Euro Indigestion

Kevin Drum picks up on an interview with author Barry Eichengreen, who has written on the possible demise of the Euro.

What’s your view now?
Rarely does an academic have the privilege of a real-time test of his hypothesis. With the benefit of that test, I would now say that I was both right and wrong. I was right in that, yes, if the Greek government were to announce tomorrow that it had decided to reintroduce the drachma, it would precipitate the mother of all financial crises. Everyone would know that its intention was to depreciate the new drachma, so in the first minute everyone would rush to get their money out of the country, out of its banks, and out of its bond market. The result would be the biggest bank run and financial crisis the world has ever seen. This danger is a formidable deterrent to even contemplating going down this road. So I think the argument I made in 2007, that attempting to exit the euro area would be the equivalent of burning down your own house in order to find a way out, was exactly right. 

In what way were you wrong?
I was wrong in that, as Paul Krugman observed earlier this year, if the house is burning down anyway, then the normal advice not to play with matches loses much of its force. If there’s a run on your banking system anyway, then the deterrent to action no longer applies. If there’s a run on your banking system and you have to close down your banks and financial markets anyway, you may want to take that opportunity to reintroduce your own currency. I still don’t think that things will be allowed to get to this point, but I no longer attach a zero probability to a country’s exiting the euro — just a close to zero probability. Never say never, but I still believe that the euro is an example of a path-dependent historical process that is unlikely to be reversed.

I think he's probably right. But I'm also not entirely sure of that. So far there's been no sign of a serious run on any euro-area banking system, but there have been signs of a "bank walk," for lack of a better term. And that could lead to a run on one bank which, in turn, could lead to a run on so many banks that the European monetary authorities can't stop it. Megan McArdle's warning that pundits "have started seeing Creditanstalt everywhere" is a good one, but this is still a scary process we're going through. I'm not sure exactly what nonzero probability Eichengreen would attach to a euro breakup, but even five or ten percent is pretty serious. Buckle up.

Starve the Beast?

Kevin Drum quotes Bruce Bartlett as he exposes the Republican tax cutting obsession for the fraud it is.

A prime reason why we have a budget deficit problem in this country is because Republicans almost universally believe in a nonsensical idea called starve the beast (STB). By this theory, the one and only thing they need to do to be fiscally responsible is to cut taxes. They need not lift a finger to cut spending because it will magically come down, just as a child will reduce her spending if her allowance is cut — the precise analogy used by Ronald Reagan to defend this doctrine in a Feb. 5, 1981, address to the nation.

Bruce goes on to look at the empirical evidence — namely that spending went down after the Clinton tax increases and up after the Bush tax cuts — and concludes that STB is a "crackpot theory." True! But what makes it even more crackpotty is that basic economic principles, of the kind that Republicans are endlessly lecturing the rest of us about, predict the same thing. If you raise taxes to pay for government programs, you're essentially making them expensive. Conversely, if you cut taxes, you're making government spending cheaper. So what does Econ 101 say happens when you reduce the price of something? Answer: demand for it goes up.
 
Cutting taxes makes government spending less expensive for taxpayers, which makes them want more of it. And politicians, obliging creatures that they are, are eager to give the people what they want.

Result: lots of spending and lots of deficits.

If you want to reduce spending, the best way to do it is to raise taxes so that registered voters actually have to pay for the services they get. I don't have a cute name for this theory, but it's true nonetheless. For a while, anyway. Until it's not.

The Folly of Simpson and Bowles

Kevin Drum points out the glaring flaw in the Simpson-Bowles chairman's mark proposal by the Deficit Commission....that it ignores healthcare costs.

Here's the problem: most plans to reduce the long-term deficit consist of three things: shiny baubles, smoke and mirrors, and actual deficit reduction measures. You want to minimize the former and emphasize the latter, and on that score I don't think Simpson-Bowles does very well.

 

Their discretionary cuts are a combination of baubles and smoke and mirrors. The baubles are the trivia, like cutting printing costs and eliminating earmarks. The smoke and mirrors comes from vague non-choices like cutting the federal workforce 10% or pretending that a spending cap will actually accomplish anything. Discretionary spending isn't really a long-term problem in the first place, but if you're going to address it anyway, then address it by proposing actual program cuts. You think manned space exploration is a boondoggle and you want to cut NASA's budget in half? Fine. You think ethanol subsidies are outrageous and you want to eliminate them? Great. You think our nation would be safe with nine supercarrier groups instead of a dozen? Preach it. But that's what it takes to cut the discretionary budget: cuts to real programs, not handwaving about caps and generic rollbacks.

Next up are their tax reform proposals, which are almost entirely smoke and mirrors. You can make any deficit reduction plan easier by proposing a tax system that (you claim) will boost growth rates by 1% per year. Run that out over 50 years and economic growth will take care of half your problem. Hooray! But the evidence that this will actually happen is close to zero. Our current tax system just isn't that inefficient. Pretending that a better tax regime will supercharge economic growth isn't as bad as relying on the infamous troika of waste, fraud, and abuse, but it's close.

Their Social Security proposal is.....actually not bad. With one change I could probably accept it as is. Still, even though I favor taking action on Social Security now, this is basically a bauble. It's reponsible for only a small part of the long-term deficit, and it's not something that rises forever. It's a one-time increase associated with the retirement of the baby boomer generation.

 

And then you get to healthcare. This is the big one. This is 90% of our long-term deficit problem. I don't have any real problem with tackling inefficient discretionary programs or sprucing up the tax code or fixing Social Security. But burbling on at length about this stuff mainly serves to allow us to avoid talking about our real problem. Because, as Derek says, it's too hard. But that's like an alcoholic nattering on about putting a taxi service on speed dial or remembering to take his vitamins every day.  

Those are great ideas, but they're basically distractions that prevent you from facing up to the fact that you need to stop getting hammered every night.

The whole point of a deficit reduction commission is that they can address the hard truths that a bunch of politicians can't. If Simpson-Bowles were really dedicated to hard truths, their report would have said two things in no uncertain terms. First, we're not going to waste too much time on discretionary spending or Social Security. They're shiny baubles that distract us. So here are links to half a dozen good plans for reining in both of them. Go ahead and read them at your leisure.

Second, healthcare costs are going up. We're getting older, medical technology is advancing, and the spending curve on healthcare heads to infinity if we don't do something about it. So we've decided that essentially our entire report is going to be about healthcare because we want to rub your faces in the fact that you have to deal with it whether you like it or not. This means, at a minimum, two things: (1) distilling the best ideas around for reining in rising healthcare costs, and (2) acknowledging that costs are going to go up anyway and we're going to have to raise taxes to deal with it.

But as hard truths go, I guess that's a little too hard. Tax increases! Paying doctors less! Telling the American public that they can't have every procedure they want just because they want it! Besides, we just spent over a year passing healthcare reform, and we're all exhausted. PPACA made only modest progress on cost controls, and that was hard enough. Better to just do some handwaving about a cap on growth rates and call it a day.

Lying for Fun and Political Profit

Sully on the role of the Big Lie in modern American politics.

It seems to me that the last year or so in America's political culture has represented the triumph of untruth. And the untruth was propagated by a deliberate, simple and systemic campaign to kill Obama's presidency in its crib. Emergency measures in a near-unprecedented economic collapse - the bank bailout, the auto-bailout, the stimulus - were described by the right as ideological moves of choice, when they were, in fact, pragmatic moves of necessity. The increasingly effective isolation of Iran's regime - and destruction of its legitimacy from within - was portrayed as a function of Obama's weakness, rather than his strength. The health insurance reform - almost identical to Romney's, to the right of the Clintons in 1993, costed to reduce the deficit, without a public option, and with millions more customers for the insurance and drug companies - was turned into a socialist government take-over.
 
Every one of these moves could be criticized in many ways. What cannot be done honestly, in my view, is to create a narrative from all of them to describe Obama as an anti-American hyper-leftist, spending the US into oblivion. But since this seems to be the only shred of thinking left on the right (exacerbated by the justified flight of the educated classes from a party that is now openly contemptuous of learning), it became a familiar refrain - pummeled into our heads day and night by talk radio and Fox. If you think I'm exaggerating, try the following thought experiment.

If a black Republican president had come in, helped turn around the banking and auto industries (at a small profit!), insured millions through the private sector while cutting Medicare, overseen a sharp decline in illegal immigration, ramped up the war in Afghanistan, reinstituted pay-as-you go in the Congress, set up a debt commission to offer hard choices for future debt reduction, and seen private sector job growth outstrip the public sector's in a slow but dogged recovery, somehow I don't think that Republican would be regarded as a socialist.

This is the era of the Big Lie, in other words, and it translates into a lot of little lies - "death panels," "out-of-control" spending, "apologies for America" etc. - designed to concoct a false narrative so simple and so familiar it actually succeeded in getting into people's minds in the midst of a brutal recession. And integral to this process have been conservative "intellectuals" who should and do know better, but have long since sacrificed intellectual honesty for the cheap thrills of enabling power-grabs.

The Truth About Social Security

Kevin Drum posts the chart that shows clearly that the projected shortfall in Social Security is manageable.

This is apropos of nothing in particular, but I guess that Social Security is going to be back in the news when the president's deficit commission reports back, so I want to take this chance to post the single most important chart you'll ever see about the finances of Social Security. Here it is:

This is from page 15 of the latest trustees report. What's important is that, unlike Medicare, Social Security costs don't go upward to infinity. They go up through about 2030, as the baby boomers retire, and then level out forever. And the long-term difference between income and outgo is only about 1.5% of GDP.
 
This is why I keep saying that Social Security is a very manageable problem. It doesn't need root-and-branch reform. The trust fund makes up Social Security's income gap for the next 30 years, so all it needs is some modest, phased-in tweaks that cut payouts by a fraction of a point of GDP and increase income a fraction of a point. Here's a proposal from Jed Graham that's designed to cut benefits a bit for high earners and encourage them to retire later, and maybe it's great. I haven't looked at it in detail. But the point is that the changes he recommends are fairly small. Any plan for fixing Social Security requires only tiny benefit cuts and tiny revenue increases. It's just not that big a deal.

GDP & the Election

Ezra looks at the election through the prism of GDP.

Today's GDP numbers are a good way to understand Tuesday's election. Start with who Barack Obama isn't: Franklin Delano Roosevelt. You hear people say that if Obama could only sell his vision, his agenda or his commitments the way FDR could, he'd be safe right now. And the comparison is understandable: Like FDR, Obama took office shortly after a financial crisis. But unlike FDR, who took office after three years in which GDP shrank by an average of 9.6 percent each year, Obama -- and his predecessor -- responded effectively enough and quickly enough to stop the economy from collapsing. Our worst year was 2009, when GDP shrank by 2.6 percent. And that was the only year in which we actually lost ground.

FDR, for his part, took office after the worst of the Great Depression was over, and -- in part because of his efforts -- when the real recovery was beginning. In 1934, the year of his first midterm election, GDP grew by more than 10 percentage points. Obama took office in 2009, which was our worst year. And this year, the year of his first midterm, we're on track to grow by 2.5 percent. That is to say, it isn't a vision thing. If Obama could get FDR's numbers, and if he could've dodged the worst years of the crisis, he could go mute and still win the election.

Obama is also not Bill Clinton. Clinton lost 54 seats in 1994, but the economy wasn't doing particularly badly. It was the third straight year of growth, and when all was said and done, we'd expanded by 4.1 percent. Democrats hold almost exactly as many House seats in 2010 as they did in 2004, and if Nate Silver is right and they lose 53 of them, they will, given the economy, have outperformed Clinton's Democrats quite substantially. Maybe passing health-care reform actually helped?

The best comparison, it turns out, is between Obama and Ronald Reagan. The 1982 midterm election also came amid a weak economy. We'd shrunk by 1.9 percent, although we'd grown -- slowly -- the year before. The two presidents were also posting similar approval numbers: According to Gallup, Reagan had 43 percent at this point in his presidency, and Obama has 44 percent.
There is, however, a difference: Reagan's party was in the minority in the House. They had 192 seats and lost 26 of them. That's a 15.6 percent loss. If Democrats lost the same percentage of their 256 seats, they'd lose 40 seats this year. But because having a large majority means, by definition, holding many more vulnerable seats, the likelihood is that Republicans would have lost much more than 15.6 percent of their seats if they'd had another 54 seats to defend, and if unified government had left all the blame on their shoulders.
 
So Obama can't show the progress that either Bill Clinton or FDR could in the months before their first midterm elections. He's got more growth than Ronald Reagan did, but also more seats and unified control of government. He's got, in other words, a pretty bad situation. Reagan did too (though the cause of his recession was the Federal Reserve, and so recovery was easier to attain after the election), but Clinton really didn't. It's his losses that really stand out.

It's Not Spending....It's Spending by Democrats

Kevin Drum nails the dishonesty in the complaints by Republicans about all that spending.

Now, it's true that a divided government is almost certain to spend less than one controlled by a single party. Beyond that, though, there's little evidence that extreme conservatives are any more concerned about spending now than they've ever been, and over the past 30 years they've never been concerned about spending. They didn't cut it under Reagan, they didn't cut it under Bush Sr., and when they finally controlled the government completely under Bush Jr., they didn't cut it then either. Hell, Social Security privatization never got anywhere even within the Republican caucus despite the fact that it was sold relentlessly and dishonestly as a free lunch. Actual cuts in spending were never on the radar.

The tea partiers are angry not over spending, but because a Democrat is in the White House. Rick Santelli's rant, which kicked off the whole movement, occurred one month after Obama took office. That was before the auto bailout, before health care reform, before financial reform, before the Iraq drawdown, before cap-and-trade, and before extension of the Bush tax cuts was even on the horizon. The only thing that had happened at that point was the stimulus bill, but even as big as that was, everyone knew it was a one-time shot, not a permanent change in spending levels.

Really, there's just no evidence at all to suggest that tea partiers are any more upset about the level of spending and deficits than they ever have been. Rather, they're upset because the spending is currently being done by a Democrat. As soon as Republicans are doing it, they won't really care anymore.

Foreclosure Follies

Barry Ritholtz has the perfect summary of the state of play in how the major banks handle the foreclosure process,

I am not sure why so many people are so confused over the concerns of the legal status of robo-signers.
 
I’ll let Thomas A. Cox, a retired lawyer, describe GMAC’s foreclosure process and the work of its limited signing officer, Jeffrey Stephan in a court filing:

“When Stephan says in an affidavit that he has personal knowledge of the facts stated in his affidavits, he doesn’t. When he says that he has custody and control of the loan documents, he doesn’t. When he says that he is attaching ‘a true and accurate’ copy of a note or a mortgage, he has no idea if that is so, because he does not look at the exhibits. When he makes any other statement of fact, he has no idea if it is true. When the notary says that Stephan appeared before him or her, he didn’t.”

Gee, how could anything go wrong in that situation?

It's the Legislature, Stupid

Ezra counters a Tom Friedman column calling for a third party Presidential candidate as the solution to government gridlock.

That might actually be the easiest thing you can say in American politics. John McCain ran as the enemy of special interests. Barack Obama did, too. His compromises and disappointments, as Friedman admits, had nothing to do with a paucity of anti-special interest applause lines. They had to do with the limits of Congress. "Obama probably did the best he could do," says Friedman, "and that’s the point. The best our current two parties can produce today -- in the wake of the worst existential crisis in our economy and environment in a century -- is suboptimal, even when one party had a huge majority."

And the answer to that is ... a tiny third party running a presidential candidate? No. If the legislative system is broken -- if the best we can do is not good enough -- you need to change the legislative system. Friedman laments Obama's "limited stimulus" and decision to "abandon an energy-climate bill altogether," but he doesn't mention the one thing that would've allowed for a larger stimulus and a fighting chance on an energy and climate bill: eliminating the filibuster.
 
The worst illusion pundits foist on the populace is the idea that if we just elect the right guy (or gal) to be president, everything will be fine. It won't be. If you don't like how our laws are being made, you have to change how our laws are being made. And that doesn't mean changing the president, who's not even in the branch of government that makes our laws. Elect Ralph Nader, or some other hard-charging third-party candidate with a penchant for applause lines, and everything will just be filibustered to death. 

"He probably did the best he could do," some pundit will say, "and that’s the point. The best our current three parties can produce today is suboptimal."

Center to the Right?

Ezra Klein on the question of whether the US is a center-right nation.

We know that self-described conservatives outnumber self-described liberals, and appear to have done so for as long as we've been polling the question. But we also know that self-described Democrats outnumber self-described Republicans -- even when conservative pollsters are asking the question -- and that's been true for decades, too. So we're a conservative country ... that leans towards the Democrats? Huh.

We know, for instance, that Americans are less bothered by inequality than Europeans. But we also know that, when given a choice (pdf), Americans say they'd like their level of wealth inequality to look less like America's and more like Sweden's.

America's center-rightness is supposedly proven by the fact that we don't have a government-run health-care system. But we love our Medicare. We prefer it, in fact, to our private insurance. And we're less satisfied with our system than Europeans are with theirs. So we're a country that opposes government-run health care -- except when we have it, and then we far prefer it to the private market, and we're more likely than people in other countries to demand that our health-care system gets rebuilt.

I want to be clear what I'm arguing here: It's not that Americans don't have measurably different opinions than Europeans. It's that our opinions and the outcomes of our political system are not closely correlated. Rather, I think that the exceptionalism of the American political system comes from its structure, which is conservative with a small-c.

Because it's harder for the government to do things, the government does fewer things. At least seven presidents have run for office with some sort of universal health-care plan. In another system, one of them would've succeeded, and we would have had national health care by the mid-20th century, and one of the central policy differences between America and Europe wouldn't exist. As it happens, our system makes legislative change difficult, and so they all failed. But in the cases when they succeeded -- Social Security and Medicare -- their successes are wildly popular, and efforts to roll the programs back have been catastrophic failures. The American political system isn't so much biased against the left or the right as against change in general, and though there are occasional moments when events and majorities align to allow a political party to achieve a lot of the items on its agenda, they're quite rare, and almost never durable.