Kevin Drum

Why We Sue

| Wed Aug. 25, 2010 2:24 PM EDT

Matt Steinglass is in Amsterdam, and he's pleased to find that his daughter can swim in the Amstel River if she wants. "If I'd tried letting my daughter do this in, say, the Potomac River in Washington, DC," he says, "I would have likely been arrested." Why the difference? Because in America everyone is afraid of getting sued, so they insist on putting in place ever more restrictive rules on what we are and aren't allowed to do:

The reason you can [swim freely in public waters] in the Netherlands is that if anybody tried to sue the city of Amsterdam because they or their child had been injured while swimming in the river, the suit would almost certainly be dismissed....Essentially, you still have the freedom to swim in the river in Amsterdam because people assume you have the common sense to avoid stupid behaviour, like diving in when you don't know what's underneath, or not keeping to the sides of the river during barge traffic hours. And if you don't, it's nobody's fault but your own.

But there's another reason why I can let my daughter swim in the Amstel, and that is that I'm pretty sure that in a well-regulated country like the Netherlands, the water is reasonably free of heavy pollutants and raw sewage. (I would not, for example, let her swim in the Mekong.) This, I think, outlines a useful distinction between different kinds of regulation....To generalise: for risks I can assess myself, I don't want regulations that prevent me from doing as I please just because I might end up suing the government. For risks I can't assess myself, I do want regulations that give me the confidence to do as I please. One kind of regulation stops me from swimming in a pond in Massachusetts. The other kind lets me swim in a river in the Netherlands. One kind of regulation makes me less free. The other kind makes me freer.

It's worth digging into this a bit. Why is America more litigious than Europe? With the obvious caveat that not every country in Europe does things exactly the same way, here are a few reasons:

  • America's common law culture has always given lawyers more power and greater scope for action than in continental Europe. Tocqueville commented on this 200 years ago.
  • In civil cases, most European countries have adopted a "loser pays" rule. If you sue and lose, you have to pay the other side's costs. This obviously makes people think a lot harder before they decide to file a suit.
  • In most European countries torts are tried in front of judges. In the United States the constitution guarantees jury trials, and juries are probably more likely to award damages than a panel of grizzled old judges. (Or even grizzled young judges.)
  • Largely thanks to conservatives, America has developed a litigation culture rather than an enforcement culture. In Europe the tradeoff generally goes the other way: they have more rules and tighter enforcement of those rules, which means that private litigation is less necessary.
  • On a related note, Sean Farhang argues that at the level of federal legislation, Congress actively encourages private litigation as an enforcement mechanism because it doesn't trust enforcement to the executive branch (which might be headed by someone who prefers to take it easy on favored constituencies).

Long story short, this difference between Europe and the U.S. is so deeply rooted that it's not likely to change — and it's not really due to a national culture that promotes a refusal to accept personal responsibility or anything like that. It's mostly institutional in nature, and the incentives of our institutions point in the direction of more lawsuits instead of more regulations. Conservative tort reform advocates are huge fans of implementing a European-style loser pays rule in America, and I might be too if they were willing to make the other half of the bargain and support European-style regulation and enforcement designed to make our institutions safer and fairer in the first place. But they're not.

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Lifetime Social Security Payouts

| Wed Aug. 25, 2010 12:48 PM EDT

Over at the Tax Policy Center, Gene Steuerle and Stephanie Rennane quote from a CBO report about how total lifetime Social Security payouts are increasing:

In today’s dollars, CBO calculates that a single person born in 1960 (assumed to retire at age 65 in 2025) who earns close to median wages over their lifetime is scheduled to receive approximately $250,000 in lifetime Social Security benefits, while a similar earner born in 2000, expected to retire in 2065, would receive around $420,000.

Does this show how generous Social Security payments have gotten? No. Just the opposite. Real per-capita GDP in 1960 was about $15,000. In 2000 it was $39,000. That's a 160% increase. Conversely, the real increase in total Social Security payouts over an average lifetime is going up only 70% for retirees born in those two years.

Social Security as a program will cost us more in the future than it does now. Longer lifespans are a small part of the reason, and the fact that the huge baby boom generation is about to retire is a much bigger reason. But lifetime payouts, far from spiraling out of control, are considerably stingier now than in the past. We're a far richer country than we were in 1960, but average wages haven't kept up with productivity growth for a long time — and since Social Security payouts are tied to average wages, not economic growth, benefits haven't kept up with economic growth either. Reducing them even further by raising the retirement age would merely be compounding one injustice with another.

Is Inflation Good For the Rich?

| Wed Aug. 25, 2010 12:02 PM EDT

Felix Salmon sez:

Inflation is painful for the poor, but much easier for the rich, whose wealth is tied up in things like stocks and houses which tend to retain their real value.

Hmmm. I haven't thought about this in a long time. Historically, of course, inflation was generally a populist favorite because it reduced the real value of debt. Conversely, "sound money" was preferred by the banking class for exactly the opposite reason. They were the ones making the loans, and they didn't want the value of those loans to be eroded.

Of course, that was back in the day of fixed-rate lending. If you owed the bank a fixed $500 per month on your seed loan and inflation skyrocketed, that $500 became pretty cheap and farmers rejoiced. J. Pierpont Morgan, on the other hand, was not amused.

But what about an industrial era where loan rates are variable and everything is indexed to inflation? Then who benefits (relatively speaking) from inflation? That's an empirical question, and Romer and Romer provided the following answer in 1998:

We find that the short-run and long-run relationships go in opposite directions. The time-series evidence from the United States shows that a cyclical boom created by expansionary monetary policy is associated with improved conditions for the poor in the short run. The cross-section evidence from a large sample of countries, however, shows that low inflation and stable aggregate demand growth are associated with improved well-being of the poor in the long run. Both the short-run and long-run relationships are quantitatively large, statistically significant, and robust. But because the cyclical effects of monetary policy are inherently temporary, we conclude that monetary policy that aims at low inflation and stable aggregate demand is the most likely to permanently improve conditions for the poor.

A couple of years later William Easterly and Stanley Fischer took another look at the data and concluded that inflation had a very mild but negative impact on the poor, and that in polls, "the disadvantaged on a number of dimensions — the poor, the uneducated, the unskilled (blue collar) worker — are relatively more likely to mention inflation as a top concern than the advantaged."

This doesn't tell us anything about moderate levels of inflation — say, the difference between 2% inflation and 5% inflation. It's more geared to general long-term stability. Still, the days of yeoman farmers demanding free silver at 16:1 are just a memory. Today a bout of inflation just jacks up the rate on their credit card balances.

Healthcare For Students

| Wed Aug. 25, 2010 11:24 AM EDT

Megan McArdle reacts to a story from Kaiser Health News suggesting that healthcare reform might prevent universities from offering low-cost student insurance policies:

I imagine that the administration has been blindsided by this one....Had this been written into the law, it probably would have passed unnoticed, but the farther this presses into the spotlight, the harder it's going to be to arrive at a politically acceptable answer.

Chalking this one up to the cost of passing multi-thousand page bills that no one has read.

Hah hah! Stupid Democrats didn't even read their own bill! I imagine we're going to be inundated with stuff like this over the next few years, as critics of reform crow over every story that suggests even the remotest possibility of some negative outcome on one benighted group or another. But here's my prediction: virtually none of these self-serving pity stories will amount to anything.

Take this one. We're not talking about university health centers here, we're talking about actual health insurance policies. And if you read through the rest of the story, you find that most students are insured through their parents' policies. According to the GAO, "only 7 percent bought their own policies or purchased school-based plans." Add to that the fact that so far there's no real evidence that healthcare reform will seriously impact student health policies anyway (colleges are merely "warning" that it might) and that a lot depends on the rules HHS sets, which is all part of how healthcare reform is designed to work. HHS rule setting is a big part of the process and was always intended to be.

So: do I expect vast hordes of angry students descending on Capitol Hill? No. Do I expect HHS to sit around and do nothing about this? No. Do I expect that some reasonable set of rules will be worked out in the end? Yes. Do I expect that critics will take any notice of the fact that yet another scare story about healthcare reform will turn out to be overblown and ridiculous? No indeedy.

Iraq Update

| Wed Aug. 25, 2010 10:28 AM EDT

Anthony Shadid reports on a coordinated wave of insurgent attacks across Iraq yesterday:

For weeks, there had been sense of inevitability to the assaults, which killed at least 51 people, many of them police officers. From the American military to residents here, virtually everyone seemed to expect insurgents to seek to demonstrate their prowess as the United States brings its number of troops below 50,000 here. But the anticipation did little to prepare security forces for the breadth of the assault. Iraqi soldiers and police officers brawled at the site of the biggest bombing in Baghdad, and residents heckled them for their impotence in stopping a blast that cut like a scythe through the neighborhood.

....For weeks, insurgents have carried out a daily campaign of bombings, hit-and-run attacks and assassinations against the security forces and officials, seeking to undermine confidence in their ability to secure the country. They remained the target Wednesday in attacks in Falluja, Ramadi, Tikrit, Kirkuk, Basra, Karbala, Mosul and elsewhere.

....The attacks come amid deep popular frustration with the country’s politicians, who have failed to form a government more than five months after elections in March. Shoddy public services, namely electricity, have only sharpened the resentment.

Violence in Iraq is still far below its 2006-07 levels, but the main goal of the surge, in George Bush's words, was always to provide "breathing space" for political reconciliation that would make its security gains permanent. This has been its Achilles heel ever since it was completed, and the news on this score has continued to get worse for at least the past couple of years. The Florida-like inability to agree on the most recent election results and form a government of any kind is merely the latest act in the play.

And while we're on the subject of military intervention abroad, Fred Kaplan has a good piece in Slate explaining the regional politics that makes progress in Afghanistan so hard. I don't think I'm up for two separate posts on the subject of foreign wars today, so instead I'm just tacking this onto the Iraq news. It's worth reading.

Two Memes Enter, One Meme Leaves

| Wed Aug. 25, 2010 12:18 AM EDT

Summing up Tuesday's election results, Newsweek's Andrew Romano says that the anti-Washington press meme is about to change:

On Tuesday, voters in Alaska, Arizona, Vermont, and Florida weighed in on a variety of marquee primary races--and in every case, they preferred (or were seeming at press time to prefer) the incumbent, establishment, and/or Washingtonian candidate to his or her insurgent foe.

....It's no secret that the press tends to shoehorn even the most multifaceted news event into a simple narrative. Expect that process to continue on Wednesday; both Politico and Agence France Presse have already published stories trumpeting the death of the anti-Washington meme. Unfortunately, the whole exercise is just as futile when incumbents are winning as when they were losing; politics just isn't that tidy. Case in point: even as the anti-establishment eulogies were hitting the wires, the Associated Press was reporting that health-care multimillionaire Rick Scott had defeated Washington-backed Bill McCollum in Florida’s Republican gubernatorial primary and Christian youth camp director James Lankford had upset former state Rep. Kevin Calvey, a Club for Growth favorite, in the runoff for Oklahoma’s open 5th District House seat.

Well, look. Isn't there someone who's enough of a political junkie to give us the straight dope on this? How many incumbents have lost this year compared to 2006? Or 2002? Can't we put a number to this? If the number is a lot higher than the average midterm election, then the anti-Washington meme deserves to live. Otherwise it deserves to die. Which is it? Who's ready to tot up the results from the past few elections and tell us?

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Who You Calling a Statist?

| Tue Aug. 24, 2010 6:47 PM EDT

Conor Friedersdorf argues that although Matt Yglesias is a liberal, he's not entirely a liberal:

Mr. Yglesias favors deregulating various professional cartels, ending the legally proscribed monopoly on buses that some urban public transit agencies enjoy, reforming America's absurd system of agricultural subsidies, and making it easier for developers to build in accordance with the local demand for real estate, rather than government imposed zoning restrictions....Why does he favor some policies that conservatives like? And can we identify more of them for the sake of strategic alliances? We'll never know if, upon learning that he is a liberal, we automatically presume that he is a "statist," or even more absurdly, that he prefers tyranny to liberty.

In response to a similar argument yesterday, Mark Levin came out with all guns blazing:

This is so pathetic. So a liberal blogger favors regulation [I assume Levin actually means deregulation here –ed] in some respect, and this proves to Friedersdork that my characterizing the general left-wing enterprise as statist is unhelpful — to Friedersdork. So, the fact that the liberal blogger isn't advancing big-government arguments ALL THE TIME demonstrates the inaccuracy of referring to his agenda as statist.

Levin is a loon. Equating the liberal project with tyranny is deranged, his tone is consistently obnoxious (note the childish reference to "Friedersdork," one of his favorite bits of juvenilia), and he barely even pretends to offer arguments. He just screams into the microphone for a few hours a day.

And yet.....I actually think he has the better of things here. Let's face it: people like Matt and me aren't even as centrist as your average DLC Democrat of the mid-90s, let alone sympathetic in any serious way to most conservative arguments. I'm in favor of full-blown European style national healthcare, for example. Matt favors astronomical tax rates on the rich. It's true that neither of us has any intrinsic love for a big state per se, but it's still the case that a big state is pretty integral to attaining most of our preferred policy outcomes. And that's true even if there are a few modest areas where we might usefully team up with conservatives — though even there it's worth noting that of the three things Conor mentions, at least two of them (ag subsidies and zoning) are so wildly unlikely to change that favoring reform is sort of a freebie. It's the kind of thing where you can take a contrarian philosophical stand without any serious risk that you're ever going to be called to account for it.

Now, it's true that I'm generally in favor of reducing or eliminating government programs that don't work. Who isn't? But self-interest plays a big role here, even if we don't always like to admit it. Like Matt, I think we should eliminate ag subsidies. But that's a pretty easy stand to take since I'm not a farmer. Earlier today I suggested we do away with Fannie Mae because we subsidize housing too much. I can afford that too, since I already own a home and don't need any help buying one. High tax rates on the rich? That wouldn't affect me much, so I'm OK with it. National healthcare? That would be pretty handy in case I ever want to quit my job, so that's also in my self-interest. Fighting global warming? Well — fine. That wouldn't really do me any good since I don't have children and I'll be dead before climate change causes me any personal grief. So there's no self-interest at work there. On the other hand, I make enough money that a carbon tax wouldn't really inconvenience me much, so I'm not exactly taking a heroic stand by advocating one.

It's useful to know where you can find political allies. If you can find liberals who favor charter schools, less regulation of small businesses, and an end to Fannie Mae, that's well and good. But that's 10% or less of my worldview. I also favor high marginal tax rates on the rich, national healthcare, full funding for Social Security, more spending on early childhood education, stiff regulations on the financial industry, robust environmental rules, a strong labor movement, a cap-and-trade regime to reduce carbon emissions, a major assault on income inequality, more and better public transit, and plenty of other lefty ambitions that I won't bother to list. If we could do all that without a bigger state, that would be fine. But we can't. When it's all said and done, if we lived in Drum World I figure combined government expenditures would be 40-45% of GDP and the funding source for all that would be strongly progressive. "Statist" is an obviously provocative (and usually puerile) way to frame this, but really, it's not all that far off the mark. It wouldn't be tyranny, any more than Sweden is a tyranny, but it would certainly be a world in which the American state was quite a bit bigger than it is now.

Chart of the Day: Housing Prices Since WWII

| Tue Aug. 24, 2010 4:23 PM EDT

In what Matt Yglesias calls "the department of stuff people are wrong about," the New York Times reports the following:

In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.

With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.

“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.

That chart at the bottom of this post, constructed from Case-Shiller data, shows the reality: home prices have actually been pretty steady over time. In fact, if you look at a fifty-year period after World War II, home prices were absolutely steady. In 1947 the Case-Shiller index stood at 110, and in 1997, adjusted for inflation, it stood at 110 again.

So here's the question: why do people think that home price appreciation is a law of nature, when it so clearly isn't? Here are a few theories:

  • People are really bad at math. A 10% annual rise over ten years is a 150% increase. That's pretty crazy. But most people have no sense for how numbers like that compound.
  • People are bad at adjusting for inflation. If you bought a $20,000 house in 1947 and sold it in 1997 for $150,000, that seems like a tidy profit. In fact, it's zero profit. Adjusted for inflation those numbers are identical. But despite all the complaining we do about inflation, most people don't realize just how much it adds up to over the years. (It's that pesky compounding problem again.)
  • In some areas, housing prices really have increased a lot. The house I grew up in cost $16,000 in 1959. Adjusted for inflation that comes to about $120,000 today. But even after the recent downturn it would sell for at least three times that amount now. In Orange County, housing really has been a pretty profitable business in the postwar era.
  • We have a very human tendency to overreact to startling news. You hear a story about a neighbor who bought a house and sold it five years later for a 50% profit and you remember it. Newsweek runs a story about the Southern California housing bubble of the 70s that jump started the Proposition 13 tax revolt and you remember it. Your property tax bill keeps showing a higher assessed value every year and you remember it. You hear about one square mile of Tokyo being more valuable than the entire state of Oregon and you remember it.

    But what you don't remember is that another neighbor lost money on his house (he didn't crow about it, after all) or that the Southern California housing market cooled off in the 80s (and the Detroit market had been falling the entire time) or that your assessed value is basically just tracking inflation (the math is too hard) or that the Tokyo story was bogus to begin with (and the Tokyo property bubble collapsed shortly after that anyway). And you never even notice the occasional story that provides the big picture in the first place — partly because they don't often get written and partly because they're not very interesting even when they are. So we end up retaining lots of bits and pieces suggesting that housing prices always rise and downplaying or not noticing the news that tells us otherwise.

Add your own theories in comments. This really does seem like a belief that simply won't die regardless of how much evidence there is to the contrary, and that's something that's probably distorted the housing market every bit as much as all the government intervention in the world.

Should the Feds Exit the Housing Market?

| Tue Aug. 24, 2010 12:53 PM EDT

Speaking of housing, Dean Baker is unhappy with the likely resolution to the collapse of Fannie Mae and Freddie Mac, and I think he makes a pretty good point. Fannie and Freddie are in the business of buying 30-year fixed rate loans from the banks that originate them, and if it simply did that and nothing more as a fully public institution it would probably be OK. They'd be taking on interest rate risk, but it would be the mirror image of the interest rate risk on the broader federal debt. Overall, the federal government would be pretty well hedged on this bet.

Alternatively, we can simply get rid of them entirely:

We know that the private sector can and does issue mortgages without government support. This is demonstrated by the existence of the jumbo mortgage market. Jumbo mortgages exceed the size limits set for a loan to be purchased by Fannie and Freddie. Even in the current environment the spread is only 90 basis points (9/10ths of a percentage point) compared with the Fannie/Freddie backed conformable mortgages, and it is typically much less.

Dean believes — and I agree — that we should choose one of these alternatives. Either Fannie and Freddie are public institutions guaranteed by the federal government, with the risk of running them fully transparent, or else the secondary mortgage market is entirely private and everyone knows there's no government guarantee behind it. But that's not where the conversation is going:

Instead, the consensus seems to be to design some hybrid model in which private profit-making banks will decide which mortgages will get a government guarantee. We are assured by the housing finance wizards that the government regulators will effectively police the private banks. The basic issue is the problem of moral hazard: Private banks have incentive to issue the guarantee to the worst junk around, since they can will make money on the process and the risk goes to the government. It is difficult to believe that anyone who has lived through the crisis of the last three years would want to re-establish this sort of situation.

Status quo bias is hard to overcome, unfortunately. My own tentative take is that Fannie and Freddie should simply be phased out over a period of years and allowed to die. Regulated private markets can probably sustain housing just fine these days, and I'm just not sure we need a huge federal bureaucracy to provide homebuyers with a slight interest rate bonus.

More generally, I think we provide home buyers with too many bennies already, and we'd probably all be better off if we allowed the market to set prices here without the distorting influence of federal supports. I'm fine with the government getting involved when there's a clear market failure (as there was when Fannie Mae was first set up) or if there's some need to make a benefit universal (as with Social Security or Medicare). But I don't think either of those applies to the contemporary housing market, so why not just get the feds out of the mortgage business altogether? I'm open to good arguments to the contrary, but I haven't really heard any yet.

Housing Market Update

| Tue Aug. 24, 2010 11:37 AM EDT

Hey, how about that first-time homebuyer tax credit? It was originally scheduled to expire at the end of 2009, and home sales spiked as people rushed to get their loans approved in time. Then the program was extended, and after a brief lull sales rose again, this time spiking in June as people rushed to get their loans approved before the program went away for good. So what happened in July? The chart below, modified slightly from one created by Daniel Indiviglio, shows the results:

That's a stunning 27% decline in July. There's no telling whether that's a short-term effect or if home sales will stay low for a while. The most optimistic appraisal is that it's a short-term impact because of the intoxicating effect the tax credit seems to have had on people. Megan McArdle, who just bought a house, reports that she and her husband "were astonished by the effect that the tax credit seemed to be having on people. Prices were climbing rapidly, as people got into bidding wars that raised the price by more than 8%. Inventory vanished rapidly; the average days on the market for a new property that wasn't ridiculously overpriced, half-finished, or occupied by tenants who wouldn't let the place be shown, was 1-4 days."

That's been my sense too, which is remarkable since $8,000 shouldn't be that big an incentive to buy something as expensive as a house. But then again, maybe that's the Southern Californian in me talking. $8,000 isn't a huge incentive if you're buying a $500,000 house in Los Angeles or Orange County, but it's probably a much bigger deal if you're buying a $150,000 house in Little Rock.

In any case, we better hope this is just a short-term effect from housing sales getting artificially pulled in a month or two to take advantage of the tax credit. If it's not — if the tax credit really was propping up the market — then we're in for yet more economic pain. Slow housing sales drive lower house prices, and lower house prices have an outsize effect on consumer spending and on economic growth in general. Buckle your seat belts.