John Quiggin wants to rein in big banks, and figures the best way to do it is to separate basic banking (taking in deposits, making loans) from everything else (trading, M&A, derivatives, etc.). Matt Yglesias objects, because we're already trying to do a limited version of this with the Volcker Rule and it's turned out to be really, really hard:
I could keep droning on about this, but I'll stop. The point is that other people ought to drone on a bit more about which rules, exactly, they want to see put in place and why the objections to those rules are wrong. The general argument that the backstopped segment of the banking system should be ringfenced from the speculative bit is so persuasive that the U.S. Congress already passed a law purporting to do it. Yet obviously finance has hardly been dethroned from its commanding place in American political economy, and guaranteed banks haven't stopped engaging in big speculative trades.
This is one of my perpetual problems with complaints about regulation. It's easy to say we should have less of it, and probably we should. And yet, the plain fact is that we live in a really big, really complicated society. There's just no getting around that. And that means our regulatory apparatus is going to be big and complicated too. I'm not sure there's any getting around that either.
In the case of high finance, I happen to think that I'd probably trade all of Dodd-Frank for a simple but severe minimum leverage requirement. But even if we all agreed about that, it's not as if that would be a trivially easy regulation to write. Leverage is a ratio, and you have to define both the numerator and the denominator, both of which are very complex when you're dealing with big banks. You also have to make sure your new reg applies not just to chartered banks, but to the shadow banking system as well. (AIG wasn't a bank, but its failure caused plenty of problems.) That adds yet more complexity. And then you have to stay ahead of all the bright boys and girls who will figure ways around your shiny new rule as time goes by.
And that's the best case: a complex environment where, at least arguably, there's a relatively simple rule that might serve us better than a thousand smaller rules. You really don't run into that very often. In most cases, it's really hard to think of a simple rule that works well and fairly. If you're a libertarian who thinks a modern mixed economy can work great with only minimal regulation in the first place, this isn't a problem. You'll just take a chainsaw to the regulatory state. For the rest of us, though, the answers aren't easy. It's just not clear how a complex society can run without fairly complex rules.
This weekend Paul Krugman lavished immense praise on a presentation that Larry Summers gave to the IMF a few days ago, and I'll confess that I'm a little puzzled by this. Not because it wasn't a good presentation. It was. But it's quite short and basically just tosses out an idea without really elaborating on it much. Here's the idea: we might be in a permanent condition of slow economic growth—i.e., secular stagnation.
The evidence Summers presents is pretty straightforward: during the aughts, we had a huge housing bubble, and yet the economy still performed only listlessly:
Too easy money, too much borrowing, too much [perceived] wealth. Was there a great boom? Capacity utilization wasn't under any great pressure. Unemployment wasn't under any remarkably low level. Inflation was entirely quiescent. So somehow even a great bubble wasn't enough to produce any excess in aggregate demand.
That's true enough, and you can argue that this is a new thing. As recently as the late 90s, the dotcom bubble did produce a boom and did push employment to very high levels. That in turn put pressure on employers to offer higher wages, and sure enough, wages went up.
But the housing bubble, despite being even bigger than the dotcom bubble, did no such thing. As Summers says, it didn't produce high employment; it didn't push wages up; and it didn't get the economy running at full capacity. And today, six years after the bubble burst and four years into recovery, with the world's financial plumbing once again functioning just fine, the economy still isn't running at high capacity. What's up?
When I've talked about this before, I haven't framed it as a problem of the natural interest rate going below zero, as Summers does. Instead, I've usually framed it as a problem of an investment drought. There simply aren't enough promising real-world investments available, which means that lots of money is either sitting on the sidelines or else getting diverted into financial rocket science.
Now, in one sense, this is just two ways of saying the same thing: there aren't enough promising real-world investments at current interest rates. It doesn't matter that real interest rates are already negative. Reduce them even further, and more investments will look like winners. And yet, if Summers is right and this is a permanent condition,1 we're still left with a question: what happened to produce a world in which, for an extended period of time, even negative interest rates aren't low enough to make real-world investments attractive in sufficient quantities to get the economy humming?
The answer matters, because it determines our response. Krugman mentions demographics as one possible answer: slowing population growth means slower economic growth. Another possibility is increased automation: as machines take over more and more work, there are fewer jobs available and less income to spend. There's also Tyler Cowen's great stagnation thesis. Or the possibility that increasing income inequality means that the future will have fewer and fewer middle-class buyers to power a consumer economy, and investors know it. Or perhaps, as Jared Bernstein suggests, the culprit is the financialization of America (and the world):
I wonder if the key is “secular,” as in sector, as in sectoral misallocation. Many observers of the US economy have worried about the impact of financialization—the relative growth of the finance sector—on growth. Part of the concern is the bubble machine, and part is the devotion of considerable resources to non-productive activities.
And the misallocation is profound. Who out there thinks financial markets are playing their necessary role of allocating excess savings to their most productive uses? Anyone?
Not me. And yet, I wonder if this is really something that can be blamed on Wall Street? I'm all for reining in the size of the financial sector, but I confess to thinking that there must be something deeper than this that underlies our problem. Wall Street would happily allocate more money to real-world investment opportunities if the demand were there. But it's not, even with essentially free money. For some reason, the investment community doesn't believe that expanding production of real-world goods and services to maximum levels will pay off. If Summers is right, this is not a temporary condition that can be solved with monetary policy, it's a permanent change in the economy. But why? One way or another, the answer has to get back to the real world. That's where everything starts.
1Something that's still up in the air. Usually, when bad economic times last long enough, people start to think they'll last forever. Ditto for good economic times. It may be that we're just in an unusually bad recession and need more time to pull out. However, the evidence of the aughts really does suggest that something happened to the economy starting around 2000, which means it's been going on for an awfully long time.
Here's an email from a reader in California with an interesting wrinkle on the rate shock debate:
I’m self employed, with individual health insurance coverage, and my family is one of those whose current health insurance policy is being canceled and whose premium will rise once we purchase insurance on the CA exchange. But it’s not as simple as that. We signed up for our current policy in November 2011 (therefore no grandfathering) and the premium was substantially lower than the policy we had prior to that. In hindsight, I’m guessing that the premium for that newly introduced plan was so low because the insurance company knew it would have to be canceled in 2014. So, they weren’t going to incur a lot of losses or have to make provisions for a long claims tail.
The premium for our new insurance, purchased from the exchange, is going to be about what our original (pre-2011) policy premiums would have been now, allowing for the usual annual premium increases. So, yes, we’re having to move from cheaper to more expensive insurance. On the other hand, it’s very likely that the cheaper policy would never have been available in the first place without the ACA’s 2014 deadline for such plans. Of course, the insurance company didn’t clarify back in 2011 that this policy had a limited lifespan and would have to be replaced in 2014 with a new one.
In a bit of bad planning, it turns out that most of the final quilts in our 2013 quiltblogging extravaganza are Irish chain quilts. This one is a single chain made out of fabrics purchased in Sedona, which is why it's cleverly named Sedona Chain. It's a crib size quilt that's machine pieced and hand quilted. I mistakenly thought it was lap sized, which is why I asked Marian to model it on her lap. But this nonetheless turned out to be a popular decision, and as soon as I put her down, Domino promptly curled up and took a nap.
In other cat news, meet Inspector Picklejuice, the newest member of the MoJo cat family. Inspector P belongs to Ivylise Simones, our new creative director. Welcome aboard to both.
God knows, Walter Shapiro has earned the right to be cynical about his fellow ink-stained wretches. Today, he takes on Double Down, the 2012 campaign sequel to Game Change from authors Mark Halperin and John Heilemann. Shapiro thinks that it basically represents the final triumph of the "win the morning" approach to politics:
Double Down is all about shiny objects. It is as if the authors, in a desperate effort to justify their reported $5-million advance, opted for sleight-of-hand to divert readers from the predictable story of the actual 2012 campaign. So after luxuriating over Donald Trump’s ludicrous presidential pretensions early in the book, Halperin and Heilemann devote yet another page to this loathsome self-promoter in their final chapter. The only narrative justification (beyond having another Trump anecdote to peddle on TV) is that Obama’s research team discovered that in ads “voters always noticed and remembered Romney juxtaposed with a private jet branded TRUMP.
....Double Down, in truth, peddles bite-sized dramatic nuggets rather than a nerd’s-eye view of how contemporary politics really works. The authors’ guiding philosophy seems evident: If it can’t be hawked on a talk show then it doesn’t belong in the book.
....Halperin and Heilemann show little interest in unraveling one of the enduring mysteries of Campaign 2012: Why did the supposedly data-driven Romney lose touch with reality and believe to the end his overly optimistic internal polls and the eager Republican faces at campaign rallies? For all of its in-the-moment hype, Double Down exudes a slightly musty aroma, as if the authors are uncomfortable with how politics has changed with the advent of social media. In fact, Double Down may be remembered as a historical curiosity—the last campaign retrospective that fails to mention Facebook.
I almost feel sorry for Halperin and Heilemann. The truth is that the 2012 campaign just wasn't very interesting. Republicans put on an amusing clown show during the primaries and then ended up nominating the most boring person in the world—who, in turn, refused to spice things up with a Sarah Palin-esque choice of running mate. Obama, for his part, ran a Spock-like campaign that only Nate Silver could love. What's more, there were no novel issues in the campaign, just an endless relitigation of the same themes that had been occupying us for the past three years. There were some gaffes here and there, and Obama's Denver debate meltdown provided a tiny spark of uncertainty about the election's final outcome, but even that wasn't much. Honestly, the result was entirely predictable for at least the final month, and it took heroic spin efforts from the media to pretend otherwise.
So is it any surprise that the book is fairly uninteresting except for the occasional shiny object? Not really. I read Jon Alter’s The Center Holds a while back, and I'm a fan of Alter's writing. But it was a dull book for anyone who followed the campaign even loosely. Campaign coverage is now so dense and omnipresent that there just isn't very much we don't know by the time all the wrap-up books come out. So Halperin and Heilemann can make hay with the odd shouting match that wasn't reported in real time, but aside from that there just isn't very much to say. 2012 will go down in history as a pretty routine fight.
Hell, you can't even say it was the beginning of the nerd era, or the blog era, or the data mining era, or the social media era. That stuff all got started in 2004 and 2008. It got stronger in 2012, and will get stronger still in 2016, and it's a fascinating story. It's also the only story worth taking a deep dive into if you want to understand the mechanics of presidential elections in the 21st century. But it's not for the Morning Joe crowd.
Jon Chait notes today that to the extent conservatives have any kind of plan to replace Obamacare, their plans are generally far more disruptive to far more people. It wouldn't just be one or two million people who have their plans canceled or suffer from rate shock, it would be tens of millions who would be forced to give up coverage they like. What's more, contrary to a general preference for comprehensive coverage, Republicans almost universally prefer plans that dump huge amounts of risk on individuals:
The right’s dilemma grows more acute when you move from the general to the particular. Their argument is that Obama forces healthy people to pay higher premiums to pay for a bunch of crap they don’t want or need. Karl Rove argues in his Wall Street Journal column that Obamacare forces people to pay for “expensive and often unnecessary provisions.” And what provisions are these? Where is the medical equivalent of Bridge to Nowhere or scientific research on animals that Republicans love to mock? The problem turns out to be a requirement that “every policy offer a wide range of benefits including mental health and addiction treatment, and maternity care (even for single men or women past childbearing age), and cover 100% of the cost of an array of preventive services.”
This is a morally bizarre conception of what health insurance means. Most of us don’t need mental-health or addiction treatment. Some of us do. Some of us who don’t currently need mental-health treatment might potentially need it one day. You could have a system in which only people who need mental-health treatment pay for mental-health insurance, but then it wouldn’t be insurance anymore. It would be a system in which you pay for a doctor out of pocket.
I've identified the new "welfare mothers." Are you ready? Mothers.
The whole point of insurance is to pool risk because you don't know what kind of problems you might have in the future. Would it be better to allow people to choose from a menu of things they want individually, rather than simply covering everyone for everything and then spreading the cost around? That's surely a matter of opinion, but most Americans don't like the idea. They don't like it substantively because it obviously promotes free riding, and they don't like it emotionally because it just doesn't smell right. When we sign up for employer coverage—by far the most popular kind of health coverage outside of Medicare—we all understand that we're joining a risk pool. I'm paying for someone else's maternity coverage. They're paying for my blood pressure meds. We're all paying for the possibility of some kind of catastrophic bout of cancer that we all dearly hope will be someone else's problem. What's more, we all understand that the benefits of employer health care are immensely unequal. A 50-year-old head of household receives benefits that are probably worth about $20,000 or so. A healthy 25-year-old single worker receives benefits worth about $4,000. Is that unfair? I wouldn't say so, and Americans have voted with their feet for years in favor of this kind of system.
In any case, as Chait says, the most bizarre part of the current Republican screamfest is their objection to men being forced to pay for maternity coverage. Seriously? They think that the societal cost of carrying on the species should be borne solely by women aged 18-40? Young women should pay the full freight and the rest of us should give them a vote of thanks but otherwise tell them they're on their own? That's morally contemptuous, and I'm pretty sure that most of us understand that.
A couple of days ago, WikiLeaks leaked a copy of the proposed Trans-Pacific Partnership agreement. This is interesting in its own right, of course, but it's especially interesting because the draft copy specifies exactly which provisions the United States is fighting for and what positions other countries are taking. This means that if the US wins agreement for its demands, it will be a very public cave-in by most of the other negotiators. Needless to say, that makes caving in harder.
That said, what's actually in the draft? Today, Henry Farrell talks to George Washington University professor Susan Sell about the chapter dealing with intellectual property (trademarks, copyrights, patents, etc.). Here's an excerpt:
After Thursday’s leak of the intellectual property chapter it is obvious why the USTR and the Obama administration have insisted on secrecy. From this text it appears that the U.S. administration is negotiating for intellectual property provisions that it knows it could not achieve through an open democratic process. For example, it includes provisions similar to those of the failed Stop Online Piracy Act (SOPA), and Protect Intellectual Property Act (PIPA), and the Anti-Counterfeiting Trade Agreement (ACTA) that the European Parliament ultimately rejected....
People call it a Hollywood wish list — why?
Some provisions of the text resurrect pieces of SOPA and PIPA and ACTA that many found to be objectionable. The entertainment industries (movies and music) championed these agreements and sought stronger protections in the digital realm. These industries were stunned when SOPA and PIPA got killed. Only the United States and New Zealand oppose a provision that would require compensation for parties wrongfully accused of infringement (QQ.H.4). The United States is alone in proposing criminal procedures and penalties “even absent willful trademark, counterfeiting or copyright or related rights piracy”.
Only the United States and Australia oppose a provision limiting Internet Service Provider liability (QQ.I.1); U.S. copyright holders would like ISPs to be held liable for hosting infringing content. The United States also proposes extending copyright to life plus 95 years for corporate-owned copyrights. Hollywood consistently presses for longer copyright terms and it is doing so here.
Read the whole thing for more. It's no surprise that the United States is pushing the hardest line on IP protections, but it is a little surprising that its line is so hard and that it's apparently getting strong pushback from virtually every negotiating partner.
We are in full feeding frenzy mode. Politico, by my count, has no fewer than 14 front page headlines today about the great Obamacare debacle. The Washington Post's four top news articles and its four top op-eds are all about Obamacare, and the top op-eds are uniformly panicky.
Is panic just built into political observers, or what? Ruth Marcus thinks Obama's entire presidency at risk. Ditto for Milbank. And if that's not bad enough for you, Krauthammer suggests that yesterday's events spell doom for the entire liberal project. It's almost a relief to get down to the unsigned editorial, which is merely troubled, not in full-scale meltdown (or, in Krauthammer's case, glee).
So what causes this? It's pretty obviously ridiculous, and I suspect that even the folks writing this stuff would agree about that if they took a breath. But they write it anyway. Are they truly that panic-stricken? Do they simply need something exciting to write? Or what?
Well, this isn't very exciting, but here's what really happened yesterday. Obama made a short speech and then took questions. It wasn't the high point of his presidency, but virtually no one outside the Beltway thought it was a disaster. It was just another forgettable presidential press conference. The Obamacare website is in deep trouble, but the evidence is pretty clear that it really is getting better, and will continue to get better. Lots of people are suffering from rate shock, but not as many people as Republicans and the press would have you believe. It's early days, and signups will continue to improve as we get closer to the deadline. Insurers are upset with Obama's new fix, but they'll calm down. Their denunciations yesterday were pretty pro forma.
This is a bleak moment for Obama, but it's not his Iraq or even his Katrina. Within a few months everything will settle down. Republicans have an obvious political motive for stoking panic, but the rest of us should be a little smarter about buying into it. Okay?
This is just a quick note to anyone who's worried and/or hopeful that Congress will pass some kind of legislative fix for people whose health insurance has been canceled due to Obamacare. It won't happen. Republicans are interested only in Obamacare's failure and will refuse to support any Democratic bill that genuinely addresses the problem. Conversely, Democrats are interested only in improving Obamacare and relieving the political pressure they're feeling. They will refuse to support any Republican bill that contains an obvious poison pill. Unless I'm missing something, the intersection of these two positions is the null set. Thus, there is no bill that can pass Congress.
This is not a joke. No one should waste any time reporting or commenting on the various bills that are likely to pop up over the next few weeks. It's all just posturing. Obama's regulatory fix is the only one we're going to get.
An obvious twitter 'bot followed me with tweets consisting only of advertising for, among other things, wasabi flavored ice cream. Now, I think you will agree that wasabi flavored ice cream is rather a niche product. You may not know that it exists (in Rome to which all roads lead). I hope with some (but rapidly declining) confidence that you don't know that I really like wasabi flavored ice cream. HOW does a twitter 'bot know I like wasabi flavored ice cream ??? I feel we have skipped artificial intelligence and gotten straight to artificial ESP.
How indeed? I'll bet the answer is pretty interesting. I'm assuming, of course, that Waldmann hasn't simply blanked out and forgotten that he wrote a tweet a couple of weeks ago about wasabi ice cream.
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