Kevin Drum

Idiocy in Illinois

| Tue Dec. 9, 2008 12:12 PM EST

IDIOCY IN ILLINOIS....I seem to recall reading somewhere recently that Illinois governor Rod Blagojevich has a 4% approval rating. So I guess he figured he had nothing to lose:

Gov. Rod R. Blagojevich of Illinois was arrested on Tuesday morning and charged with corruption, including an allegation that he conspired to profit from his authority to appoint President-elect Barack Obama's successor in the United States Senate, prosecutors said.

As Mr. Blagojevich mulled the Senate appointment, prosecutors say, he discussed gaining "a substantial salary" at a nonprofit foundation or organization connected to labor unions, placing his wife on corporate boards where she might earn as much as $150,000 a year and trying to gain promises of campaign money, or even a cabinet post or ambassadorship, for himself.

A 76-page affidavit from the United States Attorney's office in Northern Illinois says Mr. Blagojevich was heard on wiretaps over the last month planning to "sell or trade Illinois' United States Senate seat vacated by Pres-elect Barack Obama for financial and personal benefits for himself and his wife."

....According to the statement from prosecutors, Mr. Blagojevich told an adviser last week that he might "get some (money) upfront, maybe" from one of the candidates hoping to replace Mr. Obama. That person was identified only as "Candidate 5."

In an earlier recorded conversation, prosecutors say, Mr. Blagojevich said he was approached by an associate of "Candidate 5" with an offer of $500,000 in exchange for the Senate seat.

Jeebus. Is Blagojevich also the world's biggest moron? The evidence says yes.

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Race and Status

| Tue Dec. 9, 2008 12:31 AM EST

RACE AND STATUS....Blacks are often stereotyped as having lower status than whites. That won't surprise anyone. But does it work in the other direction too?

Apparently so. The LA Times reports today on a study suggesting that people are more likely to be identified as black if their status changes for the worse. In a review of data from the National Longitudinal Survey of Youth, in which subjects are interviewed annually (biannually after 1994), a pair of researchers found that people who had been identified by interviewers in one year as white were less likely to be identified as white the next year if they were in jail, unemployed, or impoverished:

"Race isn't a characteristic that's fixed at birth," said UC Irvine sociologist Andrew Penner, one of the study's authors. "We're perceived a certain way and identify a certain way depending on widely held stereotypes about how people believe we should behave."

....For example, 10% of people previously described as white were reclassified as belonging to another race if they became incarcerated. But if they stayed out of jail, 4% were reclassified as something other than white, the study said.

I don't have any special views on the "race is a social construct" question, but this certainly suggests, at the margins at least, that social status does indeed have an effect on how race is perceived. The full study is here.

Risk

| Mon Dec. 8, 2008 8:33 PM EST

RISK....Brad DeLong says that, ultimately, the global stock of capital fluctuates based on five factors: (1) savings and investment, (2) good and bad news out in the real world, (3) the default discount, (4) the liquidity discount, and (5) the risk discount. The first two haven't changed recently. The third has produced about $2 trillion in mortgage losses and $4 trillion in followon recession-based losses. The fourth, thanks to heroic efforts from central banks, has had a positive impact of about $3 trillion. So in Brad's estimate, the first four factors have produced a net loss of about $3 trillion worldwide. However, total actual losses worldwide during the economic crisis of the past year have come to about $20 trillion so far:

Thus we have an impulse — a $2 trillion increase in the default discount from the problems in the mortgage market — but the thing deserving attention is the extraordinary financial accelerator that amplified $2 trillion in actual on-the-ground losses in terms of mortgage payments that will not be made into an extra $17 trillion of lost value because global investors now want to hold less risky portfolios than they wanted two years ago.

....Our models predict that in normal times, with the ability to diversify portfolios that exists today, the risk discount on assets like corporate equities should be around 1% per year. It is more like 5% per year in normal times — and more like 10% per year today. And our models for why the risk discount has taken such a huge upward leap in the past year and a half are little better than simple handwaving and just-so stories. Our current financial crisis remains largely a mystery: a $2 trillion impulse in lost value of securitized mortgages has set in motion a financial accelerator that we do not understand at any deep level but that has led to ten times the total losses in financial wealth of the impulse.

.... $2 trillion shocks to global wealth [] happen every several years, every time there is a recession or a big rise in the prices of natural resources. But financial distress of the magnitude we see today happens once a century. Since the Bank of England developed its lender of last resort doctrine in the 1830s, we have only had two episodes this bad: the Great Depression and today.

If I had to guess, I'd say the financial accelerator was so outsized this time around because of the size and scope of the uncertainty it generated. During an oil shock, say, or a dotcom bust or a Latin American default, investors have at least some idea of which investments are going to be hardest hit and — more importantly — which ones aren't. But this time around, because of the size of the initial losses and their fundamental opacity, every investment has become suspect. After all, until the global derivative chains are somehow unwound, virtually every bank, hedge fund, and corporation with any serious exposure to modern financial instruments is — maybe, possibly — bankrupt. A housing bust wouldn't normally affect IBM very hard, for example, but what if it turns out that IBM has a bunch of CDS counterparty exposure to mortgage losses somewhere on its books? They probably don't, but how sure are you of that? Multiply that uncertainty by every company in the world, and you get $17 trillion in losses.

Eventually, I guess, the housing market will bottom, the toxic waste sloshing around the financial system will once again have a reasonable range of values, and the question of who has exposure to the losses will start to get narrowed down. Until then, the risk premium will probably stay sky high.

*John Thain's Bonus

| Mon Dec. 8, 2008 3:15 PM EST

JOHN THAIN'S BONUS....The Wall Street Journal reports on the latest in the bonus soap opera:

Merrill Lynch & Co. chief John Thain has suggested to directors that he get a 2008 bonus of as much as $10 million, but the battered securities firm's compensation committee is resisting his request, according to people familiar with the situation.

....A few months ago, when the board began seriously considering 2008 bonuses, a proposal was presented to the compensation committee by Merrill that Mr. Thain should be paid in excess of $30 million, according to people familiar with the matter. That number has since come down in recent talks with various board members and Mr. Thain has recently indicated to committee members that $5 million to $10 million is more reasonable.

Well, that's mighty big of him, isn't it? Especially for a guy who got a $15 million bonus just for signing on at Merrill a year ago.

But garden variety outrage isn't what I'm after here. What I want to know is: what was Thain's bonus plan when he was hired? According to the Journal, "Merrill shares were trading above $50 when he was hired, and his pay package was structured heavily toward his ability to increase the price by another $40 or more. Merrill's shares have fallen steadily this year, closing Friday at $13.04 in 4 p.m. New York Stock Exchange composite trading."

Look: the plan he signed is the plan he signed. If his bonus was based on increasing Merrill's stock price, and instead their stock collapsed, then he shouldn't get a bonus. Instead of just saying so, though, Thain and the compensation committee will apparently go through something that's become standard American CEO kabuki, in which the comp plan is essentially rewritten if "bad luck" reduces bonuses below a level that's tolerable to our titans of industry. In this case, Thain's argument is that he saved Merrill by selling it off to Bank of America, a deal that BofA had been lusting over for ages and that required, according to news reports, little more than a couple of days to put together.

This isn't a matter of outrage toward John Thain personally. For all I know he did the best he could with the hand he was dealt. But that doesn't matter. He's getting paid plenty of money for showing up to work, and arranging a shotgun marriage after presiding over a historic collapse hardly seems deserving of special attention. If he doesn't have the horse sense to figure that out on his own, BofA might want to think twice about keeping him aboard.

Abortion Politics

| Mon Dec. 8, 2008 2:46 PM EST

ABORTION POLITICS....In the New York Times yesterday, Ross Douthat made the case that hardline views on abortion didn't have much to do with the Republican defeat in November. I think he's basically right about that. Abortion just wasn't a high profile issue this year.

However, then he goes a step further, arguing that conservatives aren't really so very hardline on abortion these days anyway. "Compromise, rather than absolutism," he says, "has been the watchword of anti-abortion efforts for some time now." Steve Benen replies:

The evidence of conservative willingness to "compromise" on abortion is surprisingly thin. In 2005, for example, pro-life and pro-choice Democrats crafted the Prevention First Act, which aimed to reduce the number of abortions by taking prevention seriously, through a combination of family-planning programs, access to contraception, and teen-pregnancy prevention programs. Dems sought Republican co-sponsors. Zero — literally, not one — from either chamber endorsed the measure.

What's more, this year, pro-life activists in South Dakota and Colorado forced strikingly inflexible anti-abortion measures onto their statewide ballots. Both lost, but it was a reminder of the movement's "absolutism" on the issue.

There is, of course, another side to this as well. As Ross himself points out in his piece, the Supreme Court's ruling in Roe v. Wade means that "the pro-life movement is essentially trapped." He takes this to mean that pro-lifers can't offer any genuine compromises because Roe doesn't allow them, but there's more than a whiff of disingenuousness to this. After all, does anyone really believe that the pro-life movement wants to overturn Roe (and Casey) merely in order to open the door to European-style compromise on abortion law? Anyone care to sound out James Dobson on that notion?

The truth is more prosaic: pro-life activists have done exactly what you'd expect them to do. They've pushed for the most restrictive possible laws they can get away with, and in many states they've succeeded in making abortion de facto unavailable. If Roe were overturned, compromise would be the last thing on their minds.

Biden and the Senate

| Mon Dec. 8, 2008 2:13 PM EST

BIDEN AND THE SENATE....Harry Reid got some attention over the weekend for telling the Las Vegas Sun that Joe Biden should stick to his end of Pennsylvania Avenue after the inauguration:

In a move to reassert Congressional independence at the start of the new presidential administration, the vice president will be barred from joining weekly internal Senate deliberations, Senate Majority Leader Harry Reid said in an interview with the Las Vegas Sun...."He can come by once and a while, but he's not going to sit in on our lunches," Reid said. "He's not a senator. He's the vice president."

....A spokeswoman for the vice-president-elect said "Biden had no intention of continuing the practice started by Vice President Cheney of regularly attending internal legislative branch meetings — he firmly believes in restoring the Office of the Vice President to its historical role."

"He and Senator Reid see eye to eye on this," said Biden's spokeswoman Elizabeth Alexander.

This is fine, and certainly in keeping with tradition. But here's the funny thing: of all the things that Dick Cheney did to expand the role of the vice president, spending more time on Capitol Hill was one of the few that seemed pretty legitimate to me. The vice president is, after all, the president of the Senate, so the idea that he might spend a lot of time in the Senate cloakroom taking the temperature of presidential initiatives and just generally working to help round up votes — well, that doesn't really sound like much of an abuse to me. The fact that Republican senators tended to knuckle under to Cheney's strongarming says more about Republican senators than it does about whether the vice president is a good choice to liason with Congress.

Of course, all Reid has said is that Biden won't be welcome at Democratic caucus meetings, so maybe we're all reading more into this than is really there. That really was a bridge too far for Cheney, but there's plenty the vice president can do outside of formal caucus meetings if he wants to. And offhand, I can't think why he wouldn't want to.

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Chart of the Day - 12.08.2008

| Mon Dec. 8, 2008 1:39 PM EST

CHART OF THE DAY....Via Andrew Revkin, Maxwell Boykoff of Oxford University charts media mentions of global warming over the past five years. The dark line is the European media and the heavy dashed line is the North American media. As you can see, during the past two years media attention to global warming has nearly halved in both places. (The other lines are Oceania, South America, and Asia.)

What makes this especially perverse is that it's come at the very time when climate scientists are getting increasingly cataclysmic in their warnings about the danger of global warming. It's no longer a vague theory and it's no longer a matter of gradual change. Most climate scientists now think that we're getting very close to a tipping point at which we'll basically destroy our planet if we don't make some big changes very quickly. Here's Bill McKibben, from our current issue, on the most important number on earth, the concentration of carbon dioxide in the atmosphere:

And so we're now in the land of tipping points. We know that we've passed some of them — Arctic sea ice is melting, and so is the permafrost that guards those carbon stores. But the logic of Hansen's paper was clear. Above 350, we are at constant risk of crossing other, even worse, thresholds, the ones that govern the reliability of monsoons, the availability of water from alpine glaciers, the acidification of the ocean, and, perhaps most spectacularly, the very level of the seas....We can't rule out, in other words, the collapse of human society as we've known it. "If humanity wishes to preserve a planet similar to that on which civilization developed and to which life on Earth is adapted..." We should add the phrase to the oath of office for every politico on the third planet.

Are you listening, politicos?

Non-Outliers

| Mon Dec. 8, 2008 12:54 PM EST

NON-OUTLIERS....Matt Yglesias defends Malcolm Gladwell's Outliers:

I've seen a few people express the notion that Gladwell's conclusion — that success is determined largely by luck rather than one's powers of awesomeness — is somehow too banal to waste one's time with. I think those people need to open their eyes and pay a bit more attention to the society we're living in. It's a society that not only seems to believe that the successful are entitled to unlimited monetary rewards for their trouble, but massive and wide-ranging deference.

Beyond that, it's a society in which the old-fashioned concept of noblesse oblige has largely gone out the window. The elite feel not only a sense of entitlement, but also a unique sense of arrogance that only an elite that firmly believes itself to be a meritocracy can muster.

Point taken. But just to push back a little, I'm not sure it's the outliers who are the biggest problem here. To a certain extent, I think most people already understand that there's more than a little bit of luck involved in the fact that IBM decided to license Bill Gates's MS-DOS instead of CP/M or that 24 turned out to be a monster hit for Kiefer Sutherland. The star who gets a lucky break early in his career is practically a cliche. What's more, I think most of us don't begrudge the occasional outliers their jackpots all that much. Sure, Gates and Sutherland were both good and lucky, but at least they were good.

The bigger problem is with the vast amounts of money earned routinely and consistently by people who aren't even all that good. Ordinary CEOs and ordinary Wall Street executives, for example, have gotten enormous paydays over the past few decades not because they were really any better than their predecessors, but simply because they were riding a wave of prosperity. And it's not just a lucky few, either: it's all of them. Most of these guys aren't even outperforming the market significantly, let alone acting as titans of industry, but one way or another they've managed to convince themselves that a rising tide is a sign of personal brilliance. This allows them to sleep easily at night as they keep worker pay stagnant and use the resulting enormous buckets of money to reward themselves and their peers with comp packages that would make Croesus blush.

I wish Gladwell would write that book. It's one thing to make a story about geniuses interesting, but it's the corrosive and stifling triumph of the non-geniuses that could use a popular touch. Maybe next time.

Gates on Defense

| Mon Dec. 8, 2008 1:48 AM EST

GATES ON DEFENSE....In Foreign Affairs, once and future Defense Secretary Robert Gates writes about the need for a greater focus within the Pentagon on counterinsurgency and prosecution of small wars:

One of the enduring issues the military struggles with is whether personnel and promotions systems designed to reward the command of American troops will be able to reflect the importance of advising, training, and equipping foreign troops — something still not considered a career-enhancing path for the best and brightest officers.

....As secretary of defense, I have repeatedly made the argument in favor of institutionalizing counterinsurgency skills and the ability to conduct stability and support operations. I have done so not because I fail to appreciate the importance of maintaining the United States' current advantage in conventional war fighting but rather because conventional and strategic force modernization programs are already strongly supported in the services, in Congress, and by the defense industry. The base budget for fiscal year 2009, for example, contains more than $180 billion for procurement, research, and development, the overwhelming preponderance of which is for conventional systems.

....There is no doubt in my mind that conventional modernization programs will continue to have, and deserve, strong institutional and congressional support. I just want to make sure that the capabilities needed for the complex conflicts the United States is actually in and most likely to face in the foreseeable future also have strong and sustained institutional support over the long term. And I want to see a defense establishment that can make and implement decisions quickly in support of those on the battlefield.

In the end, the military capabilities needed cannot be separated from the cultural traits and the reward structure of the institutions the United States has: the signals sent by what gets funded, who gets promoted, what is taught in the academies and staff colleges, and how personnel are trained.

Gates' full piece doesn't contain any startling insights or bold new directions, but it certainly suggests that his basic sensibilities are fairly sound. The big question is whether he can do anything about it. He understands the obvious, namely that big weapons systems are so entrenched in the Iron Triangle of Pentagon procurement that they aren't going away no matter what he does, so he's set his sights fairly modestly. He just wants to redirect funding a bit and change the military personnel structure to reward counterinsurgency and nation building. It's a limited vision, but as he says, funding and promotions are where the rubber meets the road. It's the right place to start.

Fred Kaplan has more here, including a few specific suggestions for how Gates might turn his concept into reality. Also this: "My guess is that Obama said that he'll back him up on this — not because I have inside information (I don't), but because I doubt that Gates, who has been desperate to leave Washington and retire to his lakeside home in the Pacific Northwest practically since he arrived at the Pentagon, would have agreed to stay without Obama's backing."

From the Annals of Cluelessness

| Mon Dec. 8, 2008 12:50 AM EST

FROM THE ANNALS OF CLUELESSNESS....A reader recommends watching this interview on Friday between Greta Van Susteren and Troy Clarke, president of GM North America. It's worth a listen just to hear his answer to this one question: "What possessed the three automakers to come to town without a plan asking for money [two weeks] ago?...Didn't you know that people would want a plan?"

The exchange starts at about 10:45, and Clarke's answer, basically, is that they figured, hey, the banks got bailed out without a plan, so why shouldn't they? After all, when it's raining money, you don't ask questions, you just get out your bucket.

Points for honesty, I guess, but not much else.