Republicans and the Tax Deal

Hmmm. Last week I wrote a post suggesting that, in the end, Republicans would get scared off by their tea party wing and leave it up to Democrats to pass the Obama tax deal. So I proposed a pool: how many Republicans will actually end up voting in favor? I figured 30 in the House and five in the Senate.

But I never published the post. Republican support at the time seemed so strong and so widespread that I figured I was wrong. This time, Lucy wasn't going to pull away the football. Republicans really did lust after those tax cuts for the rich so much that they couldn't not vote for them.

But maybe I should have had the courage of my convictions. I see that Mitt Romney denounced the deal today, and Ezra Klein notes that Rush Limbaugh, Sarah Palin, and the Tea Party Patriots are also opposed. His conclusion: "I'd bet there are plenty of elected Republicans looking to bail. What they need is an excuse. If the House Democrats manage to make any real changes to the deal, they'll have one — and so will John Boehner and Mitch McConnell." Added to that, there's the dawning realization that the stimulus from the tax deal might be just big enough to all but guarantee Barack Obama a second term in the White House.

So we'll see. The cloture vote did pass 83-15 yesterday, so signs of a revolt are pretty muted right now. And maybe I'm overestimating Republican cynicism — though that's pretty damn hard to do these days. But an awful lot of them would probably like to see the bill pass, just not with their vote attached to it. In the end, I still wouldn't be surprised to see it get just barely enough votes to make up for a few Democratic defections. Maybe ten votes in the Senate instead of five, but no one should be shocked if it's nothing higher than that.

Quote of the Day: Ending the War

The last words of Richard Holbrooke, President Obama's chief envoy to Afghanistan and Pakistan, before he was sedated for surgery on Friday:

"You've got to stop this war in Afghanistan."

That would be a fitting memorial.

Judge Hudson's Weird Decision

Judge Henry Hudson's opinion declaring the individual mandate unconstitutional is a curious thing. The federal government basically argued that (a) PPACA regulates the healthcare market and (b) the healthcare market is plainly an instance of interstate commerce. So broad regulation of the healthcare market is well within the purview of the Commerce Clause of the constitution. Furthermore, since individuals get sick and receive medical care whether or not they have healthcare coverage (and whether or not they can pay for it), a decision not to buy health insurance has a significant effect on the healthcare market. Therefore, forcing people to buy healthcare coverage is a reasonable provision in a bill meant to regulate the healthcare market.

But here's what Hudson has to say about that:

If a person’s decision not to purchase health insurance at a particular point in time does not constitute the type of economic activity subject to regulation under the Commerce Clause, then logically an attempt to enforce such provision under the Necessary and Proper Clause is equally offensive to the Constitution.

I'm no lawyer, but that's just not right. As defined by Hudson, the Necessary and Proper Clause serves no purpose at all, because anything that isn't specifically authorized elsewhere in the constitution logically can't be authorized by the Necessary and Proper Clause either. But the Necessary and Proper Clause isn't meant to merely add an exclamation point to other provisions of the constitution. Rather, it says that rationally related subsidiary means are constitutional as long as the overall ends are constitutional. To make Hudson's paragraph meaningful and non-tautological, it would have to read like this:

If regulation of the healthcare market does not constitute the type of economic activity subject to regulation under the Commerce Clause, then logically an attempt to enforce an individual mandate under the Necessary and Proper Clause is equally offensive to the Constitution.

This would be true. But no one is arguing that Congress can't regulate the healthcare market, so it also doesn't matter. The entire issue at stake here is whether the individual mandate is a reasonable means to implement a piece of regulation that, broadly speaking, is clearly within Congress's purview. But because Hudson peremptorily sweeps this away with his odd tautology, he never really engages with the key question in the entire case. 

For reasons that Jack Balkin summarizes well here, I think the Supreme Court will end up agreeing that the individual mandate is well within the range of means that Congress can choose from in order to regulate a large and important sector of interstate commerce. But whether they do or not, it's hard to believe that they or any other court will take Hudson's facially preposterous reading of the Necessary and Proper Clause seriously.

Gambling on the Future

Robert Samuelson thinks the Great Recession has eroded America's appetite for financial risk. Matt Yglesias has the right response:

The allergy toward risk-taking isn’t a consequence of the recession, it’s something that existed even beforehand. After the dot-com bubble and the Enron/Worldcom accounting scandals, people were looking for safe investments. And the selling part of housing (for ordinary households) and mortgage-backed securities (for big shots) was that this was supposed to be a basically safe non-speculative investment with a somewhat higher yield than a savings account or a treasury bond. That turned out to be an illusion, but it was a risk-averse pursuit from the beginning.

The entire decade of the aughts was marked by an almost fanatical aversion to risk. All those synthetic CDOs and credit default swaps, all the super senior tranches that banks smugly kept on their books, the whole panoply of measurement tools like VaR and the Gaussian copula — all of them were designed to convince investors that risk had been engineered out of the system. That's why they were so popular. Not because Bush-era investors were bold capitalists with confidence in the future, but just the opposite: it was because Bush-era investors were desperately looking for high-yield investments that were essentially fully hedged and risk free. It was a fool's paradise, all right, but it was a fool's paradise based thoroughly and explicitly on avoiding risk.

Now, of course, it's worse. Investors are still risk averse, but they're also operating in a recessionary environment in which good investment opportunities are genuinely hard to find and financial engineering no longer seems like a panacea. What's changed isn't the fundamental timidity of America's modern millionaire class, only the fact that it's now a lot more obvious.

Should the Supremes Rule on Healthcare?

A district judge in Virginia has ruled that the individual mandate clause in the healthcare reform bill is unconstitutional. Two other district judges have previously ruled the other way. In the normal course of things, these rulings will be appealed, several circuit courts will hand down their opinions, and the Supreme Court will eventually provide a final determination. But Rep. Eric Cantor wants to cut out the red tape:

To ensure an expedited process moving forward, I call on President Obama and Attorney General Holder to join Attorney General Cuccinelli in requesting that this case be sent directly to the U.S. Supreme Court. In this challenging environment, we must not burden our states, employers, and families with the costs and uncertainty created by this unconstitutional law, and we must take all steps to resolve this issue immediately.

I'm not sure what the legal issues are here, but there have certainly been times in the past when I've wondered why we bother going through the whole rigamarole of lower court decisions in cases like this. I mean, everyone knows this is going to end up at the Supreme Court anyway, and everyone knows that the Supreme Court quite plainly couldn't care less what any of the lower courts say about it. All those lower court decisions are no better than waste paper.

But maybe I'm missing some important process issues that make it unwise to just hand this off to the Supremes right away. I'm not quite sure what, though. Regardless of whether you like the law or not, it really does require a ton of planning and implementation, and that would be helped considerably by knowing for sure whether changes will be required by the Supreme Court. Tentatively, then, put me in Cantor's camp.

Tax Cut Deal Wildly Popular

ABC News and the Washington Post have the first poll out about public reaction to the Obama tax cut deal. ABC created a colorful chart of the results, so I'll link to them:

Support for the overall package was extremely high: 68% among Democrats and Independents and 75% among Republicans. But the breakdown in the chart above ought to give all of us lefties pause. It's great to see that extending unemployment benefits polled higher than any other element of the plan, but not so great that bonus tax cuts for the rich polled considerably higher than cutting payroll taxes.

Obviously wording can be an issue in polls like this, and it's notable that the tax cut question didn't provide a choice of supporting only the broad cuts but not the additional cuts for the rich, and also notable that the estate tax question didn't mention that estates under $3.5 million would be tax free in any case. On the other hand, the tax cut question specifically called out "wealthy people" and the estate tax question specifically mentioned an exemption of $5 million. So it's not as if people didn't have some idea of just whose taxes were being cut here.

But the payroll tax cut, which would specifically benefit the working and middle classes, only garnered 39% support. So what's going on? Why are so many more people in favor of an estate tax cut they'll never see but not in favor of a payroll tax cut that will put immediate money in their own pockets?

Possible answers: (a) people don't really understand that cutting payroll taxes means they'll see an immediate increase in their take home pay, (b) people associate payroll taxes so strongly with Social Security solvency that they don't want to cut them, (c) people fantastically overestimate how likely they are to have a $5 million estate when they die, (d) lots of people have a strong instinctive view that people should be able to pass on their wealth to their kids no matter how much it is, (e) people are just generally confused about all this stuff and it's hopeless to try and figure out what's really going on.

In any case, I'll say this again to wavering lefties who have suddenly decided that the tax deal is no good because the payroll tax cut will never be undone and Social Security's finances will be decimated: yes, Republicans will engage in their usual Democrats are raising your taxes! demagoguery when the tax cut expires next year, but no, it won't be very effective. There are lots of good reasons for this, and this poll provides evidence for one of them: the public isn't all that keen on cutting the payroll tax in the first place. They want Social Security fully funded, and that argument, in the end, will carry the day. Never underestimate the power of AARP.

No Labels

Sometimes I wake up and I'm instantly confused. My twitter stream is blazing with snark over some topic that I've never heard of, and every individual tweet simply assumes you know what the fuss is about. Today it's #nolabels. WTF?

Well, it turns out that No Labels is the latest centrist brainchild of....someone. I'm not sure who. But it features such luminaries as Evan Bayh, Joe Lieberman, Michael Bloomberg, David Gergen, and a bunch of others. And what are they all about? I'm not sure. A pragmatic and sensible approach to our nation's problems, of course, and God knows I'm OK with that, but beyond that it's not clear. I browsed through their Issues page, but it was mostly just explanations of problems and links to reports and white papers from other organizations.

I don't want to be instantly cynical about this. Who knows? Maybe it will catch on. But I dunno. Issues are pretty important to people, and No Labels categorically ignores social issues and doesn't go much further on the rest of the issue spectrum either, saying "we don’t want to prejudge or lock ourselves into a given position on any issue when there is a much bigger cause that can unify us as Americans."

Maybe. Turning down the outrage-o-meter certainly sounds like a good idea, but I'm not sure it means much to have a civil discussion if you don't actually engage with all the stuff that normally turns our political discourse uncivil in the first place. In any case, now you know.

News Flash: Wall Street Still Loathed

According to Bloomberg, virtually every person in America thinks big Wall Street bonuses should be either heavily taxed or banned outright:

More than 70 percent of Americans say big bonuses should be banned this year at Wall Street firms that took taxpayer bailouts, a Bloomberg National Poll shows. An additional one in six favors slapping a 50 percent tax on bonuses exceeding $400,000. Just 7 percent of U.S. adults say bonuses are an appropriate incentive reflecting Wall Street’s return to financial health.

....Seven of 10 Americans say it’s Wall Street’s turn to help bail out the government Treasury, supporting a tax on Wall Street profits as a way to reduce the $1.3 trillion deficit. By comparison, 43 percent favor a freeze on spending for items like education and medical research, 33 percent would cut farm subsidies, 25 percent back a new tax on gasoline, and 15 percent would reduce benefits in the Medicare health insurance program for the elderly.

This works out to 88% who want big bonuses taxed or banned and 70% who want Wall Street profits heavily taxed. President Obama, of course, has basically done everything he can to save them from this fate, restricting his actions to occasional verbal criticisms and support of a very modest financial reform bill. His reward for this act of loyalty to capitalism has been for the captains of industry to turn on him like rabid dogs, funnel millions of dollars to his opponents, and demand that he stop saying mean things about them. The result of all this mau mauing will be a meeting on Wednesday with top business leaders in order to "mend fences" and assure everyone that they'll be treated with more respect in the future.

Ladies and gentlemen, your American democracy at work.

Wall Street's Cozy Derivatives Club

When you make trading of financial instruments open and competitive, it becomes less profitable for dealers and banks. This happened in 1975 with stock broking and in 2002 with corporate bond trading, and in both cases broker-dealers lost billions of dollars as aggressive price cutters entered the market and commissions shrunk. It was good news for buyers and sellers, but bad news for banks.

So what about derivatives trading, the biggest and most profitable market by far on Wall Street? You will be unsurprised to learn that big banks have never been keen on the prospect of putting derivatives trading into a clearinghouse and requiring that prices be made public. They much prefer the current system, in which a small number of banks control the entire market and neither buyers nor sellers have any idea exactly what commissions they're paying when they puchase derivative contracts.

Sadly for the big banks, the Dodd-Frank bill mandates the end of this cozy relationship. But legislation is one thing and reality is quite another. In fact, if you have a good memory you'll remember a post earlier this year, before Dodd-Frank was passed, in which Bob Litan warned (in my paraphrase) "that even if we pass regulatory reform, the dealer-banks that currently control the market in OTC derivatives have a ton of incentive to slow-walk anything that creates genuine transparency."

Well, guess what? He was right! Dodd-Frank may mandate exchange trading and transparency for derivatives, but who's going to run those exchanges? Big banks, of course. In the New York Times today, Louise Story tells us what this means:

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan. The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

....The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.

....Bank of New York Mellon has been trying to become a so-called clearing member since early this year. But three of the four main clearinghouses told the bank that its derivatives operation has too little capital, and thus potentially poses too much risk to the overall market. The bank dismisses that explanation as absurd. “We are not a nobody,” said Sanjay Kannambadi, chief executive of BNY Mellon Clearing, a subsidiary created to get into the business....The real reason the bank is being shut out, he said, is that rivals want to preserve their profit margins, and they are the ones who helped write the membership rules.

....Critics have called these banks the “derivatives dealers club,” and they warn that the club is unlikely to give up ground easily. “The revenue these dealers make on derivatives is very large and so the incentive they have to protect those revenues is extremely large,” said Darrell Duffie, a professor at the Graduate School of Business at Stanford University, who studied the derivatives market earlier this year with Federal Reserve researchers. “It will be hard for the dealers to keep their market share if everybody who can prove their creditworthiness is allowed into the clearinghouses. So they are making arguments that others shouldn’t be allowed in.”

Definitely read the whole thing, which has several more damning details. Banks can talk all they want about capital requirements and governance structures, but if they're unwilling even to admit publicly who runs their clearinghouses, it's pretty obvious their primary interest is focused on keeping the derivatives club very, very small and very, very private. In other words: no aggressive competition needed here, thankyouverymuch. Big commissions and big bonuses will remain the order of the day.

Unless, of course, regulators take a tough line and force banks to genuinely open up derivatives trading. What do you think are the odds?

Defining Corruption Down

Christopher Caldwell has a cover essay in the current issue of the Weekly Standard about the economic havoc being wreaked in Europe thanks to the straitjacket that the euro has put them in. It's an interesting read, though I don't agree with everything he says. But I'm curious about this sentence, from a review of the piece by Kenneth Anderson:

Toward the end, the essay points out that although Greece is every bit as corrupt and profligate as the newspapers suggest, that was not the case with [] Ireland, certainly not in the sense of Greece.

This is a common attitude, but I'm not sure any of us should buy it. Granted, Greek corruption is depressingly crude, conspicuous, and grasping, sort of like being mugged in a dark alley or shaken down by a wise guy. By contrast, Irish corruption, much like its U.S. counterpart, is rather more genteel, discreet, and white collar than the Greek variety. For this reason, it's usually treated as mere "cronyism" — regrettable, perhaps, but not truly corrupt "in the sense of Greece."

On the other hand, the U.S./Irish version is actually far more efficient at separating the yokels from their money. In any meaningful sense, then, shouldn't it be considered more corrupt? The fact that the theft is mostly legal and barely even noticeable may make it more respectable, but it hardly makes it more honorable.