Kevin Drum

Pure Libertarianism

| Wed Dec. 3, 2008 9:17 PM EST

PURE LIBERTARIANISM....Should the U.S. government bail out the auto industry? Arnold Kling comments:

This is an example where pure libertarianism gets you quickly to the right answer. Lose the "we," and instead ask, would I undertake this policy myself? That is, would I lend money to the auto makers? If the answer is that I wouldn't, then the implication is that "we" shouldn't.

The same reasoning applies to giving money to financial firms. I wouldn't, therefore we shouldn't.

Picture everyone in Congress who voted for TARP standing on a street corner in a Santa suit, ringing a bell, and asking for donations to pay for the rescues of AIG, Citigroup, and so forth. In a libertarian society, that is what they would have to do in order to fund the bailouts.

If that image doesn't move you in a libertarian direction, then nothing will.

Well, then, I guess nothing will. Because this sure doesn't do anything to persuade me.

As it happens, I'm not entirely convinced that Detroit ought to be bailed out. At the moment, I'm probably more in the "prepackaged bankruptcy" camp. Still, the whole point of government is that it does things for us collectively that we can't (or wouldn't) do individually. After all, if congressmen stood on corners begging for donations to the Pentagon they probably wouldn't raise enough to fund a single F-22, but that doesn't mean Congress shouldn't fund the Pentagon. Ditto for roads, courts, police, Social Security, unemployment insurance, foreign embassies, and national parks. The arch-angelic among us excepted, none of us would contribute much money to these causes unless we knew that everyone else who benefited from them was contributing too.

TARP is no different. We aren't rescuing banks because we feel sorry for bankers (though I'll concede that sometimes I kind of wonder about that), we're rescuing them because we think their failure would bring the economy down around our ears and we'd just as soon avoid that. A bit of collective action on this front will help keep all of us out of a repeat of the 1930s.

Now, that might be wrong. Go ahead and make the case for inaction on its merits if that's how you feel. But a generic claim that federal intervention is a bad idea because none of us would intervene as individuals just doesn't hold water for anyone who isn't already a hardcore libertarian. This is the kind of argument that hurts their cause, not the kind that helps it.

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The Trade Deficit

| Wed Dec. 3, 2008 4:20 PM EST

THE TRADE DEFICIT....Conventional wisdom says we need to run a big federal deficit in order to stimulate our way out of the current recession. Fine. But if we stimulate demand, that means we're going to be buying ever more stuff from overseas, which in turn means that our trade deficit will continue to remain large and growing, financed by the willingness of China and other trade surplus nations to stockpile U.S. treasury bills in return for shipping their stuff to us. Martin Wolf isn't impressed:

This is not a durable solution to the challenge of sustaining global demand. Sooner or later — sooner in the case of the UK, later in the case of the US — willingness to absorb government paper and the liabilities of central banks will reach a limit. At that point crisis will come. To avoid that dire outcome the private sector of these economies must be able and willing to borrow; or the economy must be rebalanced, with stronger external balances as the counterpart of smaller domestic deficits. Given the overhang of private debt, the first outcome looks not so much unlikely as lethal. So it must be the latter.

....In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries [i.e., countries like China –ed] must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy.

Some argue that an attempt by countries with external deficits [i.e., countries like the United States –ed] to promote export-led growth, via exchange-rate depreciation, is a beggar-my-neighbour policy. This is the reverse of the truth. It is a policy aimed at returning to balance. The beggar-my-neighbour policy is for countries with huge external surpluses to allow a collapse in domestic demand.

I don't know what the answer to this is. U.S. consumption of goods and services is about 5% higher than U.S. production, and this can't keep up forever. Eventually our consumption has to go down and China's has to go up.

But not yet. Because we're in the middle of a financial panic and we need to keep domestic consumption high in order to keep from collapsing. And this isn't hard to do, because in one of the great ironies of a crisis that was brought on by the United States, nervous investors worldwide now believe that U.S. treasuries are the safest place to park their money in a troubled world. So for the time being, there are lots of buyers for treasuries, yields are nearly zero, and we're having no trouble at all financing a big federal deficit.

This won't last forever, of course. Panic will subside soon enough, the treasury bubble will burst, and foreign investors are going to start demanding higher returns. The dollar will have to depreciate, America will have to produce more and consume less, and the domestic economy will trundle along dismally for years until we manage to rebalance things.

Economists have been warning about this for years, of course. But over time, as nothing bad ever came of it, their warnings began to sound like crankery. After all, plenty of them warned us about the housing bubble for years too, and for the most part we didn't listen to them. In a few years, though, when the trade deficit bubble finally goes pear shaped, we're going to be asking once again why no one saw it coming. Even though lots of people did.

Like I said, I don't know what to do about it. The trade deficit bubble helped finance the housing bubble, and now that the housing bubble has burst it's the worst possible time to think about bursting another bubble as well. Eventually, though, the rest of the world will do it for us. Expect a bumpy ride.

Soft Power

| Wed Dec. 3, 2008 2:41 PM EST

SOFT POWER....Matt Yglesias talks framing:

Can we retire the term "soft power" already? I always feel that it's been popularized not so much by Professor Nye as by deranged warmongers who like the idea of terming every alternative to militarism as somehow "soft," fluffy, and weak. Soft Power is a good book, but it's a bad coinage for an era in which national security issues have returned as a partisan political topic, and I don't think it's an especially great label for what Nye's talking about.

I agree, but what do we replace it with? "Cultural power" is no good, since it evokes thoughts of cultural imperialism. "Economic power" sounds scary too, and none too apropos anyway considering the economic devastation we're currently wreaking on the world. Anyway, soft power encompasses lots of things, so any individual term won't be enough.

I've heard "smart power" bandied about, but I doubt that will catch on. Too jargony. "Non-military power" gets to the nub of things, but doesn't roll off the tongue very well. So what's a good alternative word that basically means "mostly non-military"? Anybody care to chime in?

UPDATE: In comments, Jon and Matt suggest "civil power." Dan Drezner suggests "social power." Matt Yglesias thinks the problem is with "power," not "soft." On the other hand, plenty of people in comments think "soft power" is just fine as is.

Quote of the Day - 12.03.08

| Wed Dec. 3, 2008 2:31 PM EST

QUOTE OF THE DAY....From Tim Fernholz, on Bill Richardson's nomination as Secretary of Commerce:

For a man who once broke the world record for number of hands shook in eight hours, it seems like he's now gunning for number of cabinet posts held in one lifetime.

Hmmm. Who does hold the record for number of cabinet-level posts held? This will be Richardson's third. Elliot Richardson held four. No other serial cabinet members come immediately to mind. Anyone know?

College Costs

| Wed Dec. 3, 2008 2:15 PM EST

COLLEGE COSTS....The New York Times, quoting a new report from the National Center for Public Policy and Higher Education, says:

Over all, the report found, published college tuition and fees increased 439 percent from 1982 to 2007, adjusted for inflation.

Bob Somerby is astounded, as well he should be. The report is here, and the chart on page 8 is clearly labeled "Growth Rate in Current Dollar Price." In other words, not adjusted for inflation. In real dollars, tuition costs since 1982 have gone up about 150%. That's a lot, but not quite the quintupling the Times suggests.

For what it's worth, my guess is that this number is strongly affected by big tuition hikes at state universities. Adjusted for inflation, for example, tuition at Harvard has gone from $15,000 in 1982 to $31,000 last year — a mere doubling. Conversely, the state university I attended charged virtually nothing when I was there in 1981 but today charges in-state students nearly $4,000 per year. The eye popping tuition figures at elite universities get the headlines, but it's the budget strapped state schools — and the middle class students they serve — who have seen the eye popping increases.

16 Hours

| Wed Dec. 3, 2008 1:20 PM EST

16 HOURS....A new report has — once again — stated the obvious: it's insane to require doctors to work long shifts without sleep. And — once again — not everyone agrees:

The report, produced by the Institute of Medicine, an arm of the National Academies, recommended that medical residents ideally should work no longer than 16 consecutive hours, considerably less than the 30-hour shifts now allowed.

....Dr. Mark I. Langdorf, medical director of the emergency department at UC Irvine Medical Center and associate director of the residency program, called the recommendations "nuts."

"The problem here is balancing the need for patient safety, which I acknowledge, with the need to have the training in medicine be an apprenticeship," he said. "It sells the educational process short to make training so intermittent that you don't really get continuity."

"Continuity of care" has been the excuse for 30-hour shifts forever, but I've never seen a single person actually make a coherent case for objecting to a five-hour nap in the middle of a shift. They just chant continuity like a mantra and expect the rest of us to believe that 30 hours is some kind of talismanic number even though it really doesn't make any sense. Hell, I don't think I could even blog intelligibly after 30 hours, let alone make subtle and potentially life-saving diagnostic decisions. This may be an ancient practice, but so was bleeding patients until we figured out better. It's time to stop being idiots about this.

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Mumbai

| Wed Dec. 3, 2008 12:34 PM EST

MUMBAI....Christopher Hitchens is feeling peevish:

When Salman Rushdie wrote, in The Moor's Last Sigh in 1995, that "those who hated India, those who sought to ruin it, would need to ruin Bombay," he was alluding to the Hindu chauvinists who had tried to exert their own monopoly in the city and who had forcibly renamed it — after a Hindu goddess — Mumbai. We all now collude with this, in the same way that most newspapers and TV stations do the Burmese junta's work for it by using the fake name Myanmar.

Andrew Sullivan approves: "I wasn't aware of this but now that I am, the Dish will refer to Mumbai by its previous name."

Hold on a second. The Burma/Myanmar issue hinges on whether you think its ruling military junta is legitimate. No such ambiguity attaches to Mumbai. The Shiv Sena party may indeed be Hindu chauvinists, but Mumbai's name change was eventually approved by the democratically elected municipal corporation of the city, the state of Maharashtra, and the federal government of India, and they've stuck to it for over a decade now. Like it or not, there's no question that this was a legitimate change. Comparing it to the renaming of Burma is absurd.

Holbrooke to Pakistan?

| Wed Dec. 3, 2008 12:32 AM EST

HOLBROOKE TO PAKISTAN?....The Washington Post reports:

President-elect Barack Obama is seriously considering giving former ambassador Richard Holbrooke a key role in handling diplomacy in south Asia, a move that would put one of America's most prominent international troubleshooters in the middle of trying to resolve the thorny and interrelated problems surrounding India, Pakistan and Afghanistan, according to several sources familiar with the transition.

Obviously I think this is a good idea. I hope it turns out to be true.

Chambliss Wins

| Tue Dec. 2, 2008 10:09 PM EST

CHAMBLISS WINS....CNN says Saxby Chambliss has won the Senate race in Georgia. No surprise, but still kind of a bummer.

Miscellaneous Felix Salmon Review

| Tue Dec. 2, 2008 8:18 PM EST

MISCELLANEOUS FELIX SALMON REVIEW....Felix Salmon:

I've now reached the point at which I simply don't believe people when they say that lower pay for bankers will result in worse performance — especially since it looks very much as though it was higher pay for bankers which was at least partly responsible for much of the present crisis. Let's bring down pay, a lot, and see whether performance really falls.

The financial system went for decades, quite happily, without monster paydays: why can't we go back to those days? No one thinks we need to pay the Treasury secretary lots of money to make sure he's "working hard"; why are bank CEOs any different? And insofar as lower bank salaries would drive America's best and brightest into other sectors of the economy, that would surely be a good thing.

Hear hear — and not just for banks. Our economy worked just great back when CEOs were paid 50x the median salary, and I don't see why it can't do so again. The most efficient way to make that happen, of course, is not to directly cut CEO pay but to pay line workers more. Not only would they spend that extra money on actual stuff (as opposed to idiotic investment scams), thus helping drive the economy upward, but it would automatically reduce the pot of money available for all the suits. It's a twofer.

In other Felix Salmon news, he says I got a couple of things wrong in my super-senior tranche post yesterday. First, he says that the synthetic CDO market is smaller than the cash CDO market, not bigger, and also that banks mostly didn't keep synthetic CDOs on their books at all. Rather, they kept the real CDOs and sold off the synthetics. Noted.

Elsewhere, Felix points to a post by Sam Jones that explains super-senior tranches in yet another way, and it's worth reading on the off chance that you have an obsessive interest in this stuff. If you don't, though, here's the conclusion:

The risk is with the noteholders of the synthetic CDOs. And just as with [asset-backed] CDOs, those noteholders are likely to see some very severe losses. Synthetic CDOs are only now about to experience the same kind of dramatic collapse that plagued ABS CDOs way back in late 2007 and early 2008.

The trigger will be the growing number of corporate defaults, which just like assumptions on subprime mortgage defaults, was, in many synthetic structures, underestimated. Barclays analysts see a "rising tide" of synthetic CDO downgrades on the horizon. Downgrades which could well have huge regulatory capital requirements on the super-senior positions banks have on their books.

Oh goody. And for what it's worth, this is why I'm interested in all the gory details of this stuff. Ezra is right that the housing bubble underlies everything (though it might not next time....), but the financial rocket science really did kick everything into another gear. Understanding it is not only interesting for its own sake, but also provides some insight into how everything unfolded and what's going to happen next. Though, at this point, I admit that I'm not even sure I want to know.