Kevin Drum

Capital Gains

| Fri Dec. 19, 2008 8:53 AM PST

CAPITAL GAINS....Today, the New York Times reports that the housing bubble was partly fueled by tax changes in 1997 that eliminated capital gains taxes on home sales:

The different tax treatments gave people a new incentive to plow ever more money into real estate, and they did so....By itself, the change in the tax law did not cause the housing bubble, economists say. Several other factors — a relaxation of lending standards, a failure by regulators to intervene, a sharp decline in interest rates and a collective belief that house prices could never fall — probably played larger roles.

But many economists say that the law had a noticeable impact, allowing home sales to become tax-free windfalls. A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.

Of course, that's not the only thing the 1997 law did. It also reduced the general capital gains rate from 28% to 20% just as the dotcom boom was taking off, helping turn that into a monstrous bubble too. Nice work, Washington!

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Closing Gitmo

| Thu Dec. 18, 2008 11:27 PM PST

CLOSING GITMO....This is more a contingency plan than a firm commitment, but it's still good to hear that Gitmo may be on its way to the dustbin of history:

The Defense Department is drawing up plans to close the Guantanamo Bay military prison in anticipation that one of President-elect Barack Obama's first acts will be ordering the closure of the detention center associated with the abuse of terror suspects.

....The prison, built to hold suspected terrorists after the 2001 U.S.-led military intervention in Afghanistan, now houses about 250 detainees, including Khalid Sheikh Mohammad and others accused in connection with the Sept. 11, 2001, terrorist attacks.

...."If this is one of the president-elect's first orders of business, the secretary wants to be prepared to help him as soon as possible," Morrell said. "The request (for a closure plan) has been made, his team is working on it so that he can be prepared to assist the president-elect should he wish to address this very early in his tenure."

It's worth reiterating that closing Guantanamo doesn't address the fundamental issue of what to do with all the detainees. There are still some very difficult issues to settle on that score. But it would be a helluva good start.

The President Speaks

| Thu Dec. 18, 2008 7:03 PM PST

THE PRESIDENT SPEAKS....George Bush is leaving office in style, isn't he? In his farewell interviews so far, he's said this:

Bush: One of the major theaters against al Qaeda turns out to have been Iraq. This is where al Qaeda said they were going to take their stand. This is where al Qaeda was hoping to take ...

Raddatz: But not until after the U.S. invaded.

Bush: Yeah, that's right. So what?

Then he explained his approach to economic management:

I've abandoned free-market principles to save the free-market system.

And finally there was this, after Ben and Henry gave him some bad economic news:

So I analyzed that and decided I didn't want to be the President during a depression greater than the Great Depression, or the beginning of a depression greater than the Great Depression.

That's some analysis. He's really decided to go out with a bang, hasn't he?

In related news, Pew has a new poll out in which they asked people to describe Bush in a single word. The biggest gainers since 2004 were incompetent, idiot, and ignorant. You're shocked, aren't you?

Was Keynes Right?

| Thu Dec. 18, 2008 5:37 PM PST

WAS KEYNES RIGHT?....Tyler Cowen is skeptical that a massive spending-driven stimulus plan will bring the economy back to life. For various reasons he discounts the usual Depression-era examples (the New Deal, Nazi rearmament, WWII) and then says:

My point is simple: it is very hard to find examples of successful fiscal stimulus driving an economic recovery. Ever. This should be a sobering fact....The bottom line is this: we are being asked to believe that a big, trillion or even multi-trillion fiscal stimulus can boost the current macroeconomy. If you look at history, there isn't good reason to believe that. Any single example, such as the Nazis, can be knocked down for lack of relevance or lack of correspondence to current conditions. Fair enough. But the burden of proof isn't on the skeptics. It's up to the advocates of the trillion dollar expenditure to come up with the convincing examples of a fiscal-led recovery. Right now we're mostly at "It wasn't really tried." And then a mental retreat back into the notion that surely good public sector project opportunities are out there.

But do we need examples? I'd argue that we're basically in terra incognita today. In the postwar era, we've virtually never seen an industrialized country, let alone the whole world, stuck in a liquidity trap before. The only example that comes to mind is Japan in the 90s, and their experience with fiscal stimulus was pretty mixed. Depending on your preconceptions, you could take the Japanese experience either as proof that massive stimulus doesn't work or as evidence that not enough was done. And either way, it's only one example, so it would hardly be proof enough for skeptics anyway.

That leaves us with theory, which suggests that government spending when monetary policy has lost traction helps to stimulate the economy. But even if doesn't, my question to Tyler is this: what harm does it do to try? Assuming that stimulus spending is implemented even modestly well, it will, at a minimum, help out a bunch of people with continued employment and produce a bunch of infrastructure improvements that will enhance our future welfare. The downside is more debt, and I'm open to the argument that this is a bad thing to the extent that this debt is funded from overseas and produces further deterioration in our current account balance. But is that the argument against spending? Or is it something else?

Hilda Solis

| Thu Dec. 18, 2008 3:44 PM PST

HILDA SOLIS....Rick Warren may have left a bad taste in the leftosphere's mouth, but we're all thrilled with his choice of Rep. Hilda Solis as Labor Secretary. Here's Jonathan Stein:

Quit yur bellyaching! Obama's pick for Secretary of Labor is reportedly California Rep. Hilda Solis, the proud daughter of a union mom and union dad. In addition to a background as a management analyst at the Office of Management and Budget and a 100 percent rating from the AFL-CIO in 2007, Solis brings a reputation as one of Washington's leading proponents of green jobs....If you were to sketch an ideal Labor Secretary, you could hardly do much better.

Solis sounds great, and her one-minute tribute to the Employee Free Choice Act (above) is terrific. If I have any cautionary note to add, though, it's this: what did you expect? Of all the senior-level appointments Obama had to make, this was the only one that was virtually assured from the beginning of being a gift to the left. And it was. So I wouldn't take this as any slam dunk indication of how seriously he's going to take labor issues.

Don't get me wrong: I'm not trying to throw cold water on Obama's choice of Solis. It's just that his overall cabinet picks have been mainstream enough that it's probably not wise to take anything big away from any one of them. Hopefully Solis will help prod Obama to appoint some good NLRB members and put some serious political capital behind the push for passage of EFCA, and that's what I'll be watching for. A labor-friendly pick for Secretary of Labor is just a start.

Yum Yum

| Thu Dec. 18, 2008 1:36 PM PST

YUM YUM....Entertaining news from the gnomes of Zurich:

Credit Suisse Group said Thursday it will use up to $5 billion of its own illiquid assets such as mortgage securities to pay senior staff year-end bonuses at its investment bank, a move meant to spread risk more evenly between the bank and its employees.

The Zurich-based bank plans to pool commercial mortgage-backed securities and leveraged loans it can't sell because demand has seized up, then dole out units in the entity to managing directors and directors as part of this year's pay, according to a memo made available by a spokesman.

There's certainly an appeal to this, isn't there? Eating their own dog food, so to speak. Or their own toxic waste, as the case may be. I wonder if this idea will spread to Wall Street?

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Bailout Update

| Thu Dec. 18, 2008 12:57 PM PST

BAILOUT UPDATE....The latest on the auto front:

The White House said on Thursday that an "orderly" bankruptcy was one option being considered to try to rescue General Motors and Chrysler, which are seeking billions of dollars to avoid a shutdown.

....Under one possibility that has been discussed, the government would give G.M. and Chrysler enough financing to operate for several months. Then a government-selected overseer would bring together company executives and other representatives to map out steps that would be taken once the two companies file for Chapter 11 protection.

This is the "prepackaged bankruptcy" option that's been mooted a few times before. It actually sounds like a decent compromise to me: it keeps the companies from imploding in the middle of a huge recession, but at the same time it gives a bankruptcy court considerable leeway to impose serious restructuring of the kind that a political process probably can't. The end result — if it's done right — is a pair of companies that will end up smaller but still viable in the long term, and an economy that takes only a moderate hit instead of a killing blow. Call me tentatively in favor of this approach.

My Dysfunctional State

| Thu Dec. 18, 2008 12:36 PM PST

MY DYSFUNCTIONAL STATE....After reading last night's post about the bizarre lengths California Democrats have to go through just to pass a budget, Matt Yglesias says:

Not to tell the good people of California how to run their business, but from reading stuff like this it's clearer and clearer that the state desperately needs a new constitution. You never meet anyoen who thinks the institutions of governance in California are well-designed, or even who denies that the existing institutional configuration makes it impossible to solve any of the state's problems. But nobody quite seems to want to do anything about it. And yet surely it can't be impossible to change this stuff — state constitutions used to be re-written all the time.

Well, no, it's not impossible or anything. But here's the thing. Talk of calling a constitutional convention has been banging around California for at least the last few decades — maybe since 1851, for all I know — and it's gotten a lot louder recently. Here, however, is the rule for calling a convention:

The Legislature by rollcall vote entered in the journal, two-thirds of the membership of each house concurring, may submit at a general election the question whether to call a convention to revise the Constitution. If the majority vote yes on that question, within 6 months the Legislature shall provide for the convention. Delegates to a constitutional convention shall be voters elected from districts as nearly equal in population as may be practicable.

In plain English: you need a two-thirds vote of the legislature to put an initiative on the ballot and then you have to get it approved by the voters. The problem is that no matter how sweetly liberals might croon about what a convention could do, conservatives all know the truth: the whole point of the thing would be to get rid of our insane two-thirds requirements for passing budgets and raising taxes. Unfortunately, our whole problem is that Republicans control (slightly more than) one-third of the legislature. And if we can't get them to vote for a tax increase in the first place, what are the odds we could get them to vote for a constitutional convention called for the express purpose of making it easier to increase taxes? About zero.

OK, but how about a simple initiative? We could get rid of the two-thirds rule just by collecting signatures and getting a majority vote, right?

Right. And we tried that just a few years ago. Prop 56 was supported by all the usual good government groups and would have reduced the majority needed to pass budget and tax measure from two-thirds to 55%. A bunch of other fluff was added to make it more popular ("rainy day" funds, no pay for legislators if they don't pass a budget, etc.), and in the end.....

....it got whomped 66%-34%. No one was fooled for a second. Everyone knew the whole point was to make it easier to raise taxes, and so it lost in a landslide.

So what to do? It's true that our legislature is dysfunctional. As George Skelton put it today, "Modern-era Republicans adamantly refuse to vote for any tax increase. They took a campaign pledge not to and seem to regard it as some cult-like blood oath." That's true. The solution is a little less obvious. Unfortunately, our electorate is dysfunctional too.

Pay Cuts are Coming

| Thu Dec. 18, 2008 11:22 AM PST

PAY CUTS ARE COMING....Felix Salmon, after noting that FedEx has announced across-the-board pay cuts for just about everyone:

There's been a huge shift in power in recent years from labor to capital: corporate profits have been rising much faster than wages for some time now. It makes sense that capital would make use of its newfound power to reduce labor costs in a deflationary environment of rising unemployment. During the boom, companies laid off workers because those workers demanded, and cost, too much money. Now that workers have lost their negotiating leverage, we might start seeing more across-the-board pay cuts.

Heads I win, tails you lose! In boom times you get laid off, in slack times you get your pay cut. That's certainly one way to run an economy, I guess.

Eat Your Almonds

| Thu Dec. 18, 2008 11:08 AM PST

EAT YOUR ALMONDS....A new blog called On the Public Record is written by a "low level civil servant who reads a lot of government reports." My kind of blogger! Today, LLCS brings to our attention the California Almond Board:

The good prices for almonds are the result of excellent work by the California Almond Board. The Almond Board has done magic and created demand for more than a billion pounds of California almonds in the past fifteen years. They have run marketing campaigns to get Americans to buy more almonds ("A can a day, that's all we ask." Do any of you really want a can of almonds a day?). They have created new almond drinks. They've introduced almonds into breakfast cereals. (Think back to the mid-nineties. Don't you remember that breakfast cereals rarely had almonds in them?) California almonds have replaced and destroyed every other major source of almonds in the world. Right now on the Almond Board front page, they report happily that almonds are the number one nut ingredient in food.

This really is superior work by the Almond Board and I can only imagine that the walnut and cashew boards look on in envy.

Later, after a persual of their website:

They're doing amazingly consistent high quality work and I wonder how that came about. Did they just happen to hire someone good, who built a good organization? Did that person love almonds or just doing good work? Coincidence that it was the Almond Board and not the Walnut Board or Citrus Board? Does everyone talk about almonds as the shining light of California agriculture because of some quirk of hiring and personality? Anyway, I don't know what almond growers pay for the board (I assume some small percent of their price/piece), but they're getting stellar value for it.

It sure seems to me that mixed nuts have a higher percentage of almonds (pronounced aamins, by the way, rhymes with famines) than they used to. Or is that my imagination? In any case, maybe the tofu folks need to hire away the guru behind the Almond Board's success. It would make Ezra Klein happy, anyway.