Kevin Drum

Targeting Inflation

| Sun Jan. 17, 2010 12:47 PM EST

In general, which is a better inflation target: 2% or 4%? Matt Yglesias ponders the question here. I've long thought that the higher target is better for a variety of reasons (spurs consumption, allows wages to react to recessions faster, provides greater monetary flexibility, etc.), but my crude understanding of the situation is that even if this is all true, policymakers are afraid that once inflation targets get above 2% or so, you run the risk of a runaway spiral. Inflation of 4% is OK, but when that turns into 5% and then 7% and then 10%, you've got a big problem. And that's what happens if you're anything but maximally hawkish.

But what I don't know is whether history really supports that view. Aside from episodes of hyperinflation, which aren't really germane to our situation, do inflation targets higher than 2% often lead to an inflationary spiral? In America, the obvious historical episode is the high inflation of the 70s, but that had a variety of causes, and it's not clear that inflation targeting (implicit in this case, since the U.S. Fed doesn't have an explicit target) had anything to do with it.

Anyway, comments welcome. It's obvious that a higher inflation target right now would probably be a pretty useful thing, but how about as a general policy? Would markets go crazy, convinced that the Fed would keep raising the target whenever the economy needed a bump? Or would they shrug after a while and just revert to all of their usual non-inflation-related pathologies? My guess is the latter, but what do I know?

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A Paywall for the Times?

| Sun Jan. 17, 2010 12:19 PM EST

Bad news from New York magazine:

New York Times Chairman Arthur Sulzberger Jr. appears close to announcing that the paper will begin charging for access to its website, according to people familiar with internal deliberations. After a year of sometimes fraught debate inside the paper, the choice for some time has been between a Wall Street Journal-type pay wall and the metered system adopted by the Financial Times, in which readers can sample a certain number of free articles before being asked to subscribe. The Times seems to have settled on the metered system.

From a reading point of view, this is not a big deal to me. If I need to subscribe to the Times, I'll subscribe to the Times. But from a blogging point of view, it's a problem. An important part of the great Blogosphere Circle of Life™ is the ability for readers to click on links, both to get the full story for its own sake and to make sure bloggers are playing fair with their excerpts and commentary. If the Times cuts this off, it's a big hit.

So it's semi-good news that they're planning to adopt the FT model, where casual readers can access a dozen or so articles per month without subscribing. At least that's something. Alternatively, if they go with the WSJ model, I hope they provide some mechanism to provide short-term access for nonsubscribers. The Journal does this via email links, which provide public access to linked articles but expire after a week.

And of course, the big question: will it work? Will the Times gain more subscription revenue than they'll lose in advertising revenue? I doubt it, though that depends a lot on whether the recent collapse in online advertising revenue is just a temporary result of the recession or a reflection of long-term trends.

And the second biggest question: will other newspapers follow their lead, thus bringing to an end the great era of endless free news on the internet? Or is the Times one of the few who can even arguably pull this off? Wait and see.

The Black Death

| Sat Jan. 16, 2010 1:11 PM EST

Chapter 6 of William Bernstein's A Splendid Exchange is about the Black Death of the 14th century. It contains this passage:

Even this greatest European apocalypse is only a small part of the story. If the cultural and demographic records of the Black Death are imperfect in Europe, those for the Middle East and Far East are essentially nonexistent; there is no Arab, Indian, or Chinese Decameron.

The basic story here is that the Black Death was actually considerably worse in the Middle East than it was in Europe. In the Nile Valley, where there was no place for city dwellers to escape to (thanks to the surrounding Sahara Desert), the original plague and its aftershocks were especially devastating. Egypt never recovered.

But why are there so few non-Western accounts of the plague? 14th century Arab and Chinese culture were more advanced than European culture, after all. So why no records?

Friday Cat Blogging - 15 January 2010

| Fri Jan. 15, 2010 2:50 PM EST

On the left, Domino is snoozing in a nice patch of afternoon sunshine. On the right, Inkblot is snoozing on his favorite red American Airlines blanket. And doing it well! Sometimes modesty is appropriate, but other times you just need to show off your strengths. Have a restful weekend, everyone.

Death Knell for the CFPA

| Fri Jan. 15, 2010 2:45 PM EST

Bad news on the financial regulation front:

Senate Banking Committee Chairman Christopher Dodd is considering scrapping the idea of creating a Consumer Financial Protection Agency, people familiar with the matter said, an initiative at the heart of the White House's proposal to revamp financial-sector regulations.

....Mr. Dodd's offer is conditional, however: Republicans must agree to create a beefed-up consumer-protection division within another federal agency, these people said.

....Bipartisan support is believed necessary to pass such legislation, as Democrats aren't likely to get the 60 Senate votes needed to overcome a potential Republican filibuster. With Mr. Dodd no longer seeking re-election, some of the pressure to apply a populist stamp on new financial regulations has eased.

This is bad news on multiple fronts. First, although the CFPA isn't a central part of the plumbing that might prevent a repeat of 2008, it was one of the few clean reforms still standing in the regulatory bills working their way through Congress. Second, I have my doubts that ditching it will gain any GOP support. They'll just find other reasons to oppose reform. Third, it was one of the few parts of the reform effort that was genuinely understandable and popular with ordinary voters. Losing it means that regulatory reform is both weak and hard for most people to understand. Yuck. Dems would do better to keep it and force Republicans to vote against it. At least then they'd have a campaign issue.

A New Day?

| Fri Jan. 15, 2010 1:08 PM EST

Martha Coakley is pretty obviously not going to win any awards for best Senate candidate of the year. But her Republican opponent in the Massachusetts special election for Ted Kennedy's seat, Scott Brown, sure isn't any great shakes either. According to an op-ed he wrote in the Boston Globe yesterday, his platform is this:

  • Oppose healthcare reform.
  • Oppose fiscal stimulus. (Because February's stimulus bill "failed to create one new job.")
  • An across-the-board tax cut, deficits be damned.
  • Harsh interrogation of the Christmas bomber.

This all comes under the rubric of "a new day is coming," but it sure sounds like the same old tired GOP day to me. Is there even one thing in this entire piece that isn't just a retread of eight years of the Bush/Cheney administration?

And while we're on the subject of state politics, I was sorry to learn today that here in California, Republican Tom Campbell has decided to drop his bid for the governor's mansion and instead run for Barbara Boxer's Senate seat. He would have been a better candidate for governor than either of the other Republicans, and going up against Jerry Brown I might even have voted for him in the general election. But he couldn't raise enough money to compete with a couple of Silicon Valley zillionaires, and I suppose he figured that when push comes to shove, people like me wouldn't have ended up voting for him after all. And he might be right about that. But he doesn't bring anything at all to the Senate, so it's a net loss all around. I doubt that Boxer will have any trouble at all dispatching him.

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Selling Out to Unions?

| Fri Jan. 15, 2010 12:18 PM EST

Our story so far: one of the funding mechanisms for healthcare reform is an excise tax on expensive health plans, popularly known as the "Cadillac tax." As policy, it's a good idea: by taxing expensive plans, you provide an incentive to keep their costs down. As politics, though, it sucks: union health plans, which are often pretty rich, would get hit by the tax. And Democrats like unions.

So yesterday everyone compromised. The excise tax is still in the bill, but the cutoff for the tax was raised from $23,000 to $24,000, dental and vision were excluded, and implementation was delayed a couple of years to give unions more time to renegotiate their contracts. In other words, a policy beloved mostly by wonks and deficit hawks stayed largely intact and unions got only a few crumbs. Nonetheless, John Boehner (R–Ohio) thundered that it was the "latest in a long line of backroom payoffs and sweetheart deals." Sarah Palin tweeted that workers "should oppose their UnionBOSSES backroom deal." Even some liberals bought the framing: "I'm not about to pretend that the union deal was anything but interest group politics," said Ezra Klein.

But except for the sense in which everything in a democracy is interest group politics in one way or another, I don't buy it. This compromise doesn't give unions anything. All it does is slightly moderate a basically anti-union tax. If Democrats were really cutting backroom deals with union bosses, they never would have proposed the excise tax in the first place. Or they would have exempted union contracts completely. There are plenty of other ways to fund healthcare reform, after all. But we've gotten to a point in the United States where anti-union sentiment is so widespread that (a) proposing a tax that falls largely on unions, and then (b) reducing it a bit, is considered a grubby giveaway even by some lefties. Yeesh.

And I say that as a supporter of the excise tax, which I think is good policy even if it does harm union interests a bit.1 But whatever else you can say about it, it does harm union interests, and the new version continues to harm union interests. It just harms them a little less. I sure wish we could cut a few "backroom" deals like that when it comes to giveaways for the rich and powerful.

1Though, as Ezra points out here, there are better, more progressive alternatives.

Healthcare vs. Jobs

| Fri Jan. 15, 2010 11:15 AM EST

Via Bruce Bartlett, here is political analyst Charlie Cook repeating a widely held piece of conventional wisdom:

Nearly a year after Obama's inauguration, judging by where the Democrats stand today, it's clear that they have made a colossal miscalculation. The latest unemployment and housing numbers underscore the folly of their decision to pay so much attention to health care and climate change instead of focusing on the economy "like a laser beam," as President Clinton pledged to do during his 1992 campaign. Although no one can fairly accuse Obama and his party's leaders of ignoring the economy, they certainly haven't focused on it like a laser beam.

....Much of the political debate, meanwhile, has been obsessed with details of competing health care reform bills. Some analysts have wondered whether Democrats in Congress would be better off passing an unpopular bill or risking the consequences of failing to pass one at all. More to the point, though, is the probability that if Obama and Hill Democrats had taken a more modest approach to health care reform, they could have pivoted back to jobs and the economy sooner. It doesn't take much imagination to envision Obama declaring, "Health care reform is a journey; not a single step. We are today laying a foundation on which America can build better health care."

I don't really understand this. Is it a purely political argument that, regardless of the merits, Obama should have been viewed as spending 24/7 hunkered down in the West Wing helping create jobs for American workers? Or is it a substantive argument that governments have limited bandwidth and Obama should have spent more of his on reducing the unemployment rate?

The former is puerile and the latter is mysterious. What exactly should he have done? He passed a big stimulus bill, and it's plain that there's no political will in Congress to pass another one of any size. He extended unemployment benefits. He tried to take action on mortgage foreclosures, and perhaps he could have done more along those lines. But the financial lobby fought him, Congress wouldn't support cramdown legislation, and banks have resisted taking part in his program. The Consumer Financial Protection Agency would be a nice pro-worker feather in his cap, but it wouldn't help anyone find a job and probably wouldn't have gotten through Congress any quicker even if they weren't busy with healthcare.

So exactly what would his "pivot" back to jobs1 have looked like? Nobody ever really says. But aside from giving rousing speeches, the big levers available to fix the economy are monetary, which is in the hands of the Fed; fiscal, which he's done; and meliorative, which he's largely done too. The rest is mostly window dressing.

1Assuming that this mythical "more modest" healthcare bill really could have passed any faster than the current one in the first place. Frankly, given the Republican Party's dedication to "What part of NO! don't you understand" as its political strategy, I doubt it.

Life in Sarahville

| Fri Jan. 15, 2010 10:37 AM EST

Sarah Palin, tweeting at 7:05 am with the GOP talking-point-o'-the-day on the healthcare deal struck yesterday:

Pls pay attention 2 Big Union backdoor deal struck yest w/Big Govt in sweetheart healthcare deal.Call the folks u elected,say NO! UNFAIR....

Sarah Palin, five minutes later, after suddenly remembering that she's supposed to be a woman of the people who sticks up for regular working stiffs like you and me:

good,hardworking pro-business UnionMEMBERS should oppose their UnionBOSSES backroom deal on this;unfortunately/unfairly paints all of'm bad

Nice save, Sarah! Except let me get this straight: hardworking union members should oppose a deal that helps them out because.....um, why exactly? Sadly, Twitter's 140-character limit didn't give her room to explain. But apparently it's bad for union members to support the deal even though it benefits them, and it's bad for them to cut a deal that moderates the excise tax even though Sarah is opposed to the excise tax in the first place. That's life in Sarahville.

Taming the Oil Bubble

| Fri Jan. 15, 2010 2:06 AM EST

Housing wasn't the only financially induced asset bubble in the aughts:

In a move aimed at limiting financial speculators' ability to drive up oil prices, the Commodity Futures Trading Commission on Thursday proposed restrictions on the number of energy contracts that any single investor can hold and new limits on the trading activities of Wall Street banks.

....The Commodity Futures Trading Commission seeks to establish a limit on how many contracts an investor could have across all regulated markets in which oil and natural gas are traded. This would broaden the limits that existed before 2001, since it would apply not only to contracts for future delivery of oil, but also to markets that involve the physical delivery of oil and natural gas.

That's important, because several Wall Street firms got involved not only in the speculative futures market but also in the physical markets, giving them tremendous potential for market manipulation. Morgan Stanley, as a player in the physical market, controls an estimated 15 percent of the home-heating oil supply in New England. Goldman Sachs owns shares of companies that own pipelines and refineries.

The case for a speculative bubble in oil is still, if you'll pardon the expression, a little more speculative than the airtight case for a housing bubble, but there's no question that the evidence seems to point more in that direction that it did a couple of years ago. Which is no big surprise, I suppose: after all, what we really had was a credit bubble, not just a housing bubble. And when there's lots of credit sloshing around, it's bound to drive up a lot of asset prices.

In any case, the position limits the CFTC is proposing are relatively modest. It's worth giving them a try.