Kevin Drum

Goldman and the Economy

| Thu Oct. 15, 2009 10:49 AM EDT

Do rising profits on Wall Street mean that the economy is finally starting to pick up?  Not quite.  Here's how Goldman Sachs' soaring third-quarter revenue breaks down:

Goldman's business from fixed income, currency and commodities trading again bolstered its bottom line, with revenue more than tripling. Revenue from its principal investments soared 55% from second quarter after losing money a year earlier.

Investment-banking revenue fell 31% and financial advisory revenue dropped 47%.

In other words, even more than usual, Goldman is a hedge fund with a smallish investment bank tacked onto the side.  They made better bets than the other guys, but the kind of business that would indicate a recovering economy is still very much in the tank.

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Burn it Down and Salt the Earth

| Wed Oct. 14, 2009 2:20 PM EDT

The Wall Street Journal reports that the good times are rolling again:

Major U.S. banks and securities firms are on pace to pay their employees about $140 billion this year — a record high that shows compensation is rebounding despite regulatory scrutiny of Wall Street's pay culture.

....Total compensation and benefits at the publicly traded firms analyzed by the Journal are on track to increase 20% from last year's $117 billion — and to top 2007's $130 billion payout. This year, employees at the companies will earn an estimated $143,400 on average, up almost $2,000 from 2007 levels.

I sort of feel like I've run out of things to say about this.  There's an insanity here that's almost beyond analysis.  Wall Street can spark an economic slowdown that misses destroying the planet and causing a second Great Depression only by a hair's breadth — said hair being an 11th hour emergency infusion of trillions of taxpayer dollars — and then turn around and use those trillions to return to bubble levels of profitability within a year.  And they can do it even though the rest of the economy is still suffering through the worst recession since World War II.  It's mind boggling.

Is there any silver lining here?  Probably not, but I'll try: If Wall Street can shrug off the worst recession of our lifetimes as if it's a minor fender bender and get the party rolling all over again in less than 12 months, it means the next bubble is already in the works and its collapse will be every bit as bad as this one.  That in turn means it will almost certainly happen while today's politicians are still in office.  So maybe news like this will finally spur lawmakers to realize once and for all that the financial industry needs to be cut down to size.  Half measures won't do it.  Self-regulation won't do it.  Compensation limits won't do it.  Byzantine, watered-down rules won't do it.  Something like a Morgenthau Plan for Wall Street is the only thing that has even half a chance of working.

Will Congress finally get this?  Probably not.  The financial lobby is just too strong.  But we can hope.

Karzai Revisited

| Wed Oct. 14, 2009 1:06 PM EDT

Matt Yglesias pushes back today on my contention that a counterinsurgency effort in Afghanistan is probably doomed unless the national government is largely accepted as legitimate by the Afghan public.  He's not in favor of a big COIN effort, but:

At the same time, I think [] critics have developed a tendency to drastically understate the extent to which COIN could “work” in Afghanistan.

....I went and looked up the most corrupt countries on earth at Transparency International and [...] Afghanistan, as you can see, is pretty corrupt. That said, it’s not really far out of line with local norms. Sundry other central Asian states join it at the bottom of the barrel. And while it’s true that some of the most corrupt countries are anarchic failed states, the examples of Myanmar and Turkmenistan clearly indicate that establishing effective control over your territory doesn’t at all require you to develop good governance or be respected by the people.

Well, sure, but I don't think anyone is arguing that corrupt states can't be effective.  The difference, though, is that a foreign superpower isn't fighting a war in any of those other places.  That's the issue: not whether corrupt states can "work," but whether a foreign army can successfully fight an insurgency when it's allied with a government that has little local support.  In fact, the success of the surge in Iraq, which Matt mentions, is precisely due to the fact that, corrupt or not, Nouri al-Maliki's government had built up a shaky but workable coalition among Shiites, Kurds, and Sunnis.  It wasn't exactly a shining beacon of good governance, but a combination of bribery, al-Qaeda overreach, sectarian cleansing, and a ceasefire from the biggest opposition group opened up just enough space for a counterinsurgency operation to work.  Without at least that minimal level of support for the Maliki government, the surge almost certainly would have failed.

In the modern era, as far as I know, the track record of success for counterinsurgencies led by foreign powers fighting alongside unpopular local governments is approximately zero.  In fact, I'm pretty sure it's exactly zero.  So the question isn't whether Karzai is corrupt — of course he is — the question is how wide his support is.  That's actually a bit of a tricky question, especially in the fractious tribal politics of Afghanistan, but it's the question to ask.  Corruption is just a symptom, not the core problem.

To Jab Or Not To Jab?

| Wed Oct. 14, 2009 12:20 PM EDT

I think Shannon Brownlee is on a crusade to convince me never to see a doctor again.  And she's doing a good job!  Today, she has a pretty interesting article in the Atlantic questioning whether flu vaccines actually have any effect at all:

Study after study has found that people who get a flu shot in the fall are about half as likely to die that winter — from any cause — as people who do not....Yet in the view of several vaccine skeptics, this claim is suspicious on its face.....When researchers from the National Institute of Allergy and Infectious Diseases included all deaths from illnesses that flu aggravates, like lung disease or chronic heart failure, they found that flu accounts for, at most, 10 percent of winter deaths among the elderly. So how could flu vaccine possibly reduce total deaths by half? Tom Jefferson, a physician based in Rome and the head of the Vaccines Field at the Cochrane Collaboration, a highly respected international network of researchers who appraise medical evidence, says: “For a vaccine to reduce mortality by 50 percent and up to 90 percent in some studies means it has to prevent deaths not just from influenza, but also from falls, fires, heart disease, strokes, and car accidents. That’s not a vaccine, that’s a miracle.”

....The history of flu vaccination suggests other reasons to doubt claims that it dramatically reduces mortality. In 2004, for example, vaccine production fell behind, causing a 40 percent drop in immunization rates. Yet mortality did not rise. In addition, vaccine “mismatches” occurred in 1968 and 1997: in both years, the vaccine that had been produced in the summer protected against one set of viruses, but come winter, a different set was circulating. In effect, nobody was vaccinated. Yet death rates from all causes, including flu and the various illnesses it can exacerbate, did not budge.

So why do people who are vaccinated get less sick?  Skeptics say it's because people who get the vaccine are healthier in the first place.  In fact, it's called the "healthy user effect" (catchy!), and a researcher named Lisa Jackson did a study a few years ago showing that people who got vaccinated during flu season were also much less likely to die even outside flu season.  They really do seem to be a healthier group in the first place.

So what to do?  I've never gotten a flu vaccine before, and to the best of my knowledge I've never had the flu either.  I was thinking of finally caving in this year and getting one, but now I'm not so sure.  I don't suppose it does any harm, but I don't generally accept that as a good reason for doing anything else, so I'm not sure why I'd find it persuasive in the case of flu vaccines either.

In any case, apparently there's wide agreement even among skeptics that the vaccine is effective in children, and that immunizing healthcare workers and some others is a good idea in order to prevent the spread of flu.  For the rest of us, I guess it depends on who you believe.  Either way, though, Sumit Majumdar, a physician and researcher at the University of Alberta, offers this advice: “There’s no worse place to go than the hospital during flu season.  But we don’t tell people this.”  Now he has.

UPDATE: After reading through the comments, I realize that my writing here was sloppy.  Apologies.  So just to be clear: Brownlee's article questions whether the flu vaccine reduces flu deaths, not whether it works at all.  If you want to reduce your chance of getting the flu and feeling crappy for a couple of weeks, get the shot.  It might or might not have much effect on your risk of dying, but it does lower your risk of getting sick.

Chutzpah Watch

| Wed Oct. 14, 2009 11:27 AM EDT

Via Dan Drezner, I see that the Saudis have an intriguing proposal:

Saudi Arabia is trying to enlist other oil-producing countries to support a provocative idea: if wealthy countries reduce their oil consumption to combat global warming, they should pay compensation to oil producers.

That's obviously not too likely to happen, but someone help me out here.  My recollection is that one of the roadblocks to raising gasoline taxes back in the Carter/Reagan era was Saudi opposition.  They figured it would reduce oil consumption and therefore reduce both oil prices and oil revenue.  So this is basically the same position they've held for 30 years or so.

Is this true?  My memory is vague on this.  But I could swear that this is more of the same old same old, just updated for the 21st century.

The Karzai Problem

| Wed Oct. 14, 2009 1:49 AM EDT

I'm not usually especially smitten with Tom Friedman's musings on war and nation building, but he's on the right page here:

I understand the huge stakes in stabilizing Afghanistan and Pakistan. Gen. Stanley McChrystal, our top commander there who is asking for thousands more troops, is not wrong when he says a lot of bad things would flow from losing Afghanistan to the Taliban. But I keep asking myself: How do we succeed with such a tainted government as our partner?

....I am not sure Washington fully understands just how much the Taliban-led insurgency is increasingly an insurrection against the behavior of the Karzai government — not against the religion or civilization of its international partners. And too many Afghan people now blame us for installing and maintaining this government.

....We have been way too polite, and too worried about looking like a colonial power, in dealing with Karzai. I would not add a single soldier there before this guy, if he does win the presidency, takes visible steps to clean up his government in ways that would be respected by the Afghan people.

If Karzai says no, then there is only one answer: “You’re on your own, pal. Have a nice life with the Taliban. We can’t and will not put more American blood and treasure behind a government that behaves like a Mafia family. If you don’t think we will leave — watch this.” (Cue the helicopters.)

If Obama and McChrystal can come up with a truly plausible plan for stabilizing Afghanistan, I think I could gulp hard and support it.  But the absolute bare minimum requirement for such a plan is a national government that's largely supported by the population.  Like Friedman says, it doesn't have to be Switzerland, but it has to be good enough.  Without that, Afghanistan really is Vietnam 2.0.

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Make Mine Unleaded

| Tue Oct. 13, 2009 6:04 PM EDT

Speaking of books, here's a passage from Mark Kleiman's When Brute Force Fails that I've been meaning to blog for a while:

Given the decrease in lead exposure among children since the 1980s and the estimated effects of lead on crime, reduced lead exposure could easily explain a very large proportion — certainly more than half — of the crime decrease of the 1994-2004 period.  A careful statistical study relating local changes in lead exposure to local crime rates estimates the fraction of the crime decline due to lead reduction as greater than 90%.

Mark's book is focused on a particular strategy for reducing crime, so this topic gets only a couple of pages in a chapter on miscellaneous methods of crime control.  But surely it deserves more?1  If it's really true that lead reduction was responsible for most of the post-1990 decrease in crime, and if changing demographics played a role as well, doesn't that mean that everything else probably had almost no effect at all?  Broken windows, open-air drug markets, three-strikes laws, CompStat, bulging prison populations, etc. etc. — all of them together couldn't have had more than a minuscule impact if lead and demographics explain almost everything.

I don't really have a lot to say about this, actually.  Mainly I just wanted to highlight this passage because it's pretty interesting.  It seems a little discouraging, though, if it's really true that all our best efforts to reduce crime over the past couple of decades have had a collective impact only barely different from zero.

On the other hand, it certainly means that federal spending to eliminate lead from houses ought to be a no-brainer.  It would cost about $30 billion, but as Mark says, it would probably save us at least $30 billion per year in reduced crime.  The fact that Congress didn't allocate this money long ago makes you wonder if maybe the Capitol building could use a lead abatement program of its own.2

1Of course it deserves more.  So here's a bit more.

2The stimulus bill included $100 million for lead abatement, which is fine.  But considering just how effective lead reduction is on all sorts of policy levels, it's sort of a crime that they couldn't manage to dig up a little more than that out of an $800 billion total.

Taxing and Spending

| Tue Oct. 13, 2009 4:49 PM EDT

Conservative apostate Bruce Bartlett explains why he became an apostate:

During the George W. Bush years [supply side economics] became distorted into something that is, frankly, nuts — the ideas that there is no economic problem that cannot be cured with more and bigger tax cuts, that all tax cuts are equally beneficial, and that all tax cuts raise revenue....As a consequence, we now have a tax code riddled with tax credits and other tax schemes of dubious merit, expiring provisions that never expire, and an income tax that fully exempts almost on half of tax filers from paying even a penny to support the general operations of the federal government.

Indeed, by destroying the balanced budget constraint, starve-the-beast theory actually opened the flood gates of spending. As I explained in a recent column, a key reason why deficits restrained spending in the past is because they led to politically unpopular tax increases. But if, as Republicans now maintain, taxes must never be increased at any time for any reason then there is never any political cost to raising spending and cutting taxes at the same time, as the Bush 43 administration and a Republican Congress did year after year.

The supply-siders are to a large extent responsible for this mess, myself included. We opened Pandora's Box when we got the Republican Party to abandon the balanced budget as its signature economic policy and adopt tax cuts as its raison d'être. In particular, the idea that tax cuts will "starve the beast" and automatically shrink the size of government is extremely pernicious.

In most countries, there's sort of a natural cycle to politics.  For a while, voters elect liberals who promise lots of goodies but also raise taxes.  People like the goodies, but eventually get tired of the taxes, and throw the bums out.  Conservatives then take office promising to cut taxes and restrain spending growth.  People like the low taxes, but eventually they get itchy for more goodies so they throw the bums out.  Rinse and repeat.

Whether deliberately or not, Reagan and the supply siders killed this cycle.  They decided they could stay in office forever by cutting taxes and increasing spending, thus pleasing everyone.  It even worked for a while.  In the ensuing 28 years Republicans held the presidency most of the time and controlled Congress for much of the rest.

But eventually the piper has to be paid.  We still haven't quite come to grips with that, but we can't avoid it too much longer.  Either we (a) slash government spending in ways that the public quite plainly isn't willing to do, (b) raise taxes in ways that the public isn't yet willing to do, or (c) allow the rest of the world to do it for us.  I used to be more optimistic about the possibility of avoiding (c), but lately I've begun to wonder.  I've read more than a few pronouncements over the past couple of years about the death of the tax revolt — I think I've even written a few myself — but I have to admit that it's not really looking all that dead these days.  Not here in California, anyway.

On the other hand, Italy hasn't collapsed yet, and we're still several years away from being as bad off as they are, so we've got time.  Maybe we'll come to our senses sometime in Obama's second term.  Maybe.

Snowe Votes Yes

| Tue Oct. 13, 2009 1:51 PM EDT

Bizarrely enough, the most important person in the galaxy right now appears to be Sen. Olympia Snowe of Maine.  And apparently Snowe has come through, announcing that she'll vote for healthcare reform.  "When history calls, history calls," she said.

And with that, my forecast for healthcare reform, which has already increased from 60% to 70% to 75%, now goes to about 90%.  There are still plenty of details to fight over, but Snowe's decision makes success of some kind far more likely than not.

Shut Up!

| Tue Oct. 13, 2009 1:33 PM EDT

Disagreements about healthcare policy or cap-and-trade emission auctioning are all well and good, but if we're going to yell at each other about something, shouldn't we yell about TV ads that yell back at us?  Over at his blog, Berin Szoka provides a libertarian laundry list of reasons why the government shouldn't enact rules that regulate the audio volume of TV commercials.  Here's one of them:

I understand that most users probably do wish that commercials probably weren’t so loud. But, this very fact, combined with the ease with which users can now skip all commercials (36% of U.S. homes have a DVR), creates a pretty powerful incentive for the TV industry to self-regulate the volume level of advertising. “Noisy or strident” advertising is just another example of the “tragedy of the commons” at work: Absent any rules, every individual advertiser has an incentive to jack up the volume in order to attract attention, and doing so will probably work up to a certain point of increased annoyance by the user. But collectively, such ads hurt all advertisers because they increase ad blindness, ad deafness, and/or outright commercial skipping.

The same dynamic plays out on the Internet, where flashing, blinking, bouncing, strobing dancing ads really drive users nuts and make them turn to tools like AdBlock Plus and Flashblock — which is why ad networks like Google have policies that implement their own “time, place and manner” rules out of pure self-interest. Such rules are useful and valuable. They benefit advertisers, consumers and the ad network alike, because there exists a basic harmony of interests between them: annoying ads don’t really benefit anyone in the long-term.  Do we really want government bureaucrats making these decisions instead?

Yes.  Yes I do.  You see, blaring TV commercials have been an obvious and fixable problem for several decades and no "basic harmony of interests" has yet manifested itself.1  This suggests to me that it never will unless the industry is pressured into doing it.  Plus there's this: the industry has been promising to enact voluntary standards off and on for years, but oddly enough, they never seem to make any progress unless Congress starts making threatening noises about doing it for them.  Since I expect this state of affairs to last approximately forever, I would be delighted to see Congress call their bluff and just pass a bill setting out some reasonable standards.

This comes via Peter Suderman, who agrees with Szoka and is therefore now my sworn enemy.2  Nothing personal, of course, just business.  However, I did learn something new from him.  Namely that "there are various technological solutions from companies like Dolby and SRS that help keep TV volumes on a more even keel."  Really?  I didn't know that.  But click the links and judge for yourself.  This technology doesn't appear to be very widespread yet, and I suspect that managing volume at the source is a better approach anyway (especially since the most annoying ads are deliberately engineered to be annoying).  Still, it's better than nothing since neither the industry nor Congress has made much progress over the years.

But does it work?  Does anyone out there have one of these wonder devices?  What's the skinny?

1A shortcoming, by the way, that's made worse by the artistic decisions of certain shows.  The worst for me is 24, which I have to crank up in order to hear the hoarse stage whisper that Kiefer Sutherland affects in his Jack Bauer role.  The ads are loud even at the best of times, but they're really loud when you've already turned up the volume just to hear the show itself.

2This is an issue, like the Do Not Call registry, that transcends politics.  I don't really care whether volume regulations are liberal or conservative or trample the Bill of Rights or whatever.  I just want the noise to stop.  If it takes jackboots to stop it, then so be it.