Kevin Drum

Boston With Good Weather

| Fri Jul. 2, 2010 10:28 AM EDT

Matt Yglesias on his visit to California:

Every trip I ever take to this state is a time to become frustrated anew that the bulk of America’s walkable urbanism exists in the horrible-weather locales of the Northeast or else the even-worse-weather locale of Chicago. Head west to California and the climate is lovely — tons of great places to walk around — but the built environment is inhospitable to such endeavors. It’s a huge shame. If you took Boston and relocated it to somewhere in California, it would possibly be the greatest place on earth. Instead it’s Boston.

Hmmm. That's been done, hasn't it? I think they called it San Francisco, and its residents are indeed convinced that it's the greatest place on earth. Just ask them. And with all the hills, it's much better for your cardiovascular health, too!

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Are We Headed For a Double Dip?

| Fri Jul. 2, 2010 10:19 AM EDT

From the LA Times today:

A fresh batch of weak economic news Thursday heightened concerns about the staying power of the fledgling recovery, with more uninspiring news expected Friday when the government reports on the May job market.

....Most economists still see a "double dip" as a remote possibility, clinging to forecasts that the economy will muddle along at a modest pace for several quarters....After a series of strong economic data early this year, recent reports have been more mixed, but that hasn't altered the fundamental outlook for the economy, said Ken Matheny, a senior economist at Macroeconomic Advisers, a forecasting firm based in St. Louis.

Well, "most" forecasters may think a double dip is a remote possibility, but not John Hussman:

A few weeks ago, I noted that our recession warning composite was on the brink of a signal that has always and only occurred during or immediately prior to U.S. recessions....What prompts my immediate concern is that the growth rate of the ECRI Weekly Leading Index has now declined to -6.9%. The WLI growth rate has historically demonstrated a strong correlation with the ISM Purchasing Managers Index, with the correlation being highest at a lead time of 13 weeks.

....Taking the growth rate of the WLI as a single indicator, the only instance when a level of -6.9% was not associated with an actual recession was a single observation in 1988.

Great. And today's lousy jobs report may put a few more folks in Hussman's camp. Buckle your seat belts.

Keeping Up With the Jones Act

| Fri Jul. 2, 2010 5:00 AM EDT

Have you heard of the Jones Act? Unless you read Newsmax and listen to a lot of right-wing radio, probably not. It's an obscure statute that's been on the books since 1920, and it requires all shipping between U.S. ports or in U.S. coastal waters to be carried in U.S.-flag ships that are owned and crewed by U.S. citizens.

So why are conservatives suddenly up in arms about it? Because, they claim, it's a labor-inspired rule that's obstructing aid to a Gulf Coast being ravaged by the BP oil spill. Why, if only President Obama would stand up to the union bosses and grant a waiver to the rule, we could get help from the Dutch, the Norwegians, the Belgians, and all the other countries that desperately want to help but are being kept away. Sarah Palin got the ball rolling on this meme a couple of weeks ago when she said, "It’s amazing to me and to so many others that though President Bush had been able to waive Jones Act provisions for Katrina, President Obama hasn’t thought to do that yet?" It's been a right-wing talking point ever since.

This is, as it happens, entirely false. No waivers have been requested yet because so far none have been needed. The Jones Act doesn't apply to vessels like oil skimmers that would be used in coastal areas, and the world's largest skimmer, a converted Taiwanese supertanker, is in the Gulf and will begin operations soon. It doesn't apply at all more than three miles off the coast, where the spill itself is taking place. There are, it turns out, over a dozen foreign flagged ships helping out with spill operations. "To date," reports, "25 countries and four international organizations have offered support in the form of skimming vessels, containment and fire boom, technical assistance and response solutions, among others." Only one offer has been declined.

Not surprised? Me neither. But I was pleasantly suprised by this headline on a Jones Act story distributed on Wednesday by McClatchy:

GOP's false talking point: Jones Act blocks Gulf help

One of the reasons that conservatives get away with mendacious memes like this one is because the media rarely calls them out directly on it. When it came up on Meet the Press last weekend, for example, David Gregory's response was "Mm-hmm," and it was left to Rep Ed Markey (D–Mass.) to explain why the charge was baseless. So three cheers to the heroic but anonymous copy editor at McClatchy who read William Douglas's story and didn't try to fudge things. It's a false talking point, full stop, and it's nice to see someone in a mainstream organization say so plainly.

Are We In a Treasury Bubble?

| Thu Jul. 1, 2010 6:36 PM EDT

Conservative economist Scott Sumner tries to divine Paul Krugman's secret to economic prognostication:

If you read Brad DeLong, you probably notice that he is a bit in awe of Krugman’s ability to be right about everything. Actually, Krugman isn’t right about everything....But to give the devil his due, he is right about an awful lot of things. Why is that?

....Think about all his recent posts mocking the conservative fear that big deficits will lead to higher interest rates. What evidence does Krugman use? He cites the low and falling 10 year bond yields. In other posts he has used TIPS spreads to explain why inflation is the last thing we should be worried about. Now flash back to March 2009, when Krugman warned that $780 billion in stimulus would not be enough to get the job done. Did he know this from his models, as he claimed? Or did he cheat, did he peek at the equity, commodity and bond markets, and notice that all were predicting a severe recession with lots of disinflation, if not outright deflation? I think he peeked.

My theory is there are two kinds of economists:

1. Those who look smarter than they really are, because they rely on the EMH to predict

Paul Krugman

Scott Sumner


2. Those who look dumber than they really are because they rely on their own models to predict

EMH is the Efficient Market Hypothesis, and in this context it basically means that current prices reflect the best information we have about the state of the market. There are no hidden secrets and there are no models that can provide better predictions. If the market, putting its money where its mouth is, thinks that interest rates and inflation are going to remain subdued, then your best bet — as Krugman and DeLong point out regularly — is that interest rates and inflation are going to remain subdued.

Of course, neither Krugman nor DeLong is a big fan of EMH, so Sumner is having a bit of fun at their expense in this post. Still, there's a point to the snark, and it's why I'm a smidge less sure about the market's view of interest rates and inflation than K&D are. The problem is that I'm on their side when it comes to EMH: it really isn't a very reliable theory, and it's especially unreliable in the middle of bubbles. Relying on market prices as a guarantee of safety during the credit bubble of the aughts would have led you wildly astray, and I suspect that it might be doing the same thing now: thanks to the global recession, the overall dearth of good investment opportunities, and a general fear of the future producing a sustained flight to safety, we may be in the middle of a treasury bubble that's pushing interest rates to artificially low levels. If we are, then that bubble may pop unexpectedly and we may learn that the market has been fooling us all along.

Now, DeLong in particular has been tireless in making a related but separate point: it doesn't really matter what you think about the future. If the market — whether or not it's being fooled by a bubble mentality — is willing to loan the government money for 10 or 30 years at low interest rates, then the government should take the money. Once the rate is locked in, it means we're getting cheap funding to stimulate the economy, and we might as well take advantage of it. This has nothing to do with either EMH or any attempt to predict the future.

And I basically agree. I'm not sanguine about the state of the economy, and I think the risk that either expansionary fiscal policy or expansionary monetary policy will touch off a serious inflation storm is small. In any case, small enough that I'm willing to take it. Still, there is a chance that expansionary policy will, at some point, spook the market enough that it wakes up from its bubble and decides to send interest rates skyrocketing. I don't think it's a very big chance, but it's a chance. And it's why I'm just a little bit waffly on the whole subject.

Deficit Poser Alert

| Thu Jul. 1, 2010 1:48 PM EDT

Ryan McNeely isn't impressed with the deficit hawkery of Blue Dog Democrat Stephanie Herseth Sandlin (D–SD), who has been relentless in her efforts to reduce stimulus and jobs spending:

The problem is that Herseth Sandlin voted to permanently cut the estate tax, which “would have reduced government revenue by an estimated $268 billion over the next decade, according to the Center on Budget and Policy Priorities.” There were no corresponding spending cuts. She also voted for the Energy Policy Act of 2005, which contained billions in tax breaks for extremely profitable oil companies. She also voted against the deficit-reducing Affordable Care Act. Finally, she voted for a $100 billion emergency supplemental for the Iraq War without requiring a withdrawl timeline, against the wishes of Democratic leadership.

She's a deficit poser, not a deficit hawk. She doesn't care about the deficit, she just prefers that money be spent on rich people, big corporations, and foreign wars instead of the unemployed and those without healthcare. Which is fine, I guess. But tell me again why she's a Democrat and why anyone takes her alleged deficit hawkery seriously?

Chart of the Day: The Recession's Effect

| Thu Jul. 1, 2010 12:40 PM EDT

We already know that unemployment, long-term unemployment, and underemployment have been sky high during this recession, but a new study from Pew has some additional startling news: even among the still employed, 74% have taken a pay cut of one kind or another,1 either directly or via forced time off — and it's probably even worse than this since Pew apparently didn't ask about cuts in benefits. I wonder: does this mean that wages among the currently employed aren't as sticky as we think? And is this new? My sense is that we haven't seen pay cuts of this breadth in previous recessions, even in 1981-82. But that's just a sense. I don't know if there's survey data to back that up.

Other bullet points from the Pew study:

  • More than six-in-ten Americans (62%) say they have cut back on their spending since the recession began in December 2007.
  • About half the public (48%) say they are in worse financial shape now than before the recession began....Government data show that average household wealth fell by about 20% from 2007 to 2009, principally because of declining house values and retirement accounts. This is the biggest meltdown in U.S. household wealth in the post-World War II era.
  • A third (32%) of adults now say they are not confident that they will have enough income and assets to finance their retirement, up from 25% who said that in February 2009.
  • Throughout most of the decade of the 2000s, Republicans were significantly more upbeat than Democrats about the state of the economy. That pattern is now reversed.

That last point, by the way, almost certainly explains the different levels of economic optimism among various demographic groups. In all cases, the more Democratic trending group is also the most optimistic.

In other related news, homes sales are down, GM is selling fewer cars, jobless claims spiked last week instead of falling, and thanks to Ben Nelson (D–LetEmRot) unemployment benefits still haven't been extended. Those benefits are only for losers in other states, after all. As long as Nebraska is doing OK, why should he be worried?

1A couple of commenters point out that the categories in the chart aren't mutually exclusive. A single person might fall into more than one of them, so you can't just add them up to get 74%. That's true. So the real number is lower than this. At a guess, though, it's still well over 50%.

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Question of the Day: Journalistic Ethics

| Thu Jul. 1, 2010 11:22 AM EDT

From Max Sawicky:

If it is forbidden for journalists to privately deride their subjects, why is it fine for them to publicly idolize them?

Well, um, because.....look! Halley's comet!

News Flash: John Bolton Still Clueless

| Thu Jul. 1, 2010 11:05 AM EDT

Uber-hawk John Bolton takes to the pages of the LA Times today to trash the Obama/Petraeus strategy in Afghanistan. Neither counterterrorism nor counterinsurgency will work, he says, to meet the twin goals of crushing the Taliban and keeping Pakistani nuclear weapons safe:

Instead, we require a sustained military presence in Afghanistan devoted to the grim, relentless crushing of the Taliban and Al Qaeda, coupled with substantially enhanced Pakistani military pressure there. This means protracted military action, not social services, which Team Obama is thoroughly unwilling to endorse. It turns out, entirely predictably, that Afghanistan was not "the good war" after all.

This is no surprise coming from Bolton, but still: don't even his neocon buddies ever get embarrassed by him? Maybe he should ask the Soviets how their "grim, relentless" campaign in Afghanistan did in the 80s? That is, if he can find any Soviets to ask. The Soviet Union outlasted the failure of their all-out war in Afghanistan by only a few years.

Bolton is probably right to think that both counterterrorism and counterinsurgency are unlikely to work. But we aren't pursuing them because Obama is too much of a pussy to wage a real man's war. We're pursuing them because just about everyone in the U.S. military understands what Bolton doesn't: all-out conventional war against insurgent foes like the Taliban and al-Qaeda is even more unlikely to work. What's more, the theory of counterinsurgency isn't based on the idea that economic progress will defang the insurgents themselves (Bolton: "Religious fanatics, and their grievances, do not arise from poverty or deprivation. Accordingly, their fanaticism is not susceptible to remedies based on economic determinism, whether of the crude Marxist variety or its community-organizer cousin. Their motives and hatreds will not disappear with prosperity or free elections."). It's based on the idea that it will reduce their support among the indigenous population, support that any insurgency needs to operate effectively. This is counterinsurgency 101, something that the military community hashed out years ago, but Bolton still doesn't seem to get it. For him, it's always the killing fields or nothing.

Elena Kagan and the Vegetables

| Thu Jul. 1, 2010 12:40 AM EDT

Supreme Court confirmation hearings are little more than figurative jokes these days, but the LA Times tells me that today's questioning of Elena Kagan was literally a joke:

Perhaps no amount of cramming could have readied her for the question asked of her by Republican Sen. Tom Coburn of Oklahoma: Can the government, he wondered, pass a law forcing Americans to eat fruits and vegetables?

To Kagan, at first blush, the question must have seemed absurd, maybe even a joke. "It sounds like a dumb law," she replied off the cuff. Then, realizing Coburn was serious, she segued into sort of the windy, contextual, cautious analysis that she has employed to answer most of the questions asked of her over the last two days.

But she had fallen into Coburn's trap by answering more like the law professor she is than by simply responding like most people would. She never just said: "Of course it can't."

Within hours, a video detailing the exchange was atop the Drudge Report website, hundreds of thousands had viewed it on YouTube, and conservatives were having a field day. Her equivocation fit ideally with the narrative Republicans are trying to fashion during these hearings — a story of a federal government out of control and a Congress running amok.

We are truly ruled by idiots. At least, we will be if Republicans win control of Congress in November. Be afraid. Be very afraid.

Federal Stimulus, State Sedative

| Wed Jun. 30, 2010 10:03 PM EDT

Over at The Corner, Ramesh Ponnuru recommends a post by Alan Reynolds of Cato:

A recent Washington Post column by Ezra Klein dreamed up a new excuse for the conspicuous failure of Obama’s so-called stimulus plan. Klein argues that the stimulus of federal spending has been offset by the “anti-stimulus” of fiscal austerity by state and local governments.

....But it is easy to identify each sector’s direct contribution to the overall growth rate of real GDP from a St. Louis Fed publication, “National Economic Trends.” State and local government spending was rising during the first three quarters of the recession, and the drop in the fourth quarter of 2008 accounted for just 0.25% of the 5.37% annualized decline in GDP. In the first quarter of 2009, state and local spending subtracted just 0.19% from real GDP, but federal spending subtracted more (0.33%) due to cuts in defense spending. Government obviously made only a minor contribution to the 6.4% drop in overall GDP.

....The table shows that government spending on goods and services had nothing to do with the recovery (transfer payments don’t contribute to GDP). As a matter of simple accounting, the state and local sector has been a very minor negative force — scarcely comparable to the Fed’s inaction in 1930-32.

This is a very peculiar argument. If you cut through the fog of words, here's the table from the St. Louis Fed report that Reynolds is relying on:

The stimulus bill passed in February 2009 and presumably started taking effect in the second quarter of 2009 and beyond (red shaded area). Add up the numbers and they show that federal spending was responsible for 1.58 percentage points of GDP growth during that period while state spending was responsible for -0.36 percentage points of GDP growth. Look at just the three most recent quarters and it's even worse: 0.73 points of growth from the feds and -0.84 points from the states. In other words, it's exactly what Ezra said: the federal stimulus has been largely offset by declines in state spending.

Now, it's true that federal spending in general has a fairly small impact on total GDP. But that's because when you remove transfer payments the federal government only accounts for about 15% of total spending. The rest is private sector. There's nothing mysterious about this.

I dunno. Maybe I'm missing something. I'm not sure that this is a very illuminating way to judge the effect of the stimulus on GDP in the first place, but to the extent that it is, it backs up Ezra completely: the federal stimulus has been largely counteracted by state cutbacks, just like he said.