Kevin Drum

West Coast Offense

| Tue Nov. 11, 2008 5:49 PM EST

WEST COAST OFFENSE....Adam Serwer writes today about the pros and cons of class-based affirmative action (vs. race/gender-based AA), and Atrios offers some advice:

If, say, a left of center magazine or some other Washington institution wanted to engage in a bit of class-based affirmative action, I have a fairly simple suggestion. Just make sure you reach out beyond elite schools. I've attended and taught at a variety of institutions, and some excellent students can be found most places. And while I don't know the hiring practices of random left of center magazines, or for Congressional staffs, or for the Washington Post, it wouldn't surprise me if first round resume weeding is frequently done based on the college the applicants attended.

I'll second that. Sure, the East Coast centrism of opinion magazines is easy to understand, since they're almost all based on the East Coast. But while I can't say for sure that things haven't changed recently, a few years ago I was noodling around on this subject and was astonished at the hegemony of the Ivy League in the mastheads of most progressive magazines. I expected it to be heavy, but my recollection is that my (admittedly unscientific) sample was something like three-quarters Ivy League. Considering the number of top notch universities elsewhere in the country, that's pretty hard to defend.

So yeah: recruit on the West Coast. Lots of smart liberals out here! And at public universities, which might produce a wider range of sensibilities. It's true that East Coast weather sucks and us Californians are more than a little crybabyish about snow and sleet and whatnot, but Ezra Klein managed to make the transition. I'll bet plenty of others can too.

UPDATE: But not just California! Recruit from all the other states too!

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Yet More on the CDS Market

| Tue Nov. 11, 2008 5:09 PM EST

YET MORE ON THE CDS MARKET....I've been meaning to link to yet another Felix Salmon post about credit default swaps, since I know what a fascinating subject they are for everyone, but one thing led to another and I haven't done it yet. Basically, "one thing and another" means that I spent several hours yesterday trying to understand the whole CDS issue better, but I failed miserably. So instead of pretending otherwise, I'm just going to link. Salmon conducted an IM conversation with Robert Waldmann about the CDS market, and part of it went like this:

Felix Salmon: So, have I brought you around to the idea that CDS really aren't a major cause of the current crisis?
As you know, Kevin Drum calls me "disturbingly persuasive"

Robert Waldmann: Ah well that is ambitious. You have convinced me that there is a perfectly legitimate reason which can explain why face value is so huge. As to the cause of the crisis, I remain confused. Stupid CDS tricks could have done it. So could stupid CDO tricks and what all.

Felix Salmon: I will concede that there were indeed stupid CDS tricks

Robert Waldmann: I mean the situtation is I don't understand the new financial instruments and it sure looks like the trader types didn't understand them as well as they thought.

Felix Salmon: But the stupidity was in understanding credit risk, not in understanding CDS.

Well....sure, but this seems like a bit of a dodge. After all, pretty much all financial bubbles are based on mispricing risk in some way or another. It seems like we need to dig a little deeper and try to figure out if there were specific aspects of the way modern financial markets are regulated that encouraged even more risk mispricing than usual.

The question, then, isn't whether credit default swaps are useful instruments. They are. The question is whether there's something about the way they're managed in real life that makes them potentially more dangerous than, say, stocks or pork belly futures. And if so, what can we do to limit "stupid CDS tricks"? Here's one possibility:

Robert Waldmann: OK a reform proposal. CDS must come with collateral even if you find a sucker willing to buy one without collateral (this is a regulatory restriction).

Felix Salmon: Yes yes yes.
That's why I'm so astonished Berkshire Hathaway is STILL writing CDS without collateral requirements.
But a move to an exchange would have the same effect.

If I understand this right, the benefit of requiring collateral is twofold. First, it keeps the CDS market from going too crazy, since CDS sellers can only sell protection if they have collateral to back their positions. Second, it reduces counterparty risk, since even if the CDS seller goes bust there's collateral that's been posted to make good on the swap. The big problem with AIG, for example, which has been the most spectacular example of a financial firm losing its shirt due to CDS exposure, is that they were writing CDS willy nilly without having to post collateral (thanks to their AAA rating). When their rating started going south, and they had to post collateral to make up for it, the company went down the toilet. If they'd had to post collateral in the first place, that wouldn't have happened.

So I guess that's a good start: make CDS exchange traded and insist on collateral posting requirements for all writers of CDS.

But what I still don't have a handle on is the scale of the losses in the CDS market. Clearly, AIG and the monoline insurers lost a ton of money. But Salmon suggests that the broader banking industry didn't. Partly this is because only a small segment of the financial industry were net sellers of CDS protection:

Felix Salmon: There's AIG, there's the monolines, and there's the synthetic CDOs bought by institutional investors.
Given the zero-sum nature of any derivatives market, that means that everybody else, on net, was a buyer of credit protection.

So far, this seems to be right: net losses in the broader financial industry on CDS trades seem to be pretty modest. So far. Unfortunately, though, that still leaves the CDOs, which we don't know much about yet, and it also leaves everyone else, who might be choosing not to settle CDS contracts yet that have big losses associated with them. I have a feeling we might need to wait a while longer to know for sure if the broader CDS market is as benign as Salmon thinks.

But it might be. Obviously it's cheating a bit to single out the particular areas where CDS sales caused big problems and then say, "well, aside from those areas everything was fine" — after all, it's always the case in every industry that aside from the problems there are no problems — but still, if it turned out that the big abuses came from noncollateralized CDS sales and synthetic CDOs, that would make me happy. After all, I'm already on record as thinking that CDOs are the devil's spawn. Anything that heaps more abuse in their direction is fine with me.

Bottom line: I'm still confused. For one thing, an awful lot of smart people seem to disagree with Salmon. I'd like to see some of them engage with his arguments. For another, the CDS market is so opaque that we still don't really know how much exposure is out there and who has it. At the very least, that seems unacceptable. And finally, even if there were only three segments of the financial market that were net sellers of CDS protection, just how much is it going to cost us to bail them out?

One way or another, the losses in the financial markets appear to be far wider than just subprime loans. After all, the size of subprime losses in the U.S. seems to be about half a trillion dollars, but in the past year banks have raised something like $300-400 billion in new private capital and another $200 billion so far in government capital. So that means their overall capitalization levels should be OK. But apparently that's not the case. So where are all the rest of the losses coming from? CDS? CDOs? Currency forwards? What? Does anybody actually know? And if not, what will it take to find out?

POSTSCRIPT: And one more thing. It's really annoying that the plural of CDS is CDS. "CDS market" is fine, and CDS when referring to an individual swap is fine, but why not CDSes when referring to multiple swaps? As in, "Sellers of CDSes should be required to post adequate collateral for each CDS they sell"? What does Wall Street have against plural acronyms?

Netbooks

| Tue Nov. 11, 2008 1:49 PM EST

NETBOOKS....As part of my mission to stay hopelessly behind the curve in technology matters, I just yesterday discovered the existence of a new class of notebook computers called netbooks. I guess they've been around for nearly a year, but my local Micro Center didn't carry any the last time I was there in August. Yesterday, though, they had half a dozen different models, all of them small enough to toss in a purse or tote without thinking twice, but with screens large enough (barely) to get real work done.

As it happens, I've always wanted something in exactly this form factor, so I almost bought one on the spot. But I didn't. After all, I just bought a Mac notebook on impulse a few months ago. And it's not like I compute mobile-ly very often anyway.

Still, they're pretty damn cute. And cheap. And I think I want one. So consider this an open thread. Should I buy one? What kind? Anyone have any personal experiences to share?

Space!

| Tue Nov. 11, 2008 1:14 PM EST

SPACE!....Ross Douthat suggests that any conservatives foolish enough to support Newt Gingrich as chair of the RNC ought to reread the list of fabulous new ideas for the Republican Party that he published in Human Events last May. I don't have a dog in this fight, but I went back and refreshed my memory anyway. Here's one of Newt's suggestions for GOP revival:

Implement a space-based, GPS-style air traffic control system. The problems of the Federal Aviation Administration are symptoms of a union-dominated bureaucracy resisting change. If we implemented a space-based GPS-style air traffic system we would get 40% more air travel with one-half the bureaucrats. The union has stopped 200,000,000 passengers from enjoying more reliable air travel to protect 7,000 obsolete jobs. This real change would allow the millions of frustrated travelers to have champions in congress trying to help them get places better, safer, faster.

Now, Newt loves anything space-based, and he loves to bash unions too, so this is right up his alley. But what's the deal with this space-based air traffic control system, anyway?

Well, it turns out that it's been on the drawing board for a while. The underlying technology is called ADS-B and has apparently worked well in tests in Alaska and other countries. Last year the FAA awarded a contract for part of a GPS-based system to ITT, but not much has been done since then. The entire project is known as NextGen, and according to this AP dispatch from last month, the real opposition to it comes not from the unions, which are skeptical but apparently not dead set against it, but from the airlines themselves, which don't want to bear the cost of upgrading their planes.

I guess this might be more than you wanted to know about this, but hey — I was curious. It was one of Newt's Top Nine ideas, after all. In the end, though, it turns out that the story is fairly prosaic: a GPS-based air-traffic control system might be a very fine thing that would save fuel and allow more air traffic, but it would cost a lot of money, be extremely complex to implement, has some technical issues to overcome, and faces some modest opposition from entrenched interest groups, including both airlines and the air traffic controllers union. In other words, just your standard gigantic federal technology project.

And, perhaps, just the thing to throw into a trillion dollar stimulus bill. Who knows? But part of the rebirth of the Republican Party. I'm thinking probably not.

UPDATE: By coincidence, the Wall Street Journal has a story about this exact subject today. No mention of union opposition at all. You can read it here if you want the latest.

House Democrats

| Tue Nov. 11, 2008 12:32 PM EST

HOUSE DEMOCRATS....Did congressional Dems underperform this election compared to Barack Obama? Should they have won even more than 20 additional seats? Andrew Gelman cries foul:

The only trouble with this theory is that it's not supported by the data. Obama won 53% of the two-party vote, congressional Democrats averaged 56%. The average swing of 5.7% from Democratic congressional candidates in 2004 to Dems in 2008 was actually greater than the popular vote swing of 4.5% from Kerry to Obama.

I think this is basically right, but I want to add something. Andrew compares the average district vote in each state, and for technical reasons he thinks this is the right measure. I, however, prefer something cruder: total congressional vote, which turns out to be a pretty good predictor of total House seats won by each party.

So how did Dems do? In 2004 they lost to Republicans by 2.2 percentage points. In 2006 they won by about 7.4 points, an astonishing swing of 9.6 points. This year they won by about 8.2 percentage points, an even more astonishing swing of 10.4 points since 2004 — and, as Andrew points out, bigger than the 8.7 point swing from Kerry to Obama.

So I guess my question to the skeptics is: Just how much do you think the Dems should have won by? Ten points is an enormous margin, far bigger than any party has enjoyed for the past two decades. If that's underperforming, I'll take it.

The Car Tax

| Tue Nov. 11, 2008 11:41 AM EST

THE CAR TAX....The LA Times chimes in this morning to suggest that if Arnold Schwarzenegger wants to raise revenue, he should think about reimposing the old vehicle license fee, which he cut when he took office, rather than raising sales taxes:

The car tax is a smarter choice than a sales tax for digging out of the current budget hole. Asking Californians to pitch in through their vehicle registration fees rather than at the cash register would have fewer negative effects on sales, which we can expect to be diminished too much already in the coming months.

Sales taxes are regressive: They take a higher percentage of household income from the poor than from the rich. A 1999 California Policy Research Center study found vehicle license fees to be nearly as regressive, but at least the proceeds are unrestricted and could be used to bail the state out of its mess. Because of voter fiat, sales taxes paid at the gas pump are off limits for any use but transportation. Local government also claims a share. Another advantage of car taxes: They are deductible from federal income tax. Try deducting your sales tax on your 1040 form and see how far you get.

I'll add another couple of related points. First, the California sales tax is already high, and local add-ons make it even higher. Schwarzenegger's proposal would hike it above 10% in most places, and most of the tax literature I've read suggests that 10% is an upper bound for an effective sales tax. Above that it has serious effects on sales revenue, promotes out-of-state purchasing, and produces compliance problems.

Second, sales taxes are regressive by nature and there's only a limited amount you can do about it (exempting food purchases is the most common approach to adding a bit of progressivity). Not so with the vehicle license fee. Right now the VLF is a flat rate on the assessed value of a vehicle, which is based on its purchase price and a fixed schedule of depreciation (basically 10% per year). It's true that if all you did was raise the VLF to its old rate of 2% it would remain about as regressive as a sales tax (see Table 5 here), but that's not the only way you can do it. Unlike a sales tax, which needs to be a flat rate for administrative reasons, the VLF could easily vary by assessed value. It could stay at its current rate of 0.65% up to, say, $10,000 in assessed value, increase to 2% for more expensive cars, and increase still further to 4% for top end cars. The average rate would still be about 2%, but the incidence of the tax would be more progressive.

And finally, here's one more great reason for increasing the VLF. It's a truism that if you tax something, you get less of it. So ask yourself: which could California use less of? General consumption? Or cars? The question answers itself, doesn't it?

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Stimulus Math

| Tue Nov. 11, 2008 1:11 AM EST

STIMULUS MATH....Goldman Sachs says we're about to suffer the deepest recession since World War II, with unemployment expected to top 8.5% next year and maybe inching a little higher in 2010. So how big should a stimulus package be given the size of the economic tsunami we're headed into? Paul Krugman tells us today that since Okun's Law suggests that every point of unemployment above 5% represents a 2% output gap, an 8.5% unemployment rate means that the economy is performing 7% under its potential:

So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it's too small. What's the multiplier? Better, we hope, than on the early-2008 package. But you'd be hard pressed to argue for an overall multiplier as high as 2.

When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion.

Given the likely length of this recession, we'll probably need nearly this much again in 2010. Call it an even trillion bucks when it's all said and done.

As recently as a few months ago that would have seemed unimaginably large to me. Today, not so much. Stimulate away, President Obama.

Larry Summers

| Mon Nov. 10, 2008 2:57 PM EST

LARRY SUMMERS....Sheryl Sandberg defends Larry Summers:

At the World Bank, he was a tireless advocate for girls' education. At Treasury, he fought for social security benefits for women working in their homes, better enforcement of child support obligations, and an expansion of child care tax credits.

....Larry has been attacked by some in the women's community for remarks he made about women's abilities. As he has acknowledged himself, this speech was a real mistake. What few seem to note is that it is remarkable that he was giving the speech in the first place — that he cared enough about women's careers and their trajectory in the fields of math and science to proactively analyze the issues and talk about what was going wrong. To conclude that he communicated poorly — and even insensitively — is fair. To conclude that he is opposed to progress for women overlooks the fact that improving this progress was precisely the subject he was addressing.

Jon Cohn defends him too:

On the issues I know best and over which the Treasury Secretary has sway, Summers is good. Very, very good. In the last few years, he has become a persistent critic of inequality and advocate for government action to redress it. He's a true believer in health care reform, both as a way to alleviate economic insecurity and to address the country's long-term fiscal crisis. He wants major action on climate change. And he has argued for aggressive action to stimulate the economy, despite high deficits.

And Brad DeLong:

Larry is — in Paul Krugman's words — a "a force of nature....You can bring him up to speed on anything in fifteen minutes....If you do a piece of something for him excellently — a link in a chain, say — he will do his damnedest to make sure that all other links in that chain are done equally excellently....If he thinks you know more about something than he does, he will listen to you very patiently and then trust and act on what you have told him....Very good people want to work for Larry because he will, if he thinks you can handle it, push you forward into the limelight and give you more responsibility than you thought you could handle.

The anti-anti-Summers backlash appears to be gathering steam.

Recession Watch

| Mon Nov. 10, 2008 2:28 PM EST

RECESSION WATCH....Via Brad DeLong, the Wall Street Journal reports the following:

The unemployment rate is expected to rise to 8.5% by the end of next year and inch even higher in early 2010, economists for Goldman Sachs wrote Friday. The cumulative trough-to-peak increase of more than 4 percentage points in the jobless rate would be the most since World War II, they said.

The BLS unemployment series is above, modified to show 9% unemployment in 2010. I guess this would technically beat out the 1979-81 "double-dip" recession because there was a pause in the middle of that one. To me, the current recession still doesn't look quite as bad '79-'81, but then, we haven't had a sudden oil crisis yet either. And let's hope we don't. It looks plenty bad already.

Arnold on Marriage

| Mon Nov. 10, 2008 1:48 PM EST

ARNOLD ON MARRIAGE....The latest from the Governator:

Gov. Arnold Schwarzenegger on Sunday expressed hope that the California Supreme Court would overturn Proposition 8, the ballot initiative that outlawed same-sex marriage...."It's unfortunate, obviously, but it's not the end," Schwarzenegger said in an interview Sunday on CNN. "I think that we will again maybe undo that, if the court is willing to do that, and then move forward from there and again lead in that area."

Have I mentioned recently just how disgusted I am with Schwarzenegger? Yes? Well, I still am. In addition to single-handedly causing at least half or more of our budget crisis, he also twice vetoed bills that would have legalized gay marriage in California. And now I have to listen to his crocodile tears over the subject? Spare me.