Karl Smith is trying to figure out what the real problem with the economy is:

Prices on the NASDAQ, for example, go up and they go down. That can be good or bad for you. But, the market clears. It doesn’t matter what happens in tech or to Pets.com or if we weren’t as wealthy as we thought we were or all kinds of other junk. The market clears.

Why aren’t markets clearing? This is the question. Why do I have houses piling up for sale? Why do I have workers filling out resume after resume? Why did I at the worst of the recession have inventories of real goods piling up at record rates? Why do I still have 2009 model year cars on my lots? Why do I have assembly lines that are not turning?

Why aren’t my markets clearing?

We lose a bunch of wealth fine. We got the balance sheets wrong fine. There is no new tech fine. There is not enough oil fine. All fine, whatever.

Why aren’t my markets clearing?

One reason, perhaps, is that markets aren't clearing by design. I'm stealing this idea from somewhere that escapes me at the moment, but if a bank is holding, say, equities in its portfolio, it marks those equities to market when the market goes down. Everyone does this. The price of a stock is whatever the stock market says it is on any given day.

Not so for housing. Banks will insist that we're just going through a "rough patch," and eventually housing prices will rebound. So they resist marking their real estate holdings to their true value and accepting the consequences. This is understandable, since in some cases the consequences are insolvency and complete failure. Still, with this toxic waste clogging their balance sheets, credit doesn't flow and markets don't clear.

This, of course, is something that was a hot topic of converstation back in 2008 and 2009, but if I had to guess, I'd say there's still a lot of delusional thinking like this in corner offices all over the financial world. Credit channels are blocked up because we still haven't faced up to the extent of the housing bust. Markets in general aren't clearing because one market in particular isn't being allowed to clear. I don't think that "fixing" the housing mess is the holy grail of getting our economy moving again, but it's probably a big part of it. Mark down the toxic waste, renegotiate underwater mortgages, and recapitalize the banks if necessary. It would be a good start.

Guns in Public

Yesterday, California governor Jerry Brown signed a bill that prohibits people from openly carrying handguns in public:

California has allowed weapons to be displayed in public, provided they are not loaded. Gun enthusiasts took advantage of that to gather at Bay Area Starbucks outlets last year with pistols on their hips. Police chiefs and sheriffs complained that panicked customers' calls were diverting them from chasing real criminals.

Sam Paredes, executive director of the advocacy group Gun Owners of California, said the ban could lead, paradoxically, to more carrying of handguns...."This situation will be a catalyst to unite all of the gun community in lawsuits," Paredes said. "The probable outcome is you will have far more people carrying concealed loaded guns as opposed to openly carrying unloaded guns.''

Handguns have never been one of my hot buttons, so I don't have a big emotional investment in this issue one way or another. But here's what I don't understand. As near as I can tell, the gun community has won an all but total victory over the past couple of decades. Democrats have almost universally given up on gun control as a losing issue, there's been no serious action on the federal front for years, and the Supreme Court in 2008 handed down the holy grail of gun rights, ruling in Heller that the Second Amendment guarantees a personal right to bear arms and then ruling a couple of years later in McDonald that this guarantee applies to states and local communities as well as the federal government.

So what's been the reaction? Well Heller and McDonald have spurred a rash of lawsuits as gun groups try to force communities to allow possession of handguns. That's entirely understandable, since this is their core issue. Beyond that, though, instead of basically taking a victory lap, gun groups have gotten ever more bellicose. Wayne LaPierre sounds like an utter lunatic with his talk of secret plans from the White House to take away everyone's guns. Alleged UN plots to ban handguns are on every gun owner's lips. And the latest front is for gun enthusiasts to swagger around with guns on their hips when they go to McDonald's to order an iced latte. Hell, the leading edge of this movement is demanding the right to take their guns everywhere: bars, schools, courtrooms, you name it. Not because there's any serious danger in any of those places, but just to show they can.

I dunno. Maybe this is just human nature. Maybe victory always makes people eager for more more more. But why don't they just accept their victory and bask in it instead? Get Heller and McDonald enforced around the country and call it a day. None of them cared about carrying guns around in public twenty years ago, after all. And if there's any way to get a sympathetic public to turn against them, demanding the right to have armed posses of obsessive gun enthusiasts marching around in supermarkets and bars and school corridors sure seems like a good way to do it.

Bottom line: you won. Nobody can take your guns away anymore, and once the Heller/McDonald rulings have been fully adjudicated, you'll have broader rights about the kinds of guns you can own than the kind of car you can drive. Enjoy it.

UPDATE: I originally said Brown had vetoed a bill that allowed open carry. He actually signed a bill that prohibited it. Sorry. The text has been corrected.

Under the proposed Basel III requirements, banks are required to increase their capital levels, and big banks are required to increase their capital levels even more. The Bank for International Settlements estimates the cost of these new regulations:

Adding together these two components, we find that the impact is again quite small, with GDP at the point of peak impact forecast to have fallen 0.34% relative to its baseline level. Roughly 0.04 percentage points are subtracted from annual growth during this period, while lending spreads rise by around 31 basis points.

Well, that doesn't sound so good. Sure, 0.04% isn't much, but it adds up over time. I wonder if there's any benefit to these new rules?

The benefits of the G-SIB framework relate primarily to the reduction in the exposure of the financial system to systemic crises that can have long-lasting effects on the economy. The LEI estimated the benefits of Basel III by multiplying the degree to which it reduces the annual probability of a systemic crisis, by an estimate of the overall cost of a typical crisis in terms of lost output. Drawing on the [Basel Committee Long-term Economic Impact Study's] results, the MAG estimated that raising capital ratios on G-SIBs could produce an annual benefit in the order of 0.5% of GDP, while the Basel III and G-SIB proposals combined contribute an annual benefit of up to 2.5% of GDP — many times the costs of the reforms in terms of temporarily slower annual growth.

Shazam! A cost of 0.04% per year and a benefit of 2.5% per year. This comes via Dan Drezner, who comments that, of course, "it's not terribly surprising that global regulators will say that they're right and the banks are wrong." True. But this is a massive difference. The BIS modeling would have to be off by an enormous amount for these new rules to be anything less than hugely beneficial. Basically, we're paying a tiny amount each year in order to avoid periodic financial crises like 2008 that wipe out gigantic chunks of GDP at a single crack.

Tim Geithner may have gotten some things wrong, but his insistence on the importance of "capital, capital, capital" has been exactly right. Jamie Dimon can bluster all he wants about the new rules being "anti-American," but the details of his complaints are trivial compared to the benefit of raising global capital levels substantially — which probably won't hurt American banks much at all anyway. Geithner is right to stand up to Wall Street's usual howling and charge full steam ahead with the new Basel requirements.

Harry Reid explains the negotiations over a bill to curb Chinese currency manipulation that finally led Democrats to change the Senate's rules:

The bill — which is supported by business and labor interests — had garnered a bipartisan supermajority not just once but twice. With passage virtually assured, the minority reached for the only tool left to try and derail the bill, confronting us with a potentially unlimited number of votes on completely unrelated amendments. Voting on these amendments would require suspending the Senate’s rules — an obscure procedure that hadn’t been used frequently until this Congress and hasn’t been used successfully since 1941.

....We offered votes on four amendments, and they wanted five. We offered five votes, and they wanted six. Finally, we offered votes on seven amendments, including a vote on an outdated version of President Obama’s American Jobs Act, with which Republicans were seeking to score political points. Still, Republicans refused. They came back with a demand for nine votes that required suspending the Senate’s rules. The same logic that allows for nine unstoppable motions to suspend the rules could lead to consideration of 99 such motions.

I haven't heard Mitch McConnell's side of this, but this sure has the smell of truth. First, because it sounds exactly like something McConnell would do. Second, because McConnell's actions would have to have been pretty outrageous to get the notoriously milquetoast Democratic caucus to unanimously support a rules change. But I guess even a herd of cats can eventually be pushed too far.

Has innovation stagnated over the past half century? One version of the argument for the prosecution is that your great-grandma from 1900 would be astonished if she were whisked forward in time to 1950. But if your parents from 1950 were whisked forward to 2011, they'd mostly yawn. Aside from the internet, everything would seem pretty familiar.

But Matt Steinglass points out that there's one area where this isn't true:

The situation with health care is almost the reverse of that with most other consumer technology. While someone from 1890 would have found a hospital in 1950 pretty much familiar, with a bunch of tweaks and upgrades, someone from 1950 would find a hospital today unrecognisable and startlingly futuristic. From widespread use of blood banks and antibiotics to defibrillators, epidural anaesthesia during delivery, heart surgery and angioplasty, laboratory diagnosis of viruses and bacterial infections, tumor biopsies and chemotherapy, and of course organ transplants, MRIs, and so forth, most of what we expect to see when we go to a hospital these days was developed in the second half of the 20th century. Not to mention the drugs we buy, both prescription and over the counter: birth-control pills, antihistamines, antidepressants, anti-retrovirals, et cetera.

Is this a good thing? Sure, and yet Matt has reservations: "We celebrate the technological revolutions that shifted us from an economy mainly focused on getting enough food to eat well....I'm happy that people today spend much more on cars, computers, clothes and entertainment than they do on food. I wouldn't be happy with an economy in which people spent more on health care than they do on cars, computers, clothes and entertainment."

I hate to be the one to break the news, but I'm pretty sure we already spend more on healthcare than on those four categories combined. This is a bad thing in a lot of ways, because there really is a lot of waste in the healthcare field. We overpay for services, we demand lots of tests that aren't necessary, and, as Matt points out, we spend a ton of money on end-of-life treatments that are hard to justify.

And yet, I want to argue that there are two reasons the situation isn't quite as bleak as it seems. First: a lot of the innovations of the past 50 years are really, really useful. We're often unhappy because the biotech revolution hasn't given us 100-year lifespans yet, but we obsess too much over lifespan. Hip replacements don't allow you to live longer, but they're pretty damn beneficial. Just ask anyone who's had one. Ditto for heart bypass surgery, which allows you to live a much more active life than otherwise. Ditto again for prescription pain meds, HIV therapies, artificial limbs, blood pressure meds, and a hundred other things. Modern medicine really does allow a lot of people to live far more comfortable and mobile lives than they used to.

Then there's reason #2: I guess I just have more faith in the future of medicine than a lot of people. Right now, I think we're stuck in the early stages of a technological revolution, and early stages of technological revolutions often don't look that great. Steam engines in their first few decades were barely worth operating beause the technology just wasn't good enough or cheap enough to replace very much human labor. Computers in the 50s seemed doomed to highly specialized niches that would benefit the economy only modestly. Even agriculture wasn't really all that promising when it first got started 10,000 years ago.

I think that's where we are with medicine. We understand enough to make some progress, but we don't understand enough to make the jump to truly inexpensive, broad-based therapies that make our bodies fundamentally better than they used to be. It's just a really hard problem. But selective breeding eventually turned wheat into a truly useful staple crop, the separate condenser made steam engines the drivers of the Industrial Revolution, and the development of ICs turned computers into mass-market devices. We haven't gotten there with medicine yet. We're beyond the mechanical calculator stage, so to speak, but not quite past the tube stage. And that stage of development often produces products that are unreliable, expensive, and only marginally useful.

But we'll get past it eventually. And when we do, healthcare will probably once again be a smaller share of the economy than cars (or whatever we use for cars by that point), computers, clothes and entertainment. So there's some reason for optimism. Or, at a minimum, at least some reason not to despair too soon.

So Rick Perry has a new ad up that slams Romneycare in about the same apocalyptic tones you'd normally use to advertise a movie about a zombie invasion of the world. Perry's ad, of course, is plainly not meant to influence the upcoming primaries, which are still months away. It's meant to create a mini-feud on the day before a Republican debate, thus prompting the debate moderators to mention it, or maybe play a clip, and then demand that Romney address Perry's blast.

I guess this is legit. And it's not as if the subject probably wouldn't come up anyway. But I just thought it was worth a note. This is one of the ways that primary battles are waged in the brave new era of YouTube and the endless debate. Creating teensy little controversies right before each confrontation is all part of the game nowadays.

Via Felix Salmon, here's a chart put together by economists Gordon Green and John Coder, based on data from the monthly Current Population Survey. It's an index of self-reported income over the past 12 months and it's bad, bad, bad. As you can see, median incomes plummeted during the recession, and as you can also see, incomes continued to plummet during our so-called recovery. Reported income is now down 10% from 2008 levels. More here from the New York Times, including this pithy comment from Princeton economist Henry Farber: "As a labor economist, I do not think the recession has ended."

Indeed not, though perhaps economists who don't care about labor will disagree. In any case, here's your economics lesson for the day: debt implosion ---> reduced spending ---> layoffs and wage cuts ---> plummeting incomes ---> even less spending, more layoffs and wage cuts, and ever lower incomes ---> Zuccotti Park. Republicans and centrist Democrats, please take note.

From E.J. Dionne, possibly the nicest guy in the whole world, telling George Will he's a bounder and a cad for treating Elizabeth Warren badly:

This is a tour de force. My colleague has brought out his full rhetorical arsenal to beat back a statement that he grants upfront is so obviously true that it cannot be gainsaid. Will knows danger when he sees it.

Here's the backstory. Elizabeth Warren gave a speech a few weeks ago making the unremarkable—almost banal—point that businesses depend on roads and schools and courts and police protection and lots of other products of our tax dollars. They don't just spring out of Zeus's forehead. George Will, obviously in a cold sweat over the possibility that the ragamuffins in Zuccotti Park might take this to heart, admitted that Warren was obviously right but then sprang for her throat, accusing her of not merely making a case for fair levels of taxation, but of wanting to convert the United States into some kind of Leninist collectivist hellhole. It went downhill from there.

I haven't bothered blogging about any of this before, since Will long ago allowed his sense of nightmarish panic over creeping lefty totalitarianism to destroy whatever decent instincts he used to have. But Dionne's column does give me an excuse to post Warren's video, which I haven't done before. So here you go. This is for my sister, who's not especially political but finds Warren an inspiration nonetheless. Bankers beware.

Hey, waddayaknow. My print piece for the magazine this month, "Five Six Myths About the Economy," is now up on the website. That's handy timing, what with Occupy Wall Street in full swing, isn't it? It's not quite as magisterial as Ezra Klein's take on Obama's economic policy this weekend (which I highly recommend), but it makes up for that with several lovely charts.

The chart below illustrates Myth #3, Lower taxes are the best way to grow the economy. I'm all in favor of low taxes if we can afford them, but in the moderate range that we set tax rates in the United States, their effect on economic growth and productivity is practically nothing. All the hot air in the world from our Republican friends just can't change that basic fact.

Anyway, there are more myths where that came from. Just click the link to bone up on what you need to know before you visit the relatives this Thanksgiving.


I just finished Francis Fukuyama's The Origins of Political Order, so I was curious to see what Thomas Meaney had to say about it in his review in The Nation. But I hardly think this is a fair description of the book:

The Origins opens with a chapter on the social life of chimpanzees, which Fukuyama uses as a guide to the state of nature of humans....To encounter this newfound reverence for sociobiology at the onset of the book is disappointing. When Fukuyama relies on neuroscience or evolutionary biology to explain how political institutions develop, he confuses the answer to a second-order natural question (why do people build political institutions?) with the answer to a first-order normative question (what sort of institutions should people build?). One gets the sense that he is willing to enlist just about any explanation of human behavior to combat the economic-centric historical theories of Locke’s laissez-faire descendants such as Friedrich Hayek and Mancur Olson.

Meaney is viewing Fukuyama's thesis through the lens of a decades-long disagreement over basic philosophical questions, but I think this leads him astray. Fukuyama does indeed ask why people build political institutions and why different people build different ones, but the bulk of the book really isn't especially concerned with the kind of institutions they should build, even if Fukuyama's own preferences are plain. To a reader who comes in largely cold, as I did, the book is far more descriptive than it is prescriptive.

In any case, Fukuyama's basic thesis isn't really all that novel. States, he says, basically exist on a continuum of central authority. If you have a strong central authority unchecked by other actors (local nobility, independent cities, religious leaders, etc.) you end up with despotism. If you have a weak central authority and lots of competing power centers, you end up with a state too feeble to get very much done. Western Europe, he says, largely via accidents of history, ended up somewhere in the middle and prospered.

But how do strong central authorities evolve in the first place? Fukuyama spends a great deal of time talking about kinship structures and the way they interfere with state building (thus the brief foray into primate psychology at the beginning of the book). Loyalty to family and tribe is naturally strong, he argues, and tearing down that loyalty is crucial to building an effective state with adequately strong central authority. This, again, isn't an especially novel observation, but his application of this observation to early Christian history was new to me. "The Catholic church," he writes, "took a strong stand against four practices: marriages between close kin, marriages to the widows of dead relatives (the so-called levirate), the adoption of children, and divorce." All of these are things that help kinship groups keep property within the group, and by systematically cutting them off, and then promoting the voluntary donation of land and property to the church itself, the Catholic church enhanced its own power. Later on, rules like priestly celibacy were designed to prevent kinship groups within the church from interfering with the central power in Rome. All of this strengthened the power of the church at the expense of kinship ties, and while undermining the family may or may not have been a deliberate strategy, that was the end result. Tribal and family connections in Western Europe became (and remain) much weaker than in much of the rest of the world.

Fascinating! I'd be interested in learning whether other scholars agree with this interpretation, but unfortunately Meaney doesn't tell us. Instead we get this about Fukuyama's broad comparisons of the rule of law (a necessary precursor to a non-despotic state) under various historical regimes:

Despite Fukuyama’s assurances to the contrary, these sorts of forced comparisons create the impression that The Origins of Political Order is gamed from the beginning, with the book—and history—reaching its foregone climax in the Western European states that avoided Chinese and Indian excesses.

Well, sure it's gamed. But that's not because Fukuyama isn't playing fair, it's because he knows how history turned out. Like it or not, Western Europe did develop a globe-spanning empire before anyone else, and Fukuyama is quite legitimately interested in trying to figure out why. Maybe his conclusions are right, maybe they're wrong, but he doesn't really have any choice other than to seek answers to the question of how things actually turned out rather than how they might have turned out. It's like complaining that Einstein cheated when he developed General Relativity because he knew the real-world observations he had to explain before he started.

So what is Meaney's real problem? I think he gives himself away here:

Fukuyama curiously glides over the major historical problem in The Origins, which is, quite simply, that liberalism, capitalism and democracy have always been uneasy bedfellows. In its raw form, the principle of democracy—rule by and for the people—sits awkwardly with the defining principle of capitalist organization, which necessitates political arrangements that encourage unequal concentrations of wealth. Democracy has prospered in the West largely because its capitalist economies have redefined what democracy means.

Fukuyama may well be too convinced of the historical superiority of market-based democracy — though this hardly tallies with his supposed allergy toward economic-centric historical theories — but Meaney may be making more of this than he should. That there are tensions inherent in late capitalism is hardly an esoteric observation, and it's just not true that Origins "curiously glides over" the subject. It deliberately glides over it because it's a book about pre-Malthusian state building and halts around 1800. Volume 2 will tackle the past 200 years, which is where you'd expect Fukuyama to take up the interplay of liberalism, capitalism, and democracy in the modern world.

It's inevitable, I think, that any account of something as complex and contingent as state building runs the risk of sounding like a just-so story. But if there's a defect to Origins, it strikes me that it's just the opposite: the book is full of fairly dense historical description and fairly light on overarching theory. And Fukuyama spends several chapters, totaling nearly a hundred pages, describing several European states in a deliberate attempt to illustrate just how fortuitous and chancy successful state building is. So, yes, one of his messages is that the subject is more complex than a simple economic-centric model can account for. But that's a feature, not a bug. After all, if you want to understand why human beings do things, you need to understand human behavior, and in a lot of ways we're all still just hairless apes. So bring it on: primate psychology, tribal loyalties, religion, kinship structures, economic and geographic factors, the interplay of interest groups, and ever so much more. Whether Fukuyama can eventually produce a coherent model of state building from all this remains to be seen. But Volume 1 isn't a bad start.