Kevin Drum

The Fix We're In

| Fri Oct. 17, 2008 2:56 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.

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Bailout Watch

| Fri Oct. 17, 2008 1:53 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.

Purging Ohio

| Fri Oct. 17, 2008 12:43 PM EDT

PURGING OHIO....A couple of weeks ago the Ohio Republican Party sued the Ohio Secretary of State. Their aim: forcing her to turn over to county officials the raw results of database matching operations for new voter registrations. She had refused because these matching efforts are notoriously unreliable, effectively purging tens of thousands of new registrations because of inaccuracies in the DMV and Social Security databases.

But of course the bulk of new registrations this year are Democratic voters, so the Ohio GOP went to court anyway. Today, in an impressively quick ruling, the Supreme Court unanimously ruled against them. I guess Scalia and Thomas must still be feeling guilty over 2000.

UPDATE: Elsewhere, Matt Yglesias makes the case for a national ID card as a way of cutting voter fraud. He doesn't actually say that, mind you, but that's how I choose to intepret his tale of voting woe anyway. And I agree.

Defending the Squiggle

| Fri Oct. 17, 2008 12:08 PM EDT

DEFENDING THE SQUIGGLE....Daniel Davies defends the "squiggle," CNN's real-time plot of reactions from their focus group of undecided voters during presidential debates:

My only complaint about the crawler is that CNN removes it from the screen when the debate finishes. I absolutely wish that they continued to show the favourable/unfavourable reactions of the dial-testing focus group to the talking heads on the news afterwards; you'd be able to see the worm plunging every time Wolf Blitzer opened his gob. I suspect a few uncomfortable home truths would arise out of that one.

He's got a few other ideas for on-screen dial testing too. Oddly enough, though, I'm tired of the squiggle. For the first three debates I was fascinated by it even though I knew it was mostly just BS, but in the fourth debate I hardly watched it at all. It wasn't anything deliberate, I just didn't care. Short attention span, I guess.

The Widening Gyre

| Fri Oct. 17, 2008 11:59 AM EDT

THE WIDENING GYRE....Over at MojoBlog, David Corn reports on the latest crop of last ditch attacks being waged by loony right groups against Barack Obama. The nickel version:

Mohamed Atta's Driver License....Obama is a Socialist....Obama Is a Secret Muslim Plotting With an Evil Billionaire....Obama Is Fronting for Islamic Jihadists....

I guess things really are different this year. This stuff just sounds pathetic, not scary. Details here if you want to read up on the latest.

Reading the Moose Entrails

| Fri Oct. 17, 2008 11:32 AM EDT

READING THE MOOSE ENTRAILS....Apropos of nothing in particular, I want to go on the record with a prediction that Sarah Palin will disappear into a well-deserved obscurity after the election is over. She is not a "comer." She is not the future of the Republican Party. She will not run for president in 2012. In fact, she won't maintain any kind of serious national political standing at all. At best, she'll spend the next few years being a celebrity starter at NASCAR races and speaking at Republican prayer breakfasts. At worst, she'll be an occasional butt of late night comics.

Palin is lazy, ill-informed, contemptuous of policy, and way too convinced that everybody in the country is dazzled by her folksy energy and thousand-watt smile. Yes, the diehard GOP base is rapturously in love with Palin and her media mockin' ways, but that's more a reflection of the base's future, not hers. Palin is a three-day wonder who's already a month past her sell-by date, and on November 5th she'll disappear to Wasilla for good.

Just wanted to get that off my chest. Anybody disagree?

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Congress Update

| Fri Oct. 17, 2008 11:26 AM EDT

CONGRESS UPDATE....Via email from Congressional Quarterly:

Illinois 14th – CQ Politics has updated this race from Leans Democratic to Democrat Favored (less competitive).
Indiana 2nd – CQ Politics has updated this race from Democrat Favored to Safe Democrat (less competitive).
Indiana 3rd – CQ Politics has updated this race from Republican Favored to Leans Republican (more competitive).
Indiana 7th – CQ Politics has updated this race from Democrat Favored to Safe Democrat (less competitive).
Indiana 8th – CQ Politics has updated this race from Democrat Favored to Safe Democrat (less competitive).
Iowa 4th – CQ Politics has updated this race from Safe Republican to Republican Favored (more competitive).
Minnesota 1st – CQ Politics has updated this race from Leans Democratic to Democrat Favored (less competitive).
Nebraska 2nd – CQ Politics has updated this race from Republican Favored to Leans Republican (more competitive).

Every single change favors the Democrats, and there are 16 more that they'll cover in a separate story tomorrow. Details here. And Karen Tumulty reports that trends are similar in Senate races. Bottom line: If you're a Republican, life really sucks right now.

The Shah and Us

| Thu Oct. 16, 2008 8:54 PM EDT

THE SHAH AND US....Here's a bit of interesting historical work on the roots of the Iranian revolution:

A new report based on previously classified documents suggests that the Nixon and Ford administrations created conditions that helped destabilize Iran in the late 1970s and contributed to the country's Islamic Revolution.

....The report, after two years of research by scholar Andrew Scott Cooper, zeros in on the role of White House policymakers — including Donald H. Rumsfeld, then a top aide to President Ford — hoping to roll back oil prices and curb the shah's ambitions, despite warnings by then-Secretary of State Henry Kissinger that such a move might precipitate the rise of a "radical regime" in Iran.

....Analysts and historians often contend that President Carter, a Democrat, fumbled Iran, allowing the country to eventually become one of the chief U.S. opponents in the region. But the report suggests that his Republican predecessors not only contributed to the shah's fall but also were inching toward a realignment with Saudi Arabia as the key U.S. ally in the Persian Gulf.

....We should get credit for what happened at [OPEC's Doha summit in December 1976]," Kissinger told Ford. "I have said all along the Saudis were the key. . . . Our great diplomacy is what did it."

But it would prove to be a Pyrrhic victory....The shah's government, shaken by the loss of oil revenue, imposed a harsh austerity budget that threw thousands out of work, collapsed investor confidence and panicked middle-class Iranians. Economic chaos and unemployment quickly spread.

Within a year of the Doha summit, the first mass demonstrations that grew into revolution broke out on the streets of the Iranian capital.

The collapse of oil prices in the mid-80s, also engineered by the Saudis, was one of the key factors in the disintegration of the Soviet Union. So apparently Saudi Arabia can claim at least partial credit for both the rise of the Iranian revolution and the fall of communism. Not bad for a country with a population of 20 million or so.

Recapitalization

| Thu Oct. 16, 2008 8:18 PM EDT

RECAPITALIZATION....Via a link from John Quiggin, here's some raw data for you. It's several years old (too old to include data on Japan's banking crisis), but it includes historical data on the initial cost of recapitalizing banking systems after most of the other financial crises of the past few decades. Given the different nature of every crisis, and the different nature of small countries vs. big countries, it's hard to suggest that there's any kind of "average" recapitalization required after a banking collapse. Nonetheless, the historical records suggest that 5% of GDP would be a reasonable guess and 10% would hardly be out of line, especially given the epic nature of our current meltdown.

And how are we doing in comparison? So far the Treasury has committed $250 billion as part of the Paulson bailout plan and another $100 billion or so to Bear Stearns, AIG, and Fannie/Freddie. To get to 5% of GDP we'd need to increase that to $700 billion. To get to 10% we'd need to increase it to $1.4 trillion. Just some benchmarks to keep in mind.

Quote of the Day - 10.16.08

| Thu Oct. 16, 2008 5:43 PM EDT

QUOTE OF THE DAY....From Joe Klein:

Ronald Reagan used to say that the most frightening nine words in the English language were "I'm from the government and I'm here to help." That is no longer true. This year, the most frightening eight words are "I'm John McCain and I approved this message."

Actually, that's just the best prepackaged zinger from the linked post. The most genuinely penetrating piece of wordsmithing was this:

We have had 30 years of class warfare, in which the wealthy strip-mined the middle class.

That's a very good metaphor. Personally, I'm not very interested in income redistribution. I'm interested in getting the distribution right in the first place. For three decades we've artificially kept middle class wage increases far below the growth rate of the economy, and this trend has been even more pronounced over the past eight years. This has created an enormous pool of extra money that's been — yes — strip mined and redirected to the rich, and fixing this is Barack Obama's biggest and longest-term challenge. If we restore the normal growth of middle class wages, it provides a sustainable consumer base for the entire economy; it reduces the demand for endless credit card debt; it brings down income inequality naturally; and it goes a long way toward keeping the financial sector under control and reining in Wall Street salaries without putting in place a bunch of artificial (and probably fruitless) regulations.

And that's just for starters. Stop the strip mining and economic vigor will follow. It's at the core of everything.