Matthew Yglesias's Blog, page 2506

How Social Security Stabilizes

Rick Perry's odd notion that states should be allowed to opt out of Social Security seems like a good opportunity to discuss the useful role of social welfare programs in promoting "automatic" economic stabilizers.

The way this works is that 50 million or so people—about one American in six—gets a Social Security check on a regular basis. And importantly the size of the check is unrelated to short-term or localized economic fluctuations. During downturns, that's nice for the Social Security recipients who are cushioned from the blow. During upsides, it's bad for the Social Security recipients who tend to fall behind. So it kind of nets out. But crucially this stability is nice for everyone else participating in the economy since the fact that a certain proportion of your customer base doesn't fully participate in short-term swings reduces the exposure of your business to those swings.

Many Floridians, for example, are getting hammered by the precipitous decline in Florida home prices. Many other Floridians are getting hammered by the precipitous decline in Florida home construction. But many other Floridians are getting hammered by the fact that their customers are being hammered by the decline in home prices and construction activity. The existence of Social Security benefits is one of the few things that helps halt the downward cycle of other people's misfortunes becoming your misfortune. The checks keep flowing and their recipients keep buying stuff and their spending becomes your income becomes your spending becomes someone else's income.

This is an excellent feature of the modern social insurance state that accounts of the negative impact on incentives of taxation tend to neglect. But unfortunately, in America state and local government doesn't operate like Social Security. One of the key lessons of the current crisis should be about the importance of "automatic stabilizers" we have, but also the extent to which their gross impact is offset by very unsound budgetary practices elsewhere. This is an issue that can be fixed in principle and would leave us in much better shape to weather the next economic storm.

The 111th Congress Should Have Overreached More

Will Saletan absolutely nails the question of whether it was somehow a "mistake" for Nancy Pelosi to jeopardize a certain number of members of congress' re-election chances over a health care bill:

A party that loses a House seat can win it back two years later, as Republicans just proved. But a party that loses a legislative fight against a middle-class health care entitlement never restores the old order. Pretty soon, Republicans will be claiming the program as their own. Indeed, one of their favorite arguments against this year's health care bill was that it would cut funding for Medicare. Now they're pledging to rescind those cuts. In 30 years, they'll be accusing Democrats of defunding Obamacare.

Most bills aren't more important than elections. This one was. Take it from Mitch McConnell, the Senate Republican leader. Yesterday, in his election victory speech at the Heritage Foundation, he declared, "Health care was the worst piece of legislation that's passed during my time in the Senate." McConnell has been in the Senate for 26 years. He understands the bill's significance: It's a huge structural change in the relationship between the public, the economy, and the government.

And I think it's critically important to understand something about the contours of the choices here. Losing 40 House seats rather than 60 House seats wouldn't have made the 112th Congress substantially friendly to the progressive agenda. A different tactical choice that completely transformed the political landscape would have been nice. But a different tactical choice that merely reduced the extent of the losses on the margin would have made little difference.

The main thing veterans of the 111th Congress should feel bad about is that they didn't seize the opportunity to engage in more liberal overreach. Back in March 2009, 8 Senate Democrats signed a letter opposing the inclusion of carbon pricing in reconciliation instructions. Of the 8, zero won re-election in 2010 and three (Byrd, Bayh, Lincoln) won't be in the 112th Senate anyway. Had there been enough climate hawks in the 111th Senate to push through carbon pricing through reconciliation, the impact on the Democratic Party's short-term electoral prospects would have been minimal but the impact on the future of the country would have been large.

Statesman Rankings

I got into a bit of a Twitter dispute yesterday as to whether or not until-recently President of Colombia Alvaro Uribe is "underrated." Sadly, it was hard to get a grips on the issue because nobody publishes goofy ordinal ranking lists of best statesmen. Whenever such lists come out (of best presidents, best movies, best albums, whatever) people complain about the arbitrariness of it all. But the reality is that such lists allow us to talk about who's over-rated and who's underrated.

My view is that the greatest statesman of our time is Indian Prime Minister Manmohan Singh, who I also feel confident calling the most underrated statesman simply because I don't constantly see people pointing out the fact that he's the greatest statesman of our time.

At the very bottom, you really can't beat Kim Jong-Il. I want to say that Angela Merkel is overrated (and increasingly so as the Germany economy recovers nicely) but of course I can't actually prove that anyone is rating her highly. Hence, somebody needs to publish these rankings. Sounds like a job for Foreign Policy magazine.

No Policy, No Policy

I don't share Kevin Drum's worry that just because left-of-center elites can't cohere around a policy agenda for jobs that Barack Obama won't be able to take credit for a recovery if one happens:

And what's the liberal story about what the economy needs? Don't all raise your hands at once. More stimulus? That's a good answer, but every Democrat in an actual position of power is either afraid to say so or doesn't believe it. Hell, most of them weren't even willing to take credit for the positive effects of the 2009 stimulus. A payroll tax holiday? Also not a bad answer, but no one is pushing it. Policies to weaken the dollar? That'll be a cold day in hell. Massive infrastructure investment? A direct government jobs program? Work subsidies? Maybe, kind of, and we're not sure.

In other words, liberals don't have a story at all. A few of them do — call them the Krugmanites for short — but it's a small and uninfluential band. In the halls of power and the corridors of the media, liberals have nothing but a collective clamor of pet ideas and peevish finger pointing. So even if the economy does improve, there won't be any way for them to persuade the public that their policies were responsible. For starters, they themselves probably won't really believe it.

I think this is totally wrong. Bill Clinton had no trouble whatsoever getting credit from the American people for the strong economic performance of the late-1990s and continues to be credited by them for it to this day even though it's now clear that some of that performance was a mirage induced by irrational exuberance about Internet start-ups. The fact of the matter is that the American people are really good at over-attributing things to the President of the United States.

Also note that media narratives are absolutely insane. Back when Republicans were unpopular because of the poor economy in late 2008, Barack Obama's calm demeanor amidst economic crisis was said to be key to his popularity. Then when Democrats became unpopular because of the poor economy in late 2009, Barack Obama's calm demeanor amidst economic crisis was said to be the key to his unpopularity. But if the economy improves, then conventional wisdom about every single aspect of Obama's personality and policy agenda will pivot around that fact. With the economy in the dumps, the health care bill is liberal overreach. If the economy improves, the health care bill will be said to demonstrate the genius of pushing a moderate proposal with no public option. Just you wait.

Incidentally, to fix the economy we should do this.

The 75 Year Itch

I was slightly surprised to discover that I agree with one of the central points of Third Way's post-election column, namely that with the passage of the Affordable Care Act we're now faced with the end of big government liberalism and progressive politics will necessarily need to concern itself primarily with operating the public sector more efficiently rather than operating a larger public sector.

That said, I can't resist the temptation to note this bit of bizarre history:

For roughly 75 years, America dominated the world economy, taking robust economic expansion for granted. Those days are over. If the United States doesn't attain growth far greater than what is projected for the next 20 years, we will never attain the middle class living standards we expect; claim the leadership role we need for a safer world, or pay for the entitlement state we've created.

What 75 year period was that? They seem to have totally forgotten the Great Depression, a period during which people certainly didn't take robust economic expansion for granted.

Pelosi Sticking Around

It looks like Nancy Pelosi is going to stick around as Top Democrat in the House. This has led to a dumb media meme about her continued presence being a political millstone for the party moving forward. That's dumb. People pushing that narrative should recall that when Pelosi first took over as minority leader the CW was that her ascension doomed the party to perpetual minority status. The fact of the matter is that congressional leaders just don't play that kind of role. House leadership is very important to what actually happens in the House of Representatives and their political importance is strictly secondary to that.

Now of course if you just don't like the idea of liberals having a strong voice as a matter of substance, then yes it would be better to dump her for someone more moderate. But there's no extra political bonus to be gained that way. Legislative caucuses need to pick people who they think will be effective at leading a legislative caucus, not a "public face" for the party or whatever.

What's the Deal With Dino Rossi?

In all seriousness, how many times does this guy need to lose close, winnable races in Washington State before the WA GOP stops nominating him? It's not like he's the only Republican in the state, after all. They've got several congressmen, a couple of downballot statewide officeholders, and there's got to be someone recruitable among the ranks of Microsoft/Amazon/Starbucks executives. Right?

The District of Short Buildings

One of the most pathetic aspects of life in the District of Columbia is that you actually have to live in the shadows of taller buildings in the suburbs. Lydia DePillis observes that it's happening again in Wheaton:

While reading about the new Safeway-anchored residential development just approved in Wheaton, all I could think was: Why can't we get these kinds of buildings in the District? It's a 17-story, 486-unit, 195-foot-tall apartment complex that will add density and vibrance to the suburb's delightfully diverse and quirky town center. But it won't look like the superblocks that proliferate within the D.C. diamond, which are the way they are because developers must ask their architects to pack as much square footage under the 130-foot height limit as possible to make the deal work financially. Since Wheaton is not bound by such restrictions, this development can achieve a kind of light, airy quality with towers on each corner and quite a bit of open space in the middle of the block. That also creates higher-quality living spaces for apartment dwellers, many more of whom will be able to have natural light.

Exactly, exactly. The Height Act is bad aesthetically, it's ecologically destructive, and in economic terms it's hugely costly for DC residents. Time for a change!

Endgame

Where do we go now?

— Insurers plan to undermine allegedly budget-busting Affordable Care Act by hiking spending and cutting taxes.

— David Brooks doesn't know much about where the midwest is.

— Dana Goldstein on performance pay for teachers.

— Really hard to say what performance pay for the fish and wildlife service would look like.

— Rick Perry wants states to opt-out of Social Security.

Citizens Here and Abroad, "Stranger".

Recapitalization Through Profit

(cc photo by MJTR)

Imagine you're a public official faced with the problem of a several important banks becoming undercapitalized due to investment losses on, for example, backed securities. What's more, there are several other important banks that, though not currently undercapitalized, are close enough to the line that a generalized "panic" about the banking sector will push them under. You're in a scenario, in other words, when you don't dare allow even a single bank fail lest it cause a nearly universal failure of your banks.

You have basically two choices in this scenario. One choice is that you force the banks in question to accept capital injections from the public sector. This will "bail out" the bank and save it as an institution. It's also obviously better for the bank's owners than the alternative of letting the bank fail. But for the owners it's also not ideal since it means the value of their shares is being diluted. Indeed, if raising extra capital were a bailout of the shareholders they would have avoided this problem long ago by simply raising capital from private investors. But their reluctance to do this has helped bring us to the crisis point. They'd rather get public equity than fail, but they'd rather avoid getting public equity.

A different option is to refuse to give "the banks" extra money. Instead you perform stress tests and proclaim that the banks are secure, implicitly signaling the existence of government guarantee of their operations. You have the Federal Reserve start paying interest on banks' excess reserves, giving them a zero risk profitable investment parking cash with the Fed. Then you hunker down and wait for the regulatory forbearance to allow the profit-making process to generate sufficient capital to resolve the situation.

The downside of the second option is that it takes much longer to work, needlessly prolonging the massive suffering throughout the country. Another downside of the second option is that it undermines the effective of loose monetary policy, needlessly prolonging the massive suffering throughout the country. A third downside of the second option is that it's wildly more favorable to the people who owned the banks, in a way that creates a massive problem of injustice. The upside, however, is that you don't need to ask congress for additional bailout money. And, indeed, the public at large will regard this option as superior to a soft-on-bankers "bailout." But at the very same time the bankers themselves will recognize that forbearance is actually a much softer policy than the unpopular "bailout" alternative.