Kevin Drum

Nobody Cares What You Think Unless You're Rich

| Tue Apr. 8, 2014 5:36 PM PDT

In a simple model of democratic politics, there are three basic drivers of political decisionmaking:

  • The collective opinion of average citizens
  • The collective opinion of the affluent
  • The lobbying of interest groups

But which of these really matter? Martin Gilens and Benjamin Page studied 1,779 policy outcomes over two decades and came to a pretty simple conclusion: the collective opinion of average citizens doesn't matter a whit:

When the preferences of interest groups and the affluent are held constant, it just doesn't matter what average folks think about a policy proposal. When average citizens are opposed, there's a 30 percent chance of passage. When average citizens are wildly in favor, there's still only a 30 percent chance of passage. Conversely, the odds of passage go from zero when most of the affluent are opposed to more than 50 percent when most of the affluent are in favor.

Interest group lobbying, it turns out, also has an effect on policymaking—but business interest groups matter a lot more than mass interest groups. This comes via John Sides, who has much more detail about the study here. But none of it should come as a surprise. We've seen plenty of results like this before.

Advertise on MotherJones.com

Quote of the Day: How Do You Solve a Problem Like Obamacare?

| Tue Apr. 8, 2014 2:22 PM PDT

From a Republican congressional health aide who was "granted anonymity to speak candidly," on the difficulties of creating a Republican plan to replace Obamacare:

The problem with replace is that if you really want people to have these new benefits, it looks a hell of a lot like the Affordable Care Act. ... To make something like that work, you have to move in the direction of the ACA. You have to have a participating mechanism, you have to have a mechanism to fund it, you have to have a mechanism to fix parts of the market.

That's a problem, all right. If you actually want to cover people, you have to pay for it. End of story. Republicans are steadfastly not willing to pay for it, so they aren't going to cover anyone with whatever plan they dream up. No matter what kind of smoke and mirrors they throw up to disguise this, that's the bottom line. No money, no coverage.

Really, though, all this GOP aide is saying is that Obamacare is fundamentally a pretty conservative plan. Liberals nearly all prefer a simpler, cheaper, more comprehensive riff on single-payer of some kind. But that couldn't pass in 2009—even moderate Democrats wouldn't have supported it—so instead we had to cobble together a bunch of conservative ideas into a kind of Rube Goldberg edifice that was at least better than nothing. It only works moderately well, but that's because the conservative take on healthcare is fundamentally incoherent. The more conservative your health care plan, the worse it works.

So Republicans have a choice. They can:

  1. Introduce a more liberal plan that's cheaper and works better.
  2. Introduce an even more conservative plan that's more expensive and works even worse than Obamacare
  3. Toss out a few of the usual pet rocks and just pretend it's a plan.

My money is on Option 3.

My Kinda Sorta Non-Review of Thomas Piketty's "Capital in the 21st Century"

| Tue Apr. 8, 2014 10:51 AM PDT

I'm having a hard time finishing Thomas Piketty's Capital in the 21st Century. Is this because it's a long, dense tome? Not really, though that doesn't help. Is it because he has nothing interesting to say? Not at all. Capital presents a very provocative thesis. Nevertheless, I started it once, put it down, finally picked it up again, and still haven't finished it.

So what's the problem? It's pretty simple: Piketty's provocative thesis is extremely elementary and he makes it right in the introduction. Here it is in a nutshell:

Over the long run, ordinary labor income grows at about the same rate as the broader economy. That's about 2-3 percent per year these days. Capital, however, tends to produce real returns of 4-5 percent. This means that over the course of, say, 50 years, labor income will increase about 3x while capital stocks will increase about 9x. That in turn means that income from capital will also increase 9x. And since rich people have by far the bulk of all capital income, income inequality inevitably grows forever unless something stops it.

The shorthand for this is r > g. That is, r (the return on capital) is historically greater than g (economic growth), which means that rich people with capital will always see their incomes grow faster than ordinary wage slaves. The rest of the book is a lengthy succession of charts and tables demonstrating that, historically, r really is greater than g. Since I was pretty easily persuaded of this, I had a hard time slogging through all the details.

In any case, the historical data isn't really why anyone other than specialists cares about this book. After all, the world has been ticking along for centuries, and somehow the rich have not, in fact, accumulated 99.9 percent of the world's income despite more than a thousand years of r being greater than g. Why? The simple answer, I gather, is war. This is the great leveler. The rich get richer for a while, but then they lose it all during periods of war, and the cycle starts all over. That's what happened in the 20th century: The rich were obscenely wealthy early on, and then came World War I, the Great Depression, and World War II. That wiped out lots of wealth, and the postwar rebuilding era was one of those rare eras when g was actually greater than r. (See chart on right.) So labor did relatively well for a few decades. This ended in the 80s, when the old historical pattern reasserted itself.

This brings us to the question we really care about: Now that we've reverted to a more ordinary r > g world, will this continue? I started skipping through the book to find Piketty's answer, and I was disappointed at what I found. After some preliminary throat clearing to get clear on some details (the nature of private savings, what components should be counted in capital accounts, etc.), we get....nothing.

Basically, Piketty says that historically r has been greater than g, and there's no reason to think this won't be true in the future. That's really about it. Oh, he addresses some technical issues, like the fact that a glut of capital should reduce the return on capital, but basically that's his argument. In the past r has almost always been greater than g, and we'd be foolish to think that's likely to change.

Don't get me wrong: Piketty may be right. Hell, he probably is right. But while the details are of keen interest to specialists and practitioners, the gist of his argument is simply that the future will probably look like the past. That's certainly plausible, but I'm frankly having a hard time plowing through a ton of background material in support of such a simple thesis.

I'm not sure why I'm fessing up to all this. I'm really doing nothing except admitting that I'm not sure what everyone else sees that I don't. As a data-gathering exercise, this book is unquestionably a tour de force, and I'm truly not trying to slight Piketty's seminal achievement here. But as a layman's guide to the future (and it's explicitly written for a lay audience), Capital has little to say except that current trends will probably continue. It might be unreasonable to expect more, since obviously no one can predict the future, but I guess I expected more anyway. Is r > g really a monocausal explanation for the evolution of the entire world economy? Is it possible that r might decline for structural reasons in the future? Or that g might increase thanks to automation? Or that other factors might come into play? That seems at least worth addressing in some depth.

In any case, this is Piketty's story. Capital grows faster than labor income. Rich people have most of the capital. Therefore rich people get richer faster than ordinary wage earners and income inequality inexorably rises. If we don't like that, we'll have to do something about it. Piketty thinks the only answer is a global wealth tax, which he admits is a political nonstarter. Dean Baker has some other ideas here. Or maybe war will once again take care of things. Or maybe the rise of smart robots will make things even worse than Piketty ever imagined. I guess we'll all know in another 50 years or so.

Unless You Can Do It Blindfolded, Please STFU

| Tue Apr. 8, 2014 9:31 AM PDT

I've long suspected this, but now we have Scientific Proof™. Professional violinists who insist that there's nothing like a Strad can't even tell them apart from modern instruments:

In this study, 10 renowned soloists each blind-tested six Old Italian violins (including five by Stradivari) and six new during two 75-min sessions—the first in a rehearsal room, the second in a 300-seat concert hall. When asked to choose a violin to replace their own for a hypothetical concert tour, 6 of the 10 soloists chose a new instrument....On average, soloists rated their favorite new violins more highly than their favorite old for playability, articulation, and projection, and at least equal to old in terms of timbre. Soloists failed to distinguish new from old at better than chance levels.

Wine snobs can barely distinguish red from white when they're blindfolded. Pro violinists can't pick out a Strad from a decent modern violin. Art aficionados are routinely taken in by fakes even when they're allowed to investigate them from inches away. The examples of this kind of thing are endless.

So am I skeptical when you claim your $90,000 turntable is really and truly light years better than some mere $2,000 POS? Yes I am. Am I skeptical when you claim you can distinguish Beluga caviar from Sterlet? Yes I am. Hell, I'm not even sure you can tell the difference between Coke and Pepsi. If you can do it blindfolded, then I'll believe you. Until then, don't even bother me with this nonsense.

The OC: No Longer Sprawling, Thank You Very Much

| Tue Apr. 8, 2014 7:47 AM PDT

Via Andrew Sullivan, the table on the right shows the most compact, least sprawling large metro areas in the United States. New York is number 1, no surprise, and I've read enough about the "myth" of LA sprawl that I wouldn't have been surprised to see Los Angeles on the list. But no. Los Angeles ranks 21st. Oddly enough, though, take a look at what region breaks the top ten: Orange County, aka Santa Ana/Anaheim/Irvine.

How did that happen? Orange Country is practically the dictionary definition of suburb, after all. Well, it turns out that scores are based on four factors, and Orange County does very well on three of them: development density, land use mix, and street connectivity. But I still don't really get this. Sure, Orange County is fully developed, but almost exclusively by low-density housing and low-slung office buildings. Land use mix is probably OK, since Orange County is old enough to have turned into one of Joel Garreau's "edge cities," regions that provide both bedrooms and jobs. As for street accessibility, our high score must be a technicality of some kind. Sure, we have lots of four-way intersections, but outside of a few small downtown centers, no one would really consider any of Orange County walkable in the usual urban sense.

So I still don't get it. But it doesn't matter. The OC is now officially off limits for your mockery of sterile, suburban sprawl. We're more compact and accessible than Chicago, Detroit, or Denver. So there. More details here.

Let's Invade Ukraine! (As Soon As We Can Figure Out Where It Is)

| Mon Apr. 7, 2014 10:38 PM PDT

A couple of weeks ago, a team of researchers asked Americans to locate Ukraine on a map. You'll be unsurprised to learn that most of them couldn't. But check this out:

Accuracy varies across demographic groups. In general, younger Americans tended to provide more accurate responses than their older counterparts: 27 percent of 18-24 year olds correctly identified Ukraine, compared with 14 percent of 65+ year-olds.

Say what? The idiot youngsters, the ones who are forever being mocked for not being able to locate France on a map, did better than their older, obviously better educated peers? How about that. Keep this in mind the next time you see one of those endless surveys bemoaning what geographic numbskulls the kids today are.

But that wasn't really the point of the survey. This was:

The further our respondents thought that Ukraine was from its actual location, the more they wanted the U.S. to intervene militarily. Even controlling for a series of demographic characteristics and participants’ general foreign policy attitudes, we found that the less accurate our participants were, the more they wanted the U.S. to use force, the greater the threat they saw Russia as posing to U.S. interests, and the more they thought that using force would advance U.S. national security interests; all of these effects are statistically significant at a 95 percent confidence level. Our results are clear, but also somewhat disconcerting: The less people know about where Ukraine is located on a map, the more they want the U.S. to intervene militarily.

Yep: folks who thought Ukraine was somewhere near Chad were more convinced that Russia's actions posed a threat to US interests. Chew on that for a while. Let's toss out some possible reasons for this:

  1. Ignorant folks are more likely to be jingoistic supporters of military action.
  2. If you think Ukraine is farther away from Russia than it is, it makes sense to assume that Russia is trying to project military power over a great distance and therefore poses a greater threat than a mere border incursion would.
  3. Low-information respondents are more easily manipulated by rabble-rousers.
  4. Ignorance of geography is a proxy for ignorance of both the capabilities of the US military and the costs and likely success of intervention.
  5. This is just some weird statistical artifact and means nothing.

Or maybe there's something I haven't thought of.

Advertise on MotherJones.com

The New York Times Fails to Explain Why "Super Predators" Turned Out to Be a Myth

| Mon Apr. 7, 2014 6:37 PM PDT

Sorry for the radio silence. I went in to see my pulmonary specialist today, and he was very distressed at my lack of progress on the breathing front. So he immediately sent me downstairs for a new battery of tests, including a stat review of the echocardiogram I did last week. Verdict: I am in the bloom of health. I have the lungs of a sperm whale and the heart of an ox. As a last-ditch diagnostic effort—and since they already had an IV tube in my arm anyway—the ER doctor pumped me full of an anti-anxiety drug just to see if my attacks were brought on by stress. Apparently not, which isn't surprising since I lead an enviably stress-free life.

Unfortunately, once they had done that I wasn't allowed to drive myself home, so I had to wait for Marian to get off work and come pick me up. In the meantime, I kept up on the latest news with my iPhone. Or tried to, anyway. Kaiser brags about its Wi-Fi network, but it didn't work at all, and the nurses confirmed that everyone complains about this. So I switched to the cell, but despite the fact that there was a cell tower about 200 yards away, Verizon was unable to provide me with even 3G service most of the time. Bastards.

Still, while I was crawling through the news at 300 baud speeds, I did come across a New York Times story about the mid-90s fear of "super predators," teenage criminals with no conscience and no impulse control, who would soon be rampaging across the city destroying everything in their wake. In fact, just the opposite happened. Teen crime has declined dramatically since the mid-90s, and New York City is safer now than it's been since the 60s. What happened?

But how to explain the decline in youth violence?

Various ideas have been advanced, like an improved economy in the late ‘90s (never mind that it later went south), better policing and the fading of a crack cocaine epidemic. A less conventional — not to mention amply disputed — theory was put forth by some social scientists who argued that the Supreme Court’s 1973 ruling on abortion in Roe v. Wade had an impact. With abortions more readily available, this theory went, unwanted children who could be prone to serious antisocial behavior were never born.

That's really disappointing. The burnout of the crack epidemic is at least plausible as a partial explanation, but the rest is nonsense. Nobody still thinks the economy had anything to do with the drop in crime. Better policing might have had a minor impact, but crime dropped even in cities that didn't change their police tactics. And the abortion theory hasn't really weathered the test of time well.

I swear, I think the New York Times has some kind of editorial policy about never mentioning the most obvious link of them all: the decline in gasoline lead between 1975 and 1995. It's not as if I think the lead-crime theory is a slam dunk or anything, but surely the evidence is strong enough that it belongs in any short summary of the most likely causes of crime decline? It sure as hell has more evidence in its favor than economics, better policing, or legal abortion.

And yet the New York Times stubbornly refuses to so much as mention it in passing. I found one short piece on the subject from 2007, and then nothing. During the past seven years, even as the evidence linking lead to declining crime rates has become more and more solid, they don't seem to have mentioned it even once. Are they afraid of pissing off the police commissioner or something? What's the deal?

In Defense of "Flash Boys"

| Mon Apr. 7, 2014 10:45 AM PDT

Felix Salmon reviews Michael Lewis's Flash Boys today, and he's not impressed. I think Salmon's basic criticism is on point: the big problem with high-frequency trading isn't that small investors get ripped off, it's that the system is so complex that literally no one really understands how it works or what kind of danger it poses:

By far the biggest risk posed by the HFT industry, for instance, is the risk of the kind of event we saw during the flash crash, only much, much worse. The stock market is an insanely complex system, which can fail in unpredictable and catastrophic ways; the HFT industry only serves to make it much more brittle and perilous than it already was. But in Lewis’ book-length treatment of HFT, he barely mentions this risk: I found just one en passant mention of “the instability introduced into the system when its primary goal is no longer stability but speed,” on Page 265, but no elaboration of that idea.

HFT cheerleaders like to brag that their algorithms increase liquidity. And that's probably true. The problem is that HFTs don't guarantee liquidity. In fact, it's far worse than that: they displace other sources of liquidity during normal times, but there's a good chance that during a crisis, at precisely the moment when liquidity is most important, HFT traders could suddenly and systematically exit the market because events have outrun the parameters of their algorithms. This could easily spiral out of control, turning a bad situation into a catastrophe.

Is this a real threat? Nobody knows. And that's the problem. HFT is so complex that literally no one knows how it works or how it will react in a crisis. This is not a recipe for financial stability.

Unfortunately, that doesn't make for a very entertaining book, so Lewis instead focuses on the ability of HFT shops to "front run" orders in the stock market—that is, to see bids a few milliseconds before anyone else simply by virtue of having computers that are physically closer to a stock exchange than their competitors. An HFT algorithm can then execute its own order already knowing the direction the price of the stock is likely to go. But even though this isn't the biggest problem with HFT, I do think Salmon is a little too dismissive of it. Here he is on the subject of Rich Gates, a mutual fund manager who discovered he was being front run:

Gates “devised a test,” writes Lewis, to see whether he was “getting ripped off by some unseen predator.”....Gates “was dutifully shocked” when he discovered the results of his test: He ended up buying the stock at $100.05, selling it at $100.01, and losing 4 cents per share. “This,” he thought, “obviously is not right.”

Lewis does have a point here: It’s not right....In Gates’ mind, what he saw was the 35,000 customers of his mutual fund being “exposed to predation” in the stock market. Between them, those customers had lost $40: 4 cents per share, times 1,000 shares. Which means they had lost roughly a tenth of a cent apiece, buying and selling $100,000 of Chipotle Mexican Grill within the space of a few seconds.

But there’s always going to be a nonzero “round-trip cost” to buying $100,000 of a stock and then selling it a few seconds later....But still, $40 for two $100,000 trades is hardly a rip-off. Especially when you consider the money that Gates himself is charging his 35,000 mom-and-pop customers.

When Gates was running his experiments, his flagship fund, the TFS Market Neutral Fund, had an expense ratio of 2.41 percent: For every, say, $100,000 you had invested in the fund, you would pay Gates and his colleagues a fee of $2,410 per year. That helps puts the tenth of a cent you might lose on Gates’ Chipotle test into a certain amount of perspective. TFS trades frequently, but even so, any profits that HFT algos might be making off its trades are surely a tiny fraction of the fees that TFS charges its own investors.

That's true. But the whole point of HFT has always been to skim tiny percentages from a large number of trades. Nobody has ever suggested that individual traders are losing huge amounts of money to HFT shops. Nevertheless, that's no reason to downplay it. In fact, that's one of the things that makes HFT so insidious: it's yet another way for Wall Street players to game the system in a way that's so subtle it's hardly noticeable. This is the kind of thing that permeates Wall Street, and I think Lewis is correct to aim a spotlight at it.

There are plenty of reasons to be very, very wary of HFT. I wish Lewis had at least spent a few pages on the potential instability issues, but let's face facts. Front running is a perfectly legitimate problem to focus on, and it's likely to generate a lot more public outrage than a dense abstract about the possibility of robots causing a financial crash sometime in the dim future. So if you're the rare person who can attract a lot of attention to a legitimate financial danger, it makes sense to write a book that concentrates its fire on the most accessible aspect of that danger. That's what Lewis chose to do, and I don't really have a problem with that.

Gallup Confirms Further Fall in Uninsurance Rate

| Mon Apr. 7, 2014 9:04 AM PDT

The latest Gallup poll on the uninsured is out, and it shows that the uninsurance rate continues to drop. Using the same 2011-12 baseline I've used before, uninsurance has now dropped about 1.8 percentage points since the rollout of Obamacare. Since the Gallup poll includes everyone, not just the nonelderly, this amounts to about 5.6 million people. However, note that this 5.6 million drop doesn't include sub-26ers who are on their parents' insurance, since that policy change had already taken effect by 2011. Nor does it include the entire late surge in Obamacare enrollment. Add those in and the real number is probably in the neighborhood of 8-9 million. By the end of the year, we should hit 10 million or so.

The biggest declines in uninsurance were among the young, among blacks, and among the low-income. More details at the link.

Why Are We All So Obsessed With Inflation?

| Mon Apr. 7, 2014 8:36 AM PDT

Paul Krugman brings up a familiar trope this weekend: why is it that everyone is so obsessed with ultra-low inflation, even in the middle of a sluggish economy that would almost certainly benefit from a few years of 4 percent price growth? His answer: rich people are uniquely vulnerable to high inflation, and therefore fear it. And since rich people have tremendous influence on policy—especially economic policy—we've consistently implemented policies dedicated first and foremost to restraining inflation. Tyler Cowen dissents:

We all know that inflation is extremely unpopular with voters.  We also observe that inflation remains extremely unpopular in a variety of northern European economies, which typically have more egalitarian distributions of income (though not always wealth) than does the United States.  In any case the top 0.1 percent in those countries has less wealth per capita than in the U.S. and, at least according to progressives, less political influence too.

....People that wealthy can put their money into hedge funds, private equity, private capital pools, and the like....The very wealthy also have the greatest ability to hedge against inflation using derivatives and commodities, if they do desire....I am not suggesting that the very wealthy are out there pushing for higher inflation. But they are much more protected against such inflation than Krugman’s analysis suggests, and the middle class in protected service sector jobs is more vulnerable than is usually recognized.  There is a reason why 4-6% price inflation has become the new third rail of American politics.

I chalk this up to something a little different: inertia. Practically speaking, I don't think protected service sector workers have a lot to fear from moderately high inflation. They're mostly unionized, and their contracts often include COLA hikes. But I agree that rich people don't have a lot to fear either. Given modern portfolio management, it's not hard to hedge against inflation, especially if you're wealthy enough to pay a good money manager. The elderly are often brought up in this context too, and they probably really do have a certain amount of vulnerability to inflation. But not that much. Social Security benefits are indexed to inflation, and even most middle-class investments (in 401(k)s, etc.) tend to be inflation-resistant, if not inflation-proof.

So what's going on? My take has long been fairy simple: it's mostly due to septaphobia, or fear of the 70s. It's not actually true that the middle class was decimated by the 70s, but a lot of middle-class workers felt hard done by, especially since the price we all paid for the 70s was the traumatic Volcker recession of 1980-81. As for rich people, they really did suffer losses during the 70s as we made our rocky transition from an era of financial repression and fixed returns to our current era of global finance and variable returns. Central bankers belong in this story too: during the 70s, they developed a deep fear of their own inability to control wage-price spirals once inflation got above 2 percent or so. This fear is badly misguided, however: the economy has evolved enormously since the 70s and modern central banks have plenty of tools to fight inflation before it gets out of control. Basically, the 70s are to modern publics what Weimar hyperinflation was to a generation of Germans: a scarring experience that forged a deep and broadly-held fear of inflation of any kind.

There's so much inflation indexing in our modern economy—sometimes explicit, sometimes not—that inflation poses only a moderate threat to the rich. In fact, if I had to choose a class of people who probably should be threatened by inflation, it's the broad working and middle classes. After all, why do so many economists think a higher inflation rate would be good for the economy? Partly because it produces lower real interest rates, and thus stimulates investment. However, it's also because it allows a faster downward adjustment of real wages, since employers can simply let inflation erode wage rates instead of angering workers with deep nominal cuts. And who does that affect? Not Bill Gates.

That said, I don't disagree that, in reality, elite opinion drives much of the inflation fear in the United States and Europe. It's irrational, since the rich benefit from lower middle-class wages and a faster-growing economy, but that doesn't mean it's not real. Phobias are hard to cure.