Kevin Drum

What Was Forbes Thinking?

| Mon Sep. 13, 2010 12:12 PM EDT

Former Bush speechwriter David Frum comments on Newt Gingrich's endorsement of Dinesh D'Souza's recent Forbes cover story claiming that Barack Obama's mainstream liberalism can best be understood as the neocolonial racial animus of the son of a Luo tribesman:

As for the underlying D’Souza article that inspired Gingrich, what is there to be said? When last was there such a brazen outburst of race-baiting in the service of partisan politics at the national level? George Wallace took more care to sound race-neutral.

Here’s the question, though, for the rest of us: Why do Forbes (which presumably has many choices of cover material) and Gingrich imagine that such a message will resonate with their conservative audience? Nothing more offends conservatives than liberal accusations of racial animus. Yet here is racial animus, unconcealed and unapologetic, and it is seized by savvy editors and an ambitious politician as just the material to please a conservative audience. That’s an insult to every conservative in America.

This is the right question. Newt Gingrich is a firebrand who will say almost anything to get attention. Dinesh D'Souza is so consumed with a revulsion toward modern society that he sees demons everywhere he goes. It's hardly news that they're dishing out shameless bombast like this.

But Forbes? Why on earth is a mainstream business magazine giving this kind of obscenity cover story treatment? One can only assume they think their audience will buy it without complaint. Frum again:

With the Forbes story and now the Gingrich endorsement, the argument that Obama is an infiltrating alien, a deceiving foreigner — and not just any kind of alien, but specifically a Third World alien — has been absorbed almost to the very core of the Republican platform for November 2010.

Apparently so. Even for the cynical among us, the events of the past few months have been pretty astonishing. The only glimmer of good news here is that maybe — just maybe — movement conservatives are finally riding the racial animus bandwagon too hard and too blatantly. Maybe — just maybe — it's finally gotten out of control and it's going to lead to the backlash of disgust and revulsion they so richly deserve. Maybe.

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Income Inequality Week Continues!

| Mon Sep. 13, 2010 11:42 AM EDT

Our complex modern economy increasingly rewards education and skills. Does this explain the huge rise in income inequality over the past few decades? Ezra Klein:

That explanation is intuitively appealing, but it doesn't fit the facts. For one thing, Europe had the same technological revolution, but without the attendant increase in inequality. For another, the startling changes in inequality was between those at the 99th percentile and those in the 90th percentile. It was the tippy-top pulling away from the top, or what I like to call "the conehead economy." If you imagine the economy as the person, it's grown eight inches, and most of that growth has been in its forehead.

Matt and Alex both double back on this and note that technology does play a major role here, and they're right: The Internet, television and other forms of mass media and communication make it much easier for one person or firm to serve a national or international audience. To use an easy example, Kobe Bryant can make more money because the Chinese watch his basketball games and pay him to endorse their products (that's not a random example, incidentally).

Two points. First the minor one: the idea that sports stars and Hollywood celebrities and J.K. Rowling are driving the growth in inequality is just flat wrong. There simply aren't enough of them. If you take a look at income statistics, the tippy top is occupied almost entirely by corporate executives, Wall Street financiers, and a motley collection of doctors, lawyers, and other high-paid professionals. Sports and entertainment personalities make up only a few percent of the total.

But there's a bigger point to make here too. It's true that one of the great mysteries of the modern American economy is that the biggest growth in income inequality hasn't been between, say, the average worker and the well-off computer programmer. The biggest growth has been between the programmer and the white shoe lawyer. And an even bigger chasm has developed between the white shoe lawyer and the Fortune 500 CEO. In other words, the biggest change in inequality has mostly been within the top 10% or so. Any explanation has to grapple with that fact.

Still, all that extra money had to come from somewhere. And there's not much question where that is: the middle classes. Basically, the overall economy has grown considerably over the past 30 years, generating lots of additional income. However, the vast middle of the wage-earning class has received only a small part of that income growth. The chart below shows how much less income the working and middle classes have gotten because their earnings didn't increase at the same rate as overall economic growth:

So about $800 billion per year has been transferred from the bottom 90% to the top 10%. In addition, it turns out that within the top 10%, almost all of that $800 billion has gone to the top 1% and especially to the top 0.1%.

So there are, in fact, two mysteries here. First, what caused middle class incomes to stagnate, thus making a gigantic pool of additional money available to the better-off? Second, why did that giant pool go almost entirely to the rich and super rich? Any theory of rising income inequality needs to answer both those questions.

Our Powerless Fed

| Mon Sep. 13, 2010 10:27 AM EDT

I move sort of slowly when it comes to rearranging my reading habits, and it was only about a month ago that I finally added Economics of Contempt to my RSS feed list. And then I forgot about it. Why? Because EOC, it turns out, only puts up a new post once every few weeks or so, and nothing had popped up since I moved it from bookmark land to RSS land.

But today something finally popped up, and it was....intriguing. Thanks to Barack Obama's delays nominating new members to the Fed and to Richard Shelby's mindless obstructionism of the ones he has nominated, the Fed Board of Governors currently only has four members:

The Fed's emergency lending authority (the famed Section 13(3)) requires that any emergency lending facility to non-banks be approved "by the affirmative vote of not less than five members" of the Fed Board of Governors. Currently, there are only four members of the Fed board: Bernanke, Warsh, Elizabeth Duke, and Dan Tarullo. Donald Kohn retired earlier this month, and the Senate has yet to vote on Obama's three nominees (Janet Yellen, Peter Diamond, and Sarah Bloom Raskin).

So if an emergency crops up and the Fed needs to take action, it won't be able to. The odds of this happening are low — that's why they call them emergencies, after all — but then again, if it does, we'll really, really need to do something quickly — another reason we call them emergencies. So Shelby is playing with fire here, all because he's still nursing a grudge over Democrats passing a financial reform bill that he didn't like. Nice work, Dick.

The Foxification of the Republican Party

| Sun Sep. 12, 2010 8:13 PM EDT

Pew has one of their regular surveys of media consumption out today, and it has lots of interesting tidbits. Newspaper and radio news continue to decline, online news continues to prosper (in terms of audience, if not profitability), Bill O'Reilly and Sean Hannity appeal mostly to old people, and the New York Times and Wall Street Journal are the most popular destinations for in-depth reporting.

But the most interesting chart in the report is one showing how cable news viewing habits have changed since 2000:

  • Democrats: -3% (Fox), +1% (CNN), +3% (MSNBC)
  • Independents: +3% (Fox), -2% (CNN), 0 (MSNBC)
  • Republicans:
    +22% (Fox),
    -9% (CNN),
    -6% (MSNBC)

In other words, Democrats and Independents have changed their viewing habits only slightly while Republicans have flocked to Fox and dropped both CNN and MSNBC in droves. Back in 2000, it turns out, the viewing habits of all three groups were pretty similar. Since then, as Fox has steadily amped up its conservative branding, conservatives have decided that's all they want to hear. The echo chamber must be getting pretty deafening over there.

Basel III is Here

| Sun Sep. 12, 2010 7:12 PM EDT

After listening to me natter on endlessly about the new Basel III capital requirements, I suppose you've all been waiting on the edge of your seats to see what the final agreement would be. Well, it arrived today. Here's the nickel summary:

  • The most important part of the agreement covers "core" Tier 1 equity. For all practical purposes, you can think of this as real capital that can't be monkeyed around with too much by clever accountants — in other words, it mostly means cash and government bonds that are firmly held by the bank. The old standard was 2%. The new standard is 7% (4.5% plus a 2.5% "conservation buffer"). In addition, during times of credit expansion, it goes up to 9.5%, and "systemically important" banks (i.e., really big banks) are expected to have even more. So figure that big banks will be required to carry core capital of about 11% or so when the economy is strong. That's a 5x increase over the old requirement.
  • Likewise, ordinary Tier 1 capital requirements will also increase. When you add everything up, the requirement for big banks during economic booms goes up from 4% to about 12%.
  • The whole thing will be phased in between 2013 and 2018.

I think you could make a good argument for even higher requirements than this, but this isn't bad. The new emphasis on core equity is welcome, as is the requirement for higher capital cushions in good times. This latter is something that can probably be gamed a bit depending on how lenient national regulators are, but it's a good idea anyway. The whole idea of minimum capital requirements is that it's something you should build up in good times in recognition of the fact that you're going to burn through some of it in bad times. As long as regulators don't define "bad times" too softly, it's a good idea.

The BIS press release also announced that a new liquidity coverage ratio and a revised net stable funding ratio will move toward minimum standards in 2018, but it didn't provide any details about exactly what the new standards would be.

Tim Geithner has said all along that he thought stronger capital requirements were the most important part of financial reform, and hopefully that means he'll be aggressive about pushing U.S. regulators to adopt the new standards. The United States never did adopt the Basel II standards, though it did independently adopt some of Basel II's worst aspects, including the ones that allowed banks to count some forms of contingent capital as Tier 1 capital. That turned out not to be quite as safe as everyone thought, which is why the Basel III emphasis on core equity is so important. Now it's implementation time.

Forbes Jumps the Shark

| Sun Sep. 12, 2010 1:02 PM EDT

I am flabbergasted. I was about to write a quickie "Quote of the Day" post starring Newt Gingrich, who apparently now thinks Barack Obama "is so outside our comprehension" that he can only be fathomed "if you understand Kenyan, anti-colonial behavior." But as I followed the quote backward, I learned that it was based on something that Dinesh D'Souza wrote. So I followed back again, and it turns out that the source isn't just something D'Souza wrote in some obscure lunatic outlet, it's the cover story of Forbes this week.

The. Cover. Of. Forbes.

Now sure. Steve Forbes is an ultraconservative true believer. But this is still a mainstream business magazine,1 not a John Birch Society newsletter. And D'Souza is the guy who wrote an entire book blaming 9/11 on the "cultural left," a book that expressed such obvious sympathy for the revulsion of conservative Muslims toward the American left's "deluge of gross depravity and immorality" that even most of the folks at National Review couldn't stomach it.

So now he has a new book out, and this week he's abstracting it on the cover of Forbes. D'Souza is ostensibly so bewildered by Obama's mainstream liberalism (climate change! national healthcare! non-nationalization of banks! progressive taxation!) that he insists Obama is completely incomprensible except when viewed through the lens of gibberish like this:

So who was Barack Obama Sr.? He was a Luo tribesman who grew up in Kenya and studied at Harvard. He was a polygamist who had, over the course of his lifetime, four wives and eight children. One of his sons, Mark Obama, has accused him of abuse and wife-beating. He was also a regular drunk driver who got into numerous accidents, killing a man in one and causing his own legs to be amputated due to injury in another. In 1982 he got drunk at a bar in Nairobi and drove into a tree, killing himself.

An odd choice, certainly, as an inspirational hero. But to his son, the elder Obama represented a great and noble cause, the cause of anticolonialism. Obama Sr. grew up during Africa's struggle to be free of European rule, and he was one of the early generation of Africans chosen to study in America and then to shape his country's future.

....It may seem incredible to suggest that the anticolonial ideology of Barack Obama Sr. is espoused by his son, the President of the United States. That is what I am saying. From a very young age and through his formative years, Obama learned to see America as a force for global domination and destruction. He came to view America's military as an instrument of neocolonial occupation. He adopted his father's position that capitalism and free markets are code words for economic plunder.

....His proposal for carbon taxes has little to do with whether the planet is getting warmer or colder; it is simply a way to penalize, and therefore reduce, America's carbon consumption.....Rejecting the socialist formula, Obama has shown no intention to nationalize the investment banks or the health sector. Rather, he seeks to decolonize these institutions, and this means bringing them under the government's leash....If Obama shares his father's anticolonial crusade, that would explain why he wants people who are already paying close to 50% of their income in overall taxes to pay even more....Obama supports the Ground Zero mosque because to him 9/11 is the event that unleashed the American bogey and pushed us into Iraq and Afghanistan. He views some of the Muslims who are fighting against America abroad as resisters of U.S. imperialism....Finally, NASA. No explanation other than anticolonialism makes sense of Obama's curious mandate to convert a space agency into a Muslim and international outreach.

This is the cover story of Forbes this week. And I am flabbergasted.

1Right? Or am I out of touch? Does Forbes run this kind of drivel routinely these days? Or is this peculiar even for them?

UPDATE: I see that Daniel Larison got here a few days ago. His takedown is worth a read.

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Boehner Land

| Sun Sep. 12, 2010 1:05 AM EDT

I imagine that Eric Lipton's piece in the New York Times today about John Boehner's almost comic dependence on business lobbyists was assigned a few weeks ago. But it's certainly convenient that it appeared at the same time that Democrats are trying to introduce Boehner to the American public as the face of the Republican Party:

He maintains especially tight ties with a circle of lobbyists and former aides representing some of the nation’s biggest businesses, including Goldman Sachs, Google, Citigroup, R. J. Reynolds, MillerCoors and UPS. They have contributed hundreds of thousands of dollars to his campaigns, provided him with rides on their corporate jets, socialized with him at luxury golf resorts and waterfront bashes and are now leading fund-raising efforts for his Boehner for Speaker campaign, which is soliciting checks of up to $37,800 each, the maximum allowed.

....Michael Steel, a spokesman for Mr. Boehner, said the industry ties only help make Mr. Boehner a better Republican leader. “Like the American people, Boehner — a former small-business man — is most concerned right now about the issue of jobs,” he said. “So he often speaks with employers, rather than, for example, labor unions or environmentalists who support job-killing policies.”

....His clique of friends and current and former staff members even has a nickname on Capitol Hill, Boehner Land. The members of this inner circle said their association with Mr. Boehner translates into open access to him and his staff....One lobbyist in the club — after lauding each staff member in Mr. Boehner’s office that he routinely calls to ask for help — ticked off the list of recent issues for which he had sought the lawmaker’s backing: combating fee increases for the oil industry, fighting a proposed cap on debit card fees, protecting tax breaks for hedge fund executives and opposing a cap on greenhouse gas emissions.

Two quick notes. First, it's telling that Boehner's friends and flacks hardly even bother trying to spin this. Boehner does whatever the business community wants and they don't figure they really need to deny it. Second, as I said, the timing of the story is convenient for Democrats. But it would be even more convenient if more Democrats could say with a straight face that they don't act pretty much the same way. Just sayin'.

Friday Cat Blogging - 10 September 2010

| Fri Sep. 10, 2010 1:45 PM EDT

This picture of Domino is one of my favorites ever. I couldn't really tell you why. It just seems so perfectly feline. (However, she wasn't staring in the window because she wanted me to open the door and let her in. That's usually the reason, but this time it turned out she was engaged with some sort of insect on the front porch and wasn't trying to get my attention at all. She just wanted to catch her bug.) Over on the right, Inkblot has burrowed himself under a quilt, something that's suddenly attracted his interest just this week. I guess the weather must be turning colder. He didn't really do the job right, though, so as soon as I finished taking pictures of him I lowered the quilt so he could have a more cave-like hidey hole. He seemed pleased.

Yet More on Basel III!

| Fri Sep. 10, 2010 12:23 PM EDT

Felix Salmon passes along the news that the new Basel III capital requirements will be announced this weekend. Can you feel the excitement?

He also links to a new BIS report that asks: What's the effect of higher capital standards, anyway? Banks argue that it will increase the cost of borrowing and therefore slow economic growth, and they're probably right about that. However, it will also reduce the frequency and severity of banking crises. So what's the net effect?

First things first: How big is the effect of banking crises? Do they merely have a temporary negative effect on economic growth, which gets washed away during the subsequent recovery? Or is the output level permanently lowered? Here's a series of charts from the report:

I've added the green lines to roughly show the pre-crisis trend level. In some cases (notably Mexico) this obviously overstates things, since the pre-crisis growth rate was probably unsustainable. But in most cases it looks as if the effect is a permanent reversion to a lower output baseline that never gets made up by higher growth — at least not in the medium term of 20 years or so. The BIS report offers up several explanations for why this is so, but the bottom line is simple: banking crises appear to have a large and permanent effect on the output level. It's worth paying a small price to avoid them.

And the price of higher capital requirements is indeed small. The report estimates that a 1% rise in capital standards has a 0.04% effect on economic growth. So what's the net effect? Well, if the effect of banking crises is moderate but permanent, it's shown in the red line in the chart below:

This chart estimates the long-term effects of higher capital ratios and liquidity requirements after the transition period to the higher requirements is over, and the results are pretty stunning. If capital requirements increase from 7% to 12%, the net effect on the annual level of output is nearly two percentage points upward. The BIS report analogizes this to a burglar alarm in an art museum: it costs you a little bit every year, but it's well worth it if it prevents the theft of a priceless masterpiece.

All of this is arguable, of course, and depends on your estimates of the cost of banking crises vs. the cost of higher capital standards. But if the BIS is even in right ballpark here, higher capital standards are a slam dunk. We'd be idiots not to adopt them.

UPDATE: I've reworded this is in a few places to make it clear that we're talking about permanently lower output levels here, not permanently lower growth rates. Japan and Mexico do show lower growth rates, but the main point of the BIS report is that banking crises cause an output shock that can only be made up by several years of above-average growth, and that doesn't seem to be the norm.

Breaking: Tax Cuts for the Rich Remain Unpopular

| Fri Sep. 10, 2010 11:17 AM EDT

A new Gallup poll is out and it shows the same thing as every other poll recently taken on this subject: most people would prefer to keep in place tax cuts for the middle class but not extend tax cuts for the rich. So why isn't everyone rushing to embrace this stand? At a minimum, there are three reasons:

  • It's a pretty thin plurality. 44%-37% isn't exactly a tsunami of public opinion.
  • As with most polls, this one doesn't measure depth of feeling. But here's a guess: the 44% who want to end tax cuts for the rich don't actually care all that much about it. Sure, it would be nice, but hey — did you see the Vikings last night? Favre looked terrible, didn't he?
  • As noted before, politicians don't really care much what you think unless you're rich. And it's a pretty fair guess that nearly all the rich people in the country are in the 37% that wants to extend all the tax cuts. And they care about this a lot.

In addition, of course, you have district-level dynamics that don't show up in a national poll. If you're campaigning in a district where 55% of the registered voters want to extend the tax cuts for everyone, then that's probably the stand you're going to take. The rest of the country really doesn't matter to you.

Oh — and did I forget venality and cowardice? Stir that into the mix too. Never forget venality and cowardice.