Kevin Drum

Tough Times

| Thu Sep. 17, 2009 1:10 PM EDT

In a widely read column on Tuesday, David Leonhardt said that although unemployment is high, there's good news for those who still have jobs.  Instead of falling, as they normally would during a recession, real wages have risen at a steady clip this year.  Now, there's no question this was true in the second half of 2008, when nominal wages rose modestly but plummeting prices (especially energy prices) meant that in real terms wages skyrocketed.  Unfortunately, Dean Baker says those days are long gone:

The story then reversed in 2009. Inflation has advanced at close to a 3.5 percent annual rate thus far this year. Nominal wage growth has fallen sharply....For 2009, real wages have unambiguously been falling and are likely to continue to fall as modest increases in commodity prices are not offset by nominal wage growth.

So how does Leonhardt get the story so wrong? Most importantly he uses year over year data. This includes the large fall in prices at the end of last year, which still outweighs the impact of falling real wages through 2009. Using year over year data, we can say that real wages have risen in the last year. We will not be able to say that four months from now.

Italics mine.  Real wages have gone up if you compare August to August, which includes the big deflation in the Fall of last year.  But that's a one-off.  If you look at January to August instead, inflation is up, wage growth is anemic, and real wage growth is negative.  That's the path we're currently on, not one of rising incomes.

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Chart of the Day

| Thu Sep. 17, 2009 12:28 PM EDT

Miller-McCune magazine points out today that we'll soon have new CAFE fuel standards.  EPA and the Department of Transportation announced their proposed new rules on Tuesday, and in an effort to find something interesting to say about them I present you with this chart.

Normally, CAFE is a DOT program.  But the Supreme Court recently ruled that EPA was required to regulate greenhouse gases under the Clean Air Act, so now it's a two-agency operation.  EPA's part isn't to directly regulate fuel economy, it's to regulate CO2 — though this largely amounts to the same thing.  Basically, it works like this: you multiply a car's track width by its wheelbase to come up with its "footprint" in square feet.  Then you go to this chart, which tells you how much CO2 it's allowed to emit.  A subcompact, for example, will be allowed to emit no more than 204 grams of CO2 per mile in 2016.  (That's what the technical appendix says, anyway.  The chart seems to be offset slightly high along its entire length.)

The Ninth Circuit Court has had problems with the whole "footprint" idea in the past, but EPA and DOT apparently hope that these new regs will pass judicial muster.  They also hope that car companies won't just build bigger cars, thus doing an end run around the standards.  In fact, here's what they hope the new rules will accomplish:

  • Increase fuel economy by approximately five percent every year
  • Reduce greenhouse gas emissions by nearly 950 million metric tons
  • Save the average car buyer more than $3000 in fuel costs
  • Conserve 1.8 billion barrels of oil

If the fooprint approach works the way it's supposed to, we'll reach a fleet average of 35 mpg by 2016 instead of 2020.  Time will tell.

Downsizing Missile Defense

| Thu Sep. 17, 2009 12:37 AM EDT

Interesting news on the missile defense front:

The White House will shelve Bush administration plans to build a missile-defense system in Poland and the Czech Republic, according to people familiar with the matter, a move likely to cheer Moscow and roil the security debate in Europe.

....The Obama administration's assessment concludes that U.S. allies in Europe, including members of the North Atlantic Treaty Organization, face a more immediate threat from Iran's short- and medium-range missiles and will order a shift towards the development of regional missile defenses for the Continent, according to people familiar with the matter. Such systems would be far less controversial.

Will this buy us some goodwill from Russia?  Will it send the Bill Kristol wing of the conservative movement into Munich/striped pants/appeasement hysterics?  I'd say maybe to the first but definitely yes to the second, which all by itself probably makes it worth doing.

Letting Banks Be Banks

| Wed Sep. 16, 2009 9:33 PM EDT

Back in the dim past, investment banks were mostly in the business of providing advice and underwriting services to their clients.  Oh, they traded a bit on the side with their own money too, but not a lot.  That was sort of risky, after all.  Better to focus on giving other people advice about what to buy and sell rather than doing it themselves.

But times changed, fixed commissions went away as a guaranteed source of easy income, and proprietary trading started to grow more important.  And why not?  Since investment banks were also market makers, their prop desks had privileged access to streams of information that most investors could only dream of.  Why not use that information instead of letting it go to waste?

So use it they did.  In fact, they used it so voraciously that eventually trading became by far their biggest profit centers.  Basically, investment banks became gigantic hedge funds with a bit of investment banking tacked on to the side.  And that's not all.  By the year 2000, two more things had happened.  First, the Glass-Steagall Act was repealed in 1999, which allowed investment banks to merge with commercial banks.  Second, investment banks had all become public companies, which meant they not only had enormous amounts of capital to invest, but none of their traditionally risk-averse partners were personally liable if they lost it all.

I think you know how this all turned out.  Long story short, they lost it all.  What's more, their losses would have taken down the entire banking system if they hadn't been rescued via massive government intervention.  Along the way, the last of the investment banks technically disappeared, when Morgan Stanley and Goldman Sachs got Fed permission to convert themselves into ordinary bank holding companies.

Given all this, you might wonder if it was such a good idea to let banks engage in proprietary trading in the first place.  Instead, why not limit them to taking deposits, making loans, underwriting stock and bond offerings, giving M&A advice, and so forth?  That's what banks do, after all.

Well, it turns out that Paul Volcker is wondering the same thing:

"Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking," he said in a speech to the Association for Corporate Growth in Los Angeles.

....Mr. Volcker said banks should be banned from "sponsoring and capitalizing" hedge funds and private-equity firms, and said "particularly strict supervision, with strong capital and collateral requirements, should be directed toward limiting proprietary securities and derivatives trading."

He also said collateral and leverage restrictions against the largest non-banking institutions "may be needed."

I like the way this Volcker fellow thinks.  Let banks do banking, protected by federal guarantees, while securities trading is firewalled safely away from the plumbing of the financial system.  And even at that, if your hedge fund or private-equity firm is big enough that it might destroy the world too — think LTCM — it gets regulated as well.

Anybody got a problem with that?

Paying the Piper

| Wed Sep. 16, 2009 6:05 PM EDT

My nerd license is probably going to be revoked for saying this, but I'm bored with the nonstop blogging over the Baucus healthcare bill that was released today.  (That's the "chairman's mark" for those dedicated to terminological exactitude.)  My lack of interest stems from two facts: (a) it's pretty much what we all thought it was going to be, and (b) it's basically just a starting point for negotiations, not an ending point.

Still, I'd like to highlight this comment from James Kwak:

One reason the Baucus bill is “cheaper” than the House bill is that it has lower subsidies. For illustration, let’s assume that the whole $140 billion difference is due to lower subsidies. Relative to the House bill, then, the Baucus bill costs the government $140 billion less; but it costs middle-income people exactly $140 billion more, since they have to buy health insurance. The difference is that in the House bill, the money comes from taxes on the very rich; in the Baucus bill, it comes out of their own pockets. Put another way, the Baucus bill is the House bill, plus a $140 billion tax on people making around $40-80,000 per year. That’s not only stupid policy; it’s stupid politics.

Can't argue with that.  As regular readers know, I'm more concerned with subsidy levels than I am with the public option.  This is why.  The public option is a good thing, but even in the best case it's available to only a small number of people and will likely have only a modest impact on the cost of health insurance.  Subsidy levels, conversely, affect lots of people and have a significant impact on the cost of health insurance.  According to CBPP, for example, a family making $45,000 would have to pay annual premiums of $4,800 under the Baucus plan, compared to $3,600 under the House plan or $2,500 under the Senate HELP plan.  That's a pretty big difference.

So: adopt the the Baucus version of subsidies and when 2013 rolls around you'll have lots of pissed off middle income families desperately trying to scrape up an extra five grand each year.  Adopt the HELP version of subsidies instead and these registered voters families will mostly think they're getting a pretty good deal.  And to fund it, all you have to do is raise taxes on, say, Wall Street bankers.  What's not to like?

Cool Cats

| Wed Sep. 16, 2009 3:17 PM EDT

Atrios comments on George Bush's use of language:

While I don't think Bush referring to Obama as "this cat" is really racist, in the sense of suggesting some sort of animosity towards people of color, but I think there's a reasonable chance that race played a part, in the sense that Bush would've been much less likely to refer to a white guy with that term.

But from the same article, here was Bush on another occasion:

The president asked his secretary, Karen, to bring him the Rose Garden remarks he’d just delivered that day....When he finally got them, he put his half-glasses on and looked at them. “See, this was fine today,” he said. “But we got to make this understandable for the average cat.” He proposed an outline for another speech that talked about the situation our economy was in, how we’d gotten here, and how the administration’s plan was a solution.

I think Bush just has an odd attachment to calling people "cats."  Surely some other former White House staffers could enlighten us about this, though.

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Water in the Burbs

| Wed Sep. 16, 2009 2:12 PM EDT

The city of Palmdale is running out of water, and as a result prices are going up.  Way up:

“My bill went from $12.80 to $185,” [Tracey] Summerford, a Neighborhood Watch captain, told the water board.

“My water bill went from $139 to $468,” [Mary] Sanchez said at that meeting. Since then Sanchez received another monthly bill, one for $324. Together that meant she owed the water district $792, plus a prior balance that brought her total to $924. “That’s my two car payments,” said Sanchez, who moved into her home in November....I feel discouraged. I feel like we should have stayed in Santa Clarita and lived in our apartment.”

Water blogger OTPR thinks she's just seen Armageddon for the burbs:

There it is.  There’s the end.  This is the turning point I’ve been waiting for.  With water costs this high, she’d rather be in a city apartment.  I’ve been wondering for years what would herd people in from the exurbs.  It struck me as a race between costs of water and costs of firefighting.  For a while, the cost of gas and the commute was coming on strong, but that horse fizzled.  Now we need people to know this before they lock themselves into houses.  Ms. Sanchez, don’t become a water district activist!  Spend your energy telling your friends not to do what you did!   Tell them the house and lawn isn’t worth it.  You can still save them.  That’s what we need.

This is sort of California-centric, since water isn't necessarily a suburban problem everywhere.  Schaumburg still has plenty of water from Lake Michigan, I assume.  Still, it is kind of breathtaking.

On the other hand, plenty of people who live in the Valley have $500/month electric bills in the summer from running their air conditioners, and they move/stay there regardless.  So maybe all that happens here is that people grumble for a bit and then get used to high water bills, just like they've gotten used to high air conditioning bills.

In fact, considering that Palmdale has high water bills and high air conditioning bills and high summer fire hazards AND sits right smack on top of a major fault line — well, the fact that people still live there at all probably means that people are willing to live just about anywhere no matter what it costs.  Maybe a $200 water bill is just another pinprick.

Quotes of the Day

| Wed Sep. 16, 2009 12:35 PM EDT

First up, Rush Limbaugh's take on Monday's schoolbus incident in which a couple of black kids beat up on a white kid:

In Obama's America, the white kids now get beat up with the black kids cheering.

Charming, as always.  Next up, Obama communications director Anita Dunn:

Dunn played down the role that race could have in fueling the rancor. "I think that is less a part of it than some other people might think," she said. "If you look at the history of this country, you see that in times of great stress and change, there are people who are concerned, who are threatened, there are people who are scared."

Roger that.  Move along folks, nothing to see here.

Obama and Big Labor

| Wed Sep. 16, 2009 12:04 PM EDT

James Pethokoukis listens to Barack Obama's two recent speeches to labor audiences and wonders if he's decided to throw Big Labor off the bus:

Both speeches were fiery, pro-union stem winders. Yet the president barely mentioned the top item on Big Labor’s 2009 political agenda, the Employee Free Choice Act....But the card check bill has struggled mightily on Capitol Hill and could clearly use a boost from the White House. Still, the president didn’t speak its name in Lordstown and devoted just a single sentence in Pittsburgh. Is that any way to treat the folks who poured tens of millions of dollars into Democratic campaigns last year?

I don't know why Obama decided not to mention EFCA, but I'll bet it was more tactical than anything else.  Keeping a low profile might just be the better strategy right now.  Arlen Specter, for example, now says that he's a full-throated backer of EFCA, and he thinks other Democratic fence-sitters might be too.  Mark Kleiman comments:

The legislation no longer has “card check” (automatic unionization once 50% of the workers have signed a pro-union petition) but it has two other provisions that, between them, do almost the same thing:  snap elections and real enforcement of NLRB rules against union-busting. 

And it has the provision that’s  more important than any of that:  binding arbitration on a first contract if the two sides can’t agree.   Right now, companies can just refuse to make a deal, wait six months, and then run a de-certification election (using the same dirty tricks they use in the initial elections) with the argument that “This useless union you guys voted for can’t even get you a union contract.” 

If Specter is right — and telling the truth — about Nelson and Lincoln, this year might see the passage of the most important piece of pro-labor legislation since the Wagner Act.

I'm not sure Obama needed to talk about EFCA.  He had just slapped labor-pleasing tariffs on Chinese tires, his stimulus bill has created thousands of unions jobs, and he's nominated three labor-friendly choices to fill vacancies on the NLRB.  Everyone listening to him knew that.  He can afford to keep EFCA under the radar for the time being.

Killing Healthcare Softly

| Wed Sep. 16, 2009 11:15 AM EDT

With friends like Kent Conrad, who needs Republicans?  WTF?

UPDATE: Oops.  Never mind.