Yglesias

Highway Robbery and the Progressive Future

Zach Carter — Wed, 08 Dec 2010 09:27:33 -0500

Kevin Drum gives a pretty thorough analysis of President Obama’s open assault on the mainstream Democratic Party at yesterday’s press conference, and declares that “programmatic liberalism is dead.” I think that’s more than a little exaggerated, but regardless, it’s not a fair description of the policies at stake in Obama’s lousy tax deal. The tax deal is fundamentally about whether the United States still believes it has a basic commitment to protect its most vulnerable citizens from harm. For so basic an intuition to be the subject of political negotiation should be abhorrent to anybody of any ideological stripe in today’s United States. The deal is not a signal of strength or weakness on the left or the right, it is a symbol of rank political cynicism.

Protecting the most vulnerable members of society is not a liberal idea. It is the basic moral intuition of every philosophical and religious tradition but two: cruel interpretations of Friederich Nietzsche, and a brand of libertarianism far more radical than anything in contemporary American politics. Republicans were threatening to cut off unemployment benefits and a poverty tax credit for families with children. Let me emphasize: poverty relief for children.

These policies should never, ever be the subject of political negotiation. Obama could have raised a fuss, he could have publicly shamed his adversaries for threatening a basic moral building block of a decent society. Instead, he offered absurd giveaways to the rich that have not only been the ire of “the professional left,” but of the mainstream Democratic Party for almost a decade. Nearly every Democrat in Congress is now wondering if a primary challenge will be the result of support for this deal. And Obama now has the gall to chastise “the left” for being outraged.

A decent society takes care of its poor. Committing to conservative political thinking does not require one to believe that the poor should suffer for no reason. The number of poor families in the United States has gone up dramatically during the worst recession since the Great Depression, just as the number of unemployed parents has skyrocketed. These problems are caused by major structural economic problems, not by laziness or recklessness on the part of families (and even if it were only the result of laziness or recklessness, a decent society would not take that out on the children of the lazy and reckless). Amid mass poverty, any policymaker should support poverty relief.

This is a moral intuition even more fundamental than the commitment to equality of opportunity—the root belief that a decent society does not let its members endure extreme suffering needlessly. It is not egalitarian, it is not Marxist, it is not socialist, it is not liberal. It is just something a decent society does. It can be described with economic language, but it is not fundamentally an economic problem, unless short-term poverty relief somehow results in total economic calamity. Needless to say, the United States faces no such crisis from aiding its poor.

But Obama did not make this case. He didn’t even try. He entered a room with Republican leaders, and returned to declare they had been given everything they wanted.

Shortly before the deal was announced, Gretchen Morgenson and Louise Story of The New York Times ran a numbers on how the Bush tax cuts affect Wall Street bonuses. For every $1 million in bonus payouts, they calculated, the Bush tax cuts allow Wall Streeters keep an additional $40,000 to $50,000 in income.

The price Republicans demanded for allowing the United States to participate in the basic moral foundation of every decent society the world over was $40,000 for every $1 million in Wall Street bonuses. That should be appalling to liberals and conservatives alike, and a President who does not go to the mat to shame his opponents under such circumstances is bound to lose respect among his followers.

Via a link to a prior post, Kevin defines “programmatic liberalism” as the Progressive Era of 1911 – 1919, the New Deal of the 1930s, and the 1960s. All of these involved significant restructurings of the United States government and its institutions. This is not the sort of thing under discussion in the tax debate. Not even close.

“Should the poor be sustained?” Is a much different question than, “Is it the proper jurisdiction of government to regulate X given recent events?” All kinds of ideological issues can play into regulatory questions. But for quite literally centuries, there has been a broad moral consensus about the right of the poor to live (this glosses over racism and sexism, of course). The “professional left” is not demanding new institutions or government functions. It’s demanding that our society actually be a society.

And so Obama’s assault on what he called “purist” and “sanctimonious” left cannot be viewed as anything but outrageous. MoveOn and DailyKos and FireDogLake are not actually demanding leftist positions on tax policy—their opponents are threatening outright brutality, and the President of the United States is not seriously challenging those threats. Obama’s willingness to capitulate does reveal the man’s fundamental human compassion—but it also portends serious dangers. The next major negotiation, as Matt Yglesias and Mike Konczal have emphasized, will be over raising the federal debt ceiling. If it is not raised, the United States will have no choice but to default on its debt, and the global economy will collapse. If Obama is willing to throw up the Bush tax cuts to preserve the basic moral foundation of society, then he will certainly offer anything to prevent mere economic Armageddon. With this deal, the President has signaled that whenever a difficult choice arrives, he will roll over.

Here’s a leftist tax position: restore tax rates on millionaires to Johnson-era levels of 90 percent, and use that money to guarantee free college education for the children of families earning less than $50,000 a year. Nobody on the “professional left” is demanding that right now. We’re demanding that the basic functioning of society not be ransomed away in the name of bigger bonuses, and that negotiations over economic and tax policy not allow the most vulnerable members of society to be used as bargaining chips.

So perhaps this is what Kevin means. Now that a Democratic president is willing to cave on negotiations about the moral foundation of society, liberals cannot hope for serious economic progress for several decades. I see things otherwise. Two years ago, pundits were forecasting the end of conservatism as it has been practiced for 30 years. “Liberal” thought is not dead. Our president is simply ineffective.

Why Wall Street Reform Should Hammer Bank Profits

Zach Carter — Tue, 05 Oct 2010 13:11:42 -0400

Of the universal-policy-bloggers who occasionally wade into financial waters, Matt Yglesias is generally one of the best. But sometimes he's just flat wrong, and his post today on financial profits is one of those times. Matt argues that looking to financial profits to measure the effectiveness of Wall Street reform is not a good idea, and he's missing the point. The good news is, Annie Lowrey wrote a great piece explaining the current landscape surrounding Wall Street reform, one in which responsible policymakers understand that lower bank profits are an important sign of economic progress.

Here's the key passage from Matt's blog:

"Much has been made, for example, of financial sector profits as a share of overall corporate profits. The numbers are sufficiently striking as probably constitute cause for alarm, but as a metric this is an odd one. If competition between cell phone carriers becomes more robust, leading to falling prices for consumers that’s a good thing. But since it implies smaller profits for Verizon and AT&T it means banking sector profits will rise as a share of overall profits. But who cares?"

This is silly. When people cite this statistic—and I'm one of the people who like to do so—they're not comparing Citibank's profitability to Verizon's. They're comparing the entire financial sector to the entire corporate economy. The idea that innovations in corporate governance, technology and overall corporate efficiency could be applicable to the entire economy except finance should be extremely suspect. Many of these innovations should apply to corporations generally—whether they're banks or boat-manufacturers. Moreover, there is no reason to believe that literally every sector of the economy except finance has found a way to make itself more efficient over the past few decades, while finance has remained the same old bloated bureaucratic beast.

And if we look at the actual recent history of finance, we see that there have, in fact, been dozens of major financial innovations—but innovations that served to extract rents from other players in the economy. Finance, and banks in particular, figured out great ways of simply gobbling up other peoples' money. This didn't create new, better economic activity—it destroyed economic activity and converted it into bonuses for bankers and traders.

And you can measure this phenomenon by examining financial profits as a share of overall corporate profits. It's one way of analyzing the extent to which finance is cannibalizing the real economy. That problem is very significant, even if you ignore the fact that big banks need to be bailed out and create financial crises that have brutal effects on the broader economy. The crashes and bailouts are bad, but finance is eating jobs and converting them into bonuses without them. That's worse.

Matt also emphasizes the need for international coordination on financial reform. It's true to a point, but essentially meaningless so far as U.S. policy is concerned. Sure, if the U.S. adopts really tough Wall Street regulations, and the rest of the world doesn't, then reckless financial activity will move overseas. And eventually, financial excess elsewhere can create trouble here.

But financial recklessness abroad doesn't create the same kind or degree of economic fallout that financial excess at home does. It's bad for the U.S. if global credit markets freeze up because of a real estate bubble in France. It's much worse for the U.S. if global credit markets freeze up because millions of Americans are in foreclosure. "International cooperation" has become a lame excuse not to regulate finance at home, but we can only expect our friends abroad to be as stringent as we are here. If the U.S. continues to allow its banks to take on huge risks as taxpayers guarantee losses, then we're setting ourselves up for economic trouble—much worse economic trouble than we'd have if Europe alone was allowing financial excess.

Matt is commenting on Annie Lowrey's excellent write-up of the Roosevelt Institute conference organized by finance blogger Mike Konczal. Lowrey's piece is a superb summation of the event, and an excellent snapshot of where financial reform stands at this moment—both its enormous economic potential and its perilous political straits.

I'll have my own write-up on the conference tomorrow, but here's a quick summary: Getting Congress to pass any legislation reining in Wall Street was a major task, and the bill we got gives regulators several useful tools. The trouble is, it doesn't give regulators all of the tools, and the regulators who want to fix problems are about to get badgered to death by a Republican Congress that has already threatened to de-fund key parts of the legislation. We'll know if Wall Street reform works if bank profits decline for the right reasons-- not just because the economy sucks, but because banks aren't devouring other economic activity.

Conservatives Are Clueless On Jobs

Zach Carter — Mon, 02 Aug 2010 15:00:45 -0400

Rep. Paul Ryan, R-Wis., is the Republican Party's latest effort at putting forward a credible economic ideologist. His recent interview with Ezra Klein reveals this effort to be a complete failure. Ryan's views about the financial sector completely contradict his statements about the federal budget deficit, making his policy prescriptions as an incoherent mess of meaningless talking points.

Paul Krugman and Matthew Yglesias do a nice job explaining how Ryan really doesn't know what he's talking about. But the conservative politician makes things much worse for himself when he attempts to defend himself against these criticisms. Here's Ryan, emphasis mine:

I'm not convinced – but intrigued – with the debate over the carry trade that is going on right now. What I mean by that is banks can borrow at essentially no cost from the Fed, plow the money back into no-risk Treasury securities, and earn that modest spread. This dynamic, while obviously helping banks recapitalize, could be curbing capital deployment in the private sector.

There's no question that banks are doing this. At the moment, banks can borrow from the Fed for 0 percent, and invest that money in U.S. government bonds. A 10-year bond pays the bank interest of 2.91 percent right now, with the 30-year bond closer to 4 percent. Since there is no funding cost, every basis point of that return is pure profit for the bank. It is a "modest spread," to be sure, but as Ryan says, it's all risk-free profit.

Banks are doing it because they know the U.S. government isn't going to default on its debt. Although 2.91% isn't an amazing return, it's a sure thing, and it's much less risky than lending to businesses during a deep recession. Banks can borrow as much as they want from the Fed, and they can invest that free money in as many Treasury bonds as they want, allowing them to make a killing in millions of small installments. It's called a carry-trade, and it's a huge part of what financial analysts are talking about when they say banks are "earning their way back to health." One arm of the government—the Fed—is enabling banks to make tons of money from another arm of government—the Treasury.

Unfortunately for Ryan, this behavior is totally inconsistent with everything else he says during his interview with Ezra. Ryan makes an aggressive push to claim that the U.S. budget deficit is a terrible, terrible problem that puts the economy in grave danger. The only way to deal with this, he says, is through drastic cuts in government spending. But it's impossible for the budget deficit to be a dire problem when Treasury securities to carry "no-risk." If the budget deficit was a big deal, Treasury securities would be extremely risky. Investors would be worried that the big, bad budget deficit was about to spark a default, and investors worried about default either don't invest or demand a very high interest rate to compensate them for the risk they're taking on.

There are really only two ways for budget deficits to create economic problems. First, if big enough, budget deficits can spark severe inflation, as governments print loads of money to pay off their debt. Inflation isn't happening-- it's below the Fed's target rate, and even inflation hawks at the Fed are now worried about the prospect of deflation. Second, they can spur high interest rates, as investors demand a greater return on their investment out of fears of default. Those high interest rates can impede economic growth. Ryan repeatedly tries to make the second case. Earlier in his interview with Ezra he says this:

"Locking in budget reforms and spending control will help us in the short run by taking pressure off interest rates."

and this:

"At this point, given the borrowing costs, stimulus is counterproductive."

But if there were any real pressure on interest rates, we'd be seeing high interest rates on Treasury bonds. Of course, we are not seeing high interest rates on Treasury bonds. We are, instead, seeing record lows, something Ryan acknowledges when he says that banks can only earn a "modest spread" by investing in Treasurys!

What's more, those low interest rates that Ryan acknowledges mean that the government has record low borrowing costs. Ryan tries to argue that spending money to create jobs will cost so much that the measure won't work. But there has never been a better, cheaper time for the government to borrow money than right now. The bank behavior Ryan cites means that the government should be borrowing as much as it can and spending that money to create jobs, since we are still in the middle of the worst jobs crisis in 75 years.

And make no mistake, Ryan's quest to slash government spending is a job-killing agenda. He has to resort to crazy incoherent arguments about interest rates because everybody can see that spending money to create jobs will, you know, create jobs. Ryan is simply ideologically opposed to the idea of government spending (at least now that Democrats are in power). He is looking for any excuse he can find to cut that spending, regardless of the consequences for the economy. Sane policymakers should be worried about creating jobs, not looking for ways to push a bizarre anti-government agenda.