Kevin Drum

The Bailout and the Future

| Wed Nov. 18, 2009 1:22 PM EST

Paul Krugman writes about the knock-on effects of the government paying off all of AIG's obligations at 100 cents on the dollar:

Brad DeLong says that the loss of public trust due to the kid-gloves treatment of bankers has raised the probability of another Great Depression, because the public won’t support another round of bailouts even if it becomes desperately necessary. I agree — but I think the bigger cost is that we’ve greatly increased the chance of a Japanese-style lost decade, with I would now give roughly even odds of happening. Why? Because bank-friendly policies have squandered public trust in all government action: try talking to the general public about stimulus, and it’s all confounded in their minds with the deeply unpopular bailouts.

By itself, the AIG story would be damaging enough. But it’s part of a pattern — and that pattern has ended up undermining the economy’s prospects, big time.

It's surprisingly hard to disagree with this.  The most optimistic take, I suppose, is that the economy will continue to recover slowly, there won't be another big shock that requires extraordinary government action, and we'll get out of this OK.  And I suppose that's still the most likely scenario.  But public anger over the bank bailout, which was blazing earlier in the year, hasn't really abated.  Sure, the tea parties are mostly over, but anger over the bailout is still smoldering, and it's pretty likely to increase as we continue to see headline after headline about how happily Wall Street is recovering in the middle of a deep recession thanks to all those bailout dollars.  Congress could tamp down some of this anger if it enacted some serious regulatory reforms over the next few months, but what are the odds of that?  Call me a pessimist, but I don't think they're very good.

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Is Spending Recovering?

| Wed Nov. 18, 2009 12:50 PM EST

Over at TNR, Zubin Jelveh puts up this graph of consumer spending and notes that it's turned up since August.  Last month it even crossed above the zero mark, meaning that consumer spending is up a bit from the same period last year.

But the great home equity ATM is gone, and that was a big part of what drove increases in consumer spending in previous years as homeowners took out enormous HELOCs to amp up an unsustainable lifestyle.  Without that, will we start seeing increases of 3.5% anytime soon?

A new study by the Boston Fed's Daniel Cooper suggests that we shouldn't be overly concerned with the impact of declining home-equity extraction on spending. Cooper argues that only the credit-constrained (that's economist shorthand for those with little access to credit) borrowed heavily against their homes to consume. He estimates that an 11% decline in housing wealth in 2008 lead to only a 0.75% fall in non-housing-related spending. In other words, declining home prices could only have a small impact on people's willingness to spend. The basic reason is that, in a given year, the majority of homeowners are not credit constrained, so a big drop in home prices shouldn't affect their spending ability (that is, if you believe Cooper and Willem Buiter's contention that the housing wealth effect is really the housing-as collateral effect).

But isn't the bigger question not the impact of one single factor on spending, but where increased spending is going to come from at all?  Basically, it can come from (a) wages going up, (b) increased debt, or (c) spending down savings.  Real wages have gone up a bit lately thanks to negative inflation, but that's strictly a short-term blip.  I don't think anyone expects wages to increase in the future at more than their historical 1-2% rate (1% if you count only cash wages, 2% or so if you count healthcare expenditures too).  Increased debt is out of the question too.  Consumers are paying down debt, not increasing it.  And savings are going up, not down.

None of this stuff has to last forever, and eventually all the deleveraging will be over and we can return to fundamental growth rates.  But even then, with debt and savings neutral, that growth rate is going to be determined by wage growth.  In the near future, at least, it's hard to see how that gets us back to 3.5%.

The Palin Index

| Wed Nov. 18, 2009 2:35 AM EST

Remember a few days ago I said that someone on the intertubes would provide us with a cheap-and-cheerful online index of Sarah Palin's index-less Going Rogue before it even hit the shelves?  I was wrong.  It didn't happen until several hours after it hit the shelves.  Here it is.

The War on Christmas Carols

| Wed Nov. 18, 2009 12:43 AM EST

Mark Kleiman tries to find common ground with Bill O'Reilly:

“Frosty the Snowman” and human rights

Heard it today while changing planes in Houston.  Even if having to hear that song isn’t covered by the Convention Against Torture, surely there’s a substantive Due Process claim about having to hear it before Thanksgiving.  I hope you will all agree with me that Something Should Be Done.

And not to get to Bill O’Reilly here, but the problem isn’t Christmas music.  They’re welcome to play Adeste Fideles and Good King Wenceslaus and the Gower Wassail and Gaudete and even God Rest Ye Merry as often as they like.  The problem is secularized ”holiday” music.  “Frosty” isn’t even the worst of the lot; that dubious honor goes to Jingle Bell Rock.

I happened to tune in to a few minutes of O'Reilly today, and sure enough, he was blathering on and on and on about some poor school principal in Massachusetts whose life he planned to turn into a living hell because school rules in her town don't allow kids to sell manger scenes at the holiday gift sale.  (Something like that, anyway.  I tuned in a little late to get the whole grim story.)  But look: isn't secular holiday music something we can all agree on?  I mean, it sucks.  It really does.  If O'Reilly could dump the whole War on Christmas schtick and instead take up a War on Christmas Music, it would be a bipartisan joy for all.

The China Narrative

| Tue Nov. 17, 2009 8:16 PM EST

The New York Times writes about Barack Obama's visit to China:

What emerged after six hours of meetings, two dinners, and a stilted 30-minute presentation to the press in which Chinese President Hu Jintao would not allow questions, was a picture of a China more willing to say no to the United States.

....On everything from Iran, where Mr. Hu did not publicly discuss the possibility of sanctions, to currency, where he made no nod toward changing the value of the renminbi, to human rights, where a joint statement bluntly acknowledged that the two countries “have differences,” China held firm against most American demands.

Am I missing something here?  China has always stage-managed American visits, it's never supported sanctions against Iran, it's consistently declined to change the renminbi peg to the dollar, and it's never made any substantive concessions on human rights.  So in what way was China "more willing" to say no than before?

The current popular narrative about China is all about how they're growing up, getting richer, and exercising increased leverage over the U.S. because of their huge dollar holdings.  And obviously there's some truth to all that.  Still, in this case it seems as if reporters are letting their internal narratives drive their reporting, rather than the other way around.  China's been saying no the United States for a long time.

UPDATE: The Washington Post gets into the act too:

If there was any significant change during this trip, in fact, it was in the United States' newly conciliatory and sometimes laudatory tone. In a joint appearance with President Hu Jintao on Tuesday, Obama hailed China as an economic partner that has "proved critical in our effort to pull ourselves out of the worst recession in generations." The day before, speaking to students in Shanghai, he described China's rising prosperity as "an accomplishment unparalleled in human history."

Obama's trip stood in stark contrast to visits by his predecessors. But this reflected not so much a policy shift by a new administration in Washington as a dramatic and much bigger change in the power dynamic, particularly in economics, over the past decade — a change that has been the central undercurrent of Obama's swing through China this week.

Maybe so.  But Obama has taken a "conciliatory and sometimes laudatory tone" with everyone.  He's famous for it.  Conservatives complain about it endlessly.  There's really no reason to think this is due to China's increased economic influence unless that's the narrative you were determined to start with in the first place.

Health Note

| Tue Nov. 17, 2009 7:00 PM EST

Just got back from having a stress echo test done so the medical-industrial complex can decide how healthy I am.  It was pathetic.  Fifteen minutes on their little stationary bike and my calves felt like I'd just finished a triathlon.  On the other hand, if I were in great shape they'd just amp up the resistance and make me pedal longer, wouldn't they?  So I suppose it all turns out the same in the end.

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Safe Havens and COIN

| Tue Nov. 17, 2009 3:23 PM EST

Matt Yglesias takes a look at our current obsession with denying terrorists "safe havens" and wonders if it isn't pretty counterproductive:

It’s a sort of ugly turn of phrase, but I’ve tried referring to this as the “backwaterification” of American foreign policy. Instead of paying the most attention to the places that matter most — traditionally Europe, Japan, and the Gulf now joined by China, Brazil, smaller industrialized Asian countries etc. — the logic of safe havens is for our focus to drift toward the places that matter least.

In a similar vein, Stephen Walt argues that our current obsession with counterterrorism is equally misplaced:

Those who argue for radical change invariably point to the various wars the United States has fought in recent years — notably Iraq and Afghanistan — and simply assert that we need to get ready to do a lot more of them.

Unfortunately, this line of argument ignores the fact that these wars are the result of past American mistakes. The first error was the failure to capture Bin Laden and his associates at the battle of Tora Bora, which allowed al Qaeda's leaders to escape into Pakistan and thus ensured that the United States would become enmeshed in Afghanistan....The second mistake was the foolish decision to invade Iraq in 2003, which led us into yet another costly insurgency.

....In short, the current obsession with counterinsurgency is the direct result of two fateful errors. We didn't get Bin Laden when we should have, and we invaded Iraq when we shouldn't....The obvious question is: Does the United States really want to base its military strategy on two enormous blunders?

I'm sympathetic to both of these points of view, but not entirely convinced.  Our concern with safe havens really does seem to get used as a stand-in for serious argument a little too often, but I wouldn't get too enamored of the idea that safe havens don't matter.  Whether it's in Hamburg or Helmand, harrassing the bad guys is plenty necessary.  The difference is that in Hamburg the German state already has a police apparatus with plenty of authority in place, while in Helmand we don't.  And the only way to get it is to have a presence there.

Likewise for Walt's argument.  My big concern is that we'll allow military organization to drive our national security policy, rather than the other way around.  In other words, if we build a big COIN capability, then we'll end up using it whether we should or not.  But the lessons of Afghanistan and Iraq might very well be quite different: namely that we should do everything we can to avoid COIN conflicts in the first place.  We're not very good at them and the return to national security from getting involved in them is generally either slight or negative.

But I'm not 100% convinced about either of these arguments.  I don't much like the idea of a fixation with either safe havens or COIN driving national security policy, but it's hard to deny that safe havens really are a problem and that small conflicts against irregular troops really do seem likely to define our future more than big wars against other major powers. And if that's the case, then we need to deal with it.

This argument has been going on for years, and I'm only bringing it up here again as a conversation topic.  So go ahead and school me.

The Gift Card Scam

| Tue Nov. 17, 2009 2:11 PM EST

Here's the latest good-news-bad-news on the financial regulation front:

The Federal Reserve today proposed new rules that would protect gift card users from fees and other unexpected restrictions.

....Under the proposed rules, gift cards would not expire until at least five years from the purchase date. Service and inactivity fees could only be charged once a month and only after a card had been inactive for at least a year.

The good news is obvious: at least the Fed is finally doing something.  But the bad news is equally obvious: Why did it take so long?  These things are plainly marketed as replacements for cash, after all.  And why, even now, are the rules so lame?  California flatly prevents both expiration dates and fees, and guess what?  Gift card business is booming.

On a more analytical level, I'll say this: I can understand why gift cards might eventually expire, both for accounting reasons and for common sense reasons.  But inactivity fees?  Come on.  There's no reason to make a card inactive in the first place, and there's no cost to re-activating if you do.  This is just plain and simple robbery.  The fact that the Fed caved in to industry pressure to allow this is exactly why we need a Consumer Finance Protection Agency.  A CFPA would never allow scams like this.

Trying the Terrorists

| Tue Nov. 17, 2009 1:17 PM EST

Andrew Sullivan on the prospect of trying the 9/11 suspects in civilian courts in New York City:

When you listen to the Fox News right speak about this, they reveal amazing levels of fear. They have been truly spooked by these men with long beards and chilling eyes. They are so scared of them they are willing to drop any and all legal principles that the West has historically used with respect to mass murderers. Their fear brought them to institute torture, and to engage in mass brutality against prisoners of war in every theater of combat in a manner that will tragically taint the honor of the US military for a very long time. It led them to establish Gitmo, to create for the world a reverse symbol of the Statue of Liberty, and imprint it on the minds and in the consciences of an entire generation of human beings, whose view of America will never be the same.

It's not as if the right's reaction to these trials is a surprise, not after listening to a year's worth of wailing about death panels, socialism, birthers, dithering, Chicago thugs, and more.  The right wing base today doesn't just oppose Obama, they're aboslutely terrified of everything he stands for.

But they brought the New York trials on themselves.  I'm not categorically opposed to using military tribunals in cases like this, but that's hardly an option anymore thanks to the Bush administration's contemptuous efforts to turn them into obvious kangaroo courts.  Hell, even military lawyers couldn't stomach them.  As for an international court, that would be fine too except that conservatives have blocked every attempt to make the United States a party to them.  The only real choice left, if you want ensure something within shouting distance of a fair trial, is a civilian court.

But does this mean there's any chance they could get off?  In theory, sure.  That's the whole point of having a fair trial.  In practice, forget it.  The evidence against KSM and the others is too strong.  A year from now, they'll all be convicted, New York City will be intact, and we'll get on with our lives.

And the right will move on to being outraged and terrified about something else.

The Swiss System

| Tue Nov. 17, 2009 12:26 PM EST

Tyler Cowen has a list of 11 healthcare reform ideas (plus three extras) over at his site today, and he says he would "trade away the Obama bill for these in a heart beat."  I wouldn't, for reasons having more to do with future reform than with anything on the table today, but there's plenty to agree on here.  Tyler would like to federalize Medicaid, spend more on medical R&D, make an "all-out" effort to limit hospital infections, encourage the spread of walk-in clinics, and a few other things that I've written in favor of before.  So bring 'em on.

But he's also in favor of limiting universal coverage to catastrophic care, which I'm not so keen on, and thinks that universal coverage is pretty much impossible if you try to build it on top of our current jury-rigged system:

11. Realize that you cannot tack "universal coverage" (which by the way it isn't) onto the current sprawling mess of a system, so look for all other means of saving lives in other, more cost-effective ways.  If you wish, as a kind of default position, opt for universal coverage if the elderly agree to give up Medicare, moving us to a version of the Swiss system and a truly unified method of coverage.  But don't bet on that ever happening.

I'm sympathetic to this idea, but I'm not really sure why it has to be true.  The current bills pretty clearly move us along the path toward a Swiss system — not my first choice for a model to follow, but certainly better than what we have now — and I don't think that the existence of Medicare as a separate part of that really stands in the way.  A single comprehensive system for all would probably be better and more efficient, but it's hardly an absolute precondition.  My own guess is that a decade or two from now we'll basically have Medicare for the elderly and the Swiss system for everyone else.  Austin Frakt adds this:

The current debate over health reform is just the beginning–call it Health Reform Debate 1.0 (beta). Debate 2.0 will be about costs, specifically about payment reform....Therefore, I’d like to add a 15th item to Cowen’s list: payment reform that compensates providers, at least in part, on the basis of quality and cost control. That’s very vague. One can conjure up some specifics and some have. Few are thoroughly tested and none have been anywhere near the center of political debate. But they will, and soon.

Agreed.  Coverage first, cost controls second.  It would be great to do it all at once, but politically there's really no alternative to the way we're doing now.