Kevin Drum

A Post About Yemen

| Tue Jan. 5, 2010 11:33 PM EST

I've kept silent about Yemen so far because I don't want to even begin to pretend that I know anything about the place. But, like everyone else, I've been reading about it, and I have to say that this paragraph from Richard Fontaine and Andrew Exum is probably the most enlightening one I've seen so far:

Yemen's economy depends heavily on oil production, and its government receives the vast majority of its revenue from oil taxes. Yet analysts predict that the country's petroleum output, which has declined over the last seven years, will fall to zero by 2017. The government has done little to plan for its post-oil future. Yemen's population, already the poorest on the Arabian peninsula and with an unemployment rate of 35%, is expected to double by 2035. An incredible 45% of Yemen's population is under the age of 15. These trends will exacerbate large and growing environmental problems, including the exhaustion of Yemen's groundwater resources. Given that a full 90% of the country's water is used for agriculture, this trend portends disaster.

So Yemen's population has tripled since 1975 and will double again by 2035. Meanwhile, state revenue will decline to zero by 2017 and the capital city of Sanaa will run out of water by 2015 — partly because 40% of Sanaa's water is pumped illegally in the outskirts to irrigate the qat crop.

Bizarrely, even after writing this, Fontaine and Exum follow up with this:

Given the threat posed not just by terrorism but by the potential for nationwide instability, the United States should move toward a broader relationship with Yemen, still focusing strongly on counter-terrorism but also on economic development and improved governance....Over the weekend, Obama pledged to double aid to Yemen, but this money must be spent strategically. Several areas are ripe for foreign help, including training and equipping counter-terrorism forces, bolstering border security and building the capacity of the coast guard, expanding counterinsurgency advice to the Yemeni government and expanding programs focused on basic governance and anti-corruption.

Even though they say that economic development is important, nearly their entire list is dedicated to military aid of one kind or another.1 But it's hard to see what good that will do to help a country with a soaring population, no revenue, and a rapidly dwindling water supply. Frankly, it's a little hard to see how anything is likely to have much impact on a country with problems that severe. And until those problems are addressed, it's also hard to see how even the best designed and executed counterterrorism program can have more than a very limited effect. More here from Marc Lynch, who basically seems to agree: "So what should the U.S. do? Pretty much what it's been doing in the Obama administration, which has in fact been thinking seriously about Yemen all year and which has quietly been working there in some constructive and some unconstructive ways. It's never as satisfying as a morally pure call to battle. [...] But the administration shouldn't fall into the trap of thinking it must "do something" to fend off political harping from the right and end up over-committing... or taking steps which ultimately make the situation worse."

1There's more detail in the policy brief that their op-ed is drawn from, but it's still focused almost exclusively on military and counterterrorism programs.

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Calling Their Bluff

| Tue Jan. 5, 2010 8:35 PM EST

Rep. Patrick McHenry (R-NC), formerly a wunderkind college Republican attack dog, but now sort of a journeyman big league Republican attack dog, thinks that a regular old deficit commission is a bad idea. What's needed is a deficit commission that takes tax hikes completely off the table and recommends spending cuts only. Grover Norquist calls this a "grown-up idea," but Pat Garofalo isn't impressed:

How, exactly, does taking taxes off the table from the outset represent a “grown-up” way to make “hard choices”? The whole premise behind a commission is that it will be empowered to make politically unpalatable suggestions (like raise taxes) that Congress wouldn’t normally touch....Getting deficits under control on the spending side alone is economically impossible. Exempting interest on the debt, Social Security, Medicare, and defense spending (which Republicans never agree to cut), “the rest of the budget needs to be cut by 51 percent to have a balanced budget in 2014.” So the numbers just don’t add up. Of course, from the outline of McHenry’s plan, it’s pretty clear that gutting those entitlement programs is his ultimate goal, as they are the only things that he cites as needing reform.

I say: bring 'em on, baby. We should let McHenry have his commission, make sure it's well stocked with Republicans, force them to put down on paper just exactly what spending programs they want to gut, and then put it to an up-or-down vote in Congress. We liberals are always demanding that Republican "fiscal conservatives" should tell us just what spending they want to get rid of, and now here's McHenry volunteering to commit political hara-kiri by setting it all down in a nice, official report and then forcing Republicans to put their votes where their mouths are. That would be great.

For Democrats, that is. Sadly, my guess is that the actual grownups in the GOP will put the kibosh on this idea pronto. But I can still dream.

Ping Pong Update

| Tue Jan. 5, 2010 5:40 PM EST

I learned something new today. Apparently conference committees are largely a thing of the past. Jeff Davis explains:

Section 511 of Public Law 110-81 (the Honest Leadership and Open Government Act of 2007) amended Senate Rule 28 (conference reports) to put in a strengthened point of order against conference reports that exceed the scope of the difference between the House and Senate bills....As amended by the ethics law, Rule 28 now works similar to the "Byrd Rule" on reconciliation bills — any provisions ruled out-of-scope by the Parliamentarian are stricken from the conference report unless at least 60 Senators vote to waive the provision....The changes to rule 28 make it much more difficult for Democratic leaders to add "sweeteners" to a conference report to buy votes, since 41 Senators could knock out any individual sweetener out of the conference report without defeating the entire conference report.

....As a result, since the rule changes took in effect, Democratic leaders have basically stopped sending large controversial bills to conference committees, preferring to ping-pong them instead to avoid problems in the Senate with the newly strengthened rule 28....In 2009, after the Hundred Days in which Stimulus and S-CHIP were sent through conference, only appropriations bills and the bipartisan defense authorization bill(s) were sent to conference. Everything else was ping-ponged, most notably the Defense appropriations bill right before Christmas, which had been selected by the leadership to carry many other unrelated provisions and which therefore was not sent to conference committee due to rule 28 concerns.

Do they still make Schoolhouse Rock? If so, I guess it needs some updating.

Too Big To Fail

| Tue Jan. 5, 2010 5:06 PM EST

I just finished reading Andrew Ross Sorkin's Too Big To Fail, and I know that I really shouldn't complain about it. As a first draft of history kind of thing, it's spectacularly good, with almost mind boggling amounts of detail about what went down during mid-September of 2008. Within the tick-tock genre, it's a real public service. The problem is that it's also a Woodwardesque effort that leaves you guessing who his sources are and what axes they have to grind. Sometimes, though, his sources are pretty obvious, and the narrative suddenly stops dead for a pandering little soliloquy like this one. Its star is Morgan Stanley CEO John Mack at the height of the crisis:

He needed some air, he told [his wife], and decided to go on a walk. As he roamed up Madison Avenue, he realized that his entire adult life, his entire professional career was on the line. He had been in battles before — his losing fight with the firm's former CEO, Philip J. Purcell, had been a notable one — but never anything like what he faced now. But this was not just about his personal survival; it was about the fifty thousand people around the globe who worked for him, and for whom he he felt a keen sense of responsibility. Images of Lehman employees streaming out of their building the previous Sunday still haunted him. He needed to buck up. Somehow, he was going to save Morgan Stanley.

And then he slid down the batpole to the batcave and got to work! Give me a break.

That aside, what else have I learned from the book? Apparently everyone on Wall Street really does watch CNBC 24/7. Tim Geithner doesn't come out of this affair looking very good. I guess he didn't cooperate with Sorkin. Jamie Dimon, on the other hand, does emerge as a good guy. I guess he did cooperate. And the biggest, clearest lesson of all: no one really had any idea what was going on last September. The whole thing was just massive confusion from beginning to end. By the time I was finished with the book, I couldn't tell whether I felt more or less sorry for all these guys.

POSTSCRIPT: Plus this: the downside of insta-books is lousy copy editing. Somebody should be fired over the number of egregious typos in this book.

Avatar

| Tue Jan. 5, 2010 4:39 PM EST

I saw Avatar yesterday. Oddly, I think my reaction was almost exactly the opposite of everyone else's. Originally I didn't plan to see it, since the ads and trailers just didn't make it look very interesting, but then I heard a tidal wave of commentary that went like this: Yes, the story is lame, but the tech is so awesome you just have to go. It's like being one of the first to see The Jazz Singer.

So I went to see it in glorious 3D. And yes, the story was lame. But really, it wasn't that lame. It was cartoonish, and the characters were strictly 2D, but it wasn't so dumb that I felt like walking out of the theater at any point. All by itself that makes it better than about a third of the movies I see each year.

So the story was OK, and even the message was just the usual hamhanded Hollywood stuff. But the tech? I was underwhelmed. I've seen 3D before, and the 3D in Avatar was strictly run of the mill. The CGI was OK, but nothing special. There were some cool aspects to Pandora, but they were few and far between. Am I really supposed to be impressed by a floating rock colony? As for the aliens themselves, I'll take it on faith that their portrayal was a technological miracle. But the end result was.....some vaguely human looking blue people that moved almost — but not quite! — as naturally as if they were real. I dunno. I just wasn't that awestruck.

Anyway, I know I'm late to the party on this. But I guess I was surprised that the story was a little more engaging than I thought it would be and that the tech was less spectacular than I thought it would be. Anyone else have a similar reaction?

UPDATE: For more Avatar fun, here's Patrick Goldstein on why grumpy conservatives hate it.

How's Obama Doing?

| Tue Jan. 5, 2010 1:41 PM EST

Today's raging topic in the lefty blogosphere: is Mark Halperin merely a wanker? Or is he already Galactic Wanker of the Year a mere week into 2010?

The proximate cause of this conversation is his Time article, "A Report Card on Obama's First Year." Here's what he says Obama did well: work with Congress, handle foreign policy, focus on the long term, take executive action, and steer clear of scandal. Not bad!

But here's where he did less well: managing his image, creating administration stars, wooing the great and good, changing the tone, and managing the White House policy process. Hmmm. As pretty much everyone has commented, the good stuff is all substantive, while the bad stuff, with one exception, is all about optics and atmospherics. Do these lists really add up to an equal amount of good and bad?

Obviously not, although I think it's worth defending Halperin in one narrow way: the world is what it is, and if the world is full of people who think that optics and atmospherics are a big deal, then optics and atmospherics are a big deal. Deal with it. Aside from that, though, the real question is whether Halperin is merely reporting this stuff or if he actively approves of it. Take this passage, from his bit about Obama failing to change the tone in Washington:

Once the new President cast his lot with his party in passing an economic-stimulus measure rather than seeking bipartisan agreement, rival Republicans started digging in. The White House's original plan was to leverage Obama's popularity and the agenda-setting power of the majority to force centrist Republicans to break ranks and cast cross-aisle votes on key measures — but the Administration underestimated the weakness of the opposition, which paradoxically strengthened the hand of the conservative activist grass roots, making compromise by GOP officials with the Democrats seem politically untenable. Obama's aides continue to blame the Republicans for refusing to play ball, but the buck stops with the President, whose paths to success on issues such as climate control, jobs and education are all narrower because of a partisan bitterness that rivals that of the Clinton and Bush eras.

What to make of this? On the one hand, Halperin fails to mention that Obama agreed to let tax cuts make up 40% of the stimulus bill and still couldn't get any Republican support. On the other hand, he pretty clearly lays the blame for this on weak Republicans who have become slaves to the most extreme part of their base. But then, on the third hand, he whipsaws back and suggests that it's all Obama's fault anyway, because, well, he's the president. If he wants to be successful, then one way or another he needs to figure out a way to make Republicans play ball.

But is Halperin saying this is how things ought to be, or is he merely reporting that, like it or not, this is the way things are? Beats me. It gets harder and harder to tell at places like Time these days. In any case, maybe Halperin should follow up with a list of five things the media and the Beltway glitterati are doing better than you think — and five things they're doing worse. That would be some serious link bait.

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Wall Street's Vacuum

| Tue Jan. 5, 2010 12:49 PM EST

Via Matt Yglesias, here is economist Maxine Udall (who apparently refers to herself in the third person) talking about the long-term effects of the three-decade financialization of America that began in the early 80s:

Maxine suspects that the longest term and most severe damage from the finance casino will not be from government deficits required to shore up too-big-to-fail banks and insurers. It will be from two powerful, long-standing price distortions that have distorted the composition of our labor force and the mix of human capital within it. The first distortion is the past diversion of some our best technical and mathematical minds away from physics, engineering, biology, chemistry, and, yes, even economics, to financial modeling, risk analysis, and all the other marvelous tools of speculation and gaming. Over the last 20 years or so, the financial sector has been diverting our future scientists and mathematicians into creating new derivatives aimed at managing risk (ha!) and into developing creative investment instruments aimed at obscuring risk.

The second long-term distortion is similar to the first. Maxine is thinking of all those bright, young, energetic people who came out of some of our best universities and opted to go to work for investment banks, not in technical jobs, but as traders, ratings specialists, analysts, again to support the conversion of trillions of dollars into chaff.  Many of them might have gone on to graduate degrees in chemistry, biochemistry, physics, engineering, biology or medicine.

I think this is right, but I've long thought that it's also slightly wrong in a way that's (just barely!) worth a blog post. Here's the thing: the raw number of hot shot physicists who defected to Wall Street is actually fairly small, and probably didn't really affect the field of physics in any measurable way.  And my guess is that, in general, the kind of person who's interested in high finance isn't the same kind of person who's interested in mass spectrometers and Erlenmeyer flasks. So I have my doubts that the siren song of Wall Street has really done significant damage to our technical and scientific sectors.

But the kind of person who's interested in high finance (and big paydays) is the kind of person who's also interested in starting up a hot new company or becoming a star manager in an existing corporation that makes actual goods and services that people use. That's where I suspect the damage has really been done. No matter what you think of Google or IBM or Ford Motor, they're good for the economy in a way that Goldman Sachs and the Blackstone Group just aren't. If they lose the tippy top 1% of the young men and women who are temperamentally interested in the corporate world, then their businesses become just slightly less better run, slightly less visionary, and slightly less ambitious. And on the flip side, all that brainpower is put to work in ways that, at best, seems to add no social value to garden variety banking, and at worst makes it actively more dangerous.

One of America's strengths has long been its deep and strong venture capital network, and obviously we still have plenty of bright people eager to take a flyer on a new idea. But startup firms are hugely sensitive to talent (and, yes, luck), and the loss of the very best startup talent can make the difference between a success rate of 3% and a success rate of 5%. That's a lot of Microsofts. And that's what we lose when we allow Wall Street to become so insanely lucrative.

No More Northrup

| Tue Jan. 5, 2010 12:18 PM EST

Southern California lost its last aerospace company on Monday:

In a blow to Southern California, Northrop Grumman Corp. said it would relocate its headquarters from Los Angeles — leaving the region that gave birth to the aerospace industry without a single major military contractor based here.

....Northrop's announcement was seen as a bitter pill for the much-battered regional economy, which has suffered a series of high-profile corporate defections in recent years.

[Etc.]

This is a drag, but I really think they're overplaying the "bitter pill" angle here. It's only the corporate staff, after all, and I think everyone has known this was coming for ages. If you're an aerospace company, the people you need to bribe lobby are all in Washington DC, and who wants to spend their entire lives flying back and forth to DC just to schmooze and eat lunch with congressional aides and Air Force colonels? On the list of bad things to happen to California recently, this barely even cracks the top 100.

Capital City

| Tue Jan. 5, 2010 11:24 AM EST

I've got a big piece in the January issue of Mother Jones about the finance lobby and its near total domination of Congress, the Fed, the SEC, the executive branch, and just about everyone else who matters in and out of Washington DC. And now it's online, so you can read it too! It starts with a bit of background: the collapse of Long Term Capital Management in 1998 thanks to massive overuse of leverage:

But a funny thing happened on the way to the crash: The New York Fed stepped in and arranged a bailout. Almost all of Wall Street's biggest firms participated, and they did so for one reason: The Fed convinced them that LTCM was too big to fail. An uncontrolled bankruptcy might set off a domino effect that could bring down dozens of banks. A few months later, an interagency report concluded, "The near collapse of LTCM illustrates the need for all participants in our financial system, not only hedge funds, to face constraints on the amount of leverage they assume." It was a bipartisan judgment, signed by Fed Chairman Alan Greenspan and by Robert Rubin, Bill Clinton's treasury secretary.

In any sane world, it would have been a call to arms. After all, LTCM was only worth a few billion dollars. If a relative minnow like that could pose a risk to the global economy merely through the use of profligate leverage, what might happen if a money-center bank worth 100 times as much did the same thing?

But we don't live in a sane world. We live in a world where leverage—as well as Wall Street's nearly endless stream of new contrivances for exploiting it—is largely controlled not by regulators or congressional committees, but by the finance lobby. And the last thing the finance lobby wants is constraints of any kind. So Wall Street promised solemnly to take the lessons of LTCM to heart and then got right down to the business of ignoring them. In fact it spent the next decade not merely blocking reform, but making things worse by lobbying relentlessly to expand leverage, complexity, regulatory forbearance, and risk.

If the aerospace lobby had told us after the 1986 Challenger disaster that the key to better performance was to turbocharge the engines and quit performing preflight inspections, everyone would have agreed that they were crazy. Yet that's essentially what the finance lobby has done over the past decade, and in some weird way we were too mesmerized to recognize it. Within months of a near catastrophe caused by one of the industry's brightest stars, the lobbyists were busily making certain that it would happen again — and that when it did happen, it would be bigger and more disastrous than ever.

LTCM was basically a dry run for 2008: too much risk, too much leverage, and then a collapse when a specific piece of the economy took a dive. In 1998, it was Russia that sparked the problem and in 2008 it was the housing market. So we knew the problems perfectly well but chose to do nothing about them. Why?

This article is my best effort to explain the political and cognitive problems that caused us to court disaster for ten years. Read it and tell me what you think. On Friday, David Corn and I will be on Bill Moyers Journal to talk about it. Check your local listings for the air time in your neck of the woods.

More Debit Card Madness

| Tue Jan. 5, 2010 1:11 AM EST

Someday I'll finally be able to say that there's nothing left that credit/debit card companies can do that would surprise me. But today is not that day. As I read through Tuesday's front page article on the Visa debit card network in the New York Times, I found myself so gobsmacked that I wasn't even outraged. Instead, I kept laughing at the sheer audacity of the whole thing. It is truly unbelievable.

It's a little complicated to summarize the piece in a few words,1 but it turns out that there's a big difference between using a debit card that you authorize via a PIN and using a debit card that you authorize with a signature. Back in the early days of debit cards, the small networks that operated ATMs used PINs to authorize debit cards and charged merchants no fees for their use. In fact, sometimes merchants even received a small rebate because, after all, it costs banks less to process a debit card transaction than a check.

That changed after Visa entered the debit market. In the 1990s, Visa promoted a debit card that let consumers access their checking account on the same network that processed its credit cards, which required a signature.

To persuade the banks to issue more of its debit cards, Visa charged merchants for these transactions and passed the money to the issuing banks. By 1999, Visa was setting fees of $1.35 on a $100 purchase, while Maestro and other regional PIN networks charged less than a dime, Federal Reserve data shows. Visa says the fee was justified because signature debit was so much more useful than PIN debit; at the time, roughly 15 percent of merchants had keypads for entering a PIN.

Merchants said they had no choice but to continue taking the debit cards, despite the higher fees, because Visa’s rules required them to honor its debit cards if they chose to accept Visa’s credit cards.

Visa's explanation for its high fees is pretty fanciful, but whatever. Everyone has keypads now, and a lawsuit eventually put an end to Visa's "accept all cards" policy. What's more, Visa's transaction volume has gone way up, and electronic payment networks boast the ultimate in economies of scale. So not only is Visa now charging a dime per transaction like the other guys, they're probably only charging a few pennies. Right?

While some merchants said they thought the lawsuit would pave the way to a new era of competition, a curious thing happened instead: while Visa temporarily lowered its fees for signature debit, it raised the price on PIN debit transactions and passed the funds on to card-issuing banks, and its competitors soon followed.

The current class-action lawsuit joined by Mr. Goldstone contends that Visa’s PIN debit network, called Interlink, is offering banks higher fees as an incentive to issue debit cards that are exclusively routed over this network. Interlink, which has raised its PIN debit fees for small merchants to 90 cents for each $100 transaction, from 20 cents in 2002, is often the most expensive, especially for small merchants, Fed data shows.

One large retailer, who requested anonymity to preserve its relationship with Visa, provided data that showed Interlink’s share of PIN purchases rose to 47 percent in 2009, from 20 percent in 2002, even as its fees steadily increased ahead of most other networks — to 49 cents per $100 transaction in 2009, from 38 cents in 2006.

And what is Visa's excuse for its astronomical fees?  They are, says Elizabeth Buse, Visa’s global head of product, “not a cost-based calculation, but a value-based calculation.” Roger that.

1In other words, you should click the link and read the whole thing. Really.