Author: R.A. | WASHINGTON

LAST week, Tyler Cowen quoted a famous paper in which the question was asked: Why is there so little money in politics:

We summarize the data on campaign spending, and show through our descriptive statistics and our econometric analysis that individuals, not special interests, are the main source of campaign contributions. Moreover, we demonstrate that campaign giving is a normal good, dependent upon income, and campaign contributions as a percent of GDP have not risen appreciably in over 100 years – if anything, they have probably fallen. We then show that only one in four studies from the previous literature support the popular notion that contributions buy legislators’ votes. Finally, we illustrate that when one controls for unobserved constituent and legislator effects, there is little relationship between money and legislator votes.

Well, maybe there’s plenty of money in politics after all. Consider this finding (PDF), from a December paper produced by economists at the San Francisco Fed:

Based on a panel of 48 U.S. states and unique data on business campaign contributions, our empirical work uncovers four key results. First, we document a significant direct effect of business contributions on tax policy. Second, the economic value of a $1 business campaign contribution in terms of lower state corporate taxes is nearly $4. Third, the slope of the reaction function between tax policy in a given state and the tax policies of its competitive states is negative. Fourth, we highlight the sensitivity of the empirical results to state effects.

Their work does indeed suggest that their is too little money in politics, given the excess return to campaign contributions. Still, donors are getting something for their dime. Or how about this?

By going through individual lobbying reports, we identify all lobbying activities by financial institutions related to the regulation of mortgage lending and securitisation. During the period of the boom from 2000 to 2006, we find 16 pieces of federal legislation aimed at enhancing the regulation of predatory lending practices, none of which ever became law. The amounts spent on lobbying in relation to these laws were substantial and were spent mostly by large financial institutions…

We find that, between 2000 and 2006, the lenders that lobbied most intensively to prevent a tightening of laws and regulations related to mortgage lending also:

• originated mortgages with higher loan-to-income ratios,
• increased their recourse to securitisation more rapidly than other lenders, and
• had faster-growing mortgage-loan portfolios.

These findings suggest that lobbying by financial institutions was a factor contributing to the deterioration in credit quality and contributed to the build-up of risks prior to the crisis.

Just because money was spent and legislation failed to pass doesn’t mean there was a clear causal line between the two, but it does make one think. And I think it’s fine to argue that the Supreme Court’s ruling in the Citizens United case had a firm foundation in the first amendment, but I believe it’s incredibly naive to assume that corporate cash spent on political objectives is generally ineffectual or harmless.

LAST week, just over two million Massachusetts residents went to the polls and narrowly elected Republican Scott Brown over Democrat Martha Coakley. Despite the relatively small number of people voting, and the relatively small margin of victory (just under 5%), the election outcome received significant national attention, was heralded as a major turning point in the political environment, and sent the Democratic party reeling and careening toward the centre.

Yesterday, just over one million Oregonians went to the polls and voted by slightly larger margins to raise income taxes on high-earners and on corporations in order to preserve government services. Kevin Drum posts a quote from the Los Angeles Times to illustrate the surprising nature of the result:

Over the years, voters here have capped property taxes (saddling the state with two-thirds the cost of running the schools) and passed a constitutional amendment requiring rebates whenever tax receipts come in 2% over budget. Nine times they have been asked to OK a sales tax — and said no. Proposals to increase the state income tax? Down in flames twice.

But now the Legislature is taking a tack that analysts think could finally pull the rug out from under the tax revolt: soaking the rich.

I don’t really see any reason to downplay this outcome relative to the Massachusetts election. If anything, this vote is more telling as candidate personalities weren’t on the ballot. Of course, I don’t expect Republicans to suddenly reevaluate their outlook on tax rates. One would think that someone in the Democratic leadership might note, however, that raising revenues can be a credible and acceptable way to help close a budget gap.

The tricky part is that one doesn’t really want to go about jacking up tax rates in the midst of recession (or its immediate aftermath). As the CBO notes in its new Budget and Economic Outlook, allowing the Bush tax cuts to expire shaves quite a bit off deficits over the coming decade—but at the expense of some growth. But what does seem clear is that the adminstration could propose and Congress could pass revenue-raising measures now, to begin taking effect in three or four years. Having put the country on a credible path toward budget sustainability, the government might then have more room to pursue short-term stimulus. But that’s not what we’re going to get, it seems. Instead, the American economy will be stuck with insufficient spending now, and insufficient deficit-reduction later.

JUST one more footnote to the discussion on the spending freeze. In the conference call with OMB head Rob Nabors that I mentioned in my last post, Mr Nabors was at pains to note that the freeze applied only to “non-security” discretionary spending—it wouldn’t apply to anything, he said, associated with protecting Americans from attack.

I was already bristling at the implication that while plenty of waste could be found on the non-defence side of the budget, every last dollar spent at Defence, State, Homeland Security, and Veterans Affairs was crucial in preventing attacks. But then Mr Nabors addressed a question concerning how the freeze would be carried out. And in noting that not all programmes would be treated equally—that some would face budget cuts while others enjoyed spending increases—he compared the selective trimming to the president’s decision last year to cut funding for…the F-22.

This used to be the most sophisticated team in politics. What happened?

THE Congressional Budget Office is just full of sunshine this morning:

The Congressional Budget Office projects that if current laws and policies remained unchanged, the federal budget would show a deficit of $1.3 trillion for fiscal year 2010. That amount would be slightly smaller than the 2009 deficit but, as a share of the economy as a whole…it would still be the second largest since World War II…

Those estimates are not intended to be a prediction of actual budget outcomes; rather, they indicate what CBO estimates would occur if current laws and policies remained in place…if all tax provisions that are scheduled to expire in the coming decade were extended and the AMT were indexed for inflation, deficits over the 2011–2020 period would be more than $7 trillion higher…

Accumulating deficits are pushing federal debt to significantly higher levels. CBO projects that total debt will reach $8.8 trillion by the end of 2010. At 60 percent of GDP, that would be the highest level since 1952. Under current laws and policies, CBO’s projections show that level climbing to 67 percent by 2020. As a result, interest payments on the debt are poised to skyrocket; the government’s spending on net interest will triple between 2010 and 2020, increasing from $207 billion to $723 billion.

That should provide a little perspective on the $250-billion-over-ten-years freeze on “non-security” discretionary spending. And while the administration is busy not denting the long-run budget deficit, it’s also not addressing short-term economic weakness. The CBO’s latest projections on near-term economic performance are pretty dismal. Real GDP is expected to increase by 2.1% in 2010 and 2.4% in 2011. That’s extremely sluggish growth coming out of a deep recession. Core consumer price inflation is forecast to be 1.1% in 2010 and 0.9% in 2011. And CBO has unemployment at 10.1% in 2010, 9.5% in 2011, and averaging 6.5% from 2012 to 2014.

In a conference call that just concluded, Deputy Director of Office of Management and Budget Rob Nabors responded to a question on how the freeze might conflict with efforts to return the economy to full employment. Mr Nabors noted that in 2010, the adminstration was focused on putting Americans back to work. Then in 2011, when the economy is on a more stable footing, the president will turn his attention to working toward a sustainable budget situation.

This is utter foolishness. Fiscal 2011 begins in October of this year. At that point, according to CBO, unemployment will be above 9.5%. At the beginning of fiscal 2012, according to CBO, unemployment will still be at or near 9%. This is an important point; one of the primary factors causing current high deficits is the revenue-reducing effect of a weak economy combined with the automatic increase in spending on social programmes associated with the weak economy. It’s very difficult to balance a budget while the economy is weak, because every contractionary policy move further reduces economic activity, thereby trimming revenues and putting upward pressure on automatic stabiliser spending.

The one source of solace here is that the freeze proposal is too lame to produce serious budget cuts. But that means it’s basically a waste of time and political energy, at best. No amount of spinning from the administration is going to cover that fact.

WE WILL see whether the trend continues—by all accounts, December and January produced some disappointing housing market figures across a range of categories—but for now it seems that broad-based stabilisation has broken out in housing. According to the latest data release, for the month of November, prices nationally have increased for six consecutive months. In all likelihood, American home prices will have posted in the current month their first year-over-year gain since January of 2007. Year-over-year gains have already been notched in Dallas, Denver, San Francisco, and San Diego.

And for the first time in the recovery, home prices in Las Vegas rose on a monthly basis. All told, Las Vegas prices fell 56% from peak to trough, and they returned, on a nominal basis, to their level of August 2000.

If I had to guess, I would say that Las Vegas is beginning to benefit from recovery in California’s husing markets. It was rapid price increases in California that initially drove the housing booms in Las Vegas and Phoenix. Home prices in the Golden State were surprisingly quick to recover after the bust; San Francisco prices have been rising for eight consecutive months and rose 1% in November, year-over-year. The combination of dirt cheap property in Las Vegas and growing property prices in California seems to have finally driven buyers back to America’s playground.

BRITAIN has languished in recession longer than its counterparts on the continent and across the Atlantic. This downturn, as it happens, was the economy’s longest since before the Great Depression. But finally, finally, growth has returned, to the tune of a rise of 0.1%, quarter-on-quarter. Economists had anticipated expansion of between 0.2% and 0.4%. Even those meagre figures proved too optimistic.

The numbers might very well be revised up later in the year, but with growth so weak there remains a chance that contraction will resume again in the first quarter of this year, essentially dooming the Labour Party.

The Economist adds:

Looking longer ahead, the outlook is for a pretty modest recovery this year. GDP will increase by 1.4% in 2010 according to the average of 28 independent forecasts in early January assembled by the Treasury (which itself predicted 1.25% in December). Much of the recovery will come from a turnaround in the stockbuilding cycle, as inventories are run down far less than before.

Ensuring that this fragile upturn is sustained will require some skill from policymakers. The recovery has been helped by an extraordinary stimulus, both fiscal and monetary. The budget deficit has burgeoned to a post-war record, the base rate is at a 300-year low and the policy of “quantitative easing” has been vigorously pursued. As Britain belatedly leaves recession behind, so the Treasury and the Bank of England will want to execute their own “exit strategies”. Co-ordination will be vital. The tougher the fiscal tightening, the easier monetary policy can remain. But none of these crucial decisions will be made until Britain has a new government after the general election.

Britain is in a much tougher position than America, where recession and fiscal stimulus have not overburdened the budget by quite as much, and where a more robust boost from inventory rebuilding has left the economy with more room to slow without tipping back into recession. The perfect policy line, balancing fiscal concerns with the need to secure recovery, is a very narrow one indeed. British politicians may begin to wonder whether it exists at all.

IN THE days after the election of Scott Brown as the new Senator from Massachusetts, many left-leaning pundits echoed the message that what bothered them most about the outcome was not the defeat itself but the overreaction from the Democratic leadership. The loss was disappointing, no doubt, but Democratic legislators seemed to be treating the defeat of a terrible candidate by a very good one in a special election in one state as the very death knell of their party. Republicans, by contrast, reacted to their overwhelming electoral defeat in November of 2008 by bucking themselves up to stand firm against the new president and large majorities in both houses of Congress.

I suspect those left-leaning bloggers will be fuming tomorrow:

On an exciting phone call with progressive internet writers earlier this evening, a senior administration official outlined the Obama administration’s plan to call for a freeze in non-security discretionary spending starting with the Fiscal Year 2011 budget. Described as an effort to balance concern with a “massive GDP gap” in the short run and “very substantial budget deficits out over time,” the plan calls for the FY 2011 budget to be higher than the FY 2010 budget, but then for non-security discretionary spending to be held constant in FY 2012 and FY 2013. (Let me note right here that all of the reporters on the call, myself included, screwed up and forgot to seek clarification as to whether this is a nominal freeze or a real dollar freeze).

The freeze would not apply to the Department of Defense, the Department of Veterans Affairs, the Department of Homeland Security, or to the foreign operations budget of the State Department. The official emphasized that the freeze is not the only element of the administration’s plans for deficit reduction, just the only element he was prepared to discuss on this particular call. “This is only one component of an overall budget,” he said, “you’ll see other components on Monday.”

So is this an across-the-board freeze like we’ve heard Republicans call for? No, it’s “not a blunt across the board freeze.” Rather, some agencies will see their budgets go up and others will go down, producing an overall freeze effect. The senior official sought to portray this as not just a question of spending less money, but of getting our money’s worth—cutting (unspecified) ineffective programs and spending more on programs that work.

Here‘s the New York Times version of the story. There really is no good way to interpret this turn of events. From the standpoint of the purely economical, this is a huge mistake. Even if we assume that the economy will be strong enough in 2011 to handle budget balancing, this proposal is practically worthless. The administration has said this will produce $250 billion in savings over ten years, but as The Economist noted in November, the fiscal deficit will be over $700 billion in 2014 alone, and will grow from there. Non-defence discretionary spending is nothing; those who are serious about long-term budget sustainability talk about defence, they talk about entitlements, and they talk about revenues. In other words, this will do very little about the deficit, and it will do even less to convince markets of the credibility of the American effort to trim the deficit.

So perhaps this is all about politics? Well, maybe, but there are two enormous problems with that. One is that the campaign-trail version of Barack Obama railed against John McCain’s proposal for a spending freeze, rightly, as using a hatchet where a scalpel was needed. It’s unlikely that Mr Obama’s political opponents will let him forget that. The other is that this is a complete betrayal of the political ideal Mr Obama seemed to espouse from the beginning of his political career—the rejection of the argument by the lowest common denominator in favour of a more reasoned and argued approach. This is yet another move toward the infantilisation of the electorate; whatever the gamesmanship behind the proposal, Mr Obama has apparently concluded that the electorate can’t be expected to handle anything like a real description of the tough decisions which must be made. I sympathise with Mr Obama’s position—would that American voters were patient enough to hear and consider a detailed policy discussion on a complex issue—but it’s unreasonable to expect that Americans can be hoodwinked into major policy shifts.

And this is an incredibly risky political gamble for the president. Much of the liberal base of the Democratic party was already prepared to mutiny after the overreaction to the Massachusetts defeat and the abandonment of the health-care reform bill. This may well drive them over the edge. If it weren’t enough that the proposal treats voters as children and a serious problem as a political football to be kicked around, the president’s plan also appears to endanger an economy that hasn’t meaningfully raised employment in over a decade and it solidifies defence spending as the untouchable budget category, when in fact it should be anything but.

I understand the arguments from supporters of the president that this is a poltical gambit, that it won’t actually amount to much but a sound talking point and a tool with which to co-opt the president’s moderate antagonists. What’s the difference? Seriously. How does the president move from this to any important policy goal? What room does this leave him to deal with either the jobless recovery or the long-run budget deficit?

Through bad times and good times for the president, there was one word I never associated with him and his approach to the challenges facing the country: gimmick. But this is a bright shining gimmick that advertises a lack of seriousness to both near-term economic weakness and long-run budget problems. This is decidedly not what is needed right now. If this is the best the president can do, Democrats, and the country, are in for a very long few years.

AHEAD of the State of the Union address, the Obama administration is rolling out some new economic policies aimed at helping the middle class:

Previewing a theme that is sure to dominate his State of the Union address this week, Mr. Obama unveiled a package of modest initiatives intended to help families pay for child care, save for retirement, pay off student loans and care for elderly parents.

One advantage of the president’s proposals is that they might appeal to people who are struggling financially without looking like the kind of broad expansion of the federal government that is making many Americans uneasy. They also would add little to the federal deficit at a time when Mr. Obama is pledging to reduce it.

For example, the president is calling on Congress to nearly double the child care tax credit for families earning less than $85,000 — a proposal that, if adopted, would lower by $900 the taxes such families owe to the government. But the credit would not be refundable, meaning that families would not get cash payments if they owe no income taxes.

Another of the president’s proposals, a cap on federal loan payments for recent college graduates at 10 percent of income above a basic living allowance, would cost taxpayers roughly $1 billion. The expanded financing to help families care for elderly relatives would cost $102.5 million — a pittance in a federal budget in which programs are often measured in tens if not hundreds of billions of dollars.

This is really small bore stuff relative to the $150 billion jobs packaged recently passed by the House of Representatives (and awaiting consideration in the Senate), which is itself small bore relative to the output gap. As Brad DeLong puts it:

It would be hard to design a policy that did more to maximize the likely good short-term press from a corrupt and incompetent press corps while minimizing the shifting of the tax burden away from working families with children.

Elsewhere, Mr DeLong discusses what he sees as three potential ways to increase employment:

• Shifting government spending from things that create the most in the way of useful goods and services (and that also boost employment) to things that create the most employment (and maybe also create some useful goods and services): i.e., large government employment programs.

• Shifting private production from things that create the most in the way of useful goods and services (and that also boost employment) to things that create the most employment (and maybe also create some useful goods and services): i.e., large (but incremental and temporary) new employment tax credits.

• Using the U.S. Treasury as the world’s biggest hedge fund to take huge amounts of private-sector risk onto the government’s books, and thus create an appetite on the part of investors to finance additional risky investment even given their limited and depressed risk tolerance.

“It’s unclear to me which of any of these are on the table,” says Mr DeLong. For now, I would say that the prospects for large new programmes are bleak. The Senate may ultimately pass its own jobs bill. If employment numbers were to take a sharp turn for the worse, it might be possible to wring new tax cuts out of the Senate, but this will become increasingly difficult as legislators line up to jump on the deficit-cutting bandwagon. And with Mr Bernanke’s reappointment seemingly safe, monetary policy will almost certainly continue down the path of an end to asset purchases and a slow return to higher interest rates.

This is it, in other words. Practically all of the employment-boosting policies that are going to be put out there have already been put out there. My sense is that Mr Obama is hoping to relive Ronald Reagan’s first term—economic recovery in time for election to a second term, after which broader popularity might allow him to poach Republican votes for policy priorities.

It’s a risky strategy, essentially dependent on the economy rapidly transitioning to some new growth paradigm. What has surprised me is the lack of focus on sound investments that aren’t necessarily countercyclical but which should boost medium-term economic growth.

The most obvious example is infrastructure investment. Infrastructure has received its share of stimulus money, it’s true. But the amount allocated in stimulus is no where near the level required for necessary maintenance and upgrades of the nation’s infrastructure needs. America could easily spend half a trillion dollars over the next half decade and it would still have critical needs. Just as important, the government hasn’t developed the promised new framework to better allocate infrastructure money—a national infrastructure bank. Recession or not, these issues will need to be addressed, but tackling these needs now would boost the medium-term employment outlook. Just as importantly, there is bipartisan support for infrastructure investments; as feisty as Republicans have been, it’s difficult for them to vote no on money needed to fix bridges and pipes that serve their constituents. And yet, there has been little progress on this front.

There are other examples out there. The problem with this approach is, and always has been, that the near-term multiplier isn’t that great; as short-term stimulus, aid to states and expanded unemployment insurance are more effective. But there is every reason to believe that the public never really got stimulus in the first place. Stimulus is counterintuitive, the public never observed the 12% unemployment that the stimulus package helped head off, and as far as voters are concerned the government has been spending for nothing. And as a result, it’s very hard to win new votes on “stimulus”. It therefore makes no sense to compare longer-term infrastructure plans to an imagined stimulus bill.

Instead, it makes sense to focus on measures which a) will need to be addressed eventually in any case, and b) which can be sold to voters. Infrastructure-like measures fit the bill.

That won’t win incumbents the short game—enough job creation to save them in the fall elections—but it may win them the medium game. If they’re not playing for either of those, then I don’t know what they’re doing. For incumbents, that’s all there is.

MORE fun research from NBER:

Is there an economic rationale for pronatalist policies? In this paper we propose and analyze a particular market failure that may lead to inefficiently low equilibrium fertility and therefore to a need for government intervention. The friction we investigate is related to the ownership of children. If parents have no claim on their children’s income, then the private benefit from producing a child may be smaller than the social benefit. We present an overlapping-generations (OLG) model with fertility choice and altruism, and model ownership by introducing a minimum constraint on transfers from parents to children. Using the efficiency concepts proposed in Golosov, Jones, and Tertilt (2007), we find that whenever the transfer floor is binding, fertility choices are inefficient. We show how this inefficiency relates to dynamic inefficiency in standard OLG models with exogenous fertility and Millian efficiency in models with endogenous fertility. In particular, we show that the usual conditions for efficiency are no longer sufficient. Further, we analyze several government policies in this context. We find that, in contrast to settings with exogenous fertility, a PAYG social security system cannot be used to implement the efficient allocation. To achieve the efficient outcome, government transfers need to be tied to a person’s fertility choice in order to provide incentives for child-bearing.

Emphasis mine. The last bit is particularly interesting: if you allocate Social Security funding based on fertility (which makes sense; the more taxpayers you put into the system, the more you ought to collect) that might generate a more efficient fertility outcome.

The really fun part is the authors are suggesting that if parents had a right to some of their children’s income, they’d have more children. One assumes that the kids not being born would prefer being born to not being born, even if they have to pay more in taxes to fund their parents’ retirement. In that case, it seems like everyone wins from this policy tweak.

On the other hand, having a kid significantly increases your carbon footprint. To get this right, you’d want to price in the negative externalities as well as the positive ones.

TYLER COWEN recommends Eric Barker’s blog and sends us to this post, which examines the hypothesis that prostitutes should earn a wage premium as compensation for foregone marriage opportunities. It reads in part:

In this paper, we present evidence from high-end prostitution, the so called escort market, a market that is, if not entirely safe, notably safer than street prostitution. Analyzing wage information on more than 40,000 escorts in the U.S. and Canada collected from a web site, we find strong support for EK. First, escorts in the sample earn high wages, on average $280/hour. Second, while looks decline monotonically with age, wages follow a hump-shaped pattern, with a peak in the 26-30 age bracket, which coincides with the most intensive marriage ages for women in the U.S. Third, the age-wage profile is significantly flatter, and prices are lower (5%), despite slightly better escort characteristics, in cities that rank high in terms of conferences, suggesting that servicing men in transit is associated with less stigma. Fourth, this hump in the age-wage profile is absent among escorts for whom the marriage market penalty is lower or absent: escorts who do not provide sex and transsexuals.

Mr Cowen quips:

Excellent, but I do find some problems in that account.  As for the [third] point, who ever said: “Don’t worry ma, she’s a sweet girl, she’s only serviced the conference trade!”?  Maybe, in “crossroads” cities, sexual mores are looser in some other way, as a greater supply of the free product than you will find in Topeka.  As for the third point, can’t it simply mean that conference men (even assuming that is indeed the relevant characteristic of the city) get really drunk and don’t care much about the age of the woman?

Do transsexuals not gain from marriage, or is it assumed that they’re unable to marry due to laws against gay marriage?

IN 2004, Chicago experimented with a programme, agreed to by the Chicago Teachers Union which allowed principals to dismiss teachers still in their probationary period for any reason. Remarkably, this new incentive influenced behaviour:

Results suggest that the policy reduced annual teacher absences by roughly 10 percent and reduced the prevalence of teachers with 15 or more annual absences by 20 percent. The effects were strongest among teachers in elementary schools and in low-achieving, predominantly African-American high schools, and among teachers with highpredicted absences. There is also evidence that the impact of the policy increased substantially after its first year.

One of the most frustrating problems in reforming educational systems is that it’s very hard to get unions to sign on to these kinds of deals, even when teachers are offered things like guaranteed pay increases as compensation. This isn’t because most teachers are deadbeats; bad apples make up a minority of the profession. Rather, it’s because even good teachers are reluctant to adopt performance-based measures out of a fear that they’ll be used capriciously or inappropriately. Teachers are wary of losing their jobs based on complaints from parents who feel their kids have been unfairly given poor marks, and they fear that principals will make personnel decisions based on class results without taking into account student backgrounds (a lousy teacher with great students will often produce better test scores than good teacher with lousy students).

Still, at some point you have to look at the cost imposed by the absence of any performance-based carrots and sticks and say enough is enough. Charter schools have offered many systems a way around union roadblocks, and the Chicago case demonstrates that in some cases deals can be struck. So long as these test cases produce results like those in the above quote, you can expect pressure on hold-out unions to intensify significantly. Which is as it should be.

ONE of the more quoted comments about the Bernanke confirmation ado is this, from James Hamilton:

How could there possibly be an alternative whom Barbara Boxer (D-CA) and Jim DeMint (R-SC) would both prefer to Bernanke?

A good question! It reminds me of this very good passage from Scott Sumner (which I saw at Marginal Revolution):

If our banking system absorbs trillions in losses you can be sure the government will step in, regardless of whether we have big banks or small banks.  And if our banking system isn’t in crisis, then FDIC is perfectly capable of handling an isolated bankruptcy, even at a large bank.  In any case, I can’t imagine a future where the US doesn’t have any large banks, but Europe, China, Japan and Canada have lots of large banks.  Can you?  Wouldn’t it make more sense to try to prevent the banking system from suffering trillions in losses after a bubble bursts, perhaps by requiring sizable downpayments?

But then I read that the FHA is about to set much tougher standards for FHA mortgages—they plan to require borrowers with a 590 credit score to put down at least 3.5% downpayments.  As Tyler Cowen recently argued, you knew Congress wasn’t serious about global warming when they refused to make Americans pay more for gasoline.  And I would add that you can be sure that the populists who want to “re-regulate the banking system” aren’t serious when all they can do is talk about 3.5% downpayments for bad credit risks.  It is so much more fun to bash big banks.

You can extend this to the debate over health reform. Much is made of the fact that the Senate health bill doesn’t tend to poll all that well. I think that negative poll numbers are overstated; when you discuss the things the bill would actually do with voters, they tend to react much more positively. But the bottom line is that any good health reform bill is likely to be constantly on the verge of unpopularity. Why? Well, most Americans have insurance, and most Americans are generally satisfied with their insurance (because they have no idea what it’s costing them and how rapidly costs are increasing). It’s therefore not that surprising that real reform—which would extend insurance to those who can’t currently afford it (unavoidably at others’ expense), which would expose voters to more of the costs of care, and which would necessarily limit access to services with poor cost-benefit ratios—has been all but impossible to pass. Indeed, this time around is the closest America has been in decades, and the bills under consideration barely address cost control.

Progressives have rightly lambasted the filibuster as a barrier to enacting needed but unpopular policies. And indeed, it is much harder to get legislators representing 65% of the country to pass a contentious policy, be it carbon tax or spending cuts, than it is to get legisators representing a mere 51%.

Scott Sumner also mused recently that the democratic process inevitably bogs down at a high enough level—like, say, a national government of a country of over 300 million people. As evidence, he cites the relative simplicity of state tax forms. One might also note that state governments (some of them at least) have managed to lead the way on policy issues from health reform to emissions reduction.

The problem with this approach is that it’s difficult to imossible to craft effective rules on some issues at a state level. You can’t regulate the global financial system state-by-state. You absolutely can’t reduce emissions globally without global coordination of policies.

At a high enough level, the concepts of shared sacrifice and societal benefit seem to become too impersonal, which is fine when costs and benefits are local in nature but extremely problematic when issues are national or global in scope. It seems reasonable to characterise recent crises—of imbalances, of borrowing, of economic collapse, and of environmental calamity—as failures of governmental scope. There is a mismatch between the level of government at which real solutions can be achieved and the level at which policy must be coordinated to be effective. And while eliminating the filibuster would help close that gap, by making America’s national government more representative, significant challenges would remain. We’re simply not very good at thinking like global citizens. To become global citizens will require a real cognitive leap, of the sort that turned a world of tribes and fiefdoms into a world of countries. But that leap took centuries to complete (in fact, there are parts of the world where the transformation is far from done). We’ll have to adjust more quickly this time around, if we hope to address the significant crises to come.

AT THE moment, it appears that the threat to Ben Bernanke’s confirmation has passed. Even as additional senators continue to come out against Mr Bernanke’s reappointment—the latest being Republican John McCain—leaders of both parties are telling reporters that they have the votes to confirm Mr Bernanke, and the final vote will likely be bipartisan. InTrade reflects this conventional wisdom.

The short-lived scare nonetheless generated a lot of interesting commentary on Mr Bernanke’s reappointment. Paul Krugman discussed the pro and con sides of the debate here (and Mr Krugman was recommended for the position here, a compliment he sagely dismissed as “crazy”). Here‘s Jim Hamilton making the case for reappointment, in a post which helpfully includes still more links to other posts on the debate. Meanwhile, Tyler Cowen has some sensible comments on the difficulty of changing horses mid-race, and Greg Mankiw publishes an email from an anonymous administration official, who explains why the narrative writers are ascribing to administration decisions on banking policy is misguided.

The positive case for Ben Bernanke is pretty straightforward. Mr Bernanke managed to shepherd the financial system through a very difficult period. He has moved aggressively to ease monetary policy and boost the economy, and while it can be argued that he has not been aggressive enough, additional easing would have come with certain risks (including the possibility of offsetting increases in long-term interest rates). Meanwhile, Mr Bernanke has proven to be an excellent manager of the FOMC and of Congress. The job requires diplomacy and tact, and few other candidates combine such traits with Mr Bernanke’s expertise.

There is also a negative case for Mr Bernanke, which goes like this. Markets remain shaky and a change at the Fed could cause them to falter, contributing either to a damaging increase in interest rates or a damaging decline in stock prices, or both. Meanwhile, it’s not clear that there is any confirmable candidate with more to offer than Mr Bernanke (or indeed, any other confirmable candidate). Even if a qualified, worthy candidate was found and confirmed, they would have to operate within the constraints of the FOMC (which is not a dictatorship), which would limit their ability to change course. In short, the downside risk is considerable given the potential gain.

So why even bother? Well, as writers like Scott Sumner and Paul Krugman (and yours truly) have argued, more aggressive Fed easing would probably be a very good thing for the American economy, and Mr Bernanke is clearly unwilling to walk out any farther on that limb. And replacement of Mr Bernanke would strike a major blow for accountability. Mr Bernanke has been on the Fed Board of Governors since 2002 and has been Fed chairman since 2005, a period during which a massive housing bubble inflated, leading to a devastating financial crisis and recession. Just as you’d want to axe a failing chief executive of a bank (or indeed, a country) for failure to detect and protect against this looming catastrophe, it seems important not to forgive Mr Bernanke’s complicity in this failure.

Meanwhile, the negative case for Mr Bernanke seems somewhat incoherent. If any confirmable replacement could only make small course corrections to Fed policy, then why should markets freak out at such a change?

The answer would seem to be that the move would signal a broader shift against markets and toward reactionary populism. In part, this is due to the timing. Had Mr Obama opted for a different candidate at the outset, markets would likely have accepted the decision. A failure to confirm in the wake of the Massachusetts election, however, looks like ill-considered panic.

What this turn of events really suggests, in the end, is that vulnerable markets can still strike fear into the hearts of policymakers. And that Mr Bernanke was faced all along with considerable constraints on his actions and conflicting pressures. It’s hard to imagine that someone might have done clearly better over the past two years. And that populism will continue to play a meaningful, and occasionally surprising, role in government decisions.

FROM today we are changing the way we write our bylines in order to make it clearer that different correspondents are writing different posts. We hope this will facilitate discussion between our bloggers and with other blogs, and prevent any confusion should we ever have multiple correspondents in the same city.

Some readers will wonder why we do not move to full bylines. We still consider this blog a collective effort, where what is written is more important than who writes it. So we want the focus to remain on the substance of our posts, not our surnames.

UPDATE: Just to clarify, we’ll now be using the author’s initials in the byline, as a means to distinguish between contributors.