Kevin Drum

The Upcoming GOP Civil War

| Mon Oct. 20, 2008 1:44 PM EDT

THE UPCOMING GOP CIVIL WAR.....After every election, the losing party conducts a civil war. Sometimes it's a big war, sometimes it's a small one, but the subject is usually the same: Did we lose because we failed to appeal to enough moderates? Or did we lose because we failed to uphold our heritage and give the voters a real choice? The arguments are so similar on both sides that even the terminology is often the same. Liberals refer to their party's centrists as DINOs (Democrats In Name Only) and Republicans refer to theirs as RINOs. Republican conservative stalwarts say, "If the choice is between a Democrat and a Democrat-lite, the public will choose the real thing every time." Switch the party affiliation and you get the same thing from liberal Democrats.

So what happens this time around? It's a little hard to keep this in mind at this point, but John McCain was widely considered the most electable Republican this year because of his mavericky politics and appeal to independents. He had moderate cred on immigration, campaign finance reform, and judicial nominees, and though he had a conservative voting record he had never been a committed culture warrior. If you thought that moving toward the center was the right strategy for the Republican Party after eight years of George Bush, McCain was your man.

So if he loses, what happens? Conservatives will have the upper hand, no? We tried a moderate, they'll say, and he crashed and burned. After all, if the choice is between a Democrat and a Democrat-lite etc. etc.

And that in turn suggests that instead of undergoing a long, slow moderation of their positions after this year's election, they'll go in the other direction. Their argument will be simple and compelling: the McCain strategy didn't work. The country is hungering for real conservatism, and that's the only way we can win. Hell, the only thing that even gave McCain a chance this year was his selection of Sarah Palin, the only real conservative on the ticket.

So this suggests an eye-popping state of affairs: after eight years of George Bush, Dick Cheney, and Karl Rove making them into the most unpopular party in recent history, the GOP will decide that the best response to this is to become even more conservative. I can hardly wait to see how this plays out.

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Infrastructure

| Mon Oct. 20, 2008 1:12 PM EDT

INFRASTRUCTURE....Time to rebuild our nation's infrastructure? Support for the idea is growing:

Public officials, engineers and policy experts have been warning for years that crumbling infrastructure is a ticking time bomb....A third of the nation's major highways are in poor shape, according to the Department of Transportation. The list of unsafe dams is growing. Mass-transit systems, water-treatment plants, hazardous-waste sites and more are falling apart.

The civil engineers association gave the country a "D" on its 2005 infrastructure Report Card. It called for a $1.6 trillion five-year improvement program.

Now, sure, you'd pretty much expect a civil engineers association to back a program of civil engineering projects. Still, the time is right. The usual argument against infrastructure projects as fiscal stimulus is that they take too long: you have to identify projects and draw up plans first, and only then do you put people to work building stuff. By the time the projects get started, the recession is over.

But not this time. The recession we're going into now promises to be deep and long, and a big slug of infrastructure improvements would not only be handy things to have, their timing is pretty good too. And politically it's doable too since there are plenty of projects available for all 50 states.

McCain hasn't bought into this because (I'd guess) he still doesn't really appreciate the scope of our financial problems. Plus he probably associates infrastructure projects with earmarks, so he has a Pavlovian reaction against them. Obama has done a little better, but only a little. It would be smart, both politically and substantively, for him to at least start making more aggressive noises on a big, bold infrastructure plan.

Security Agreement Update***

| Mon Oct. 20, 2008 2:23 AM EDT

SECURITY AGREEMENT UPDATE....Negotiations to put in place a long-term security agreement with Iraq aren't going well:

Key members of the Iraqi parliament's largest political bloc have called for all American troops to leave this country in 2011 as a condition for allowing the U.S. military to stay here beyond year's end, officials said Sunday.

The change sought by the influential United Iraqi Alliance would harden the withdrawal date for U.S. troops....The Shiite bloc, which includes Prime Minister Nouri al-Maliki's Dawa party, also insists that Iraqi officials have a bigger role in determining whether U.S. soldiers accused of wrongdoing are subject to prosecution in Iraqi courts, said Sami al-Askeri, a political adviser to Maliki.

....It was not immediately clear whether the U.S. side would accept the changes to the draft agreement. The document would provide legal authority for American troops to remain in Iraq after a U.N. mandate expires Dec. 31. If there is no accord or other legal cover for U.S. forces, they must leave.

The Bush administration has long resisted setting firm dates for the departure of U.S. troops from Iraq, saying that the decision should be based on security conditions. U.S. authorities ultimately accepted a compromise, which set the 2011 withdrawal date but provided for an extension if Iraq requested one.

Normally, I'd say that this is probably yet another sign of hard bargaining, and in the end an agreement will almost certainly be signed. And that still seems the most likely course to me. On the other hand, the U.S. occupation is unpopular with the Iraqi public, and with elections coming up soon no politician in the country can afford to be seen as soft on the Americans. That's democracy for you. Could be interesting times ahead.

Happy Birthday to Me!

| Sun Oct. 19, 2008 2:03 AM EDT

HAPPY BIRTHDAY TO ME!....I turn 50 today. Happy birthday also to Jim Henley, who stubbornly remains a couple of years younger than me. And to Grover Norquist, who stubbornly remains a couple of years older than me. And to GOPAC chairman Michael Steele, who stubbornly remains exactly the same age as me. And to everyone else born on October 19th. Buy yourself a cake today!

I'm Rich Enough Already, Thank You***

| Sun Oct. 19, 2008 1:24 AM EDT

I'M RICH ENOUGH ALREADY, THANK YOU....Andrew Lahde, who made himself famous by starting up a hedge fund that made a ton of money betting on the collapse of the subprime market, is closing up shop. On Friday, he explained why:

The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

Get that man a blog!

Chart of the Day - 10.18.2008***

| Sat Oct. 18, 2008 1:39 PM EDT

CHART OF THE DAY....A couple of weeks ago I quit watching the stock market's gyrations during the day because it was obvious that they didn't really mean anything. Up, down, whatever: the events of the final hour, from 3 pm to 4 pm were all that mattered, wiping out huge gains in an instant or turning small losses into disasters.

Now comes a nice chart via Zubin Jelveh that demonstrates the point graphically. As you can see, normally the stock market moves anywhere from a quarter of a percent to one percent in the final hour of the day. That's roughly the same as the other six hours the market is open. But since mid-September? Final-hour volatility jumped to 2%, and then earlier this month to a high of 6%. That's as much movement as the entire rest of the day. So if you're the nervous sort, give yourself a break and take your eyes off the hourly movements of the Dow. Just check in at 4 pm and be done with it.

Need some more charts? Ezra Klein has a nice one showing that sometimes placebos work just as well as surgery. (With a followup here.) Maybe those Christian Scientists are on to something after all?

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Friday Cat Blogging - 17 October 2008

| Fri Oct. 17, 2008 4:19 PM EDT

FRIDAY CATBLOGGING....We're in the middle of a mild Santa Ana condition right now, which means it's been pretty warm this week. Despite this, Domino has taken to burrowing under the bedroom quilt for her afternoon snooze. So that's what she's doing on the left. On the right, Inkblot, having finally cottoned to the fact that something is going on underneath the blankets, heads over to check it out. Needless to say, this had potential for considerable merriment, but after taking a brief swipe at Domino's paw, which was sticking out of the blanket, he got sort of addled and headed downstairs for a snack. That's always been the real center of his universe, after all.

LA Times Endorses Obama

| Fri Oct. 17, 2008 4:07 PM EDT

LA TIMES ENDORSES OBAMA....I won't try to pretend that the LA Times endorsing a liberal candidate is some kind of harbinger of social upheaval, but still: they haven't endorsed a presidential candidate for over 30 years. This year they're endorsing Obama:

We may one day look back on this presidential campaign in wonder. We may marvel that Obama's critics called him an elitist, as if an Ivy League education were a source of embarrassment, and belittled his eloquence, as if a gift with words were suddenly a defect. In fact, Obama is educated and eloquent, sober and exciting, steady and mature. He represents the nation as it is, and as it aspires to be.

They still like McCain because they think he'll cut taxes more on rich people (seriously, that's what they say), but they also aver that "the presidential campaign has rendered McCain nearly unrecognizable." Perhaps. Or maybe stress reveals character more than they think. That aside, though, most of the editorial is sharply on point. You can read the rest here.

The Fix We're In

| Fri Oct. 17, 2008 3:56 PM EDT

THE FIX WE'RE IN....Via Tim Fernholz, Rutgers history professor James Livingston offers his take on the core cause of our current financial meltdown. Naturally I like it, since it confirms many of my existing prejudices about the matter, so maybe you'll like it too:

The Great Depression was the consequence of a massive shift of income shares to profits, away from wages and thus consumption, at the very moment — the 1920s — that expanded production of consumer durables became the crucial condition of economic growth as such. This shift produced a tidal wave of surplus capital that, in the absence of any need for increased investment in productive capacity (net investment declined steadily through the 1920s even as industrial productivity and output increased spectacularly), flowed inevitably into speculative channels, particularly the stock market bubble of the late 20s.

....[Likewise], a shift of income shares away from wages and consumption, toward profits, has characterized the pattern of economic growth and development over the last twenty-five years....The offset to this massive shift of income shares came in the form of increasing transfer payments — government spending on social programs — since the 1960s; these payments were the fastest growing component of labor income (10 percent per annum) from 1959 to 1999. The moment of truth reached in 1929 was accordingly postponed. But then George Bush's tax cuts produced a new tidal wave of surplus capital with no place to go except into real estate, where the boom in lending against assets that kept appreciating allowed the "securitization" of mortgages — that is, the conversion of consumer debt into promising investment vehicles.

....And while consumers were going deeper into debt to service the current account deficit and finance economic growth, corporations were abstaining from investment: "The recent household deficit more than offset the persistent financial surplus in the business sector. For a period of six years — the longest since the second world war — US business invested less than its retained earnings." (FT 8/22/07, p. 13)

....So the Bush tax cuts merely fueled the housing bubble — they did not, and could not, lead to increased productive investment. And that is the consistent lesson to be drawn from fiscal policy that corroborates the larger shift to profits, away from wages and consumption.

I'll leave it to economists to argue over whether Livingston is right in detail. But the confluence of stagnant middle class wages; the resultingly vast pools of idle money looking for places to go; a rising federal deficit and a skyrocketing current account deficit; and then a series of tax cuts to make it all even worse — that's the big-picture core of what's wrong with our economy. It won't get fixed overnight, but the sooner we start the better.

POSTSCRIPT: And on a similar note, how about that capital gains tax cut in 1997, passed just in time to direct even vaster streams of cash into the dotcom bubble? Not such a good idea in retrospect, was it?

UPDATE: See Tyler Cowen here and Daniel Davies here for related thoughts. Though, really, I'm not sure "related" is quite the right word. But beneath the surface there's a sort of family resemblance.

Bailout Watch

| Fri Oct. 17, 2008 2:53 PM EDT

BAILOUT WATCH....So how's that bank recapitalization going? Are big banks going to use their $125 billion in federal cash to expand lending and unfreeze the credit markets? The New York Times reports:

"There is no express statutory requirement that says you must make this amount of loans," said John C. Dugan, the comptroller of the currency. "But the economics work so that it is in their interest to do so."

Mr. Dugan added that he would not examine how the banks used the money, but he said their actions would "be open to the court of public opinion."

Ah, yes, the court of public opinion. The titans of Wall Street are famous for their humble submission to public opinion. That should work out very well indeed.

Or not. Especially if it doesn't matter because they still don't have any money:

Lenders have been pulling back on credit lines for businesses, mortgages, home equity loans and credit card offers, and analysts said that trend was unlikely to be reversed by the government's money.

"I don't think that the market wants to see that capital being put to work to leverage the business up again," Roger Freeman, an analyst at Barclays Capital, which acquired parts of the now-bankrupt Lehman Brothers last month, told The Times. "My expectation is it's quarters off, not months off, before you see that capital being put to work."

....In the case of the nine-largest commercial banks — Citigroup, Merrill Lynch, Bank of America, Morgan Stanley, JPMorgan Chase, Goldman Sachs, Wells Fargo, Washington Mutual and Wachovia — profits from early 2004 until the middle of 2007 were a combined $305 billion. But since July 2007, those banks have marked down their valuations on loans and other assets by just over that amount.

In other words, their net profit for the past four years is already negative, and by the time this is all over their net profit for the entire past decade or three will be negative. So keep that government cash coming. $125 billion is only the beginning.