Kevin Drum

The Vicious Cycle of Stagnant Wages

| Mon Jan. 11, 2010 6:29 PM EST

Here's my capsule view of the great financial meltdown of 2008: For the past couple of decades, the benefits of economic growth have gone almost entirely to the rich. But the middle class still wanted to prosper, so the rich loaned them money to continually improve their lifestyles. That worked for a while. And then it didn't.

This is a fairly idiosycratic view, and obviously not the whole story. And although plenty of economists have condemned growing income inequality and years of middle class wage stagnation, none of them (as far as I know1) have explicitly given it a share of the blame for the economic collapse of 2008. But via Mike Konczal, I finally have a credentialed ally. Take it away, Raghuram Rajan:

In a new book he is working on, entitled “Fault Lines,” Rajan argues that the initial causes of the breakdown were stagnant wages and rising inequality. With the purchasing power of many middle-class households lagging behind the cost of living, there was an urgent demand for credit. The financial industry, with encouragement from the government, responded by supplying home-equity loans, subprime mortgages, and auto loans....The side effects of unrestrained credit growth turned out to be devastating-a possibility that most economists had failed to consider.

Like anyone, I'm pleased when I find someone to confirm my prejudices. And this is definitely one of them. Growth in a modern mixed economy2 is fundamentally based on consumer spending, and middle class consumers can increase their spending in only three ways: (1) real wage growth, (2) borrowing, or (3) drawing down savings. Only the first is sustainable. So if we want the American economy to grow consistently over long periods, we have to focus our economic machinery on median wage growth. We've done it before, we can do it again if we're smart, and the result would be good for everyone: the rich would get richer, the middle class would get richer, and the poor would get less poor. The alternative is booms, busts, and continued social erosion. So let's be smart, OK?

1This is, obviously, a pretty big caveat. But I'd be delighted to hear that I'm out of touch and lots of serious economists have made this case before.

2A democratic one, anyway. In a culture ruled by the wealthy classes, growth can be sustained pretty much any way that the wealthy classes want — and needless to say, this is a disturbingly accurate description of the past few decades. As long as the helots don't complain, though, it can continue for a surprisingly long time.

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Filibuster Redux

| Mon Jan. 11, 2010 5:54 PM EST

Ezra Klein says he didn't find Tom Geoghegan's argument about the unconstitutionality of the filibuster convincing. Fine. But he just lost my vote for Chief Justice of the Supreme Court.

But as long as we're on the subject, let me add one further argument. The following sentence is pretty much the sum total of what the constitution has to say about how the Supreme Court operates:

The judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish.

The constitution does assume that there will be multiple judges on the Supreme Court. However, it doesn't say that rulings require only a majority vote of the justices. Why? Because it never occurred to the framers that they had to say so. It was such an obvious and common convention that they just assumed it. And if anyone today tried to create a rule that effectively prevented a majority of justices from issuing opinions, they'd be (pardon the expression) laughed out of court.

The same is true for Congress. As Geoghegan notes, the framers specifically spelled out cases where non-majority votes were required, something that pretty clearly demonstrates that majority voting was the baseline they were working from. If it had ever occurred to them that anyone would seriously suggest otherwise, is there really any question that they wouldn't have made it explicit?

Modern Security

| Mon Jan. 11, 2010 3:22 PM EST

Julian Sanchez notes today that 20-somethings aren't as concerned about privacy as, say, 50-somethings:

On the one hand, this shouldn’t be terribly surprising. Quite apart from the recent proliferation of social networking technology, generational researchers have long contrasted the heavily supervised and scheduled upbringings of (middle class) Millennials born in the ’80s and early ’90s with that of their “latch key” Gen X predecessors. And for anyone currently of college age, post-9/11 levels of security theater are viewed not as a novel expansion of official intrusion, but as the baseline, as normal. This can’t be a matter of total indifference to the fogeys among us, because shifting norms will affect both legislators’ willingness to ratchet up surveillance and, at least potentially, judicial assessments of which “expectations of privacy” society is prepared to recognize as “reasonable” for Fourth Amendment purposes.

As a certified fogey, I'm obviously one of those who does view modern security theater as a "novel expansion of official intrusion." And it bugs the hell out of me. But it's easy to understand how it seems entirely normal to anyone born to it. I'm reminded of how surprised I was when I first read this passage from Bob Schieffer's memoir, This Just In:

These days, friends are never really sure I'm serious when I tell them that the Pentagon, like most of official Washington, was still open to the public in the 1970s....No one was required to show identification to enter the building, nor were security passes required....During the time that Jim Schlesinger was secretary of defense, I would sometimes drop by on a Saturday morning, and if his door was open, I would stick my head in and ask if anything was going on.

Not only was I surprised when I read that, but at first it seemed almost shocking. Just leaving the Pentagon open to any citizen who wanted to walk in? That's anarchy! In 20 years, I suppose that's how a lot of people will feel when we tell them that, yes, we really were once allowed to bring bottles of water onto airplanes.

The Unconstitutional Filibuster

| Mon Jan. 11, 2010 2:32 PM EST

I happen to think the filibuster is unconstitutional. This is a minority view, and also a quixotic one since the Supreme Court will never allow itself to get involved in this, but I still think it's true. So I was naturally happy to see Tom Geoghegan tilt at the filibuster windmill in the New York Times this weekend and lay out the constitutional argument explicitly. The filibuster, Geoghegan says, has probably always been unconstitutional, but in its current form, where no actual floor debate is required and it's been morphed into a routine requirement for 60 votes to pass any bill, it's super duper unconstitutional. He lays out three reasons:

First, the Constitution explicitly requires supermajorities only in a few special cases: ratifying treaties and constitutional amendments, overriding presidential vetoes, expelling members and for impeachments. With so many lawyers among them, the founders knew and operated under the maxim “expressio unius est exclusio alterius” — the express mention of one thing excludes all others. But one need not leave it at a maxim. In the Federalist Papers, every time Alexander Hamilton or John Jay defends a particular supermajority rule, he does so at length and with an obvious sense of guilt over his departure from majority rule.

Second, Article I, Section 3, expressly says that the vice president as the presiding officer of the Senate should cast the deciding vote when senators are “equally divided.” The procedural filibuster does an end run around this constitutional requirement....

Third, Article I pointedly mandates at least one rule of proceeding, namely, that a majority of senators (and House members, for that matter) will constitute a quorum....It would be illogical for the Constitution to preclude a supermajority rule with respect to a quorum while allowing it on an ad hoc and more convenient basis any time a minority wanted to block a vote. Yet that is essentially what Senate Rule 22 achieves on any bill that used to require a majority vote.

So there you have it. An airtight case. Airtight if it were me writing majority opinions for the Supreme Court, anyway. While we wait for that glorious day, however, it's just an opinion. But still a correct one.

POSTSCRIPT: And don't even get me started on Senate holds. Did you know that the constitution requires Senate confirmation only of "Ambassadors, other public Ministers and Consuls, [and] Judges of the supreme Court"? All the rest of the confirmation circus is required only by statute, and can be changed anytime we want. And I say: change it. Restrict it to ambassadors, cabinet heads, Supreme Court and appellate judges, and a very small number of other top level agency officials (Fed chairman, SEC chairman, etc.). Leave the rest up to the president and let the Senate get on with more important business. And for God's sake, let's say goodbye to the Senate tradition — found neither in the constitution nor in law — of allowing a single blowhard senator to bring nominations to a halt just because he's pissed off about some random personal crusade. This is no way to run a country.

Chart of the Day: Afghanistan

| Mon Jan. 11, 2010 2:04 PM EST

First the bad news: public attitudes in Afghanistan regarding the U.S. presence, who they blame for violence, and life in general are worse than they were five years ago. And the good news: these same attitudes seem to have bottomed out last year and are now improving.

This all comes from a recent ABC/BBC poll of Afghanistan, and some of the results are peculiar. Support for Hamid Karzai is surprisingly high (71% say he's doing excellent or good work) — and 75% say they're satisfied with last year's election results — despite the fact that over half the country thinks the election was marked by fraud. And positive ratings for the U.S. presence, though a little bit higher than last year, have plummeted since 2005, going from 68% to 38%. On the unalloyed bright side, however, only 8% of Afghans now think that attacks on U.S. forces are justified. That's way down both from 2005 and from last year.

This is mostly just raw data. Maybe it means something, maybe it doesn't. But somehow, a combination of Barack Obama's election, a greater U.S. focus on Afghanistan, more wanton Taliban depredations, and changes in U.S. tactics seem to be making a difference. Keep your fingers crossed.

Climate Change's Low-Hanging Fruit

| Mon Jan. 11, 2010 1:26 PM EST

If you don't live in California, you might not have heard of Arthur Rosenfeld. But for the past four decades, he's been the main inspiration behind a host of energy efficiency and conservation regulations that have made California the greenest state in the nation. He's retiring from the California Energy Commission this week, and today the LA Times remembers his early battles:

New homes and buildings were required to be better insulated and fitted with energy-wise lighting, heating and cooling systems. Appliances had to be designed to use less power. Utilities were forced to motivate their customers to use less electricity.

....Not surprisingly, those rules were attacked by business groups as bureaucratic job killers. Rosenfeld, who received his doctorate from the University of Chicago, was called unqualified by critics at Pacific Gas & Electric Co., one of California's largest utilities.

Yet these mandates have yielded about $30 billion annually in energy savings for California consumers. They've eliminated air pollution that's the equivalent of taking 100 million cars off the roads. They have been copied by states and countries worldwide. California's gains are so closely linked to Rosenfeld that they've been dubbed the Rosenfeld Effect in energy efficiency circles, where the 83-year-old has taken on rock star status.

Rosenfeld's ideas, far from being job killers, have been a boon for California. We have plenty of problems here in the Golden State right now, but better energy efficiency isn't one of them. In the end, Rosenfeld was right and his critics in the corporate world were wrong.

This reminds me of a current kerfuffle over energy efficiency on a national scale. McKinsey, the consultancy firm, has pressed the cause of energy efficiency for some time, and in 2007 they released a report that contained this now-famous chart (this is the 2009 version):

The point of the chart is simple: Some energy efficiency measures have a net cost and require fairly careful analysis to decide if they're worthwhile. Those things are shown on the right side of the chart. But there are lots of efficiency measures that not only reduce greenhouse gas emissions but produce net cost savings at the same time. These are the low-hanging fruit of climate change, otherwise known as "no-brainers." There are tremendous savings out there for the taking.

But there's still opposition to this idea. A couple of weeks ago Ted Gayer of the Brookings Institution wrote that McKinsey's conclusion "violates the basic principles of economics. If firms (or consumers) could reduce emissions at negative cost, then they would do so. To say otherwise is to say that they are willingly or ignorantly passing up profits." But firms and consumers do pass up opportunities to save money. Maybe it's through ignorance, maybe through laziness, maybe because of financing limitations. But there's plainly friction in the real world that doesn't always show up in simple Econ 101 models. A few days ago Brad Plumer linked to a Wall Street Journal report about an energy efficiency consultant, EnerNOC, that audited Morgan Stanley's New York headquarters and immediately saved them a bundle of money:

The reason Morgan Stanley didn't notice how much energy it was wasting, it seems, is because $100,000 was a (relative) drop in the bucket. The company wasn't behaving irrationally — it's just that those savings weren't worth a lot of extra effort. But as carbon concerns have become more prominent, firms like EnerNoc are popping up and making it easier for the Morgan Stanleys of the world to cut that waste. Now, if we had a cap or tax on carbon, it's reasonable to expect that you'd see even more attention paid to the issue, even more EnerNOCs popping up, and even more stories like the one above. As Jon Chait pointed out in his response to Gayer, one of the biggest impacts cap-and-trade could have is the simple signaling function — you'd just see companies and CEOs pay a lot more attention to the issue, which would make a galaxy of difference.

There really is low-hanging fruit in practice, even if there isn't in theory. Rosenfeld, I think, demonstrated that almost beyond doubt in California. Firms routinely overestimated the costs of regulatory compliance and routinely underestimated the cost savings. Some of this was ideological and some was just a case of hidebound management, but it was real. A nudge in the right direction can make a big difference, and if you pick the right nudge then energy efficiency often turns out to be pretty cheap. Sometimes even free.

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Goldman's Charity

| Mon Jan. 11, 2010 12:20 PM EST

I don't think much of this idea:

As it prepares to pay out big bonuses to employees, Goldman Sachs is considering expanding a program that would require executives and top managers to give a certain percentage of their earnings to charity.

....While the details of the latest charity initiative are still under discussion, the firm’s executives have been looking at expanding their current charitable requirements for months and trying to understand whether such gestures would damp public anger over pay, according to a person familiar with the matter who did not want to be identified because of the delicacy of the pay issue.

I think it's great if corporations support charities or set up charitable foundations of their own. It's also great if corporations urge their employees to give to charity. But that's as far as it goes. Charitable giving isn't a smokescreen for indefensible behavior, and in any case it's not charity if you're forced to do it at the point of a gun. Bankers who make millions ought to feel obligated to give some back to the community, but if they don't, that's their business, not Goldman's.

International Relations

| Mon Jan. 11, 2010 3:00 AM EST

Europe: not the hellhole you thought it was. Paul Krugman explains.

Harry Reid's Non-Gaffe

| Sun Jan. 10, 2010 6:24 PM EST

According to John Heilemann and Mark Halperin's Game Change, back in 2006 Harry Reid "was wowed by Obama's oratorical gifts and believed that the country was ready to embrace a black presidential candidate, especially one such as Obama — a 'light-skinned' African American 'with no Negro dialect, unless he wanted to have one,' as he said privately." Last night I tweeted Mark Kleiman's response to this, but today I see that not only has this non-story not disappeared, it's actually getting more attention from our stalwart media titans. So here's Mark:

Other than using an old-fashioned word to refer to African-Americans (a word which was the standard word for about the first half of Reid’s life), what did Reid do wrong?

It is the case that Obama is light-skinned and that he is a native speaker of American English, though he can and does, on occasion, use Ebonic cadences for rhetorical effect. And it is the case that both his skin tone (and the ancestry it reflects) and his command of the common dialect are among his political assets. If he had looked, or sounded, like Jesse Jackson, he wouldn’t be President. A darker hue and a more Ebonic speech pattern would certainly have cost him some votes among white Anglos, Latinos, and Asians, and almost certainly cost him some black votes as well.  (The internalization of racism in the African-American community is a well-known phenomenon.)

It would have been insane for anyone considering an Obama candidacy not to weigh those factors.  In October of 2008, when the dark-skinned, Ebonic-speaking David Alan Grier, on “Chocolate News,” urged white voters to “vote for the white half,” he was repeating a joke I’d heard at least a year earlier.

This whole thing is ridiculous. That Reid immediately apologized and Obama immediately accepted his apology isn't surprising. It's all part of the kabuki of American politics. Nor is it surprising that buffoonish attack dogs like Liz Cheney and Michael Steele are trying to pretend Reid is some kind of stone racist. But Reid was speaking privately, he was a political pro talking about Obama's electability, and he didn't say anything offensive anyway. Are we seriously at the point where we have to rely on George Will (!) to talk sense into the conservative movement?

Banks to Britain: Drop Dead

| Sun Jan. 10, 2010 1:39 PM EST

Great Britain has enacted a temporary 50% tax on large bank bonuses. Via Tyler Cowen, the Financial Times reports on how British banks plan to respond to this:

Most banks, polled in an anonymised survey, said they would absorb all or part of the cost of the one-off 50 per cent tax by inflating their bonus pools, even at the risk of irritating the government and their own shareholders....“The tax is going to be 90 per cent absorbed by the banks,” said one senior recruitment consultant with clients in the City.

In many cases that will mean banks doubling bonus pools, with the cost of the tax borne by shareholders. Dividends, already under pressure as regulators force banks to retain earnings to boost capital, are likely to be hit, bankers concede.

I'm generally skeptical of the effectiveness of direct controls on salaries and bonuses. I think the real problem is the size and profitability of the financial sector, which is what drives the big bonuses in the first place. That's what we should be paying attention to.

But even so, the arrogance and entitlement that this displays is stunning. British banks, even more than American banks, were saved from destruction by central government action, and they desperately need to rebuild their capital cushions. The last thing they should be doing is spending it on huge bonuses, and they certainly shouldn't be cavalierly doubling their bonus payouts just because their traders are upset at Alistair Darling's tax proposals. They don't even have the excuse that they need to do it in order to retain talent, since the tax applies to all firms equally.

Back here in the U.S., Christina Romer tells George Stephanopoulos that "she is hopeful that financial institutions will show some restraint, but with a shake of her head, she indicated she’s not that hopeful." Me neither. But here's the silver lining: since banks are all about to announce their bonus payouts over the next few weeks, and those payouts are certain to be outrageous, this provides the Obama administration with a lovely opportunity to stop just "shaking its head" and instead use bonus season as an opportunity to work up some righteous anger against the entire structure of the financial system. We need to target the source of the cancer, and a wave of populist revulsion is the perfect political opportunity to do it. More spine please, Mr. President.