Kevin Drum

Whose Deficit?

| Wed Jun. 10, 2009 11:49 AM EDT

Who's really responsible for the massive budget deficits we're currently running?  David Leonhardt crunches the numbers and produces a nice chart that tells the story: IWPBS.

That is: It Was President Bush, Stupid.  That's just a thumbnail on the right, but you can click on it to see the full-size version.  Here's Leonhardt on how an $800 billion surplus turned into a $1.2 trillion deficit over the past eight years:

You can think of that roughly $2 trillion swing as coming from four broad categories: the business cycle, President George W. Bush’s policies, policies from the Bush years that are scheduled to expire but that Mr. Obama has chosen to extend, and new policies proposed by Mr. Obama.

The first category — the business cycle — accounts for 37 percent of the $2 trillion swing. It’s a reflection of the fact that both the 2001 recession and the current one reduced tax revenue, required more spending on safety-net programs and changed economists’ assumptions about how much in taxes the government would collect in future years.

About 33 percent of the swing stems from new legislation signed by Mr. Bush. That legislation, like his tax cuts and the Medicare prescription drug benefit, not only continue to cost the government but have also increased interest payments on the national debt.

Mr. Obama’s main contribution to the deficit is his extension of several Bush policies, like the Iraq war and tax cuts for households making less than $250,000. Such policies — together with the Wall Street bailout, which was signed by Mr. Bush and supported by Mr. Obama — account for 20 percent of the swing.

About 7 percent comes from the stimulus bill that Mr. Obama signed in February. And only 3 percent comes from Mr. Obama’s agenda on health care, education, energy and other areas.

Everybody except the blowhards on TV seem to understand this already.  It's pretty simple stuff.

Now, Leonhardt also points out that inherited or not, Obama hasn't yet provided any credible plan for reducing federal deficits in the long term.  This is true, and eventually he's going to have to.  But since the inescapable answer includes higher taxes, he first has to turn around at least a few of the diehard tax jihadists in both the Republican Party and the conservative precincts of his own party.  That might take a while.

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Balancing the Imbalances

| Wed Jun. 10, 2009 11:21 AM EDT

Via Dan Drezner, here is Martin Wolf summarizing a recently released research report from Goldman Sachs:

The paper points to four salient features of the world economy during this decade: a huge increase in global current account imbalances (with, in particular, the emergence of huge surpluses in emerging economies); a global decline in nominal and real yields on all forms of debt; an increase in global returns on physical capital; and an increase in the “equity risk premium” — the gap between the earnings yield on equities and the real yield on bonds. I would add to this list the strong downward pressure on the dollar prices of many manufactured goods.

The paper argues that the standard “global savings glut” hypothesis helps explain the first two facts. Indeed, it notes that a popular alternative — a too loose monetary policy — fails to explain persistently low long-term real rates. But, it adds, this fails to explain the third and fourth (or my fifth) features.

The paper argues that a massive increase in the effective global labour supply and the extreme risk aversion of the emerging world’s new creditors explains the third and fourth feature....The authors conclude that the low bond yields caused by newly emerging savings gluts drove the crazy lending whose results we now see. With better regulation, the mess would have been smaller, as the International Monetary Fund rightly argues in its recent World Economic Outlook. But someone had to borrow this money. If it had not been households, who would have done so — governments, so running larger fiscal deficits, or corporations already flush with profits? This is as much a macroeconomic story as one of folly, greed and mis-regulation.

I just finished reading Barry Ritholtz's Bailout Nation, and it was great.  It's a polemic, mainly about domestic policy and regulatory idiocy, but it's a good polemic.  Well worth reading.

But there was a big part missing from it: as Wolf says, better regulation would have reduced the size of the credit bubble and the ensuing crash, but in the end, all the cheap money generated by our persistent trade deficit had to go somewhere.  You can't hold back the tide forever, after all.

I guess I've been haunted for months by John Hempton's simple formulation: banks intermediate the trade deficit.  If China is sending us huge bales of cash every month, it's going to end up in the banking system and the banking system is going to end up lending it out.  Sure, Alan Greenspan made things worse, George Bush made things worse, and the giddy free market ideology of the Republican Party made things worse.  Bill Clinton, Robert Rubin, and the Wall Street wing of the Democratic Party made things worse too.  But the underlying cause is, and always has been, our persistent trade imbalances.  That was as much a weapon of financial mass destruction as the rocket science derivatives that Warren Buffett so famously criticized.

Things have improved on this score recently.  Our trade deficit is half what it was at its peak.  The problem is that this isn't nearly enough: eventually, we need to pay down all these loans.  That means we need to start running a trade surplus, not merely a smaller deficit.  And we have to do this even though oil prices are almost certain to rise in the long term and our dependence on foreign oil is going to continue to grow.  I still haven't figured out how this is going to happen, and as near as I can tell, neither has anyone else.  All the options seem pretty grim, though.

From the Annals of Corporate Idiocy

| Wed Jun. 10, 2009 10:48 AM EDT

I love stories like this:

[Mark] Elliot's cellphone nightmare began last week when he received a notice from Bank of America saying a payment had bounced on his online bill-pay service. He looked into it and discovered that Verizon was trying to charge him $9,993.88 for his April bill.

....According to the bill, Elliot used his cellphone to upload, download or otherwise access more than 44,000 megabytes worth of data in a single month.  That's the equivalent of downloading about 11,000 songs from iTunes or 60 full-length movies.

[Blah blah....some idiocy from Verizon about how this was all perfectly normal....blah blah]

Elliot woke up Tuesday morning to another notice from BofA saying something was amiss with his account. Turns out Verizon had once again billed his account for the entire $9,993.88 — and this time BofA paid the bill.  This resulted in Elliot losing the $781 he had in his checking account and then owing more than $9,200 to the bank.

So I contacted BofA. Tara Burke, a bank spokeswoman, said the way the online bill-pay system works is that if insufficient funds exist in an account, the first two attempts by a business to withdraw funds will be rejected.  But if the business tries a third time, the transaction will be processed.

Verizon and BofA eventually fixed this stuff, but only after learning that it was going to be publicized in the LA Times.  Without that, this might have gone on forever.  And who knows if it's really over anyway?  I wonder if Elliot has checked his credit report yet to see if anyone has put a big fat black mark on it that will take the next five years to clear up?

Anyway, this is why I don't use electronic bill pay.  You have been warned.

Uighurs Headed to Different Island

| Wed Jun. 10, 2009 12:20 AM EDT

The Uighurs have apparently finally found a home:

The United States has won an agreement to transfer up to 17 Chinese Muslims from the prison camp at Guantánamo Bay, Cuba, to Palau, a sparsely populated archipelago in the North Pacific, according to a statement released by Palau to The Associated Press on Wednesday.

....The agreement opens the door to the largest single transfer of Guantánamo prisoners and is the first major deal on detainees since President Obama pledged upon taking office in January to close the prison within a year.

It also gives Mr. Obama some relief on an issue that has become a political hot button among Congressional Republicans and even some Democrats, who have noisily protested against releasing what they call potentially dangerous extremists on American soil or transferring them to prisons in the United States.

According to Palau's UN representative, "Palau is paradise."  Better than Cuba, anyway.

Quote of the Day

| Tue Jun. 9, 2009 4:18 PM EDT

From Sarah Palin, responding to a question from Fox News' Sean Hannity:

Hannity: Tim Geithner got laughed at in China last week.  Is this even more than you thought was going to be in terms of where the president would take the economy?

Palin: What's more than I thought would be is, we're hearing a lot of good rhetoric.  A lot of this is wrapped in good rhetoric, but we're not seeing those actions, and this many months into the new administration, quite disappointed, quite frustrated with not seeing those actions to rein in spending, slow down the growth of government. Instead, China's Sean it's the complete opposite. It's expanding at such a large degree that if Americans aren't paying attention, unfortunately, our country could evolve into something that we do not even recognize, certainly that is so far from what the founders of our country had in mind for us.

Damn, I love Sarah Palin.  This doesn't even begin to make any sense.  I very sincerely hope that she stays on the public stage as a face of the Republican Party for a very, very long time.

UPDATE: My bad.  I transcribed this wrong — and without the China reference it does make sense.  A little garbled, but still comprehensible.  My apologies.

Late Term Abortion

| Tue Jun. 9, 2009 12:45 PM EDT

Ross Douthat points out today that late-term abortions are vanishingly rare, but says that's part of the problem:

If anything, by enshrining a near-absolute right to abortion in the Constitution, the pro-choice side has ensured that the hard cases are more controversial than they otherwise would be. One reason there’s so much fierce argument about the latest of late-term abortions — Should there be a health exemption? A fetal deformity exemption? How broad should those exemptions be? — is that Americans aren’t permitted to debate anything else. Under current law, if you want to restrict abortion, post-viability procedures are the only kind you’re allowed to even regulate.

If abortion were returned to the democratic process, this landscape would change dramatically. Arguments about whether and how to restrict abortions in the second trimester — as many advanced democracies already do – would replace protests over the scope of third-trimester medical exemptions.

The result would be laws with more respect for human life, a culture less inflamed by a small number of tragic cases — and a political debate, God willing, unmarred by crimes like George Tiller’s murder.

There are a whole bunch of missing steps here.  Regardless of the merits of overturning Roe v. Wade, why does Ross believe that protests over second-term abortions would be any less inflamed than protests over late-term abortions?  Does he really think that if we adopted a European-style regime that banned abortion at, say, 18 weeks instead of 26, this would reduce the culture war heat that abortion breeds?  I'm really not seeing the logic here.

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Identity Politics on the Right

| Tue Jun. 9, 2009 11:59 AM EDT

Despite the fact that we now know pretty thoroughly that Sonia Sotomayor has been judicious and evenhanded on the bench, Jonah Goldberg remains worried:

If an Irish judge gave a speech to the Ancient Order of Hibernians and dabbled in a bit of excessive Irish pride, it might be inappropriate but it wouldn't be disqualifying. But if there was evidence that he gave preference to Irish plaintiffs out of "empathy," I would like to think that would get him in serious trouble....Would judge Sotomayor be your first pick in a lawsuit against a Puerto Rican organization if your livelihood was on the line? It may be entirely unfair to her, but I think reasonable people might think long and hard on that question.

Does Goldberg seriously want us to believe that he might ever have criticized as "inappropriate" a speech from a white guy displaying "a bit of excessive Irish pride"?  Give me a break.

Conservative response to Sotomayor has been astonishing.  It hasn't really, of course.  It's been drearily predictable.  But you know what I mean.  Sotomayor is a liberal judge nominated by a liberal president, and she has a long track record of speeches, prosecutions, and court opinions to her name.  Conservatives surely have at least a dozen good avenues to attack her.  But right out of the gate, seemingly as an exercise in pure reflex, they attacked her on racial grounds.  All based on one sentence from a speech eight years ago and one case in which she narrowly ruled against some white plaintiffs.  But no mind.  They zeroed in on race instantly and relentlessly anyway.  I guess they know their audience pretty well.

Bank Regulation Heats Up

| Tue Jun. 9, 2009 10:48 AM EDT

Some possibly disturbing news from the Wall Street Journal:

The Obama administration is backing away from seeking a major reduction in the number of agencies overseeing financial markets, people familiar with the matter say, suggesting that the current alphabet-soup of regulators will remain mostly intact.

....The administration, for example, is unlikely to call for merging the Commodity Futures Trading Commission and the Securities and Exchange Commission, an idea it had considered, these people say. It also isn't expected to call for the Federal Reserve, Federal Deposit Insurance Corp. or the Office of the Comptroller of the Currency to cede their primary authority to supervise banks, they say....Officials worry that trying to start from scratch could ignite messy turf battles that might slow or even derail the entire process.

I'm not necessarily dedicated to the idea that a single bank regulator is an absolute necessity, but it sure seems as though a root-and-branch reform — which is a necessity — is going to require a considerable amount of consolidation.  If the Obama administration is backing off from this already, it's a bad sign.

I'm not always in favor of these box drawing exercises.  I'm still not convinced, for example, that creating a Director of National Intelligence was a great idea.  But bank regulation in the U.S. really is archaic, and it really is counterproductive to have so many regulatory bodies that banks can choose from.  Having two or three with clearly defined mandates to supervise well-defined sectors — or possibly well-defined spheres of activity throughout the entire industry — is probably OK.  Having a few different agencies around to disagree with each other is a good thing.  But half a dozen with fuzzy responsibilities?  That better not stay on the table for long.

Restraint

| Tue Jun. 9, 2009 1:19 AM EDT

David Brooks on Sonia Sotomayor:

She is quite liberal. But there’s little evidence that she is motivated by racialist thinking or an activist attitude.

....When you read her opinions, race and gender are invisible. I’m obviously not qualified to judge the legal quality of her opinions. But when you read the documents merely as examples of persuasive writing, you find that they are almost entirely impersonal and deracinated.

....To my eye, they are the products of a clear and honest if unimaginative mind. She sticks close to precedent and the details of a case. There’s no personal flavor (in the boring parts one wishes there were). There’s no evidence of a grand ideological style or even much intellectual ambition. If you had to pick a word to describe them, it would be “restraint.”

Is anyone listening?

More on Democracy

| Tue Jun. 9, 2009 12:57 AM EDT

Michael Rubin agrees with me that George Bush didn't do a bang-up job on the democracy promotion front, but thinks this shouldn't be a partisan fight:

I do agree a bit with Drum, albeit without the snark, when he says, "George Bush's main achievement in this arena wasn't to promote democracy, it was to completely cement Arab cynicism about America's obvious lack of concern for democracy." The difference between me and Drum appears to be that I don’t think partisan animus toward a previous president should excuse the abandonment of transformative diplomacy. Give Bush credit: He broke with the past and made democratization central to the debate. Cynicism toward democratization existed long before Bush was president when, in the context of the Cold War and after, Washington proved itself willing to coddle dictatorships. It is infuriating, however, that the gap between the rhetoric and reality of the Bush administration grew so large, and that in his second turn, Bush was willing to accept such backsliding in Lebanon, Egypt, and elsewhere.

I don't know enough about the literature on democracy promotion to say an awful lot about this, but I don't agree that Bush "broke with the past and made democratization central to the debate."  Rather, I think Bush and his team of old school anticommunists merely revived the Cold War context Rubin talks about, where democracy was less a real goal than it was a rhetorical cudgel to use against countries we didn't like.  In the postwar era, that mostly meant working to overthrow left-wing dictatorships while leaving the right-wing variety alone (famously given an intellectual foundation by Jeanne Kirkpatrick in "Dictatorships and Double Standards").  In the Bush era, this transitioned with barely a pause into working to overthrow Middle East dictatorships we didn't like while giving a pass to the ones that supported us.

That just doesn't seem transformative to me.  It never has.  In fact, Bush always struck me as less serious about democracy than his predecessors.  To him it was a nice slogan — every American politician is in favor of democracy, after all — but anyone who's serious about democracy knows that it's not the kind of thing you can get overnight.  It depends critically on education, on institutions, on culture, on overcoming corruption, on property rights, on the rule of law, and a dozen other things.  None of these were things that Bush ever seemed to have the patience to bother dealing with.

Obama, conversely, seems to have a better handle on this, both temperamentally and intellectually.  The result might be less bombastic and emotionally satisfying, but it's a more effective way of actually accomplishing something.  Less transformative rhetorically, perhaps, but if he follows through it's likely to be much more genuinely transformative in practice.

I'm still being partisan here, but I'm not sure that can be helped.  The approaches of Bush and Obama aren't just personal, after all, but reflect different world views.  The Bill Kristol wing of the conservative movement believes pretty strongly in a big bang approach to democratization, something that I just don't see any future in.  The Obama wing of liberalism, conversely, seems to see democracy promotion as small ball: lots of hard slogging, lots of public diplomacy, and lots of minor initiatives that fly under the radar and don't produce dramatic moments to rally around.

Unfortunately, that approach seems to elicit little but scorn from conservatives.  Like Rubin, I'd like this whole arena to be less partisan, but I'm not sure that's possible.  At least, not judging from the first few months of the Obama administration, anyway.  It's too bad.