What really happened at Wednesday's debt ceiling talks? It's hard to say for sure, but apparently Eric Cantor repeatedly proposed some kind of short-term extension of the debt ceiling that President Obama had already said he wouldn't support, and then interrupted to propose it yet again as Obama was wrapping up the meeting. Depending on who you listen to, Obama either "stormed out," or left "angrily," or left "abruptly," or simply left after telling Cantor they'd meet again tomorrow. One way or another, though, it looks like Obama finally got fed up with Cantor's antics and warned him not to try calling his bluff. Joe Klein provides narration:

David Rogers over at Politico, who has been doing this — extremely well — for about as long as I have, has word that the President of the United States monstered down on Representative Eric Cantor in Wednesday’s deficit ceiling squabble. This is so refreshing on so many levels. Cantor has been using this crisis to undermine his leader John Boehner, by playing the Tea Party/Grover Norquist recalcitrance card. The boy badly needed someone to get up in his face and Barack Obama, of all people, apparently did, telling Cantor, in no uncertain terms, that he’d veto any short term deficit ceiling fix or, indeed, any plan that did not include revenue increases. Then Obama walked out, or the meeting ended, depending on whom you talk to.

So what we have now is the Republican party in, yes, disarray — a word used to describe Democrats almost exclusively, back in the day before the crazies took over the GOP store. You have Cantor and the House Teasies opposing any revenue increases, including a tax loophole closing plan that Ronald Reagan and Edmund Burke would have smiled upon. You have Boehner, struck dumb apparently, after his attempt at bipartisan statesmanship with the President was greeted by tossed shoes and catcalls from the Teasies. You have Mitch McConnell, well, I’m speechless about Mitch McConnell….

Republicans in disarray! And apparently even Lindsey Graham agrees. Here he is admitting to reporters that Republicans have been playing games all along:

Our problem is we made a big deal about this for three months. How many Republicans have been on TV saying, "I’m not going to raise the debt limit." You know, Mitch [McConnell] says, "I’m not going to raise the debt limit unless we talk about Medicare." And I’ve said I’m not going to raise the debt limit until we do something about spending and entitlements. So we’ve got nobody to blame but ourselves. We shouldn’t have said that if we didn’t mean it.

Republicans now seem to be a hair's breadth away from outright panic. Graham is right: at this point, no matter how desperately they try to pretend that it's Obama standing in the way of a deal (and that's clearly the conservative talking point of the day), it's simply too obvious that it's Republicans who are unwilling to say yes. Obama is almost embarrassingly eager for a deal, but they won't agree to send him a clean debt ceiling increase, they won't agree to a grand bargain, they won't agree to a medium-sized bargain, and they won't agree to revenue increases even in the form of closing virtually indefensible loopholes on hedge fund moguls and other assorted members of the millionaire class. Hell, a sizeable chunk of the GOP's tea party faction actively thinks that default would be a great thing. They're practically slavering over the possibility while their leaders watch slack-jawed, wondering just how you explain to these guys that, yes, pressing that red button over there would be really, really bad.

The tea party was pretty useful to the GOP leadership for a while. But now it's gone from being a handy campaign tailwind to a Force 5 hurricane on a path to destroy the country, and they don't know what to do about it. Under other circumstances it might be fun to watch them all get their comeuppance over this, but not if it means turning America into a banana republic along the way. They better figure out what to do with their problem children, and they better figure it out fast.

Over at FiveThirtyEight, Bryan McCabe takes on the mortgage interest deduction:

Commentators often talk about the mortgage interest deduction as a prized middle-class benefit that enables households to achieve the American dream of homeownership. But despite their strong support for the deduction, middle-class Americans are not the primary beneficiaries of this federal tax subsidy. Instead, wealthy Americans take home a disproportionate share of the deduction’s benefits.

....It’s not surprising that the wealthy benefit disproportionately from the mortgage interest deduction....What is surprising, however, is that Americans continue to support a housing subsidy that distributes benefits so disproportionately.

I think this is a lot less mysterious than McCabe makes it out to be. It's true that high-income taxpayers get a bigger absolute benefit from the mortgage interest deduction than low-income taxpayers. Of course they do: they have bigger mortgages. But I've added a column to the JCT report that produced the numbers McCabe uses in his post. The extra column shows roughly how big the mortgage interest deduction is as a percentage of income at various levels:

As you can see, it comes to about 2% of income for everyone. (I used the midpoint of each income group for the calculation. The top income group is blank because "average" income is a little tricky to compute for this group.) What's more, although homeownership rates are obviously higher at higher income levels, the homeownership rate is 60% even at incomes as low as $25,000.

So why is the mortgage interest deduction so popular? Because homeownership is pretty widespread even at low incomes and the amount of the deduction is about the same for everyone as a percentage of income. $283 may not seem like much, but to someone with an income of $10-20,000, it's as valuable as $2,856 is to someone with an income of $100-200,000. Result: everyone loves the mortgage interest deduction.

"We have a spending problem, not a revenue problem." This is the usual Republican mantra, but is it true? As Jared Bernstein points out, a simple look at spending and revenue really doesn't back this up:

There’s obviously much more to this analysis then a couple of lines on a graph, but the history of structural [] deficits in recent decades is that they are largely the result of cutting revenues rather than raising spending.

....That doesn’t imply that spending shouldn’t be on the table in the budget talks—though the real pressures come in the future, through health care—whacking food stamps, education, and so on is just plain mean. But it’s awfully hard to look at this graph and see support for that Republican mantra.

I've added some handy lines to show the general trajectory of spending and taxes over the past three decades. Putting aside the Great Recession, which has temporarily cratered revenues and imposed a burst of stimulus spending, the trend is clear: spending has generally gone down, but so have taxes. Future healthcare expenses are a big issue, but the current deficit just hasn't been primarily a spending problem. It's been a tax cut problem.

Jon Chait points me to Robert Draper's profile of Republican Whip Kevin McCarthy in the New York Times today. The subject at hand is the hardline group of tea party freshmen elected last November:

McCarthy informally polled them when they first came to town in November for orientation. All but four of them said they would vote against raising the ceiling, under any circumstances....The whip recognized that it would be counterproductive to lecture the freshmen about the economic hazards of not raising the debt ceiling.... And so McCarthy has urged them to consider raising the ceiling under certain conditions and thus to view this moment as a golden opportunity to force significant changes from the White House. “We all ran for a reason,” he tells them. “What’s most of concern to you? What is it that we think will change America?”

As a result, the freshmen have begun to move away from a hard “no” on raising the debt ceiling to a “yes, if.” In the conference room, several freshmen have said they’ll vote to raise the ceiling only if the president agrees to repeal his health care legislation. Or if Obama signs into law a constitutional amendment to balance the budget, after all 50 states have ratified it. Or if he’ll agree to mandatory caps on all nondefense spending. Or if he’ll enact the Ryan budget. The whip writes down all their ideas on a notepad.

None of these things, of course, are even remotely within the realm of reason, so they don't provide Republicans with any kind of improved negotiating position. As Chait says, "the evidence that's leaked out about internal Republican deliberations suggests the Republicans are not shrewdly trying to maximize their leverage. They're just barking mad." It's hard to disagree.

Paul Waldman on the slow but steady demise of Sarah Palin:

I'll go so far as to predict that this issue of Newsweek is the last time she'll appear on the cover of a news magazine. Ever. The "Gosh, what's Sarah Palin gonna do?!?" period has come to its end. She'll probably try to produce the same media interest four years from now, but it won't be nearly as successful. There are only so many times you can write that story.

It's been a crazy and often fascinating ride, but Palin really has little more to offer as a politician or cultural figure. What's she going to do next — say something ignorant? Complain about liberals? Provide some unseemly family drama? We've seen it all before, and it gets less interesting every time. Unless she goes on trial for murder, most Americans just aren't going to care.

Since Paul was agreeing with something I said yesterday, obviously I agree with him as well. But with a caveat: Joe McGinniss's book about Palin, The Rogue, comes out in September. Maybe it'll be great, maybe it'll be crap. Who knows? But it's possible it will be good enough to rekindle a momentary, if unflattering, last hurrah for Palin. The fat lady might not have quite sung her last note yet.

Economists on both left and right mostly agree that the current standard measure of inflation, CPI-W, slightly overstates the actual growth in the cost of living. The reason is something called "upper level substitution bias," which means that instead of always buying a standard basket of goods and services, people change their buying habits over time as prices change. When the price of hamburger goes up, they eat more chicken. When the price of chicken goes up, they switch back to hamburger.

A version of CPI that takes this into account is called chained CPI, and overall it's considered a more accurate reflection of actual inflation. But technical merits aside, there are always winners and losers when you make changes to statistics like this. One big loser would be Social Security beneficiaries. Initial Social Security benefits upon retirement are calculated based on wage levels, so they'd be unaffected by a switch to chained CPI. But annual COLA increases would be affected, and they'd be lower than they are now. Michael Hiltzik suggests two reasons this is unfair. First:

It's not at all certain that elderly persons on fixed incomes can make the sort of lifestyle changes contemplated by the chained CPI....That's because a larger portion of seniors' spending is concentrated in medical goods and services, which aren't as amenable to substitution as, say, oranges for apples.

....Indeed, the BLS has recognized that elderly consumers are a special case by developing an experimental CPI, known as the CPI-E, just for those 62 and older. Among other differences, the index overweights medical care as a factor in seniors' spending....The CPI-E rose nearly 7% faster than the standard CPI from 1998 through 2009, according to government estimates. It also tells you why, from the standpoint of seniors' real cost of living, the chained CPI is a rip-off.

No measure of CPI is perfect for everyone: if the price of gasoline is skyrocketing and you have a long commute, then your personal cost of living will rise faster than official inflation figures. Likewise, because healthcare costs are rising faster than most other goods, people with a lot of medical problems face higher inflation than those who are healthier. From a statistical point of view, then, the best you can do is choose a measure of CPI that's most accurate in general.

Still, the CPI-E issue is a serious objection: it applies to a very large group, and it applies to a large group that typically has modest incomes. Ideally, it would be handled by broadening the scope of Medicare, not by deliberately using an innacurate measure of general inflation, but broadening the scope of Medicare is hardly on the table right now. Given that reality, the net result of this change would be to cut Social Security benefits by calculating inflation less accurately for seniors.

The second objection to chained CPI is more frivolous:

If you use the chained CPI instead of the standard CPI for the annual adjustment in income tax brackets, over time that will create an effective tax increase, especially for wealthier taxpayers....What do the agents of the wealthy say about that? Let's ask the right-wing Cato Institute, which cherishes both a sedulous admiration for free enterprise and a long-standing hostility to Social Security. Cato last year called switching to the chained CPI for Social Security a "sound and overdue reform." But when it came to using the chained CPI to adjust tax brackets, Cato called that "a very bad idea."

....It's a measure of the cynicism that guides debate in the nation's capital that an "overdue reform" that would take $112 billion from the needy can be regarded as "a very bad idea" if it costs the rich $72 billion — and that no one pauses to ponder the rank injustice involved. Must be that they can't make out their own words over the purring of those Mercedes engines.

Obviously Michael is right about this. If BLS adopts chained CPI as its new official measure of general inflation, then the change should be global throughout the government. Anything else is just obvious special pleading.

On a broader note, regular readers know that I'm generally in favor of Social Security reform. But I'm in favor of it only in the context of a broad-based reform that includes a mix of small, phased-in benefit cuts and small, phased-in revenue increases. A move to chained CPI could be part of that — one that has the benefit of also affecting the current elderly, instead of dumping the entire burden only on future generations — but no one should favor it in isolation. If this is something we end up doing, it has to be done as one piece of a complete package. Otherwise we'll get the benefit cuts, Republicans will refuse to pass the corresponding revenue increases, and Social Security will remain fiscally unbalanced and endlessly under attack. A complete deal to fix Social Security all at once is the only kind of deal anyone should countenance. Piecemeal "reform" is a chimera.

A friend sends me an interesting email:

I spoke to some (very) conservative investment bankers yesterday on some deals we are handling and asked about the debt ceiling as an aside. They were very concerned about the ceiling and seemed very favorable to McConnell's offer. Europe is really, really spooking the investment community. Thus, they would like to tamp down the uncertainty here in the hopes that some sense of normalization here will help the sanity over there and otherwise across the board.

They said it was common knowledge that McConnell was taking very serious back-channel heat from Wall Street because the conclusion was that there was no reliable leadership in the House with Boehner unable to control his caucus and Cantor making his leadership play now. They view Boehner as out. In other words, McConnell is Wall Street's only viable player and so he is taking all the calls. And those calls are not saying to insist upon cuts only come hell or high water. They are saying raise the F-Ing ceiling NOW.

Have no idea if this was true. It's in their interests to say all is well because the players in their deals want that to be the case, so who knows.

I think the issue to watch is how commentators who came out against McConnell's plan more toward begrudging agreement on the theory that there is an unreasonable authoritarian socialist in the WH and, contrary to said President who seems happy to send the country into default and cut off entitlements, they'll be the responsible party, take their lumps and move on. For the good of the country.

This sounds sort of plausible to me, but your mileage may vary. In any case, the final paragraph of this email amused me because I noticed the same thing yesterday, and it's a testament to the efficiency of the conservative messaging machine. Literally within a few hours, I swear that every single conservative politician and pundit had adopted the line that talks had broken down because it was just impossible to negotiate with a socialist thug who was obviously dealing in bad faith. (The "bad faith" in question, of course, was Obama's continuing insistence that modest revenue increases be part of any deal.) The speed with which this talking point made the rounds was truly impressive.

Ben Bernanke told Congress today that the economy is still pretty shaky, and the Fed will take action if it turns down:

Bernanke said that the Fed could start new purchases of securities....his clearest indication to date that a third round of so-called “quantitative easing” is in the realm of possibility. Another option would be to provide “more explicit guidance” about how long the Fed’s current policy of ultra-low interest rates will remain in place....The Fed chief also said that the central bank could lower the rate it pays banks to park money at the Fed, currently 0.25 percent.

That's reassuring, I guess. In related news, Cate Long reports that Ron Paul continues to be a gold bug:

Ron Paul to Bernanke: "Is gold money?" Bernanke: "No it's a precious metal". Paul: "Why do central banks hold it?" Bernanke: "Tradition."

Roger that. Time to grow up, Ron.

The Wall Street Journal reports that European banks are getting very, very nervous:

As the crisis deepens, even European central banks are considering the possibility that one or more countries could leave the currency bloc, according to people familiar with the matter, a scenario that until a week ago seemed to many as implausible.

Overall, European banks appear to be growing increasingly wary of lending to each other, even on a short-term basis. Deposits parked at the European Central Bank's overnight deposit facility jumped Tuesday to €90.5 billion....While the amount of funds parked in the ECB facility ebbs and flows over the course of each month for technical reasons, it has historically been a good proxy for how fearful banks are about lending to each other—and about the financial crisis intensifying.

....The defensive moves have the potential to put further pressure on those economies by reducing the already limited supply of credit. This occurred at the outset of the U.S. financial crisis in 2008, deepening the recession. One official said the situation in Italy is being monitored "moment by moment."

This is really not good. Banking crises tend to move slowly at first and then gather speed seemingly from nowhere before finally imploding. That's how, say, Lehman Brothers can be just a wee bit shaky one week and then a week later be close to bringing down the entire global financial system. When the breakdown of trust happens, it happens very, very quickly.

And just to add an American spin here, this is really not the time to be dicking around with Treasury's ability to sell U.S. bonds. Maybe this is all just a false alarm, but then again, maybe not. And if it's not, America needs to be ready and able to provide a financial backstop to the world without a bunch of squabbling congressmen getting in the way. That's part of the responsibility that comes with being a superpower.

The Great Netflix Shaft

The latest from Netflix:

Netflix Inc. boosted by 60% the price of its cheapest movie-rental plan that includes streaming and DVD rentals, triggering an outcry among customers who still use the disc format despite the growing popularity of online movies.

Am I missing something here? Of course there's an outcry from customers who still — still! — use prehistoric disc technology. I've been a Netflix customer for about a year, ever since the last DVD rental place around here pulled up stakes, and the reason I still rent discs is because the selection of streaming movies on Netflix is pathetic. At a guess, I'd say that when I go to look for a title, it's available in streaming format about 10% of the time. The other 90% of the time I have no choice but to get the disc.

So how can anyone, least of all Netflix themselves, supposedly be surprised that discs remain popular? Again, am I missing something here?

On a related topic, this is a crappy way to treat customers. When I signed up for Netflix, I remember thinking that they were just trying to lure customers in with a low price that would suddenly jump when enough people had gotten used to the service and would either (a) not notice the price hike or (b) just shrug and keep their subscriptions due to inertia. But I confess that it never occurred to me that Netflix would suddenly jack up their price 60%. Credit for moxie, I guess.

On the other hand, I imagine it's going to work great. They'll get some griping and some cancellations, but nowhere near enough to eat into the higher revenue from the price hike. Whether they'll continue to grow at a decent clip at this new price point is another question.

UPDATE: Interesting comments. The most common is that I shouldn't be blaming Netflix, I should be blaming the studios, who are in the process of jacking up their contract demands in order to get their hands on a bigger piece of the distribution pie.