The Financialization of America

Scott Sumner tries to explain why finance is so much more lucrative today than it was in the 50s and 60s:

Today the most productive members of society are not those who produce things, they are those who discover the things that need to be produced. Once you have the blueprint, it is easy to produce many types of software and pharmaceuticals. The big money goes to those who figure out the blueprint, but also to those who allocate capital to the guy who has the idea for a Google, or Facebook, or Twitter.

....And then there’s globalization, which means decisions about allocating capital can vastly improve productivity even in the old-line industries that were dominant in the 1960s, when the rest of the world hardly mattered. Finance is not that important in an agricultural economy or even in an economy where the mass production of goods can be done with almost military precision. It becomes extremely important in an economy where it is not at all clear what should be produced, or on what continent that production should take place.

This seems pretty unpersuasive. If Wall Street were making truckloads of money on their VC investments, then OK. Maybe he'd have a point. But I'm pretty sure that true venture capital constitutes a tiny fraction of finance sector earnings. Likewise, allocating capital to old-line industries is just....allocating capital to old-line industries. Why does it matter whether those industries are in Pittsburgh or Mumbai?

If the finance sector were truly creating lots of extra value, then most of us probably wouldn't mind that bankers were taking home outsize paychecks. But are they? Are overall global growth rates higher today than they were 50 years ago? Is productivity growth higher? Is modern finance repsonsible at all for higher economic growth than it was in 1965?

It sure doesn't seem like it — though I'm open to contrary evidence. Rather, it seems as if the explosion in finance over the past three decades has mostly consisted of rent seeking and massive increases in leverage and hidden risk thanks to post-Bretton Woods globalization and deregulation. The actual benefit to the rest of mankind is a little hard to suss out.

Doing a Deal on Social Security

Digby reposts a summary today of last year's "Fiscal Responsibility Summit," in which Gene Sperling — now a top contender to replace Larry Summers as head of the NEC — said the Obama administration was interested in cutting a deal on Social Security, and warns against taking the bait:

I know I've posted that too often and regular readers are sick of it. But it's terribly important, I think, to understand that the rationale for liberals in this thing is that they are doing a good thing for the program, taking it "off the table" for the next 50 years and "making it sound." Now, I don't know if they really believe it, but it doesn't matter. What matters is that in the current environment whatever changes they come up with will come at the expense of the elderly because there will be no deal that requires tax hikes.

Atrios agrees:

I don't know why some liberals think that there is some deal, good or bad, which can somehow take the Social Security issue off the table until the end of time. As Ben Bernanke said, that's where the money is and they'll be trying to steal it in perpetuity. Cutting granny's benefits a bit won't change that.

I just don't think this is true. It's possible that Republicans will never agree to a Social Security deal that increases taxes, but keep in mind that Republicans are mainly obsessed with taxes on the wealthy. A small increase in payroll taxes and/or an increase in the payroll tax cap wouldn't affect the millionaire class much and might get a fair amount of GOP support. In any case, the only way to find out is to try. If they won't do the deal, then they won't do the deal.

But assume that a deal is possible. If it is, I think it's wrong to insist that it will come solely at the expense of the elderly, or that it won't do any good because Social Security will never be off the table anyway. On the first point, it's quite possible to structure a deal that requires nothing more than a very modest slowdown in the the future increase of benefit levels that (a) affects only those with fairly high incomes and (b) phases in over a period of decades. That's hardly Armageddon. On the second point, sure, Republicans will probably go after Social Security forever. But that's not what matters. What matters is that if the program is officially in balance then Republicans no longer have the traction to succeed. Benefit cuts are unpopular, after all, and conservatives by themselves don't have either the desire or the ability to buck the public on this unless they also have the support of the Washington Post/Pete Peterson Beltway elite. And they won't have that once the program is officially solvent. A deal on Social Security kicks the legs out of the centrist support they need in order to have any chance of reducing benefits in the future.

Now, again: maybe a deal isn't possible. There's only one way to find out. But if a deal is possible, it really would take Social Security off the table for a very long time. That would be good for the elderly, good for the country, and good for the liberal project in general. If there's any chance of doing a bipartisan deal over the next two years, Democrats should be open to it.

The $11,000 Op-Ed

Felix Salmon isn't too impressed with any of the three main candidates to replace Larry Summers as head of the NEC. Roger Altman and Richard Levin both have substantial ties to Wall Street, and then:

Finally there’s Sperling, who in some ways is the worst of the three when it comes to grubbing money from Wall Street. The other two have well-defined and easily-understood jobs; Sperling, by contrast, signed up with the Harry Walker Agency and started giving speeches to anybody with cash, including not only Citigroup but even Allen Stanford. He also wrote a monthly 900-word column for Bloomberg for $137,500 a year, which works out at about $13 per word.

This really brings things home to a scribbler like me. Being paid a million bucks a year for some kind of ill-defined financial "consulting" is one thing. I don't really know anything about what that entails. But writing? I know all about that, and $11,000 for an op-ed is a wee bit excessive, no? At least, it is if it's really just the writing you're paying for.

Darrell Issa's Agenda

Dave Weigel says that Darrell Issa's trash talk about Barack Obama being "one of the most corrupt presidents in modern times" is just that: trash talk. It's gaining him the spotlight, and now that he's got it he's going to pursue a fairly ordinary investigatory agenda:

Issa's in roughly the same position that John Conyers and Henry Waxman were in when they took over their committees in 2007. At one point, both of them went on record saying they'd consider ("keep an open mind" was Waxman's phrase) impeachment hearings. Voila, instant attention, instant pushback from leadership, and they went on to investigating the stuff that they'd intended to, like the U.S. attorney firings.

Issa became a national figure by taking a bank shot and bankrolling the petition to force the 2003 California recall; if anything he's savvier about media coverage than either Conyers or Waxman. He's got people primed for a 1995 redux of investigations of picayune scandals, but his talk about those scandals are only the entry point into what he really considers "corrupt." That's liberalism and corporatism, transparency about the ugly kludges that marked our response to the recession.

Maybe so — though I'm not sure Issa is quite as savvy as all that. Remember, when he bankrolled the recall of Gray Davis in 2003, it was because he figured it would make him California's next governor. That turned out to be a somewhat less than savvy read of the political situation.

That said, Weigel may be right about Issa's agenda. Still, my experience is that, for the most part, it's best to take politicians at face value. There aren't nearly as many of them pursuing clever three-bank shots as pundits tend to think. Issa's agenda will probably be 80% fairly normal conservative harassment, but I'd be surprised if the other 20% wasn't some pretty crazy red meat Dan Burton-esque lunacy. He may well decide that ACORN and the New Black Panthers are yesterday's news, but just wait. New stuff like that will crop up, and Issa probably won't be able to resist diving in.

Reducing Uncertainty

Republicans have been concerned about regulatory "uncertainty" holding back economic recovery, and the compromises reached during the lame duck session certainly helped to reduce uncertainty. However, the Wall Street Journal reports that at least one source remains:

The Republican gains in Congress in November's election added new questions to the outlook for health-insurance costs borne by companies. Since then, some party leaders have said they aim to reverse or at least starve the Obama health-care law; meantime, lawsuits challenge some aspects of it. "You don't know where it's going to go," said Robert J. Olson, CEO of Winnebago Industries Inc., a maker of motor homes.

So I guess the Republican caucus will listen to the business community and abandon its efforts to repeal little bits and pieces of the healthcare reform law. Right?

(Actually, it really is possible that both the healthcare sector and the business community in general, after they take a look at what kind of chaos might ensue from ad hoc partial defunding, will put some real pressure on Republicans to stand down on this. That would be an interesting turn of events, no?)

Foxes and Henhouses

Andrew Samwick writes about the well-known problem that employers — both private and public — have been underfunding their pension plans for years:

There is nothing inherently wrong with a defined benefit pension plan, but its implementation has been a challenge in both the public and private sectors. It is a promise to pay compensation in the future. To honor that promise responsibly, the plan sponsor needs to fund it adequately in the time interval between when the promise is made and when it is kept. Simply put, that hasn't been happening in large private sector plans and in most public sector plans. The problems are worse in the public sector because voters don't pay as much attention to the financial bottom line as shareholders do and because the accounting standards are sharper for private sector plans than public sector plans. For many years, elected officials have been making promises that future (now, near-future) taxpayers are not going to want to keep.

This seems like a problem that really could be solved via privatization: instead of allowing employers to self-fund their pensions, require them to use an outside fund (or funds). An outside fund would insist on contributions being adequate to fund projected payouts since they're the ones on the hook to make good. No gameplaying tolerated. And as long as there are enough funds out there, competition would keep them from going in the other direction and demanding contributions that are excessive.

What am I missing here? (Aside from the fact that employers wouldn't like the idea of not being allowed to play games, that is?) A whole swath of regulations would be required to make this work, but surely nothing more complicated than what we already have. Almost anything seems better than allowing employers to decide for themselves what's adequate and what isn't.

Parking Regulations

Matt Yglesias on requirements that businesses provide parking for their customers:

For the millionth time this isn’t something that needs regulating. Land is a valuable commodity. And ability to park one’s car is also valuable. Property owners in any given area are perfectly capable of evaluating what portion of land should be dedicated to parking based on the market demand for parking relative to the demand for other uses of land.

Requirements in cities and suburbs vary, but here in the burbs the general idea behind parking regulations is to make businesses pay for their own externalities instead of fobbing them off on other people. If I provide parking for my customers, and someone opens up next door and decides not to bother, then his customers will take up all my spots. If neither one of us provides enough parking because there's a neighborhood nearby, then our customers will take up street parking that owners of existing houses have paid for and are accustomed to using. In both cases, there are people who would like to regulate parking in order to make life more convenient and prevent free riding.

Now, if your goal is simply to reduce the amount of parking so that it's a pain in the ass and people will drive less, that's fine. It's a pretty roundabout way of doing it, but whatever. But if your goal is to match parking spaces to cars, then it's simply not true that property owners are the best judges of how much parking is needed. Like profit maximizers anywhere, they'll do their best to provide as little parking as possible and instead try to free ride on the parking that other people have already created and paid for.

If there were an efficient way to allow customers to park only in spaces specifically paid for by each business, then property owners could be left alone to determine their own parking requirements. But that's rarely the case. Thus, regulations.

Friday Cat Blogging - 31 December 2010

I think it's probably daft to pretend that I'm going to find something worthwhile to blog about today if I just keep staring at the computer long enough, so let's get straight to Friday Catblogging and call it a year. Unfortunately, even though I've had two weeks to get my act together, I haven't taken any fresh pictures of the furballs lately. So last night at 8:59 I decided instead to treat you all to a bit of cinéma vérité: Inkblot and Domino at snack time. Unfortunately, they didn't really put on a very good show. Still, vérité is vérité, and this is truly a slice of real life, dramatic qualities be damned. Sometimes life just isn't very dramatic. But still cute.

And with that, happy New Year, everyone. See you on the other side.

Convex Mirrors Coming to America?

Here's an entry from the annals of "things I've always wondered about but never had the energy to bother checking on": Why don't cars in the United States have convex driver's side mirrors? They sure seem to make sense to me, but who knows? Maybe there's something unsafe about them that I haven't thought of.

As it turns out, I still don't know. The proximate answer, of course, is that they're illegal, but I don't know why they're illegal. The reason is probably buried in the mists of time. However, according to the New York Times, the Department of Transportation, after a grueling three-year process, is thinking about maybe, just possibly, allowing carmakers to use them. Mike O'Hare, who is a positive sink of information about the most obscure topics imaginable, comments:

Thinking about bureaucrats in DOT taking three years to make a decision worth maybe half a day, having spent a couple of decades to even engage the question, through all of which millions of drivers outside the US have been running an enormous demonstration program showing the superiority of convex driver’s-side mirrors, can make a libertarian’s day.

....There’s more to the convex mirror than the Times story records. Not only is the field of view wide enough to cover the left-hand blind spot, but a convex mirror doesn’t have to be dimmed to prevent cars behind you from blinding you at night. Now, if we could get them in the right place, which is on the fender, visible through the dashboard so you don’t have to take your eyes off the road to be aware of what’s going on behind you, we’ll be making some real progress. For this location, they have to be convex, because at that distance, the field of view of a flat mirror is much too narrow. I’ve had convex fender mirrors (very hard to find, and it’s a nuisance to make a flat panel to replace the stock abortions on the doors) for twenty years and would never go back. I suppose I’m courting a ticket, but so far, no problems.

I still don't know why flat driver's side mirrors have been mandated in the U.S. for so long, so be sure and enlighten us in comments if you happen to know the answer. In any case, it looks like our long national nightmare may soon be over. Just please don't tell any conservatives that DOT is considering this change so that U.S. rules will be "harmonized with European requirements." You know how they feel about euro-weenies.

Snowy LA?

This was posted a few minutes ago on Andrew Sullivan's blog:

WTF? Is this a window facing a backlot at Universal Studios? We've had monsoon-like rain around here lately, but I haven't seen any snow yet. Or perhaps this is somewhere on the Tejon Pass, just barely within LA County and therefore technically "Los Angeles" even though it's 40 miles from the actual city?

Beats me. It's a pretty picture, though.

UPDATE: Turns out the picture is from Virginia Beach, not Los Angeles. Good to know that I'm not going crazy.