Kevin Drum

Growing Income Inequality Was What Made the Great Recession so Great

| Tue Feb. 10, 2015 3:57 PM EST

A couple of years ago a new narrative emerged about the role that income inequality may have played in the boom/bust cycle that ended in the Great Recession. In a nutshell, it goes like this:

  • Middle class incomes stagnated during the aughts.
  • Income gains went mostly to the rich, who got ever richer.
  • To sustain its accustomed lifestyle, the middle class began borrowing more. The rich eagerly provided them with loans, since there were limited opportunities to invest the huge pool of money flowing their way.
  • This worked fine, until it didn't. Eventually the middle class couldn't borrow any more, and the music stopped. The result was an epic crash driven by high household debt levels.

This view is strongly associated with Raghuram Rajan (in his book Fault Lines) and others. But a few days ago Bas Bakker and Joshua Felman wrote a piece suggesting that there's more to the story. The rich, they say, did more than just provide money that fueled a middle-class consumption boom and bust. The rich participated actively themselves. That is, the rise and fall of the consumption of the rich had as big an effect as that of the middle class—maybe even bigger.

The chart on the right shows the authors' estimate of consumption patterns by income class. As you can see, from around 2003 to the present, it was fairly flat for the bottom 90 percent. But for the well off, consumption rose substantially from 2003-06, dropped conspicuously between 2006-09 and then began increasing again at a quick pace:

The model suggests something truly striking. The top decile explains the bulk of overall consumption growth. Between 2003 and 2013, about 71% of the increase in consumption came from the rich. Much of the slowdown in consumption between 2006 and 2009 was the result of a drop in consumption of the rich. The rich also played a key role in the subsequent recovery.

Their conclusion:

Our results suggest that the standard narrative of the Great Recession may need to be adjusted. Housing played a role, but so did financial assets, which actually accounted for the bulk of the loss in wealth. The middle class played a role, but so did the rich. In fact, the rich now account for such a large share of the economy, and their wealth has become so large and volatile, that wealth effects on their consumption have started to have a significant impact on the macroeconomy. Indeed, the rich may have accounted for the bulk of the swings in aggregate consumption during the boom-bust.

In some ways, this shouldn't come as a surprise. If the bulk of income gains are going to the rich, it stands to reason that their consumption will vary substantially as those incomes go up and down. Middle-class consumption still plays a big role here, and the loss of housing wealth after 2006 still explains a great deal of why the Great Recession was so deep and so long.

But if Bakker and Felman are right, it's far from the whole story. Consumption patterns of the rich are even more volatile than those of the middle class, and when they're getting most of the income gains, then overall consumption patterns become more volatile too. If more income had been flowing to the middle class during the aughts, there would have been less borrowing and a more even pattern of consumption. The boom would have been more moderate and the bust would have been less catastrophic. Growing income inequality made the economy ever more fragile and ever more unstable, and we all suffered as a result.

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Needed: More Bourgeois Buses for the Middle Class

| Tue Feb. 10, 2015 10:41 AM EST

Josh Barro thinks our cities are building too much light rail. It's expensive, often slow, and offers virtually no advantage over simply opening up a bus line. The problem, according to a 2009 report from the Federal Transit Administration, is that "Bus-based public transit in the United States suffers from an image problem." But what if transit agencies tackled that image problem head on?

That 2009 transit report gives reason to believe it’s possible. The researchers conducted focus groups with “choice riders” in Los Angeles: people who have cars but sometimes use transit. These riders had an unsurprising preference for trains. “Riding the bus carries a ‘shame factor,’ ” the researchers found. “Most of the choice riders would not consider using it, or if they did, they would feel ashamed and keep it a secret.”

But what the local transit agency marketed as the “Orange Line” — really just a bus route in the San Fernando Valley with high frequencies on a dedicated right of way — managed to gain acceptance among “choice riders.” Focus group participants “used terms like the ‘train-bus’ or the ‘bourgeois bus’ to describe the Orange Line service,” the researchers said. The Orange Line has repeatedly beaten its ridership estimates, and nearly half its riders have access to a car, compared with just a quarter on regular local bus routes in Los Angeles. That performance shows it is possible to overcome anti-bus bias with the right amenities and marketing.

My experience here is vanishingly small since I own a car and rarely use the bus, but I'd add the "danger" factor to the "shame" factor. I can recall a few occasions where I've ridden a local bus for one reason or another, and when I mentioned this my friends were agog. They acted as if I'd literally taken my life in my hands. "Isn't that dangerous?" they asked. Well, I dunno. I got on, paid the fare, sat down, and waited until the bus got to my stop. Then I got off. End of adventure.

So perhaps we need a two-pronged marketing campaign if we want to attract more suburbanites onto buses. They need to be convinced that new bus lines are both bourgeois1 and safe. I might add that although Barro doesn't highlight this particular feature, the Orange Line mentioned in the report also has "high frequencies." That's a key feature too, and it costs money. But it still costs less to run a high-frequency bus than an above-ground light rail system.

Maybe we need more celebrities to ride the bus. I'll bet if George Clooney took the bus to work, it would suddenly become a lot more popular. You'd probably need to increase service to accommodate all the paparazzi, but surely that's a small price to pay?

1I confess to some curiosity here. Did focus group participants really refer to the Orange Line as a "bourgeois bus"? That seems a bit unlikely to me.

Quote of the Day: Who Would Be Dumb Enough to Trust Republicans With the Economy Yet Again?

| Mon Feb. 9, 2015 4:24 PM EST

From Kevin Hassett, a conservative economist who's advised both John McCain and Mitt Romney, explaining what Hillary Clinton's economic message should be in the 2016 presidential campaign:

The Republicans gave us a crappy economy twice, and we fixed it twice. Why would you ever trust them again?

Not bad, Kevin! Thanks. This comes via Ed Kilgore, who's similarly impressed: "Wow, no kidding. Hillary Clinton should say that. It would almost fit on a bumper sticker, and with a few photos would make killer text for a 30-second ad."

Iran's Supreme Leader Signals Support for Nuclear Deal

| Mon Feb. 9, 2015 4:12 PM EST

Hmmm:

Iran's supreme leader offered a new signal of support Sunday for a deal to scale back his country's controversial nuclear program as negotiators race to meet an upcoming deadline.

Ayatollah Ali Khamenei, whose recent public pronouncements have usually been skeptical about the talks, promised in a speech to Iranian air force officials that "I would go along with the agreement in the making," the official Islamic Republic News Agency reported.

It is not for nothing that they call him the Supreme Leader. If Khamenei really is suggesting publicly that he might be willing to approve a nuclear agreement with the West, that's a potentially big deal. It's never really mattered much what anyone else thinks about the negotiations, after all.

So does this mean I should raise my expectation of a deal from 50-50 to, say, 60-40? Maybe. But I'm not sure I'm there yet.

Jason Chaffetz Opens Up Dumbest Investigation of Obama Yet

| Mon Feb. 9, 2015 2:06 PM EST

I understand why net neutrality is a big deal for internet service providers, who oppose any new rules that restrict what they can do and how much they can charge. Ditto for content companies like Google, who support net neutrality because they don't want to be extorted by ISPs for access to high-speed pipes. Ditto again for activists who believe internet access should be on a level playing field for everyone.

But it's also become a bête noire of the tea party crowd, and it's a lot less clear to me why these folks care. But maybe I'm overthinking it. Perhaps they oppose net neutrality simply because President Obama supports it. Here's the latest evidence on this score:

Rep. Jason Chaffetz (R-Utah), chairman of the House Oversight and Government Reform Committee, has written to FCC Chairman Tom Wheeler asking for all documents related to communications and meetings involving White House and agency officials concerning the issue....Republicans have charged that Obama unduly influenced Wheeler's proposal. Senate Commerce Committee Chairman John Thune (R-S.D.) said Wheeler "succumbed to the bully tactics of political activists and the president himself."

....Chaffetz said in a letter dated Friday that he was investigating reports indicating "views expressed by the White House potentially had an improper influence" on development of Wheeler's proposal. He cited a Wall Street Journal article last week that reported that two White House aides led a "secretive effort" to build support from outside groups for tough net-neutrality regulations.

Chaffetz must really be desperate. Does he seriously think that the president of the United States isn't allowed to try to mobilize outside support for his policy proposals? Or even that the White House isn't allowed to lobby FCC commissioners? That's just crackers.

But Chaffetz is a certified up-and-comer in the Republican ranks, and I guess that means he has to make sure his tea party bona fides never get rusty from disuse. This time, though, he's really digging through the bottom of the barrel. Unless he wants to join up with the crazytown contingent for good—something he's managed to avoid so far—he should think twice about dumb theatrics like this. He's better off when he keeps at least one foot planted in realityville.

Scott Walker Still Having Some Teething Problems Balancing the Tea Party with the Mainstream GOP

| Mon Feb. 9, 2015 12:59 PM EST

I've been talking up Scott Walker as a good bet to win the Republican presidential nomination next year, but there's no question that he first has to find the right balance between the bullheaded "Hulk Smash Democrats" persona designed to appeal to tea partiers and the more mild-mannered Midwestern executive persona designed to appeal to moderates and big-money donors. The latest example of his difficulties with this balancing act comes from a laughable attempt to change the mission statement of the University of Wisconsin. Here's Walker's proposal:

The mission of the system is to develop human resources to meet the state’s workforce needs, to discover and disseminate knowledge....

So far, no problem. He just wants to add a bit of boilerplate about training future workers. No one objects to that. But then there's more. Everything he wants to delete is in bold:

....to extend knowledge and its application beyond the boundaries of its campuses and to serve and stimulate society by developing develop in students heightened intellectual, cultural, and humane sensitivities, scientific, professional and technological expertise, and a sense of purpose. Inherent in this broad mission are methods of instruction, research, extended training and public service designed to educate people and improve the human condition. Basic to every purpose of the system is the search for truth.

By cracky, we'll not have our universities extending knowledge beyond the borders of their campuses! And the search for truth? Sounds like a steaming pile of secular liberal claptrap. Off with its head!

But that's not the end of it. Heather Digby Parton describes what happened next:

After the changes were revealed publicly Walker made a hilariously fatuous claim worthy of Rosemary Woods and the 18 minute gap: somehow those changes just appeared and he didn’t know nothin’ about how they got there and anyway it was the University’s fault for “overlooking” it. He has had to backtrack from that as well, admitting that his people did make these changes and the university official argued vociferously against it. But none of it is his fault because well, it just isn’t. Or anyone else’s.

Last Wednesday, according to the Milwaukee Journal-Sentinel, Walker finally acknowledged that university officials had raised objections about the proposal but "had been told the changes were not open to debate." And as the Sentinel graphic on the right shows, the proposed changes were, in fact, quite deliberate.

In any case, even Walker is now being forced to pretend it was all a big misunderstanding. So what happened? My guess is that his inner circle thought the changes might win Walker some brownie points with the tea party crowd, which has always been suspicious of long-haired academics and their lefty ideas, but failed to see how bad it would look among the less wild-eyed crowd that looks to Walker as a pragmatic executive type. Walker's team is having trouble balancing those two constituencies, and that's a problem since Walker's key appeal is that he bridges the gap between them.

Needless to say, this dumb little affair won't do Walker any long-term damage. It's just a minor dust cloud. Nonetheless, it's an instructive dust cloud. Clearly Walker still hasn't quite managed to polish up the balancing act that's his biggest source of strength in the 2016 presidential race. That's something he needs to figure out in short order.

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Arming Ukraine? Sorry, but Europe Simply Isn't On Board

| Mon Feb. 9, 2015 11:54 AM EST

Republican hawks have insisted from the start that President Obama isn't being tough enough in his approach to the Ukraine crisis. And perhaps he isn't. It's a point that's arguable by reasonable people.

But what's not arguable is that regardless of what Obama would do if he had a truly free hand, he pretty clearly doesn't have a free hand. Ukraine is, first and foremost, a European problem, and the leadership of Europe just isn't on board with a more aggressive strategy against Russia:

Through nine months of struggle to halt Russia’s military thrust into Ukraine, Western unity has been a foremost priority for American and European leaders. Now, with the crisis entering a dangerous new phase, that solid front is in danger of collapsing.

....A growing number of U.S. officials, and some in Europe, particularly in countries bordering Russia, believe that the only way to dissuade Russian President Vladimir Putin from continuing what they see as an invasion of Ukraine is to raise the military cost to Moscow. That means giving the Ukrainians better weapons, they say.

....But the Germans, French and many other European leaders are equally convinced that arming the Kiev government will not halt Putin, but will increase carnage in a war that already has killed about 5,300 people and risk an all-out East-West confrontation.

[German Chancellor Angela] Merkel, speaking at a security conference in Munich, Germany, made clear that not only would Germany not contribute arms, but it also opposed allies doing so. “Military means will lead to more victims,” she said, arguing that the West should apply a patient containment approach toward Russia.

I'm skeptical about providing arms to the Ukrainians, but I remain open to arguments that it's the only way to stop Vladimir Putin's aggression. However, there's just no way that this will work without European cooperation. End of story. The US can't pretend that acting on its own has even the slightest chance of success.

So the hawks need to stop obsessing over Obama's alleged weakness, and instead look overseas. The truth is that Obama has been one of the most aggressive of the Western leaders in the fight against Putin, while it's Merkel and her colleagues who have insisted on a less confrontational approach. If John McCain and his buddies want to arm the Ukrainians, they need to figure out a way to persuade Merkel that it's the right thing to do. That might be less congenial for their tea party buddies, whose interest in Ukraine is pretty much zero aside from its role as a way of painting Obama as a weak-kneed appeaser, but it's the only way they might get what they say they want.

So that's their choice. Continue bashing Obama, which feels good but will get them nowhere. Or start pressing our European allies, which is boring and difficult and pays no political dividends—but which might actually get them closer to what they claim is their goal. Which is it going to be, boys?

A Baton Rouge ER Is Closing Because Bobby Jindal Won't Accept Medicaid Expansion

| Sun Feb. 8, 2015 8:42 PM EST

Louisiana's capital city is losing one of its emergency rooms:

The Baton Rouge General Medical Center-Mid City will close its emergency room within the next 60 days, a victim of continuing red ink and the Jindal administration withdrawing the financial support that kept it open.

....The General’s Mid City campus suffered a financial hit as a result of the April 2013 closure of the LSU Earl K. Long Medical Center....More and more poor and uninsured patients from the low-income neighborhoods of north Baton Rouge ended up at the Mid City hospital, which was the next-closest facility.

Mid City hospital reported losses of $1 million a month as more and more patients who could not pay arrived. Losses jumped from $6 million to $8 million annually from 2009 to 2012, then up to $12.5 million in 2013, according to Baton Rouge General. Last year, the facility lost $23.8 million.

The nearest ER for residents who are currently served by Mid-City is now 30 minutes further away, and it's a certainty that people are going to die because of this. But what's the real story behind this closure? Shouldn't the expansion of Medicaid be offsetting the increased losses on uninsured patients?

You bet it should. And it would, if Bobby Jindal were willing to accept Obamacare's offer of virtually free Medicaid expansion. But he's not, and that means Baton Rouge is losing one of its central emergency rooms and more people will die who otherwise could have been saved. That's some nice work, Bobby. Michael Hiltzik has more details here.

Jungle Primaries in California: It Looks Like a Big Fat "Meh"

| Sun Feb. 8, 2015 1:41 PM EST

A few years ago California adopted what's mockingly called a "jungle primary." Instead of Democrats and Republicans each running their own primary, there's just one big primary and the top two vote-getters move on. That might be two Democrats, two Republicans, or one of each.

The idea behind the top-two primary was simple: it would produce more moderate candidates. Instead of appealing to the most extreme segments of the electorate, candidates would jostle to get votes from the center. Democrats could benefit from appealing to right-leaning centrists and vice versa for Republicans.

So did it work? So far, the answer appears to be no, though the evidence is a little hazy because of another change California made at around the same time: moving all initiatives to general elections. Because of this, turnout at primaries plummeted. Unsurprisingly, it turned out that Californians were eager to go to the polls to vote for initiatives, but not so eager when there was nothing more interesting at stake than a primary battle for the state legislature. This changed the composition of the primary electorate, so it's hard to make solid comparisons with previous years.

That said, it still doesn't look like much changed. In 2012, for example, researchers polled voters using both a traditional ballot and a top-two ballot. There was no difference in the results. One reason is that most voters knew virtually nothing about any of the candidates. Were they moderate? Liberal? Wild-eyed lefties? Meh. Voters weren't paying enough attention to know. Mark Barabak of the LA Times summarizes a pile of studies published recently in the California Journal of Politics and Policy:

Voters were just as apt to support candidates representing the same partisan poles as they were before the election rules changed — that is, if they even bothered voting...."To summarize, our articles find very limited support for the moderating effects associated with the top-two primary," Washington University's Betsy Sinclair wrote, summarizing half a dozen research papers.

For starters, voters will have to pay far closer attention to their choices. Some candidates may have hugged the middle in a bid to entice more pragmatic-minded voters, but the research suggests relatively few voters noticed. There was little discernment between, say, a flaming liberal and a more accommodating Democrat; in most voters' minds they fell under the same party umbrella.

In addition, voters will have to be less partisan themselves, showing a far greater willingness to support a moderate of the other party over a more extreme member of their own. Research into 2012's state Assembly races found an exceedingly small percentage of so-called cross-over voters: just 5.5% of Democrats and 7.6% of Republicans sided with a candidate from the other party.

Now, it does turn out that moderate Republicans were more willing to cross over than any other group: 16.4 percent of them crossed over to vote for Democrats. However, this is most likely due to the simple fact that California has a lot more Democratic districts than Republican ones. This means there are a lot more districts where voting for a Republican is useless—and always has been.

The full set of studies is here. Bottom line: early evidence doesn't suggest that a top-two primary makes much difference. Perhaps it will in the future as voters get more accustomed to it, but for now they're voting the same way they always have, and for the same kinds of candidates.

Google Can Do Well With Its New Communications Products, But Only If It Acts Like a Genuine Startup

| Sat Feb. 7, 2015 6:18 PM EST

Brian Fung tells us that Google is making a "serious play in the communications space," featuring an aggressive strategy that includes rollouts of new products like ultra-fast internet service, new smartphones, and even wireless service:

Google’s investments in telecom pit the company against some of the largest voice and Internet providers around. But Google has a key advantage: It doesn’t make its money from Internet service subscribers. That’s why it will be able to drive down prices for consumers, to adopt business practices that would be unsustainable for other carriers and to influence Washington policy debates in surprising ways.

“This is a multilayered strategy,” said Harold Feld, senior vice president for the consumer group Public Knowledge. “Even if Google only makes 10 percent profit margin on its fiber and wireless offerings, that’s enough for it to be successful and to achieve the desired result of driving more use of its applications.”

This isn't quite right. Or maybe I should say it's only half right. It's true that these new services will probably help Google increase sales of its core products, thus offsetting low margins in the communications space. But that's not the real reason Google can afford to do this. The real reason is that Google is a new entrant, which means that entering these new businesses doesn't force it to cannibalize any of its current businesses.

This is the key problem that kills old companies when new technology hits the street. Every cheap new widget they sell means one less expensive old widget they sell, and very few companies have the stones to just accept reality and really dive into the new widgets regardless. So they sell the new widgets, but only half-heartedly. They defeature them. They limit their sales channels. They don't spend enough on marketing. Meanwhile, a startup with no such issues eats their lunch because their new widgets are their main business and they just sell the hell out of them.

That's Google's big advantage in this space. The fact that entering the telecom business might—might!—boost sales of other Google products is great, but it's just a bonus, and not one they should be thinking too hard about. In fact, if their new products are tailored too tightly as mere helpers for their old product lines, they could end up in the same position as all those old dinosaur companies that couldn't quite put their hearts into new tech. That road is well trod, and it's usually a pretty grim one.