Author: Megan McArdle

“Don’t tax you, don’t tax me, tax that fellow behind the tree” ~ Senator Russell Long

So now the fiscal hawks have been asked to put their money where their mouth is and actually cut some spending, it turns out, they have some reservations.  I mean, of course, they want to cut spending.  They want it with a rare passion.  They just don’t want to cut any spending that might, y’know, be done in their districts.

It is this sort of thing that makes me wonder if I ought to be
despairing at our fiscal future.  I’m not, yet.  Most countries as
developed as ours do get their deficits under control, when they have
to.  We just don’t quite have to at this point.  In our own past, when
push came to shove, we shoved taxes up and put the brakes on spending.

On
the other hand, California’s crisis is rather novel, and perhaps it
presages something in the federal future.  The fiscal hawks are living
in a fantasy world where there exist some imaginary spending cuts that
don’t affect anyone’s district.  Those who favor tax increases have
convinced themselves–or at least, the electorate–that they can fix
everything by raising taxes on a tiny slice of the very wealthy.  That
way lies fiscal crisis.

The Greek government has just unveiled a new fiscal austerity plan. With a combination of tax increases and spending cuts, it aims to get budget deficits down to about 3% of GDP–10 percentage points lower than where it is now.

Everyone is expressing optimism.  But while this sort of belt-tightening is necessary for Greece to stay in the EU, it’s going to come at a huge cost.

Greece is already in recession–that’s why its budget problems loom so
large–and the fiscal contraction will only make them deeper. 
Meanwhile, the EU will be setting its interest rates to meet the needs
of larger, healthier members (and inflation-hawk bondholders).  Tight
fiscal and monetary policy means a long, painful period ahead for the
Greeks.

This is the dilemma that faced Argentina with its
monetary peg to the dollar; ultimately, it led to devaluation and
default.  We will see if Greece can whether it better.

I am generally impatient with the narratives of American decline.  I have been alive for thirty-odd years now, and it seems that for my entire adult life, the nation has been just on the brink of plunging over some abyss or the other.  That Japanese were going to buy the country lock, stock, and barrel.  Our manufacturing jobs were going to evaporate.  We were descending into the dark night of fascism. The Chinese are going to steal all of our clean jobs.  Etc

As I wrote in the post I linked, way back in 2004:

So after fifty years of sullenly expecting it, the doom everyone was
waiting for has not only failed to come to pass–even the worry about
it has faded utterly. And we achieved this neither by defeating the
Soviet Union in battle, nor by unilaterally disarming, the two
solutions that were most widely proposed as the only thing that
could save us from this disastrous fate (and the former only in the few
brief years before Russia tested her first nuclear weapon).

Why do I bring this up? Well, because the failure of one impending
doom to come to pass has not stopped other prophets from pushing theirs.

. . . . A few
weeks ago, I was talking to a libertarian who was arguing that the
Patriot Act was a one-way ticket to totalitarianism. We were violating
fundamental rights that had been enshrined in the constitution for 200
years, and once we’d given them up, it was going to be a short step on
the slippery slope to a police state. I share her fear of government
intrusiveness. But this a markedly ahistorical view of the constitution
and the liberties it allows us to enjoy, which is no more accurate for
its extreme prevalence in libertarian circles. There is no primal state
of liberty, created by the Constitution, from which we have slowly but
inexorably been moving away. Liberties have been granted, and taken
away, and granted again throughout the history of our country. Just off
the top of my head: Lincoln’s suspension of habeas corpus, the Palmer
raids, the detention of the west coast Japanese in camps during World
War II, the committment of anyone FDR or one of his minion’s thought
was especially dangerous to the war effort to St. Elizabeth’s mental
hospital during same, the McCarthy hearings–see this wonderful Richard Posner piece
for a more elegant exegisis of the history of American liberties. The
shape of liberty has changed over the 200 years of our existence,
expanding in some places and contracting in others. There is no
libertarian eden, located somewhere in the American past, from which we
are now fallen, or falling.

Now, this doesn’t mean that the Patriot Act is a good thing. But the
fact that we have the Patriot Act now does not mean, as many
libertarians ardently argue, that we will always have the Patriot Act.
If the Patriot Act is bad, we should vigorously fight it. But there is
no need to construct doomsday scenarios in which the existance of the
Patriot Act consigns us to a totalitarian future.

Not to dump on libertarians exclusively, because everyone seems to
do it. Social conservatives think we’re doomed because the institution
of marriage has been dangerously undermined, and is therefore likely to
disappear entirely, along with God, patriotism, and the super-sized big
mac meal, if we don’t do something, quick. A large number of wonkish
types (including, on odd days, me) spend a lot of time worrying about
the possibility that our old-age entitlements will drive us into
disastrous bankruptcy; few of us stop to reflect on the many, many
unsustainable economic trends that have worried policy wonks right up
until the moment that the impending doom suddenly solved itself under
the inexorable logic of Herb Stein’s famous dictum: “If something can’t
go on forever, it won’t.” Many liberals, like Paul Krugman, think that
we nearly got into socioeconomic eden sometime around 1966, give or
take, and have been staging a fast retreat towards armageddon ever
since; marginal tax rates and some forms of social spending here take
the part of doom-bringer, even though on every measure except simple
inequality, the lives of the poor and the middle class seem to be
richer in material goods, leisure, and quality of work than they were
in the Golden Era of America’s Middle Class.

That’s not to say that liberals shouldn’t want more progressive
taxes and social spending, policy wonks more sustainably structured
entitlements, social conservatives more traditional cultural values, or
libertarians more freedom. It’s perfectly reasonable to look at the way
things are and say “they could be so much better if . . . ” What we
shouldn’t do is compare our present to some highly airbrushed past, or
mindlessly extrapolate trends, and thereby hastily conclude that we’re
all going to hell in a handbasket.

Madeline Albright spoke at my sister’s graduation last weekend, and
during her speech she said something to the effect that the world
situation now was scarier than it had been at any time since World War
II. This is a common belief — commoner among liberals, but not
exclusive to them. But huh? Think of what the world looked like to
George Orwell. Nazism defeated, but at terrible cost–and no one knew,
then, that Fascism wouldn’t re-emerge. Russia, with Stalin still at its
helm, devouring Eastern Europe. The most terrible weapon ever imagined
recently used for the first time, and every nation with two scientists
to rub together working hard to develop their own, personal
holocaust-maker. The Cold War incipient in the battles over Berlin.
And, if you’re Orwell, a nasty case of tuberculosis, and no nice
antibiotics to cure it. Things were bleak.

Yet we made it through, with a modicum of liberty and a splash of
human kindness, and now democracy is springing up like mushrooms
everywhere you look, poverty is steadily decreasing, though perhaps not
as fast as we’d like, and wars are killing fewer and fewer humans each
decade. The world is a pretty good place to live, and getting steadily
better for almost everyone. As flawed as the human race is, we seem to
be a lot better than the doomsayers think at muddling through.

I stand by this.  Times are bad right now.  But they were bad in every
previous decade, too, one way or another.  I’d say they’re worse than
usual, but that is a data point, not a trend.

I
am particularly weary of the notion that the failure to pass a health
care bill proves that the American government, and/or the Republican
party, has entered some unprecedentedly awful phase that have rendered
the nation “ungovernable”.  This confuses passing your parochial policy
preferences with “governing”.  America is still being governed about as
well as she ever has been, and if you think that this is not so, try
going somewhere like Somalia, or Haiti, which really doesn’t have a
functioning government. 

I have a simple three-step test to indicate whether a country is “governable”:

1. Is it having, about to have, or living in the aftermath of, a coup?
2. Has the civil war killed at least 1% of the population?
3. If
an alien landed and demanded to be taken to see a representative of
your government, would you be unable to comply with this request?

If
your answer to any of these questions is “yes”, then you may be living
in a country that is ungovernable, and should consult the World Bank,
or an arms dealer, if the symptoms do not resolve within a week.

Otherwise,
you are living in a functional nation-state.  You may not like what the
government does (or doesn’t do), but it is governable, and indeed, is
being governed right this very minute!

It isn’t even true that
it has somehow become impossible to pass important legislation.  The
two most recent things that absolutely had to be passed
immediately–the bank bailouts, and the stimulus–were.  Maybe they
were bad ideas.  But it turns out that Congress can still pass bills,
even unpopular ones, if the matter is sufficiently urgent.

I
don’t find it particularly surprising that Democrats with a numerically
large but politically weak coalition found it difficult to persuade
their members to pass a politically unpopular bill in the face of an
electorate that has made it clear it will un-elect anyone who thinks
that they aren’t accountable to the voters. I certainly don’t view it
as evidence of catastrophic decline.

Nor do I find it
particularly surprising that Republicans with a numerically small, but
politically fairly uniform coalition, find it easy to maintain party
discipline. It is not even the first time that such a thing has
happened. The Democrats maintained just such party discipline during
Social Security reform, with similar results.

Maybe the
Republicans are really taking obstructionism to some unprecedented new
level, but you can’t prove it by health care reform. 

The fact
is, Republicans maintained party discipline in the face of some pretty
strong Democratic party discipline.  Democrats love to describe
themselves as “open to compromise”, but what they mean by this is that
if they could have gotten the Republicans to sign onto this vast new
edifice to which the GOP (and their base) was radically opposed,
Democrats would have been willing to make some trivial tweak like
adding a weak tort reform position.  Would Democrats have signed onto
social security privatisation, if Republicans had been willing to do
EFCA in exchange? 

Some things just aren’t open to
compromise.  A compromise bill would have looked like something else
entirely–more like Medicare Part D. It wouldn’t have been “HCR 1.01”.

Moreover,
Republicans maintained this discipline in the face of the bill’s
growing unpopularity–just as Democrats did with Social Security
reform.  If the public had displayed strong majorities in favor, some
GOP members would have defected, just as some Democrats would probably
have reluctantly gone along with Social Security reform if the GOP had
kept its favorables above 50%. 

Don’t get me wrong:  I think that the American government doesn’t work that well, for reasons well described by Jonathan Rauch. 
It does many things that I don’t like, and the ones that I do like, it
mostly does in some grotesquely inefficient manner.  But that’s not
new.  Is it really novel, nor surprising, to find that even parties
with large majorities find it difficult to pass very unpopular bills on
straight party-line votes?

In the near future, I expect Obama to
focus more on popular measures that Republicans will have a hard time
opposing, and unsurprisingly, these measures will face less
opposition.  We will continue to muddle along.  Neither our government,
nor our country, will be close to perfect.  But you need only read some
history, or travel in the third world, to realize that imperfect as
they are, things will still be really damn good.

Last week, Jonathan Chait responded to me, arguing that Democrats have already taken all the political hit they’re going to from passing health care, since each house voted for a bill. Of course, if Chait is right, then Democrats should probably do it–at least, if you think that democracy should put zero weight on the actual opinions of those slack-jawed rubes in the electorate.  But this logic seems highly questionable to me.

Who are you more likely to leave:  the spouse who makes a pass at
another woman, and then thinks the better of it, or the spouse who goes
through with it?  Maybe you’ll leave them either way.  But it does not
follow that they are better off going through with it.  I don’t think it
is actually true that trying to pass a bill people hate, and then
thinking the better of it because it turns out the electorate hates it,
is no different from trying to pass a bill people hate, finding out that
they really, really hate it, and then ignoring them and pushing it
through anyway.

Moreover, I am sort of amazed that anyone does
think this.  The Republicans suffered a crushing electoral defeat after
failing to pass Social Security reform.  But raise your hand if you
think that their electoral prospects would have been better in 2006 had
they managed to ram through a bill that was polling in the mid
thirties?  Okay, Karl, put your hand down.  The rest of us realize that
no matter how bad 2006 was, it could have been worse.  And would
have been, had the AARP been stalking the GOP with murder in its heart.

This
applies equally to Clinton’s reversal in 1994.  Yes, he lost a bunch of
seats.  He could have lost more.  I find little evidence that the
public prefers parties who do things they actively oppose, to parties
that “can’t get anything done.”

I am similarly underwhelmed by
the notion that once we’ve passed the bill, it will somehow be easier to
sell “what’s in it.”  There is lots of information about what is in the
House and Senate bills, but the public has clearly not consumed that
information.  Why are they going to magically become more wonkish after
it passes?

I find it easier to make the counterargument–that in
districts where the thing polls moderately well, it’s easier to make up
pleasant characteristics for a bill that never passed, and then complain
that Republican obstructionism prevented us from realizing the dream. 
Whatever emerged from a Senate + reconciliation strategy will almost
certainly be uglier than either the House or the Senate bills on their
own.

Indulge me for a moment, and say the bill passes, and that
it polls where it is, or slightly worse, by next fall. That’s hardly a
crazy supposition, considering the further deals that will have to be
cut to make it pass, and the fact that Republicans will happily make
procedural hay about using reconciliation.

Are Democratic
candidates going to be out there campaigning on their awesome new health
care bill?  Hardly.  In most districts, their opponents are going to be
campaigning against it, and Democrats will defensively be saying that,
well, you know, it’s not really that bad.  At least if it doesn’t pass,
they can claim that they were actually voting to advance towards some
never-never bill that was going to emerge from conference.

There
is nothing good you can say about an actual bill that you couldn’t say
about a bill that you voted for, but didn’t pass.  It’s true that this
is going to make campaigns hard next fall.  But at least now Democrats
can say that they thought the better of it.  What’s their excuse if they
pass it?

It’s true that if it fails, it will be subject to
“lengthy, painful postmortem coverage detailing its flaws and
mistakes.”  But you know who reads such coverage?  Me and Jonathan
Chait, and we already have pretty strong opinions. If it passes, it will
also be subject to lengthy, painful postmortem coverage in the nation’s
“Your Money” columns.  As a veteran of reading those columns, I am
pretty sure they are going to focus heavily on the fact that starting in
2014, you will be required to buy health insurance, or pay a hefty fine
to the IRS.  It will also mention the subsidies, and so forth.  But the
very unpopular mandate is going to loom large, because that is, for the
sort of people who read “Your Money” columns, one of the most crucial
pieces of information. 

Finally, as they say in grief
counseling, “Time is the great healer.”  Passing HCR at this point would
take place in what, March?  Moving it three months closer in peoples’
angry memories.  And meanwhile, taking up legislative time and energy
from the kinds of popular things that legislators like to pass in
election years in order to sweeten their prospects. 

I’m just
not seeing it.  Of course, a pundit’s opinion about this tends to
coincide pretty neatly with their opinion about the proposed reform
bills, so take that for what it’s worth.

Apparently, the administration has issued rules requiring parity for mental health treatment with other illnesses.  They’ll take effect July 1st.  If you want to know why health insurance costs keep marching upward seemingly uncontrolled, this is why:  mandating new benefits is always popular, and the government doesn’t have to pay for them.

I am very sympathetic to the plight of the mentally ill.  Unfortunately, most of the people who will tap the benefits are not severely ill people who need intensive care; they’re people who are unhappy.  Unhappiness is not a condition for which psychotherapy, or antidepressants, have been shown to be very effective.  (Severe clinical depression, yes.  But contrary to the belief of people who felt awfully down the time their boyfriend left them, these two conditions are not the same thing.)  Since the moderately unhappy and dissatisfied are much more prevalent than those with serious disorders, that’s most of what we’ll be paying for:  someone to listen to complaints. That’s what Senators are supposed to be for.

On a more serious note, I feel like we could have achieved the laudable goal of ensuring that serious mental illnesses are not left untreated (at least, in cases where the patient wants to get treatment), without guaranteeing cheaper psychotherapy for America’s ennui-laden affluent classes.  Of course, then we’d have to recognize the fact htat this stuff has to be paid for, rather than pretending that benefits can somehow be magically generated for free with just a wave of the regulatory pen.

Update:  Let me point out something which I thought was obvious–the private insurance market is not where you necessarily get insurance if you are severely mentally ill.  Really severe mental illness, particularly schizophrenia, interferes with “normal life activities” like working or dating, and onset is typically in young adulthood.  The more likely you are to have the social or financial resources with which to obtain private insurance, the less likely you are to have the kind of severe mental illness we’re worrying about.

Join the conversation about this story »

See Also:

• Here’s Why You Can Stop Fantasizing About Healthcare Reform Coming Back To Life
• Mr. President, Here’s A Healthcare Bill That Will Do More Than Yours Did, And Can Actually Pass
• The Democratic Bill Is Dead, Here’s My Healthcare Reform Plan

Apparently, the administration has issued rules requiring parity for mental health treatment with other illnesses.  They’ll take effect July 1st.  If you want to know why health insurance costs keep marching upward seemingly uncontrolled, this is why:  mandating new benefits is always popular, and the government doesn’t have to pay for them.

I am very sympathetic to the plight of the mentally ill.  Unfortunately,
most of the people who will tap the benefits are not severely ill
people who need intensive care; they’re people who are unhappy. 
Unhappiness is not a condition for which psychotherapy, or
antidepressants, have been shown to be very effective.  (Severe clinical
depression, yes.  But contrary to the belief of people who felt awfully
down the time their boyfriend left them, these two conditions are not
the same thing.)  Since the moderately unhappy and dissatisfied are much
more prevalent than those with serious disorders, that’s most of what
we’ll be paying for:  someone to listen to complaints. That’s what
Senators are supposed to be for.

On a more serious note, I feel
like we could have achieved the laudable goal of ensuring that serious
mental illnesses are not left untreated (at least, in cases where the
patient wants to get treatment), without guaranteeing cheaper
psychotherapy for America’s ennui-laden affluent classes.  Of course,
then we’d have to recognize the fact htat this stuff has to be paid for,
rather than pretending that benefits can somehow be magically generated
for free with just a wave of the regulatory pen.

Update: 
Let me point out something which I thought was obvious–the private
insurance market is not where you necessarily get insurance if you are
severely mentally ill.  Really severe mental illness, particularly
schizophrenia, interferes with “normal life activities” like working or
dating, and onset is typically in young adulthood.  The more likely you
are to have the social or financial resources with which to obtain
private insurance, the less likely you are to have the kind of severe
mental illness we’re worrying about.

The initial estimate is that fourth quarter GDP grew at a blistering 5.7% annual pace.  With the usual caveats–third quarter GDP estimates started high and then were revised down to a much more modest level–that’s great news. 

But man cannot live by GDP alone.  I’d argue that the better measure of whether the economy has returned to health is employment–at least, that’s when the improvement starts to translate into improvements in peoples’ real lives.  Prolonged unemployment is one of the most crippling things that can afflict people in the modern world.

Yet despite a second consecutive quarter of growth, prolonged unemployment is what we’re stuck with.

The
number of long term unemployed has shot up relative to the people who
find jobs relatively quickly.  To some extent, this is normal for a
recession; employment tends to be a lagging indicator, as cautious
employers use existing workers to fill rising production orders, rather
than taking on more employees that they might have to later fire.

But
the last two recessions were characterized by lingering
unemployment–the infamous “jobless recovery” under Clinton and Bush. 
One theory for why this is true comes from a paper by Erica Groshen and
Simon Potter, which suggests
that increasingly, America’s unemployment tends to be structural rather
than cyclical.  In the old economy, aggregate demand collapsed for some
reason, and workers got laid off, then called back to work when orders
recovered.  These days, it is more likely that your job and industry
has gone away entirely.

That has particular implications for a
skilled economy.  In 1930s, when FDR was trying to combat mass
long-term unemployment, all he needed to do was create a construction
project; most of the men in the country did some sort of hard physical
labor.  It was relatively easy to create jobs that they could fill.

But
what kind of public works projects would absorb mortgage brokers or
mid-level managers?  As jobs have gotten more skilled, more human
capital is specific to firms, industry, and job classifications.

That
means it’s going to take longer to transfer those workers into other
areas of the economy.  Either they need to search harder to find a job
that meets their skill set, or they need to get new skills.  Either
way, that high unemployment number is probably going to be very
stubbornly persistent well into next year.

The Senate voted to confirm a second term for Federal Reserve Chairman — and Time Person of the Year — Ben Bernanke.

After the Senate voted 77-23 to move ahead with the confirmation, Jay Cost of Real Clear Politics tweeted that the Senate just voted for cloture on Ben Bernanke’s confirmation. Immediately thereafter came the tweet from Jim DeMint:  “By confirming Bernanke, the Senate rubber-stamped a failed economic policy.”  Perhaps, but what was the alternative?

Throwing markets into turmoil as we toss Bernanke aside and start
over?  What sort of qualified candidates does Senator DeMint think
we’ll get, after he’s punished one of the world’s greatest experts on
financial crises for, well, being in office when one happened?  More
frightening to contemplate: what sort of candidate would have been
confirmable if Bernanke’s nomination had failed?  It’s getting harder
and harder to get people into office, especially in finance, where any
nominee who knows anything is too apt to have ties to the banking
industry, or have employed a nanny without paying social security
taxes, or have some other disqualifying flaw that doesn’t actually have
much bearing on their ability to do the job.

Bernanke’s current policies would have to be much more terrible
than they are to justify throwing him out of office without even a
suitable replacement in mind.  It would be one thing if Democrats (or
Republicans, for that matter) had been carefully grooming a substitute
with an excellent resume and a good shot at confirmation.  But the “no”
votes are, in my perhaps cynical view, more about what happened in
Massachusetts last week than about any coherent policy agenda.  That’s
not a good way to make decisions, and the likely outcome would have
been greatly inferior to whatever you think is going to happen in a
second Bernanke term.

SEC just voted, 3-2, to offer “interpretive guidance” to companies on making public the threats posed to their business by climate change.  This sounds marvelous: we love transparency and the environment.  But though one hates to be the dour libertarian voice panning some feel-good consensus measure . . . well, this is deeply silly.

Rising sea levels are not a good thing (IMHO), but they are a slow-moving disaster, which companies will have ample time to disclose as they actually happen. (And aside from the owners of beachfront hotels or real estate in Manhattan’s downtown financial district, I’m hard pressed to think of companies that are at material risk from the rise).  The other sorts of predicted disasters are far more speculative–no one really knows, for example, what effect this is going to have on hurricanes, because the science isn’t that good yet.  Any disclosures would involve taking a wild assed guess at what the outcomes of global warming might be, something that most business executives are probably not qualified to do.

One could disclose risks related to the imposition of a carbon trading regime–but that’s regulatory risk, not global warming risk.  Which business executives also aren’t particularly qualified to assess.

Indeed, a cynical friend who does securities-related work suggests that “if climate change fails to materialize as expected, said public companies will be at risk of the SEC going after them for misleading disclosure.” That’s a little too cynical for me–the guidance should provide safe harbor.  But it does highlight the fact that in conditions of radical uncertainty, such disclosures could as easily be misleading as useful.

One commonly hears the argument that the FDIC creates moral hazard in the banking system, because depositors aren’t worried about the soundness of their banks.  I find this argument broadly dubious, since I have no idea how the vast majority of depositors could possibly be expected to have informed opinions on the soundness of their banks.  Moreover, during the Great Depression, local wealthy people–who did have quite a lot of knowledge about the banks, and the local economies into which they lent–got hammered along with the rest of America.

But this suggests that there is a different, more plausible form of moral hazard operating right now:

“A California Banker” writes to Mish, giving yet another reason why banks aren’t lending:

If you’re a bank with a relatively healthy balance sheet with adequate capital, (like us)you want to maintain surplus capital in order to stay on the FDIC’s list of banks they can transfer the loans and deposits from a failed institution into.

This is a home run for the acquiring bank and far more of an instant benefit than any new lending.

The problem here is that healthy banks end up competing with each other to have the largest capital surplus and therefore the greatest chance of being anointed in this manner by the FDIC. If everybody was lending, the FDIC would still have to place failed banks’ assets and deposits with someone. But instead we get the opposite corner solution, where nobody is lending — except, presumably, for banks which are close to failure and need all the interest income they can get. I wonder whether the FDIC has anybody thinking about how to counteract this syndrome.

Join the conversation about this story »

See Also:

• Why Aren’t Banks Lending? Because They’re Being Rational
• Michael Tennenbaum: Lending Loosening Up For Large Companies
• JPMorgan Earnings Blow Past Expectations, Revenue Looks Light, Consumer Lending Still Very Ugly

One commonly hears the argument that the FDIC creates moral hazard in the banking system, because depositors aren’t worried about the soundness of their banks. I find this argument broadly dubious, since I have no idea how the vast majority of depositors could possibly be expected to have informed opinions on the soundness of their banks. Moreover, during the Great Depression, local wealthy people–who did have quite a lot of knowledge about the banks, and the local economies into which they lent–got hammered along with the rest of America.

But this suggests that there is a different, more plausible form of moral hazard operating right now:

Yesterday, Oregon voters ratified two tax increases, one on high earners, and another a revision of the state’s corporate income tax. This is their strategy for plugging an enormous budget gap, like the ones that have opened up in state budgets around the country.

Conservatives, predictably, say this heralds disaster for the state, as the rich and corporations flee. Liberals, predictably, view this as a victory. Which is it?

My thoughts:

1) The fact that Clinton raised taxes, and then the economy recovered,
is not proof that raising taxes has no effect on the economy.  Most
people thing that there is at least some dampening effect, which is
especially problematic in a downturn.

2) Realistically, income tax response gets more elastic as the tax
region gets smaller.  Oregon borders two states with attractive
migration possibilities.  California’s taxes are no bargain–but
Oregon’s relatively lower tax rates may have attracted wealthy
individuals and businesses that will now find it not so attractive.

3) The Tax Foundation says that pre-tax, it was on the top ten list for
business tax climate.  That suggests that it has relatively more room
to increase taxes than other states.

4) The business tax changes apparently include a gross receipts tax,
which is really an awful tax, especially during a downturn.  Companies
which are actually losing money may still owe taxes, which could hasten
their closure, and the evaporation of any jobs they provide.

5) Trying to close the gap with only taxes on high income makes state
revenues very dependent on a very small group of people. Ask New York
and California how that’s going.

6) Since state income taxes are deductible from federal taxes, this
doesn’t entirely raise new tax revenue–much of it will be transferred
from the Federal government.

7) There aren’t that many attractive revenue-raising measures for state
budgets during a downturn, nor is cutting services always optimal,
since demand for them rises when the economy tanks. Ideally, states
would run surpluses in the good years. Practically, it almost never
happens.

Bruce Bartlett offers a lengthy history of the 1937 fiscal contraction, and why it wasn’t such a good idea.  (Short answer:  unemployment shot back up and finished the decade in the high double-digits).  He worries that Obama may be making the same mistake, withdrawing spending too soon from an economy that is still growing slowly.

I think this is a worry that we should take seriously.  But here are some reasons you might not worry so much:

1) 
1937 featured a double-whammy of fiscal and monetary contraction. 
Provided that we stagger the contractionary actions by the Fed and the
feds, things shouldn’t be quite that bad.

2)  We may not need
the extensive stimulus that the Great Depression demanded, because we
didn’t commit the cardinal sin of letting the banking system collapse
in on itself.  Supporting the banks probably had other costs, but
unemployment in the 25% range was not among them.

3)  A double
dip recession may be inevitable at some point, because we can’t
continue fiscal and monetary stimulus forever.  If 2012 is too soon,
that probably means it can’t be avoided–in which case it’s not obvious
that “later” is better than “sooner” to absorb the blow.

Update:  Apparently, I heard wrong, and it starts in 2011.  That’s infinitely more worrying, though caveats one and two still apply.

The initial reaction to the three year discretionary non-defense spending freeze that Barack Obama is proposing, is that this is not the time.  In the middle of a deep recession is no when you want to be cutting government spending.

However, it seems that the freeze will not come until 2012 2011 (see update).  At which point my analysis moves to reaction #2:  this is not going to work.

For one thing, it’s a very small percentage of the budget.  It’s supposed to save $250 billion over ten years, with the bulk of those savings coming in the out years, since the freeze is not indexed to inflation.  That’s trivial in light of an accumulated deficit of trillions over the same time period.

But even then, it’s not likely to work.  Congress has to make this happen, and though there is a lot of wasteful government spending, virtually all of it comes attached to some motivated interest group with at least one congressman in its pocket.  Moreover, this freeze is supposed to happen in an election year, when Congressman want to ship as much pork as possible to their constituents.  Come to that, Obama may not be so enthusiastic about it if his poll numbers aren’t good.

We’re going to get spending cuts when there is bipartisan consensus that they have to happen–and more importantly, what cuts should be made.  Things like base-closing commissions work because there’s consensus about what should be done, and congressmen just need political cover to do this.  But there are deep, deep divides over taxes versus spending cuts, welfare versus defense, and so forth.  Maybe if everyone’s sufficiently battered by the next election cycle–and the bond markets–we’ll get some real action.  Until then, this is Obama’s mouth writing checks that his legislature can’t cash.

Update:  I was apparently in error about 2012; ABC says it starts in 2011.  I move the dial back to “harmful”.

This is officially my favorite new music video:

There’s something of a revival of hopes this week among the progressive commentariat.  Perhaps this isn’t so bad, they are telling themselves, and me.

Here’s why I think it isn’t going to happen:

Health care’s popularity drops any time Congress discusses it.  With respect to Nate Silver, who argues that the bill would be popular if they ever passed it and could discuss what’s in it, you cannot “prove” that voters like a bill because various bits of it poll well on their own.  Do I want a sous vide machine?  Certainly!  I could take a poll that would show nine or ten wonderful things I would love about owning a sous vide machine.  Am I going to buy one?  No I am not, because it costs hundreds of dollars I need for other things.

Almost everything polls well on its own, except tax increases.  But as in my example, deciding whether you want something is not a matter of simple addition of positives and negatives.  Some negatives, like price tag, can outweigh even a stunning array of positives.  The things that poll badly:  price tag, excise tax, individual mandate.  These are crucial components that can’t be gotten rid of. 

Moreover, many of the pieces that poll well, like deficit reduction, are things that voters like, but don’t believe this bill will achieve.  They’re not going to believe it any more after you pass the bill through a process that involves buying off every special interest group in sight. 

Legislators are not unaware of this problem, and they cannot be magicked into ignoring their constituents by saying, “These are not the polls you are looking for.” 

I think Yglesias is right that this process was always more fragile than it appeared.  As I read it, majorities of both houses do not want to pass this bill–otherwise, they wouldn’t have run for the exits so quick.  They were looking for an excuse that they could deploy without risking retaliation from the leadership–and what the Massachusetts election showed, is that they don’t have all that much to fear from the leadership, because the leadership may not be there after November. Reid’s almost certain to lose his seat, and Pelosi may lose her majority in the house.

They don’t want to say they want to kill it, of course.  So instead, they’re doing pretty much what I expected:  putting it on the back burner.  We want to pass health care, but we just have a few things to do first . . .

Once it goes on the back burner, it’s over.  As time goes by, voters will be thinking less and less about the health care bill they hated, and more and more about other things in the news.  There is not going to be any appetite among Democrats for returning to this toxic process and refreshing those bad memories.  They’re going to want to spend the time between now and the election talking about things that voters, y’know, like.

Join the conversation about this story »

See Also:

• Mr. President, Here’s A Healthcare Bill That Will Do More Than Yours Did, And Can Actually Pass
• It’s Not Dead Yet: Democrats Will Make Huge Healthcare Push To Save Their Chances In November
• Privately, Democrats Know Healthcare Reform Is Toast

There’s something of a revival of hopes this week among the progressive commentariat.  Perhaps this isn’t so bad, they are telling themselves, and me.

Here’s why I think it isn’t going to happen:

Health care’s popularity drops any time Congress discusses it.  With respect to Nate Silver, who argues that the bill would be popular if they ever passed it and could discuss what’s in it, you cannot “prove” that voters like a bill because various bits of it poll well on their own.  Do I want a sous vide machine?  Certainly!  I could take a poll that would show nine or ten wonderful things I would love about owning a sous vide machine.  Am I going to buy one?  No I am not, because it costs hundreds of dollars I need for other things.

Almost everything polls well on its own, except tax increases.  But as in my example, deciding whether you want something is not a matter of simple addition of positives and negatives.  Some negatives, like price tag, can outweigh even a stunning array of positives.  The things that poll badly:  price tag, excise tax, individual mandate.  These are crucial components that can’t be gotten rid of. 

Moreover, many of the pieces that poll well, like deficit reduction, are things that voters like, but don’t believe this bill will achieve.  They’re not going to believe it any more after you pass the bill through a process that involves buying off every special interest group in sight. 

Legislators are not unaware of this problem, and they cannot be magicked into ignoring their constituents by saying, “These are not the polls you are looking for.” 

I think Yglesias is right that this process was always more fragile than it appeared.  As I read it, majorities of both houses do not want to pass this bill–otherwise, they wouldn’t have run for the exits so quick.  They were looking for an excuse that they could deploy without risking retaliation from the leadership–and what the Massachusetts election showed, is that they don’t have all that much to fear from the leadership, because the leadership may not be there after November. Reid’s almost certain to lose his seat, and Pelosi may lose her majority in the house.

They don’t want to say they want to kill it, of course.  So instead, they’re doing pretty much what I expected:  putting it on the back burner.  We want to pass health care, but we just have a few things to do first . . .

Once it goes on the back burner, it’s over.  As time goes by, voters will be thinking less and less about the health care bill they hated, and more and more about other things in the news.  There is not going to be any appetite among Democrats for returning to this toxic process and refreshing those bad memories.  They’re going to want to spend the time between now and the election talking about things that voters, y’know, like.

An aide to Senator McCain has indicated that his boss will not support a second term for Ben Bernanke, saying that McCain believes Bernanke “must be held accountable”.  Intrade still has Bernanke’s renomination chances at 93% as of this writing, but with the objections to his confirmation spreading towards the center on both sides of the aisle, I’d say they’re dimming by the minute.

Today is the day when the partnership led by Tishman Speyer and Black Rock turns the keys to Stuyvesant Town over to the people who lent them billions.

It’s tempting to point fingers and laugh, because as I discussed in this month’s magazine, this was a breathtakingly stupid deal.  As the commercial real estate bubble expanded, you saw a version of what had happened during the stock market bubble:  multiple inflation.  (Arguably, this is also kind of what happened in residential real estate). Much of the price increase in commercial real estate between 2000 and 2007 was due to rising rents.  But about half was just that buyers, suddenly and for no apparent reason, became willing to pay more for a given stream of projected rents.  Where previously, buyers might have wanted a price-to-rent ratio of ten or eleven to one, by the height of the bubble, they were willing to pay 14 or 15 times rents.

Collective insanity?  Or were they simply betting on asset price inflation–that some “greater fool” would be willing to buy their property from them at a higher price?  Hard to say.  But the net effect was a pretty impressive inflation in the commercial real estate market.  As in residential real estate, lenders participated too, loaning a higher percentage of the building’s value, and demanding less amortization over the life of the loan.

Of course, in many cases, buyers convinced themselves that there was some reason that rents would go up even more dramatically in the future. Tishman Speyer, for example, believed that it could take many apartments out of New York’s rent stabilization regime, bring them up to market rates, and make a small fortune.

But this involved some highly questionable assumptions.  First, you had to believe that it would be easy to decontrol apartments, which it almost never is, in New York, especially over the last few years.  Second, because there were a number of bidders on the property, Tishman and Black Rock paid top dollar for those projected cash flows, so there wasn’t a lot of margin for error if things went wrong.  And they didn’t just project that they’d be able to decontrol the apartments for a modest rent boost; they assumed a continuation of New York’s sizzling real estate boom.

Oops on all three counts.  The buildings didn’t upscale particularly well–the renovations have plastered the lobbies with marble, but the bones of the cheap-n-cheerful middle-income housing project are still visible beneath the facade, so the effect is faintly ridiculous rather than luxurious.  Decontrol was slower than expected.  The wide disparity between rents in the same building was known, and resented, which didn’t improve matters.  And the feisty tenants association had a lawsuit challenging the decontrol process which had started under Met Life, on the grounds that Stuy-Town had taken the city’s J-51 tax credit for rehabilitating rent controlled and stabilized buildings, which the tenants argued meant that they had to keep the apartments, well, rent controlled or stabilized.

As many of you now know, the tenants won last fall, meaning that thousands of apartments revered to their prior low rents.  That was the death blow.  But it merely hastened the end for a project that had previously been bleeding to death slowly.

The lawsuit was not exactly unforeseeable–New York has a special housing court to adjudicate its especially convoluted, irrational, and tenant-friendly housing law.  That court is where landlord dreams go to die.  But still, there are two good reasons not to give into the temptation to point and laugh. 

For one thing, Tishman Speyer is hardly the only firm to make such disastrous bets.  As a result, a lot of people think that over the next couple of years, we’re going to see a big wave of defaults akin to the one still sweeping residential markets.  What the Stuy-town owners did was not a foreclosure–it was what would be known in residential real estate as a “deed in lieu of foreclosure” deal.  But while these avoid the ugly battles in bankruptcy court, they’re otherwise much the same. 

To state the obvious, lenders have expertise in lending, not operating commercial real estate.  That means they usually want to sell–but so will a lot of other lenders, glutting the markets with commercial real estate.  Moreover, if they succeed in selling, that will give bank examiners a new, lower reference price for the collateral on loans held by other banks, which will cause further trouble.

The impairment of lender balance sheets is the other, bigger reason to worry.  The list of investors in the Stuy-Town partnership who will now see their investments wiped out includes grasping capitalist fools like CALPERS and the Church of England.  In the broader commercial real estate market, it’s mostly banks one or more notches below “too big to fail territory”.  The FDIC has the technical expertise to resolve them–but Sheila Bair has already had to force banks to “prepay” their FDIC contributions for three years in order to shore up the corporation’s finances.  If the problems in commercial real estate deepen, the taxpayer will probably be the next place she turns for help.

Congressional Democrats seem to have decided, along with the President, that the key to electoral success is to be seen beating up on anyone in the financial community.  As a result, Bernanke’s nomination for another term as Chairman of the Federal Reserve is now in serious jeopardy.

I see the political logic, but the economic logic is pretty
poor.  Bernanke didn’t become Fed chair until 2006, long after it was
realistically possible to do much about the bubble except wait for it
to pop.  He shepherded us through the financial crisis without another
Great Depression–maybe not perfectly, but no Fed chair would have been
perfect.  The markets have confidence in him.  Spiking his nomination
may have grim effects on 401(k)s throughout the land.

Moreover,
whatever he did that wasn’t popular, he clearly did with the connivance
of Congress.  Congress wanted him to pump money into banks; they just
didn’t want to take political responsibility for it.  If they’d really
objected, they could have amended the Federal Reserve Act at any time
and stopped him cold.  But they knew what he knew:  if the banking
system seized up, there would be absolutely enormous suffering.  They
wanted, as he did, to err on the side of creating moral hazard and
bailing out undeserving bankers, rather than bread lines and 25%
unemployment.

Nonetheless, I’d now say it’s quite likely that
his nomination will not make it through the Senate.  They need someone
to strike at to take voters minds off the health care bill and the
debacle in Massachusetts.  I think Ben Bernanke just got nominated to
lean into the strike zone and take one for the team.

What’s
slightly worrisome is what happens next.  A populist Fed chair sounds
fun–full employment for everyone!  But the Reagan recession is what
Volcker had to do in order to clean up the nasty aftereffects of fed
chairs that bowed to political pressure for easier money.  Remember
Paul Volcker, who everyone to the right of Chairman Mao now suddenly
loves?  He put short-term interest rates up to over 20%, and
unemployment up to over 10%, because it was the only way to cut off
inflationary expectations.