Kevin Drum

Fantasyland

| Wed May 20, 2009 11:30 AM EDT

Well, Californians basically rejected all of yesterday's budget initiatives, and since they were mostly gimmicks I don't really blame them.  So what's next?

Beats me.  There are legal, judicial, federal, and contractual limits to how much spending can be cut, and there are political limits (i.e., the Republican rump in the legislature) to how much taxes can be raised.  The sums just don't add up.

Californians are living in a dream world.  Prop 13 slashed property taxes and nobody wants to amend it, even for commercial property.  Arnold Schwarzenegger got elected in the middle of a budget crisis by promising to cut taxes.  When that proved to be an unsurprising disaster, the voters approved billions in borrowing, making the budget situation even worse.  It's easy to blame Sacramento for this mess (and I do!), but the public has been complicit every step of the way.

Historically, California has been a high tax/high service state.  That's fine.  Some states prefer a low tax/low service model.  That's fine too.  (It's a lousy idea, I think, but fiscally it's fine.)  But over the past few decades we Californians have somehow concluded that we can be a medium tax/high service state.  It's a fantasy.  Unfortunately, I'm not sure just what it's going to take to jolt everyone out of their delusions.  Stay tuned.

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Help Me, Help You

| Wed May 20, 2009 2:14 AM EDT

Guess what, gang.  It's fundraising time!

Here's the pitch: if you read my blog you're up to speed on most of the greed, corruption and hypocrisy coming out of Wall Street and Washington. You know all about the carried interest loophole.  You've heard of universal default.  You know what a yield spread premium is.

And all for free!  Sort of.  Because I'm actually supported by Mother Jones magazine, which covers all this stuff and more — and producing the magazine is a pretty expensive enterprise.  To do it, we rely on subscriptions, advertising, and donations to the Mother Jones Investigative Fund.  And that's where you come in.

Your contributions help keep our reporters at work (including me!) on these critical stories. We’re independent, nonprofit, and not afraid to take on the big guns of the financial industry. But we can do that only when our readers deliver the financial support we need to stay on the story.  So if you can afford to part with a few dollars, click here to make a donation.  It's a quick credit card donation form, and if you contribute $35 or more you get a subscription to the magazine too.

Thanks!  And the cats thank you too, since they think I get paid in cans of cat food.  (Your donation, however, needs to be in dollars.)

Bitch Slapping the Dems

| Tue May 19, 2009 7:24 PM EDT

I never expected Barack Obama to be anything other than pragmatic and center left.  Still, I confess to feeling a little in the dumps lately over just how much he seems willing to bend and compromise on some key issues.  But then I read things like this:

In an abrupt shift, Senate Democratic leaders said on Tuesday that they would not provide the $80 million that President Obama requested to close the detention center at Guantánamo Bay, Cuba.

....The Senate majority leader, Harry Reid of Nevada, seemed to ramp up the concerns of Congressional Democrats, insisting during a news conference that lawmakers would never allow the terror suspects to be released into the United States....Pressed to explain if that meant they could not be transferred to American prisons, Mr. Reid said: "We don't want is them to be put in prisons in the United States. We don't want them around the United States."

To repeat: I read things like this.  And I realize all over again just what Obama is up against.  His own party won't support him against even the most transparent and insipid demagoguery coming from the conservative noise machine.  The GOP's brain trust isn't offering even a hint of a substantive case that the U.S. Army can't safely keep a few dozen detainees behind bars in a military prison, but Dems are caving anyway.  Because they're scared.  And then they wonder why voters continue to think that a party that can be bitch slapped so easily might be viewed as weak on national security.

But that's the reality that Obama has to deal with.  Under the circumstances, I guess he's not doing so badly after all.

Credit Card Update

| Tue May 19, 2009 6:43 PM EDT

I see that Chris Dodd's credit card reform bill passed the Senate 90-5 today.  This is even better than I expected, and goes to show the agenda-setting power of being in the majority.  In the past, Republicans could have simply prevented a bill like this from coming to the floor, thus sparing themselves the political difficulty of voting against it.  Now they can't do that.  They have to vote whether they like it or not.  And since credit card reform really is a hot button issue, their sense of self-preservation got the better of them and they gave the bill a massive majority.

Which is fine, but I suspect it also means that Dodd could have played hardball a little more strenuously than he did and negotiated a better bill.  Who knows?  If Dems figure this out, maybe it will be the first legislation in history to actually be improved in conference.

Oh — and all the boo hooing from the credit card industry?  If you believe even a single word of it, you need to run not walk to your local emergency room and have them do an MRI on your brain.  There's a chunk missing.

Credit Card Hell

| Tue May 19, 2009 3:27 PM EDT

Ezra is obviously just pimping content from his new corporate overlords here, but today's Washington Post chat about the credit card industry really does make for interesting reading.  One of the things that comes through loud and clear is that people are almost universally paranoid about their credit scores.  And why not?  We live in a modern economy in which credit is essential, but your access to credit is determined by a process that's deliberately opaque, practically impossible to dispute, controlled almost entirely by credit issuers who make money when they lure you into practices that wreck your credit score, and wide open to fraud because the credit industry doesn't really care about it.

My solution?  For starters, credit scoring companies should be required by law to be far more transparent about their practices.  Beyond that, though, we need to give them an incentive to start caring about fraud: if the credit industry wrecks your credit score by allowing fraud, it's the credit industry that should pay the price, not you.  More here.

The Burbs

| Tue May 19, 2009 2:27 PM EDT

Dana Goldstein suggests that we should fund more magnet schools in urban cores as a way of attracting suburban kids into the city and opening up slots for city kids in the suburbs.  Matt Yglesias says this would probably have limited effectiveness, but still:

One way or the other, I can’t think of any good reason for a governor who’s genuinely interested in improving opportunities for poor kids not to be trying something along these lines.

Well, I can think of a good reason: because suburban parents in this governor's state would go absolutely batshit insane over the idea.  It would probably spell the end of his political career.

One of the great third rails of education policy debates is acknowledging the fact that suburban parents will flatly never go along with anything like this — at least not on a scale that makes any difference.  For the most part they don't want to ship their kids to urban schools, even if they are magnets, and they really really don't want urban schools shipping a bunch of stoners and gangbangers to their nice suburban schools.  And make no mistake: that is how they think of it, and all the research in the world showing that urban-suburban transfers don't affect educational outcomes won't budge them an inch.

I don't know what to do about this.  But to some extent education is a zero-sum game.  If we invest more money in inner-city schools, it means less for the suburbs.  If we try to attract the best teachers to urban schools, it means that suburbs get weaker teachers.  If we do it anyway, suburban parents will start sending their kids to private schools.  And the point at which public support for No Child Left Behind evaporates is the point at which suburban schools start "failing" in large numbers.  That isn't something suburban parents will tolerate, and they'll simply vote out of office anyone who tries to make them.

Even on a purely voluntary basis, I suspect that fostering "regional partnerships between urban and suburban districts" will never have more than a tiny impact.  Suburban parents just can't be talked into it, and when it comes to educational policy suburban parents rule.  Programs like the Harlem Children's Zone or the KIPP schools may have mixed track records, but at least they're both promising and feasible on a large scale.  My guess is that they're both better prospects for long-term change than trying to merge city and suburb.  I'm happy to be talked out of this, though.

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Quote of the Day - 5.19.09

| Tue May 19, 2009 1:24 PM EDT

From Richard Posner, who is decidedly unimpressed with Ben Bernanke's reputation as a great crisis manager:

He is like a general who having been defeated in battle because of his errors manages the retreat of his army competently. He does not thereby escape blame for the defeat, and should not be permitted to shift blame to the soldiers under his command who gave way under attack.

There are plenty of things that I think a reasonable person might have missed about the dangers of the Bush-era credit boom.  But I'll go to my grave not understanding how so many people missed the housing bubble.  What were they all smoking?

Punching Your Ticket

| Tue May 19, 2009 1:17 PM EDT

Lane Wallace explains why you should go to college, even if you major in something dumb like semiotics:

I figured out the true value of a college degree not in the lofty halls of Brown University, but in a corrugated cardboard factory in New Zealand. I'd taken a "leave of absence" as they call it, after my sophomore year, to figure out if I really wanted to pay all that money learn things that seemed, well ... a tad non-essential, at best. I packed a backpack and took off for the romantic frontier-land of New Zealand with nothing but $500 and a working visa in my pocket. The six months I spent there were a far cry from what I thought the adventure would be, but it was educational. Culminating in my job at the cardboard factory — where I was surrounded by people who hated their jobs but had no other viable option.

In a flash, I grasped the true value of a college degree. It didn't matter what I majored in. It didn't even matter all that much what my grades were. What mattered was that I got that rectangular piece of paper that said, "Lane Wallace never has to work in a corrugated cardboard factory again."

Cubicle rats take note.  No matter how put upon you think you are, there are lots and lots of people worse off than you.

Truthiness

| Tue May 19, 2009 12:57 PM EDT

The CIA sure does suck at keeping even marginally accurate meeting notes, don't they?  If you're the suspicious type, you might wonder if this is deliberate.  If you're the institutional type, you might wonder what else they suck at.  And if you're the political type you might be thinking that putting together a Truth Commission to get to the bottom of this is sounding a lot better than it used to.

Financial Innovation

| Tue May 19, 2009 12:26 PM EDT

Niall Ferguson thinks that if deregulation is to blame for our recent financial collapse, then financial deregulation should also get the credit for the preceding 27 years of economic growth.  Matt Yglesias takes a look at income growth over that period and isn't so sure:

For the top one percent, that’s a pretty impressive period. For the next 19 percent, there’s something happening. But for the bottom 80 percent, there’s just very little going on in terms of real income growth. There was, however, pretty robust consumption growth fueled by the credit boom and declining savings rates. The current downturn is now threatening that and calling into question the sustainability and worth of the overall growth throughout the period.

This is a kissing cousin to the question everyone is raising these days about financial innovation.  It goes like this: the basic benefit of all the financial innovation we've seen over the past few decades has been to make credit more easily available, and that clearly had something to do with the credit boom and subsequent bust.  This in turn begs the obvious question: was it really a good idea to make credit so easily available?  If the answer is no — if the only result was to mask stagnant wages and produce a fake consumption boom — then maybe all that innovation wasn't such a hot idea in the first place.

This is rapidly becoming conventional wisdom, and Matt's point deserves more attention as part of it.  For good or ill, the modern economy is driven by middle-class consumption.  If middle class wages are rising, everything is fine.  They'll consume more, debt will stay tolerable, and rich people will benefit from the growing economy.  But if middle class wages are stagnant, then vast pools of money are increasingly directed toward the rich, who have a limited ability to spend it.  So they end up loaning it back to the middle class, collecting economic rents along the way, and the middle class laps it up, figuring that their wage stagnation is just temporary and they'll eventually pay all the money back.

But they don't, of course, because today's rich have no intention of ever allowing wage growth among the middle class.  The result, eventually, is disaster.

I realize that most economists will never believe this until someone says the same thing accompanied by several dozen pages of equations with lots of Greek characters.  So can someone please get cracking on that?