Obsidian Wings

August Unemployment Data

by von

The August unemployment rate is up to 9.7%.  Geoff at Innocent Bystanders has produced a new chart (right).  The deviation between what Team Obama thought its policies would do to the unemployment rate and what those policies are actually doing is growing.

Could Part 10 of the "Stimulus for Tomorrow" series be far behind?  (Parts 1, 2, Hilzoy's response, 3, 4, 5, 6, 7, 8, and 9.)

I'd say yes.  But let's enjoy the weekend first.

Government Worked

by publius

Deborah Solomon reports in the WSJ that the federal stimulus bill that zero House Republicans voted for, and that 2.5 Republican Senators voted for, is working:

Economists say the money out the door -- combined with the expectation of additional funds flowing soon -- is fueling growth above where it would have been without any government action.

Granted, the article debates which programs have had the most impact.  But the general consensus is that federal intervention (i.e., "big government") is helping pull us out of the recession. 

The Democrats took a lot of heat for doing the right thing earlier this year.  They should use news like this in a relentlessly offensive way.  It's time to attack the people who wanted to stand by and do nothing while the economy was collapsing. 

And it's not about revenge at all.  It's about policy.  The hope is that people who are empirically wrong will be politically discredited.  That's the only way to keep them from messing up the economy the next time around.

The Failure of State Government

by publius

The state budget situation is getting uglier by the day.  It’s pretty much a full-blown crisis at this point – and that’s including the federal stimulus aid that was shamefully cut by the Senate “centrists.”

The budget crisis is not, however, some sort of freakish one-time event.  It’s a recurring problem that points to a larger institutional failure of our state government system.  Simply put, states don't work because they are chronically underfunded.  And to me, this failure is rooted in tax policy.  Our state governments are simply (1) unwilling and (2) unable to collect a sufficient amount of tax revenues for their residents’ needs.

First, the “unwillingness.”  The politics of tax policy are stuck in a very harmful place at the moment.  The sustained conservative assault on taxes has been extremely successful, and has thoroughly penetrated our political consciousness.  And here’s where it’s left us:  The GOP won’t even consider raising taxes on anything.  And the Democrats barely have the courage to raise taxes even on the very well-to-do.

And look, taxes suck.  No one likes paying them – including me.  But that said, society has a set of needs that people expect government services to meet (e.g., education, senior health care, security).  Many Americans are (rightly) unwilling to give up those services, but they simultaneously punish efforts to pay for them. 

At some point, the politics on this issue has to change – that is, we must come to terms with our need to raise more tax revenues.  A conservative might respond, “no, we need to get spending in check.”  But that’s not really the problem.  Just look around at the states’ specific problems.  Their budgets are already cut to the bone.  And it's hurting our most basic institutions and services. 

But even assuming the politics improved, states would still be structurally “unable” to provide sufficient revenues.  States are stuck in a classic collective action problem in that they compete for both residents and businesses.  As a result, I’m not sure we can realistically expect states to provide what Americans need even if the politics got better.

The larger implication is that we should rely less on state governments to provide basic services (or at least to fund them).  On social issues, I’m all for states’ rights and localism.  But federalism just doesn’t make much sense on the economic and regulatory fronts.  States are structurally unable to provide the revenues required, and there’s no real reason to think this dynamic will improve.

I’m not sure what the ultimate policy implication would be.  Maybe the federal government should set some sort of “floor” tax rate that states could then go above, but not below.  But in any event, it seems that the more we depend on the federal government to establish overall tax rates, the better. 

Federalism in the economic realm just doesn’t work.

Good News

by hilzoy

From MSNBC:

"Around Washington and Wall Street they have come to be known as TBTF — too big to fail. It's not just size, though. These companies are so far-flung, so intertwined and so precariously leveraged that a single one's collapse can create systemwide tremors that imperil the finances of millions of Americans.

With that fear in mind, the government stepped in to bail out Citigroup Inc., Bank of America Corp. and American International Group Inc. with tens of billions of public money last year.

Looking to avoid such a costly intervention, President Barack Obama's regulatory plan calls for large, interconnected companies to pay a heavy price for the systemwide risk they pose. (...)

Under the administration's proposal, companies such as Citi, Goldman Sachs and others in a broad top tier engaged in complex transactions would face stricter scrutiny and have to hold more assets and more cash as cushions against a downturn.

They also would have to anticipate their own demise, drafting detailed descriptions of how they could be dismantled quickly without causing damaging repercussions. Think of it as planning their own funerals -- and burials.

Obama's plan, in short, aims to make it far less appealing to be so big. That was the middle ground the administration sought, a step short of an outright ban on systemically risky companies. (...)

For those that qualify for top tier designation, the administration proposes a system that would dismantle them quickly if they get into financial trouble. Right now, the government has authority to step in and take down troubled banks, but not the conglomerates that pose greater risks to the economy. That lack of authority prevented the government from dissolving Bear Stearns Cos., Lehman Brothers and AIG in an orderly manner.

Under the administration's plan, the Treasury could decide to take a company swiftly through a bankruptcy-like process, appointing the Federal Deposit Insurance Corp. as a conservator or receiver. The FDIC currently now only has the authority to take over troubled banks."

This is really, really good news, if true. Lots of smaller banks have been, as Atrios says, EATED by the FDIC recently, and while I'm sure it hasn't been pleasant for them, it also hasn't had anything like the impact of, say, the demise of Lehman Bros. Having a quick procedure in place to deal with them, plus the additional capital requirements that will help smooth the process, is crucial.And making it less attractive to be big enough to pose systemic risk is also a very, very good thing.

I expect banks to be vehemently opposed to this. But this time, we should not let them win. One good long look down into the abyss has been more than enough.

"The Optics Are Bad"

by hilzoy

From the NYT:

"Banks and mortgage lenders are placing top priority on killing President Obama's proposal to create a new consumer protection agency that would regulate home loans, credit card fees, payday loans and other forms of consumer finance.

The Obama administration fired an opening shot on Tuesday, sending Congress a detailed, 150-page proposal for an agency that would set new standards for ordinary mortgages, restrict or prohibit risky loans, investigate financial institutions and enforce new laws aimed at protecting credit card customers.

"This agency will have only one mission -- to protect consumers," said Timothy F. Geithner, the Treasury secretary, in a written statement on Tuesday.

But industry executives vowed on Tuesday to fight Mr. Obama's plan with everything they have, even though banks are still heavily dependent on many taxpayer-supported loans and loan guarantees to get through the crisis. (...)

Bank executives said they knew they faced a difficult political fight, given the soaring number of homeowners facing foreclosure.

"We know the optics are bad," said Scott Talbott, vice president for government affairs for the Financial Services Roundtable, a trade association in Washington. "If you are against a consumer regulatory agency, then everybody will say you're against consumer regulation.""

I suppose that when your industry has come up with such gems as the liar loan, helped bring the entire financial system to the brink of ruin, and helped bankrupt not just the people who took out those loans but people who had nothing to do with them -- people were laid off because of the crisis you helped create -- and when, after all that, you decide to oppose regulation of consumer financial products, you might say that "the optics are bad". 

Here's some more bad optics:

"Gabby Ornelas, a former teller at the giant Bank of America Corp., remembers the training sessions. And she remembers her marching orders: "Sell, sell, sell."

Ornelas was instructed to use her Spanish language skills and Latina heritage to sign up customers for as many kinds of banking services as possible, she said -- services that led to lucrative fees for the bank and financial entanglement for many customers.

"We were coached every day to push multiple checking accounts, credit cards and debit cards even when the customer didn't understand how to use them," said Ornelas, who lives in Landover Hills, Md., a town with a large immigrant population and a per-capita income of less than $19,000.

In one case, she described a Central American mother of three who came back to see her at the bank, distressed about $300 in overdraft fees incurred after Ornelas persuaded the woman to open a second checking account. (...)

The former workers said they were going public to lay out what they saw as a little-known side of BofA's business model: encouraging working-class customers to sign up for high-interest-rate credit and cash advance services and structuring an array of check and debit card services to maximize overdraft fees and other charges."

I can see why people who engage in those kinds of practices -- or these, or these -- might be leery of a consumer protection agency. What I can't see is why the rest of us should listen to them. They had their shot at policing themselves. If they wanted to avoid regulation, they should have taken it. They didn't. To my mind, they have long since forfeited the right to complain.

The CRA... Still Not Causing the Meltdown

by publius

Megan McArdle cheers on John Carney in a misguided attempt to once again blame the housing meltdown on the CRA -- i.e., a 1970s law intended to limit loan discrimination.  She writes:

[T]he role of the CRA in the financial meltdown [has been] understated by liberals who are unwilling to admit that regulation, too, can produce hideous unintended consequences.  . . . Regardless of how much causal blame you assign it, the financial crisis has certainly proven that the CRA seems to have been a very, very bad idea.

Essentially nothing in that excerpt is true.  Felix Salmon and Ryan Chittum hopefully put the stake through this argument, but it keeps appearing (the Chittum post is more comprehensive).  To sum them up -- the bad loans at the heart of the meltdown came overwhelmingly from unregulated, non-bank lenders who weren't even covered by the CRA.  In addition, the CRA loans did very well.  And there's basically not a shred of evidence that the CRA led to the meltdown.  And you can't evade that 100% lack of evidence by citing vague "mentalities" and drawing imaginary causal lines constructed entirely of ideology.

The Public Plan and "Honest" Competition

by publius

Greg Mankiw is concerned that a subsidized public option would be unfair to private health care providers:

If [it is taxpayer-subsidized], then the public plan would not offer honest competition to private plans.  . . .  The bottom line: If the goal is honest competition in the provision of health insurance, the public option cannot do much good but can potentially do much harm.

But that's not really the goal.  The goal is to provide the most people possible with the best possible health care.  There's no constitutional obligation to make sure no one is "unfair" to private health care providers.  In any event, according to critics, government-provided health care will lead to a parade of horribles, even with subsidies.  If those criticisms prove true, people won't opt for it anyway.

I assume what Mankiw is alluding to is that people justify the public plan by citing the need to keep private providers "honest."  The idea is that private market has not -- and will not -- provide an acceptable level of services without this competition.  But Mankiw seems to be using this argument to make the conceptually distinct argument that private providers, in turn, shouldn't be subject to supposedly "unfair" competition (i.e., publicly-subsidized plans).  But the latter doesn't follow from the former at all.

If the country opts for a public plan, and people vote with their feet because they like it better, why should we care?

Robert Samuelson's Dishonest Jihad Against Social Security

by publius

If the country ever gets around to ending life tenure for Supreme Court Justices, I hope we add a provision ending it for Washington Post columnists too.  Or at least ending it for Robert Samuelson.  Today, again, we see another extremely misleading op-ed from him on the fiscal health of Social Security.

Here’s a good rule of thumb – anytime you see an op-ed whining about entitlements that uses the phrase “Medicare and Social Security,” it’s safe to stop reading.  Samuelson’s is no exception.

This isn’t news, but let’s repeat it for the one millionth time.  There is no Social Security crisis.  None.

Medicare and Social Security’s fiscal outlooks are completely different.  There is no Social Security funding emergency – even after the latest trustees report.  Assuming historical rates of growth, there is no shortfall whatsoever for 75 years.  Even under more conservative or pessimistic economic assumptions, extremely modest tweaks eliminate the modest shortfall entirely. 

And finally – Social Security is not going “bankrupt.”  Even assuming 2037 is the magic date, and assuming low growth and no tinkering before then, Social Security will still be able to pay 75% of scheduled benefits.

To lump Social Security together with the more problematic Medicare shortfall (which should be addressed through national health care reform) is blatantly misleading.  It’s like saying the combination of a Big Mac and a jelly bean is an extremely high-calorie meal.

But that’s exactly what Samuelson is doing.  In fact, Michael Lind had a Salon column a while back outlining all the rhetorical tricks that dishonest Social Security skeptics make.  It’s as if Samuelson read that column, and decided to use them all.

For instance, here’s Lind:

In order to frighten gullible Americans, anti-Social Security crusaders conflate Social Security with Medicare and talk about the "entitlement crisis" in general. This masks the fact that Social Security's projected shortfalls are minor, compared to those of Medicare.

And Samuelson:

It's increasingly obvious that Congress and the president (regardless of the party in power) will deal with the political stink bomb of an aging society only if forced. And the most plausible means of compulsion would be for Social Security and Medicare to go bankrupt.

And Lind:

About a decade ago, conservative and libertarian economists who oppose Social Security, Medicare and other entitlements came up with a clever rhetorical strategy. They would calculate the gap between the payroll taxes that pay for these programs and estimated costs over time. But there was one problem: The gap isn't all that scary, at least in the near future. So in order to frighten the American people and their elected leaders, deficit hawks cite the sum total of Social Security's "unfunded liabilities" over 75 years. But even this -- a paltry $4.3 trillion over three-quarters of a century, according to the 2008 report -- isn't sufficiently terrifying.  [So they combine Medicare and SS].  [This] produces a suitably spooky 75-year shortfall of $42.9 trillion. And if this is not alarming enough, deficit hawks can cite the truly apocalyptic figure of $101.7 trillion in combined "entitlement" spending over an infinite time horizon.

The anti-Social Security lobby always presents the "unfunded liabilities" of "entitlements" in scary dollar terms, rather than as percentage points of GDP. Here's why: Over the next 75 years, the Social Security shortfall at most hovers around 1 percent of total U.S. GDP over that same period.

And Samuelson:

That the programs will ultimately go bankrupt is clear from the trustees' reports. On Pages 201 and 202 of the Medicare report, you will find the conclusive arithmetic: Over the next 75 years, Social Security and Medicare will cost an estimated $103.2 trillion, while dedicated taxes and premiums will total only $57.4 trillion. The gap is $45.8 trillion. (All figures are converted to "today's dollars.")

Lind:

[According to anti-Social Security advocates,] [w]e have only two choices, or a combination -- cutting benefits or raising the payroll tax. False. There are at least two other choices that the deficit hawks never mention. One is more rapid economic growth, which would make it easier to pay Social Security taxes in the future without either benefit cuts or tax increases.

And Samuelson:

The inadequate trust funds will steadily diminish. The government bonds in these trust accounts will be presented to the Treasury for payment. Those payments can be financed in only three ways: bigger deficits, higher taxes or spending cuts.

One more time – there is no Social Security crisis, no matter how much people like Robert Samuelson dislike the level of Social Security benefits.

New EFCA Blog and Open Thread

by publius

Public service announcement on the labor front -- a new blog devoted to the latest news on the EFCA went online this week.  It's aptly named the "EFCA Blog."  The intro post is here -- check it out.

Otherwise, open thread.  Hope your weekend is going well.

Resolution

by hilzoy

Matthew Richardson and Nouriel Roubini have an op-ed on the stress tests in the WSJ. It makes a number of good points, but this one is particularly important:

"Stress tests aside, it is highly likely that some of these large banks will be insolvent, given the various estimates of aggregate losses. The government has got to come up with a plan to deal with these institutions that does not involve a bottomless pit of taxpayer money. This means it will have the unenviable tasks of managing the systemic risk resulting from the failure of these institutions and then managing it in receivership. But it will also mean transferring risk from taxpayers to creditors. This is fair: Metaphorically speaking, these are the guys who served alcohol to the banks just before they took off down the highway.

And we shouldn't hear one more time from a government official, "if only we had the authority to act . . ."

We were sympathetic to this argument on March 16, 2008 when Bear Stearns ran aground; much less sympathetic on Sept. 15 and 16, 2008 when Lehman and A.I.G. collapsed; and now downright irritated seven months later. Is there anything more important in solving the financial crisis than creating a law (an "insolvency regime law") that empowers the government to handle complex financial institutions in receivership? Congress should pass such legislation -- as requested by the administration -- on a fast-track basis."

It's never a pleasant experience when a large firm goes bankrupt. But the real problem with Lehman Brothers was not that it went bankrupt; it was that it went bankrupt in a completely unforeseen and disorderly way. Likewise, the reason why it's not a catastrophe when the FDIC takes over a bank isn't just that the banks it takes over are smaller than Lehman Brothers; it's that it has a very well-defined and orderly procedure that allows things that need to happen to go on happening while the bank is being taken over. 

As long as we do not have such a procedure for dealing with insolvent banks like Citi or Bank of America, they will have a gun to our collective heads, and they will be able to go on extracting money from us. We might not like it, but the alternative will be worse. 

For this reason, we obviously need to create a new alternative: a mechanism for taking over insolvent large banks that allows us to deal with them in an orderly fashion. Thomas Hoenig, President of the Kansas City Fed, proposed one such mechanism yesterday. I am not competent to say whether his version is best. But I do know that we need some such mechanism in place, and we need it immediately. 

Relying on improvised deals and ad hoc solutions might have been necessary right after the crisis hit. But it is long past time to give ourselves the tools we need to do it right.