Kevin Drum

Inflationary Demons

| Wed Mar. 17, 2010 1:37 PM EDT

Matt Yglesias notes that Michael Kinsley has a strange column in the Atlantic this month ("My Inflation Nightmare") warning about the possibility of runaway inflation in our future. I read it a few days ago and shrugged. But it stuck with me anyway. Here's Matt:

What’s strange about the column is that I don’t know how I could possibly refute it. Kinsley freely acknowledges that “virtually every leading economist across the political spectrum” disagrees with him, and he doesn’t dispute the details of any of their analyses. He also acknowledges that while it would be possible for him to make investment decisions that reflect his belief in a coming period of inflation, he’s not doing it “because I lack the courage of my convictions.”

....I note that not only does Kinsley’s column explicitly discuss the lack of evidence for Kinsley’s thesis, but it also details the theoretical error Kinsley is making—thinking too moralistically about the economy. He says “on economic matters, I’m a puritan.”....In his view, a greater punishment must be over the horizon for the sake of the moral order. And since recession is, by his lights, not enough the only other economic calamity on the menu is inflation. And so, he deduces, we must be heading for inflation, even though he himself recognizes the reasoning as so specious that he won’t use it as the basis for investment decisions.

I'm going to defend Kinsley a bit. One reason is that although he freely talks about the inner demons that prompted his heresy, he does, in fact, also offer up a concrete reason for his fears: "My specific concern is nothing original: it’s just the national debt....We talk now of trillions, not yesterday’s hundreds of billions." This is not a completely nonsensical concern, even if it would be better expressed as a percent of GDP rather than in raw dollars. What's more, if Kinsley had wanted to write something a little more sophisticated, he could have spent some time on the Fed's likely problems unwinding its trillion dollar balance sheet over the coming years, something that has at least the potential for sparking inflationary pressures if it isn't timed pretty delicately.

But that's not the real reason for defending Kinsley. The real reason is this: I sort of agree with him. Is it because we were both around for the 70s and remember what happened then? Maybe, though Paul Krugman and Brad DeLong were around then too and they're not worried. And intellectually, like Kinsley, I agree with them: inflation just doesn't seem like a big issue right now. But what about a few years from now? It really does look as if our political system is going to find it next to impossible to control our long-term federal deficit, and at the same time the dollar is going to have to come down in value eventually. Both of these things, along with the Fed's operations, pose inflationary potential. And I have a fairly healthy respect for the proposition that if the Fed loses its reputation as an inflationary hawk, it's much harder to get back than you might think.

So here's the question: if all the people you respect say that inflation isn't a big issue; if all the market evidence points toward moderate inflationary expectations; and if your fears of inflation are almost certainly grounded in demons from your youth — if all that's true, but you still feel the fear anyway, what should you do? Nothing? Or should you write about it, being honest along the way about what's driving you?

I'd vote for writing about it, for one simple reason: if smart people are still worried about this even though the experts say there's nothing to worry about, the experts need to do a better job of telling us why we're nuts. Brad DeLong, I invite you to write a Kevin Drum Smackdown Watch about long-term inflationary fears. Pretend you're writing a response to a respected liberal economist, since that's more likely to produce a serious scholarly survey. Tell me why I'm crazy.

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Half a Parliament is Worse Than None

| Wed Mar. 17, 2010 12:47 PM EDT

The New York Times reports today on just how deliberate the Republican strategy of obstructionism has been:

Before the health care fight, before the economic stimulus package, before President Obama even took office, Senator Mitch McConnell, the Republican minority leader, had a strategy for his party: use his extensive knowledge of Senate procedure to slow things down, take advantage of the difficulties Democrats would have in governing and deny Democrats any Republican support on big legislation.

....For more than a year, he pleaded and cajoled to keep his caucus in line. He deployed poll data. He warned against the lure of the short-term attention to be gained by going bipartisan, and linked Republican gains in November to showing voters they could hold the line against big government.

Jon Chait comments:

Let me be clear about something: I am not blaming McConnell1....Electoral politics is a zero-sum competition. Most democracies have systems where the opposing parties work in open conflict to each other, and, contra David Brooks, this does not result in Hutu vs. Tutsi slaughter.

Yes, there was a long period in American politics where racial cleavages created a situation where the parties had little internal ideological cohesion, and as a result Washington developed a series of cultural norms discouraging the practice of cohesive parties maximizing their electoral self-interest. Over time, though, such social norms will never hold up. Ultimately, the parties are going to maximize their partisan self-interest as allowed under the rules. If you don't like the result, you need to change the rules.

The next time Democrats find themselves in the minority, there's going to be a lot of establishment pressure not to follow the McConnell model. Be bipartisan. Don't obstruct. That would be terrible advice. I hope that Democrats would remember 2009-2010 well enough to favor a reform of the Senate to disallow holds, the filibuster, and other counter-majoritarian tactics. But if they can't succeed in changing the rules, they should follow McConnell's example, because he has shown the way to do it.

Italics mine. Changing the rules is the key. It's true that most democracies "have systems where the opposing parties work in open conflict to each other," but that's because they also have parliamentary rules that make it possible for a majority party to govern. We don't. Over the past couple of decades we've slowly morphed into a country with a de facto parliamentary legislature but without the parliamentary machinery that makes it work. The irony, as usual, is rich: conservatives, who normally rail against liberal attraction to European models of governance, have apparently decided that one European tradition they like is parliamentary-style party cohesion. But if that's what they want, they need to support parliamentary style rules as well. A strong country can't have one without the other.

1I'd actually put this differently. I don't blame McConnell for obstructing healthcare reform. It's a big bill and it was always going to inspire intense opposition. And minority parties should have some ability to obstruct and delay huge bills like this. However, I do blame him for obstructing everything. It's one thing to treat big legislation as a partisan affair — it is! — but it's another to gum up the works just for the sake of gumming up the works, as the GOP has done on bills and appointments that ended up getting virtually unanimous support on their final vote. Enough's enough.

Our Fabulous Bipartisan Senate

| Wed Mar. 17, 2010 12:14 PM EDT

Last month a jobs bill came up for a cloture vote in the Senate. Five Republicans voted for it. Today it came up for a final vote. Eleven Republicans voted for it. Chuck Schumer hailed the result: "Today is really a turning point. And there are two words that symbolize it — jobs and bipartisan."

Hmmm. Doesn't sound like a turning point to me. It sounds like lots of Republicans are still willing to posture and obstruct against anything and everything Democrats try to do, even bills that they actually approve of and want to be recorded favoring. The only difference is that this time there were six Republicans in that category instead of 20 or 30. Not exactly a new era in comity.

What's the Next Step After "Insane"?

| Wed Mar. 17, 2010 11:56 AM EDT

I might be getting myself in trouble by blogging about something where I don't know the backstory, but check out the latest from California:

Gov. Arnold Schwarzenegger, taking aim at what remained of a deficit-cutting package drafted by Democrats, said Tuesday he planned to veto $1.1 billion in projected savings realized largely through cuts to public transit. Democratic lawmakers had approved the measure as part of a package they said would have addressed $4 billion of California's estimated $20-billion deficit.

....Republican lawmakers, whom majority Democrats were able largely to bypass in writing their budget plan because it did not raise taxes, cheered the governor's planned vetoes.

....Schwarzenegger said he would reject the lawmakers' gasoline tax plan because it differed from the proposal he first made in January. Schwarzenegger's plan would have lowered gas taxes by 5 cents per gallon. The plan Democrats pushed through the Legislature would keep gas taxes at their current level.

This is insane. In order to tackle a massive deficit, Democrats were willing to cut a billion dollars out of transit funding — a traditional Democratic priority — and Schwarzenegger vetoes it because they didn't also include a tax cut. As a way of tackling a massive deficit. And the California Republican caucus cheers.

I can't even think of anything snarky to say. It's like living in a Lewis Carroll novel, except with real people. Assuming you still consider California Republicans to be real people, that is.

Online Advertising Watch

| Wed Mar. 17, 2010 11:25 AM EDT

After sitting through an SXSW panel about magazines on the iPad, Felix Salmon has a brainstorm about online advertising:

After the panel ended, I got to talking to one attendee about bridal mags, and it struck me that the bridal category could be one of the first to be truly revolutionized by the iPad. After all, bridal mags are quite unashamedly bought for the advertising content, rather than any supposedly independent editorial: the idea is that brides-to-be will flick through them, looking carefully at pretty much every ad, searching for that idea which inspires them to spend thousands of dollars on something for their wedding.

On an iPad, that experience can become much more immersive and interactive: brides could spend days if not weeks flicking through the offerings of all the different advertisers, adding various products and ideas to their virtual scrapbooks, finding local retailers for anything they're interested in, and firing off carefully-curated scrapbooks, in PDF form, to their wedding planners, parents, bridesmaids — even occasionally the fiancé too. I don't know how much inclusion in that kind of an app would be worth to an advertiser, especially one who jumped in and created deep wells of content rather than simply repurposing their print ads. But clearly there's an opportunity here for brands to really connect with readers in a new and very exciting way.

Maybe! But I wonder. If the big draw of these magazines really is advertising, won't some bright soul just start up a bridal advertising aggregation site that skips all that annoying editorial stuff in the first place? It would be nothing but a great browsing experience for ads, and since it could be run by a staff of one, the cost to advertisers would be tiny. If this took off, it could be the death of bridal magazines, not their rebirth.

Unless that editorial content turns out to be more important than we think. Upcoming brides, what say you?

Why is Obama Ignoring the Lehman Scandal?

| Tue Mar. 16, 2010 11:06 PM EDT

Mike Konczal thinks the Lehman Brothers accounting scandal is being wasted:

One thing that I’m finding surprising is that the President and the Treasury Secretary aren’t out there beating the hell out of this story. For financial reformers, this report should be like a “Get 2 Free Financial Reforms” monopoly-style card falling out of the sky. Why isn’t the administration thumping the hell out of this story?

I remember when Anthem Blue Cross Blue Shield decided to raise rates 39% in the middle of a recession and Obama immediately got on the point that this is exactly why we need comprehensive health care reform. I remember thinking at the time “If a giant scandal blows up in the financial sector, I bet he’ll go equally as hard as to why this proves we need comprehensive financial reform.”

Oddly, that isn’t happening. Senator Ted Kaufman is giving a speech today about how this fraud calls for tougher regulation, which is fantastic. Why isn’t the administration?

Mike suggests that part of the answer is that Tim Geithner is compromised by his past presidency of the New York Fed. After all, he can hardly scream blue murder about Lehman's bookkeeping outrages when he was the guy who was supposed to be overseeing their bookkeeping in the first place.

There's probably something to this. Sellout Obama apologist that I am, though, I think there's another, less sinister possibility: the White House wants all its ammunition focused on healthcare right now. They'll spare a few words on other topics here and there, but basically this is not the week for anything to push healthcare reform off the front page. If it passes the House this weekend, however, financial reform probably moves to the top of the list when Obama's overseas trip is over.

At least, I hope so.

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Our Apathetic Investor Class

| Tue Mar. 16, 2010 3:11 PM EDT

Atrios today:

I think the reaction to the Lehman scandal (not particularly strong generally) is very telling. The investor class should, much more than me, care that a major company was engaged in accounting fraud and should worry, much more than me, that other companies are doing the same. That they aren't says a lot about how the game really works.

It's true. When it comes to the general public, the lack of interest is pretty understandable: Lehman's collapse is old news, the whole "Repo 105" scam is hard to explain, and everyone already assumes that Wall Street bankers are a bunch of crooks anyway.

But the investor class is a different story. They understand Lehman's accounting trick perfectly well, and even the ones that never invested with Lehman know that this same kind of thing can bite them in the ass if someone else does it.

So why don't they care more? It's obvious why banks don't want more banking regulation — who wants to be regulated, after all? — but there are lots of wealthy investors out there who ought to be screaming for it. But they don't seem to be. Part of this might be a result of the rentier class solidarity I mentioned earlier today, but it's hard not to think that all the government bailouts and Fed programs are part of it too. Basically, rich investors just didn't lose enough. When the banks got bailed out, a lot of them did too. So they aren't really all that angry about what happened. And anyway, they might want to use a similar scam themselves someday. Memories are short and Congress is powerless, after all. It's every mogul for himself.

China's Empty Threat

| Tue Mar. 16, 2010 2:13 PM EDT

What should we do about China? The basic problem is simple: China runs a huge trade surplus — exporting way more stuff to the rest of the world than they import back — and that means the rest of the world runs a huge trade deficit with them. That includes the United States. And for us, the problem is even worse because we also run a big trade deficit with OPEC countries in order to satisfy our boundless thirst for oil. What to do?

In the case of oil, there's not much to do except use less of the stuff. In the case of China, however, our trade deficit is largely artificial: it only exists because Chinese goods are so cheap, and they're only as cheap as they are because China manipulates the value of its currency down, which in turn causes the dollar to be overvalued. Dean Baker:

This is of course unsustainable. The only way that this deficit can be corrected is by reducing the value of the dollar....This decision would mean that the United States could finally get its trade deficit down to a manageable level. The trade deficit has been the leading imbalance in the U.S. economy over the last decade. The large trade deficit required very low private savings and/or large budget deficits. This is an accounting identity. If the country is a net borrower from abroad (this is what a trade deficit means), then it must have low national savings. There is no way around this story.

In reality, China is pointing a water gun at our heads. We should beg them to become unhappy with our fiscal and monetary policies and stop investing in Treasury bonds. The improvement in the trade deficit that will result from the fall in the dollar will create ten times as many jobs as any "jobs bill" that President Obama can possibly get through Congress.

Paul Krugman agrees, but takes a different approach to explaining the problem. An undervalued renminbi is a symptom of the real problem, which is that China is buying too many U.S. treasury bills:

Although people don’t always think of it this way, what the Chinese government is doing here is engaging in massive capital export — artificially creating a huge deficit in China’s capital account. It’s able to do this in part because capital controls inhibit offsetting private capital inflows; but the key point is that China has a de facto policy of forcing capital flows out of the country....By creating an artificial capital account deficit, China is, as a matter of arithmetic necessity, creating an artificial current account surplus. And by doing that, it is exporting savings to the rest of the world.

....Notice that I didn’t mention the value of the renminbi at all in this account. It’s there implicitly: a weak renminbi is the mechanism through which China’s capital-export policy gets translated into physical exports of goods. But you want to keep your eye on the ball: it’s the artificial capital exports that are the driving force here.

Both posts are worth reading. Krugman and Baker both agree that China's threat to stop buying U.S. treasuries is not only hollow, it's something we should actively favor. If they started dumping their U.S. assets, China would lose money on the deal and the dollar would fall in value, which would help correct our trade deficit. What's not to like?

Collective Action in the Boardroom

| Tue Mar. 16, 2010 1:36 PM EDT

Over at his new home at the Harvard Business Review, Justin Fox writes about the relative silence of nonbanking corporate executives on financial regulatory reform:

It's nonfinancial businesses, not financial firms, that create lasting wealth. This is not a moral distinction. It's just the way the world works. The finance sector enables wealth creation, but the innovations that make the economy grow over time come from elsewhere. The financial industry really ought to be seen, and treated, as a servant of the real economy. It's when finance takes the lead and begins to drive economic activity, as it did during the Internet stock bubble of the late 1990s and the mortgage lending craziness of 2003-2007, that we get into big trouble. And even when it's not blowing bubbles, the financial sector can be too successful for the rest of the economy's good.

....So while the rest of the business world needs a financial sector that's healthy enough to extend credit, it also ought to favor a regulatory structure that keeps the financiers from getting too big for their britches. Explicit restrictions on pay tend not to work, so the real goal should be to rein in financial-sector profits, especially the phantom profits that come from inflating speculative bubbles. That's where leverage limits come in, and restrictions (like the "Volcker rule" that's kinda/sorta included in the Dodd bill) that try to wall off riskier financial activities from those deemed so essential that they're backed up by government guarantees.

Justin argues that this corporate silence is basically an agency problem: Wall Street frothiness is actually good for top CEO pay even if it's bad for business as a whole. True. But I'd add another thing: business executives tend to stick together. Partly this is ideological — they really are a conservative bunch and they really do believe that excessive regulation is bad — and partly it's just plain logrolling. An airline executive might believe that financial sector reform would benefit the airline industry, but he also knows that someday he's going to want help fighting some kind of government regulation of the airline industry. The best way to ensure this is to stick together and oppose government regulation no matter which sector it's aimed at.

You see the same thing at work in healthcare. Most big corporations would benefit from healthcare reform — in fact, they'd benefit from a root-and-branch government takeover of healthcare — but ideologically they don't like the idea, and in any case they don't want to abandon their fellows in the healthcare industry. This kind of tribalism broke down a bit this time around, but not a lot. For the most part, corporate executives either stayed on the sidelines or actively opposed healthcare reform. In the corporate world, it's all for one and one for all.

Deem and Pass Revisited

| Tue Mar. 16, 2010 1:05 PM EDT

I've been mulling over the "deem and pass" strategy a bit more since I wrote about it earlier this morning, and I think it's worth saying again what a bad idea this is. Not because it's unconstitutional or unprecedented, but just because the political optics are so horrible. Here's my best crack at a graphic demonstration. First, take a look at a likely Republican attack ad this fall:

Cue ominous music. Liberal Joe Smith voted for a bloated, big-government takeover of healthcare that spends trillions, balloons the national debt, and puts a federal bureaucrat between you and your doctor [etc.]

And here's the version if the bill moves through the House via deem and pass:

Cue ominous music. Liberal Joe Smith voted for a bloated, big-government takeover of healthcare that spends trillions, balloons the national debt, and puts a federal bureaucrat between you and your doctor....Cue even more ominous music....and then he tried to pull the wool over your eyes by pretending he didn't really vote for it at all. Joe Smith: not just a big-spending liberal, a contemptible, sneaky [add other words from the Newt Gingrich lexicon here] big-spending liberal.

I know that House Democrats aren't much interested in sniping like this from the peanut gallery, but they really need to man up on healthcare. Memories are short, and deem-and-pass probably won't matter a lot by November. But it will matter a bit, and that bit will be entirely negative. Best to bite the bullet and cast your vote proudly.