minutiae of economic research—i.e., nearly everyone—it sounds crazy. That goes for the top 0.1 percent as well as it does for everyone else. If they truly believed that higher inflation would get the economy roaring again, they might support it. (Might!) But they don't.

Second, there's the legitimate fear of accelerating inflation once you let your foot off the brake. This fear isn't very legitimate, since if there's one thing the Fed knows how to do, it's stomp on inflation if it gets out of control. Nonetheless, there are plenty of people with a defensible belief that a credible commitment to low inflation does more good than harm in the long run. After all, stomping on inflation is pretty painful.

Third, there's the very sensible fear among the middle class that high inflation is just a sneaky way to erode real wages. This is sensible because it's true. There are several avenues by which higher inflation helps weak economies that are trapped at the zero bound, and one of them is by allowing wages to stealthily decline until employment reaches a new equilibrium. I think that lots of people understand this instinctively.

Fourth, there's fear of the 70s, which apparently won't go away until everyone who was alive during the 70s is dead. Which is going to be a while.

It's worth noting that hard money convictions are the norm virtually everywhere in the developed world, even in places that are a lot more egalitarian than the United States. Inflationary fears may be irrational, especially under our current economic conditions, but ancient fears are hard to deal with. As it happens, the erosion of assets during the 70s was unique to the conditions of the 70s, which included a lot more than just a few years of high inflation. But inflation is what people remember, so inflation is still what they fear.

Bottom line: Even among non-hysterics, I'd say that hardly anyone really, truly believes in their hearts that high inflation would be good for economic growth. It's the kind of thing that you have to convince yourself of by sheer mental effort, and even at that you're probably still a little wobbly about the whole idea. It just seems so crazy. Until that changes, fear of inflation isn't going anywhere.