Kevin Drum

Chart of the Day #2: The Deflation Trap

| Thu Jul. 29, 2010 7:13 PM EDT

This chart comes from Seven Faces of “"The Peril," ”a paper by St. Louis Fed president James Bullard. Bullard has generally been considered an inflation hawk, but in this paper he describes a technical problem with inflation targeting. Most central banks follow something called the Taylor Rule, in which interest rates are raised when inflation gets too high and lowered when things cool off. But Bullard notes that a standard model of the Taylor Rule has two points where it's in equilibrium — in the chart below it's where the red line meets the black curve. The one on the right is fine: it corresponds to an interest rate of about 2.8% and inflation of 2.3%. This is roughly where the U.S. has been until recently. But the one on the left is trouble: it corresponds to an interest rate of zero and deflation of about -.5%. This is where Japan has been.

Bullard's conclusion is simple and direct:

The U.S. economy is susceptible to negative shocks which may dampen infl‡ation expectations. This could possibly push the economy into an unintended, low nominal interest rate steady state [i.e., deflation]. Escape from such an outcome is problematic. Of course, we can hope that we do not encounter such shocks, and that further recovery turns out to be robust— but hope is not a strategy. The U.S. is closer to a Japanese-style outcome today than at any time in recent history.

....To avoid this outcome for the U.S., policymakers can react differently to negative shocks going forward. Under current policy in the U.S., the reaction to a negative shock is perceived to be a promise to [keep interest rates] low for longer, which may be counterproductive because it may encourage a permanent, low nominal interest rate outcome. A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.

The problem we have right now is that if you grind through the usual arithmetic of the Taylor rule, what pops out of the formula is a negative interest rate. But interest rates can't be negative. So for all practical purposes, monetary policy right now is quite tight even with interest rates at zero. What Bullard suggests is that if the economy suffers any further shocks, the Fed needs to respond even though it can't lower interest rates any further. And the way to do that is to fire up the printing presses.

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Round 2 on Interchange Fees

| Thu Jul. 29, 2010 2:09 PM EDT

I tend to think that going back and forth with other bloggers on a particular issue has diminishing returns pretty quickly. I'd say that most of the time a single set of posts from each side exhausts the argument, and two posts does it 90% of the time. After that the argument usually just spirals downward along one of several increasingly predetermined paths, none of them good.

So I normally say my piece and then quit. Which I should probably do here. But I guess I'm feeling stupid this morning, because I'm going to push back yet again on the issue of credit card interchange fees. On Tuesday I linked to a Boston Fed article suggesting that the net result of interchange fees was a transfer of wealth from the poor (who pay higher prices generated by the fees even though they mostly use cash) to the middle class and the rich. I wasn't happy about this, but Matt Yglesias and Megan McArdle push back:

Matt: Once you keep in mind the fact that the median household income in 2008 was slightly above $52,000 it’s not at all obvious to me that this is any kind of scam. Instead, it appears to be a classic positive sum business interaction. Credit card companies use interchange fees to cut into retailers’ monopoly rents and then rebate a share of the fee to consumers via reward programs, and on net consumers benefit and the median household appears to benefit....Now it’s true that in this particular case my conscience is pricked by the fact that poor consumers end up losing out. At the same time, do we really think it’s feasible to conduct distributive analysis of every new business model and only accept the ones that are beneficial to poor consumers?

Megan: I never understood why the progressive consumer finance types got so worked up about interchange fees, which are essentially a knock-down fight between two very powerful business lobbies, not a cosmic injustice perpetrated against the American consumer....To be sure, the current system benefits the wealthy most. But that is broadly true of many business models; shall we outlaw Costco because the poor cannot afford lavish pantries and large chest freezers in which to store their warehouse-club bounty?

First off: I'm mystified by the "retailers’ monopoly rents" that Matt talks about. I have no idea what this is supposed to mean. So maybe I'm genuinely missing something here.

But barreling ahead regardless, I'm pretty sure the issue is more on the other side: it's the card networks (Visa and Mastercard control the vast majority of the credit card market) that are effective monopolies. So the question is: are they using their monopoly position to charge interchange fees that are too high? To put it another way: who actually pays these fees, anyway?

I did a bit of desultory research to see if anyone knows the incidence of interchange fees, and the answer appears to be no. There's been some theoretical work, but not much in the way of empirical studies. This is important, because if the net effect of the fees is merely to reduce merchant profits a bit, or to balance the costs between merchant and purchaser banks, then Megan is right: who cares? Let the giants fight it out on their own. But if merchants pass along most of the fees directly to consumers, then it matters.

However, although there's no definitive evidence on this score, there are some reasons for thinking that fees are too high and that consumers do end up paying at least part of them. There's the Boston Fed study, of course. And here's an ECB report suggesting (unsurprisingly) that in a monopoly environment interchange fees will always be set too high. And there's this New York Times piece about swipe fees in the debit card market, which makes it pretty clear that Visa's fees are simply egregious abuses of its monopoly power. And if they're abusive in the debit card market, they're probably abusive in the credit card market too. Finally, there's the fact that current fees are so high that card issuing banks can afford to rebate a big chunk of them in rewards programs, something that flatly makes no sense in a sane world.

Now, even if this is all true, it's also true that on the list of ways in which the poor are screwed, this doesn't make the top ten. It probably doesn't even make the top 100. But I hate the idea of dismissing it anyway. The problem is that this is practically a paradigm example of how all this screwing works throughout the financial industry: most of it is small stuff. It's a few dollars here and there, and banks have a huge incentive to keep it that way. That way nobody really thinks it's worthwhile to bother addressing even though those dollars add up to billions if you screw enough poor and vulnerable people at a time. And Wall Street does. That's why this kind of thing deserves attention even if it's not, by itself, all that big a deal: because there's a lot of it, and it basically all benefits the haves at the expense of have-nots. We lose our humanity when this becomes merely a shrug of the shoulders and a "to be sure."

Beyond that, let's make it clear what I'm proposing. I don't want to eliminate interchange fees. Card payment networks cost money to operate and there's nothing wrong in theory with using interchange fees as a way of offsetting those costs. In fact, I'm not sure I even want to limit interchange fees. What I'm opposed to is their invisibility. All I want to do for now is bring them into the open.

There are two ways this could happen. The first would be to eliminate the merchant charge and have card companies simply add the interchange fee directly onto consumers' bills. So every month you'd get your Visa bill, and at the bottom there'd be a charge of a few dollars that represents the interchange fee. This way consumers know just how much their cards actually cost them

However, this assumes that consumers are already paying 100% of these fees, and they probably aren't. It's probably a mix of consumers, merchants, and banks. So a better, more modest idea is to keep interchange fees intact as a merchant charge but allow merchants to pass that charge along to customers if they want to. Right now, Visa and Mastercard prohibit this, something they can get away with because they're monopolies and merchants have little choice but to accept their terms. I'd like to do away with this prohibition and let merchants raise the price for credit card purchases if they want to. If they don't, that's pretty good evidence that card networks are charging a fair price for the service merchants get from them (increased sales, less handling of cash, etc.). And there's no harm done. But if they do tack on the charge, it's pretty good evidence the networks aren't charging a fair, market-clearing price. I say: let's find out. Interchange fees are hardly the biggest injustice in the world, but then again, this is hardly the most intrusive remedy in the world either. Everyone ought to be in favor of transparency, and everyone ought to be opposed to allowing monopolies to set abusive terms in their contracts. Sometimes God is in the details, and this is one detail I'd like to expose to a little sunshine.

Chart of the Day: Healthcare Reform

| Thu Jul. 29, 2010 12:08 PM EDT

So how's healthcare reform doing? According to Kaiser, better and better: their latest poll shows that it's supported by 50% of respondents and opposed by only 35%. And of that 35%, only 27% think it should be repealed right away. The rest think it should be given a chance to work.

Now, in one sense all this tells us is that opposition has died down because healthcare is no longer the focus of 24/7 rabble rousing from Fox and Rush and Sarah Palin and half the conservative fundraising outfits in the country. But really, that's the whole point. There were always two separate questions here. #1: Could healthcare reform pass in the face of massive organized opposition? (Yes, it turns out.) #2: How would it fare once the demagoguery inevitably died down? Because it was inevitable. Nobody can keep up a fever pitch like we saw earlier this year forever unless there are continual fresh provocations.

So healthcare reform is safe. In fact, it's so safe that it's not even clear it will be a decent campaign issue this November, let alone anything else. Thirty years from now Republicans will probably be telling stories about how it's part of the fabric of America and it's a liberal myth that they ever opposed it in the first place.

Goldman Sachs and the Liberal Funk

| Thu Jul. 29, 2010 11:20 AM EDT

Remember the Volcker Rule? It was designed to get commercial banks out of proprietary trading — i.e., the practice of making money from speculative bets of their own instead of making money based on selling actual services to their clients. It got watered down considerably before the final financial reform bill was passed, but it was still there and it still held out some hope of limiting the casino atmosphere at investment banks like Goldman Sachs unless they gave up their commercial bank designation. So what's Goldman going to do about this? Charlie Gasparino reports:

The big Wall Street firm has moved about half of its “proprietary” stock-trading operations — which had made market bets using the firm’s own capital — into its asset management division, where these traders can talk to Goldman clients and then place their market bets....By having the traders work in asset management, where they will take market positions while dealing with clients, Goldman believes it can meet the rule’s mandates, avoid large-scale layoffs and preserve some of the same risk taking that has earned it enormous profits, people close to the firm say.

....People close to Goldman say Goldman will now be weighing other similar moves — taking traders out of the firm’s brokerage division and moving them to other areas of the firm where they can deal with clients and circumvent the rule.

That didn't take long, did it? If this sticks, Goldman and others will essentially be completely unaffected by this new regulation. Sadly, I suspect this is going to end up being true of much of the rest of the bill too. It was worth passing, but only barely.

On a related note, I think this partly explains why liberals are in such a funk right now. The conventional wisdom is that we ought to be pretty happy. As Jon Cohn says, liberal dejection is hard to figure: "This seems totally nuts, purely on the merits. Obama and the Democrats passed a major stimulus that cut taxes for the middle class and invested heavily in public works. They saved the auto industry, created a new regulatory framework for the financial industry, and enacted comprehensive health care reform."

That's true, but think of this in a different way. Prior to 2008, what kinds of things had been on the lefty wish list? What made our hearts sing? A temporary tax cut and a one-time investment in infrastructure and energy projects? Nope. Bailing out General Motors? Nope. Financial industry reform? Nope. Before 2008, Wall Street reform was barely even on anyone's radar. It's purely a reaction to a crisis, not the culmination of a long campaign by populist liberals — and in any case the final result was watery enough that it's highly unlikely to change Wall Street in any serious way.

So that leaves healthcare reform. And watered down or not, that really is a big deal. But among big ticket items on the lefty wish list, that's it. That's all we got. And I hardly have to tell you that not every lefty is as enthusiastic about its final form as I am.

So in terms of setting liberal hearts aflutter, there's basically been just one thing — and not much hope of getting anything more for the rest of Obama's term. And to tot up against that, we've had an almost complete acquiescence to the Bush/Cheney vision of national security; an escalation of the war in Afghanistan; the reappointment of Ben Bernanke; a couple of very moderate Supreme Court picks; an obvious unwillingness to back a serious energy bill; and indefensibly slow progress in naming new appointments. All of these things can be justified individually, but if you put 'em together and weigh them against a single major piece of liberal legislation you don't get a very pretty picture. And that's the picture a lot of liberals are seeing.

A Convincing Case for Elizabeth Warren

| Thu Jul. 29, 2010 10:42 AM EDT

Karl Smith thinks the criticisms of Elizabeth Warren's academic work are probably overblown, but argues that she'd be a poor choice to head the new Consumer Finance Protection Bureau anyway. Like Paul Krugman, he says, she's an intellectual steamroller with strong opinions:

Having the formidable, and seemingly strong priored Warren at the head of CPFA is dangerous. She seems to have strong beliefs and the analytical ability to plow through anyone in her way. A cold-hearted pointy head would make a better referee.

That’s not to say that passion has no place in intellectual discourse, but it is why its important that passions balanced. It doesn’t matter how good your intentions are, confirmation bias and a lack of diversity will leave glaring blind spots.

Consider me convinced. For a position like this — the very first head of an agency that needs to develop both a strong identity and an ethic that puts it squarely on the consumer's side — I think this is exactly what we need. Cold-hearted pointy heads are pretty useful in some areas, but not this one. We don't need a referee right now, we need a pioneer. Elizabeth Warren for CFPB!

Obama and WikiLeaks

| Thu Jul. 29, 2010 10:24 AM EDT

Doyle McManus on the WikiLeaks affair:

The most surprising thing about WikiLeaks' released trove of officially secret documents is how few surprises it contains.

That's largely because of a little-noticed, little-credited change in important parts of the U.S. military establishment over the last five years: a conscious decision to deploy the unconventional weapons of honesty and candor about the conduct of the war.

Mired in two wars that have been longer and more difficult than initially advertised, U.S. commanders have adopted an audacious but sensible strategy in describing facts on the ground: No more sugarcoating.

Why? Because one of the lessons of Vietnam was relearned in Iraq: When Americans believe they are being lied to about military operations, they stop supporting them.

Well, if this is true then the White House owes Julian Assange a debt of gratitude, doesn't it? After all, until now we couldn't really be sure they were telling us the truth about the war. Now, apparently, we can. That should be nothing but good news for the war effort. Maybe Obama should send Assange a thank you note.

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Even Yet More Warrantless Searches

| Wed Jul. 28, 2010 11:31 PM EDT

This is just excellent news:

The Obama administration is seeking to make it easier for the FBI to compel companies to turn over records of an individual's Internet activity without a court order if agents deem the information relevant to a terrorism or intelligence investigation.

The administration wants to add just four words — "electronic communication transactional records" — to a list of items that the law says the FBI may demand without a judge's approval. Government lawyers say this category of information includes the addresses to which an Internet user sends e-mail; the times and dates e-mail was sent and received; and possibly a user's browser history. It does not include, the lawyers hasten to point out, the "content" of e-mail or other Internet communication.

I forget. How many NSLs do the FBI and other federal agencies already send out every year? 30,000? 50,000? What's it up to now? Whatever it is, I guess it's still not enough. That business of getting approval from a judge is just so annoying, after all.

You know, if I'd wanted Dick Cheney as president I would have just voted for him.

Housekeeping Note

| Wed Jul. 28, 2010 7:50 PM EDT

hello, world.

Ah, excellent. Everything seems to be working. Sorry for the radio silence today. Last week Southern California Edison informed us that we might suffer a planned power outage today, and I foolishly assumed this meant the lights might go out for half an hour at some point during the morning. Nope. The lights went out at 8:30 am, a whole bunch of big trucks with gigantic reels of thick cable pulled up, workers did mysterious things all day, and at 5:30 pm the lights came back on.

So....did anything interesting happen while I was gone?

No-Growth Economics and You

| Tue Jul. 27, 2010 7:35 PM EDT

Clive Thompson investigates the renewed interest in "no-growth economics" — that is, economics that assumes the total output of the world stops growing and just stays the same. Peter Victor and Herman Daly have tried to model what such a world would look like:

Some of their conclusions are surprisingly pleasant. For example, to move away from growth, we'll all have to work a lot less....Handled correctly, this could bring about an explosion of free time that could utterly transform the way we live, no-growth economists say. It could lead to a renaissance in the arts and sciences, as well as a reconnection with the natural world. Parents with lighter workloads could home-school their children if they liked, or look after sick relatives....Viewed this way, a nongrowing economy could have broad political appeal, ushering in the sort of togetherness and family values that social conservatives celebrate. Liberals might appreciate the concept of work sharing, which could help narrow the income gap between rich and poor.

....The hard part is that we would be consuming less — probably far less. What does that mean, exactly? Daly has suggested that Americans would need to scale back our energy consumption to 1960s levels....Western consumption rates would need to shrink disproportionately so that citizens of countries like India and El Salvador could enjoy a lifestyle upgrade. Why? The no-growthers argue that a world with fewer yawning inequities between the rich and poor would be more stable; but quite apart from that, their models require stabilizing world population, and raising the economic lot of the poor is a proven way to do that.

Given the shift in wealth needed to accomplish this, Americans would need to turn back the clock to well before 1983; in fact, we'd be pretty lucky even to find ourselves where we were in 1960....People might need to develop a renewed appreciation for durable goods that require lots of labor to make but ultimately use fewer resources than their throwaway counterparts.

This is....a wee bit rosy. If we all worked two days a week, I suspect the real result would be more time spent playing video games and drinking beer, not a renaissance in the arts and sciences. And more time to look after sick relatives? I'm not sure everyone would consider this a boon.

And that's the surprisingly pleasant part! Let's put a few numbers to the less pleasant part. Right now, per capita GDP for the entire world is about $10,000. If the plan is to stop growing, but redistribute global wealth so that we're all equally well off, that means America would need to cut back its per capita GDP to the global average. A per capita GDP of $10,000 implies a median income of about $7,000 or so, which basically means that well over half the country would be living at what's now considered poverty level. In other words, not only wouldn't we get a renaissance in the arts and sciences, we probably couldn't afford video games or beer either.

It's possible that things will come to that if we destroy the planet. But it sure isn't going to happen short of that. I mean, we just saw a climate bill go down to crushing defeat because it would have raised the average energy bill of the average American by a hundred bucks or so. So count me as skeptical that no-growth economics is really gaining much of a following.

A Second Look at WikiLeaks

| Tue Jul. 27, 2010 1:49 PM EDT

The most common reaction to the WikiLeaks release of 92,000 classified cables and other documents from Afghanistan has been a collective yawn: they don't really tell us anything new, so it's not much of a story. Glenn Greenwald, among others, has been pushing back against this. Here's a sampling of his recent Twitter posts:

So this is all boring old news that tells us nothing - or WikiLeaks has Endangered Us All & the source should be killed. Can someone choose

These are the kinds of stories the WikiLeaks documents enable - decide for yourself if they're worthwhile:

James Fallows on the "nothing-new-here" dismissals of WikiLeaks from war supporters:

Old news - nothing new - boring, yawn, move along:

When I first read the Guardian and New York Times writeups about the WikiLeaks release, I mostly yawned too. But I pretty quickly felt kind of guilty about that. Not because I was wrong in a technical sense — most of the WikiLeaks stuff really has been common knowledge for a long time — but because everyone was saying it. And as my colleague David Corn points out, that really doesn't seem right. Even if the news is old, the leaked documents do provide a different look at familiar events and are likely to capture public attention in a way that the original news reports didn't. That's pretty worthwhile. Plus, as Glenn points out in the fourth tweet above, some of the leaked documents really do seem to be newsworthy in their own right:

Buried among the 92,000 classified documents released Sunday by WikiLeaks is some intriguing evidence that the U.S. military in Afghanistan has adopted a PR strategy that got it into trouble in Iraq: paying local media outlets to run friendly stories.

....In one of the WikiLeaks documents, a PRT [provincial reconstruction team] member reports delivering "12 hours of PSYOP Radio Content Programming" to two radio stations in the province of Ghazni in 2008, and paying one of them "$3,900 for Radio Content Programming air time for the month of October"....Two other messages seem to show U.S. soldiers referring to local Afghan media as extensions of their own units rather than independent reporters.

I don't have a lot more to add to this. I guess this is just sort of a weasely semi-apology for semi-dismissing the WikiLeaks documents. I really hate the idea of enabling a conventional wisdom that suggests there's nothing to worry our little heads over here. The WikiLeaks dump isn't Pentagon Papers II because it doesn't show the same level of official lying that the original Pentagon Papers did, but it's still important because it helps focus our attention on something worth focusing on. And God knows that after two weeks of the New Black Panthers and Shirley Sherrod and the Ground Zero mosque, we could stand to shift our attention to something a wee bit more worthwhile.