Relevant and even prescient commentary on news, politics and the economy.

Inflation and interest groups in the Carter Years

Robert Waldmann

Matthew Yglesias is very smart, but he is not omniscient. In particular he doesn’t remember things that happened before he was born and it appears that he has fallen for some Republican propaganda.

He writes

In the late 1970s, it just so happened to be the case that the structure of Great Society programs and of then-widespread union contracts meant that the objective interests of union members with automatic Cost of Living Adjustment (COLA) provisions, African-Americans, and public assistance recipients were quite a bit different from the objective interests of other Americans. By contrast, it was relatively easy for Ronald Reagan to assemble a coalition built around lower taxes and inflation that started with the well-off but expanded deep into the middle class. It was actually Carter who began the effort to fight inflation and deregulate certain key sectors of the economy, but that wasn’t a politically sustainable agenda for a Democrat (as witnessed by Ted Kennedy’s very strong primary challenge).

He’s wrong. as I explain after the jump.

The point of his post is that it is hard for Republicans to win elections given widening income inequality that disconnects the experience of their base (the rich) and the majority. True. I’d add that it is hard given high inequality and especially high inequality in (easily taxable hard to hide) W-2 income, since there is so much to be gained for most people from a policy of soaking the rich and spreading it out thin.

But the facts about the 70s are the facts. I was there.

Yglesias seems to be under the impression that AFDC benefits were indexed to inflation. They weren’t. The real value of AFDC benefits declined sharply under Carter. The idea that “public assistance recipients” had less of an interest in fighting inflation than your average non-union worker is simply false. AFDC benefit levels were set by state legislatures and not indexed to inflation. National average real AFDC benefit levels declined sharply during the Carter and early Reagan years, then the decline ended (for a while) around 1984. AFDC plus food stamps declined less sharply (but declined a lot) plus there was a sharp drop 81 to 82 (food stamps are federal). Overall, the recipients of AFDC+food stamps appear to have suffered much more during the Carter years than your average non-union worker.
See here (PDF), page 12.

From 1977 to 1981 the union non union wage differential in the USA decreased from 19% to 16% (17% in 1980) (all very roughly) It is true that inflation crept up during the Carter years. It is not true that this helped Unionized workers relative to non-unionized workers. See here (PDF), page 40.

The Kennedy challenge to Carter had a lot to do with the fact that Carter was generally immensely unpopular (Iran and a recession). Carter’s deregulatory efforts were generally not controversial, mildly popular and barely noticed (I remember I was there). I don’t recall any criticism from Kennedy.

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CDS zero net supply

Robert Waldmann
notes that some have argued that Credit Default Swap demonization is silly because they are in zero net supply so they can’t bring down the financial system (no names or links I will be rude below).

This argument is crazy.

If half the financial firms end up bankrupt and the other half make a killing the disruption will be immense. A gigantic shift from one player to another reduces the sum of their market values. This was shown back in the day by Larry Summers and David Cutler (heard of them) in “The Costs of Conflict Resolution and Financial Distress: Evidence from the Texaco-Pennzoil Litigation,” NBER Working Papers 2418, National Bureau of Economic Research, Inc.

If the firms don’t know who is long CDS and who is short CDS they don’t know who is solvent. Such uncertainty can cause problems.

In any case, the general equilibrium literature contains a huge section on whether assets in zero net supply can make everyone worse off *If* everyone has rational expectations. The answer is yes.

The argument zero net supply so no problem is completely inconsistent with economic theory (so what) and known facts (so there) and no sensible person can possibly take it seriously.

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Poverty Belt

By Spencer

This map in today’s New York Times is fascinating.

It is of the counties that voted more republican this year than in 2004.

But if you did a map of the poorest counties in the US it would be almost identical.

It shows the people that vote to keep themselves barefoot and pregnant.

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Kevin Drum makes me blow a gasket

Robert Waldmann

can’t help but argue at very great length that one sentence by Kevin Drum is totally utterly completely wrong.

“The public face of his economic policy, after all, was almost entirely based on tax cuts, a distinctly conservative notion.”

Andrew Sable makes a much better counterargument than mine here.

Mr Drum has fallen for conservative lies. Their actual policies are tax cuts for rich people. Their hero Reagan signed into law a huge tax increase on the non-rich (Greenspan commission proposals). In practice they cut taxes for rich people.

Obama’s proposal has shifted the debate to whether a refundable tax credit is welfare. The Republicans can’t win this one. He has finally used the argument that Republicans can’t answer. Actually Clinton did it too (and was elected remember) but didn’t follow through. Also I think Obama’s proposal is excellent policy. I think Kevin Drum has fallen for the Republican line or decided that popular populist politics is immoral and we should eat our spinach.

I argue both politics and policy at gruesome length after the jump.

The Republican’s favorite trick is to distract people from tax progressivity by pretending that the only choice on taxes is high or low. Obama has shifted the debate to more or less progressive. I have long thought that such an approach to the debate would destroy the Republican party. The evidence from Tuesday is not proof (there were many reasons for the Republicans to lose) but it is still evidence that Obama’s approach to politics works, not just for one election but to change the debate forever. McCain argued “cutting your taxes is welfare. What about all the plubmers who make over $250,000 a year”. This is not (just) because he is nuts. There is no way to convince the American people that they prefer the Republican approach to Obama’s approach.

He was fighting on Republican turf the same way Grant was on confederate turf at Appamatox. With his tax proposal he has stormed their citadel, crushed their army and left them with the choice between surrender and Guerilla warfare (they will chose the second) [earlier historical analogy was the red army was fighting on German turf in the battle of Berlin — it was correctly spelled but politically not ideal).

Drum’s framing is exactly falling for the Republican trick which have made the last 28 years such a political disaster in the USA.

No one but Mondale runs on a platform of raising taxes. Transforming the debate to one about progressivity is more than any reasonable person could hope for from one candidate no matter how brilliant.

Also Obama’s proposal is good policy.

I think the claim is wrong in many ways. First, the Obama tax cuts consist of giving money to non-rich people (at the expense of the rich) and providing incentives for low skilled people to work (setting a good example for their kids).

This approach has been tried at a much much smaller scale by the Clinton administration (the Clinton tax increase included an increase in the earned income tax credit).

Judged crudely the results were spectacular. Of course it was partly luck with investments in information tech finally producing a productivity speed up but the increase in labor force participation, the shift of the Phillips curve etc are exactly what the most extreme advocates of Obama’s policy would have predicted.

In contrast taxing the super rich will, I honestly believe, have good effects totally aside from getting the money (Matt Yglesias has made many eloquent and convincing arguments for this). The super rich are concentrated in finance. This is a big cost as many smart people are not doing other things that are definitely socially useful but don’t make one super rich. The financial geniuses sure seem to have produced something worth less than nothing haven’t they ? Wouldn’t you rather they had been less numerous energetic and creative ?

Causing the financial sector to shrink by taxing the incomes of the top financiers would, I would guess, be excellent policy even if the revenues were wasted (by the way Larry Summers sometimes argues this — one of the issues on which he flip flops).

On the other hand the case for high taxes on low and moderate income is based on … what ?

1) We need money for universal healthcare, anti-poverty programs, green infrastructure investment/subsidies etc etc etc and we can’t get it just by taxing the rich.

A resonable argument (given Obama’s current proposal especially) but not true. The US rich are so rich that there is plenty of money to grab there. The problem is political. Only if people are convinced that taxing the rich has nothing to do with taxing them will it be possible to get the money for the treasury. I had great hopes for Obama’s doughnut FICA increase (which is even more directed at the rich than his income tax plan). I still do even though he de-emphasized it and it might not happen. Then again it might (tax the rich to save social security is the worlds second best slogan after tax the rich and spread it out thin (the current proposal)).

2. It is demagogic populism.

This is true. What’s wrong with that ? If it is good policy, the fact that people support it for selfish reasons or envy of the rich doesn’t make it bad policy.

Here the idea is that politicians prove their virtue by advocating unpopular policies (based on forcing people to face the bitter truth — or in this case the untruth that the US federal government can’t do it’s job and cut taxes for the non-rich).

I don’t want virtuous politicians. I want politicians who win and implement good policies. The fact that something is popular doesn’t mean it is wrong. Look what happened to Mondale.

3 It’s class war. It would be better to unite than to divide.

This is true. So what ? Who said it is always bad to represent the class interests no matter how large the class and how mild the suffering for the tiny class that will be only super rich rather than ultra rich will be.

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Is David Leonhardt pretending Henry Paulson did his job?

Or does he know better?

This year’s election coincided with an important moment in the financial crisis. The credit markets have stabilized in the last few weeks and even improved a bit. But the rest of the economy is deteriorating fairly rapidly. It’s now in danger of falling into a vicious spiral, in which spending cuts by consumers and businesses lead to further layoffs and then more spending cuts.

To prevent that from happening, the Obama administration will need to move quickly — before it takes office — to put together some emergency plans for the financial markets and the broader economy.[italics mine; emphasis his]

So Leonhardt’s first solution is “throw more money.” Or maybe—as with the common taters last night who pretended that the Republicans didn’t control the Presidency and both Houses of Congress for six years—he’s forgotten that this one was tried, with the same kleptocrat at the helm of the Treasury then as there is now, and will be until 20 January 2009.

Leonhardt then admits that Barack Obama knows more about economics than he does:

Throughout the campaign, whenever Mr. Obama was asked about the financial crisis, he liked to turn the conversation back to his long-term plans, by saying that they were meant to solve the very problems that had caused the crisis in the first place. Back in January, he predicted to me that the financial troubles would probably get significantly worse in 2008. They had their roots in middle-class income stagnation, which helped cause an explosion in debt, and the mortgage meltdown was likely to be just the beginning, he said then.[italics mine]

We then get the mealy-mouthed conditional that makes the NYT so Authoritative:

His prognosis was right — and the pundits now demanding that he give up major parts of his economic agenda in response to the financial crisis are, for the most part, wrong.[ibid.]

And, just so we’re clear, Leonhardt isn’t talking about much money:

There is at least one obvious area of potential compromise: Mr. Obama’s call for a $1,000 payroll-tax rebate for almost every family. That would cost the government about $65 billion. But a stimulus package should probably be a lot bigger than that — maybe $200 billion or so. And at this point, drafting it well matters more than passing it immediately.

So consumers might get to borrow $2 to pay themselves for every $7 they give to Hank Paulson’s buddies. But of course these monies will be poorly spent. Not the parenthetic:

That means starting work on new construction projects that government agencies have already deemed worthy but that lack financing. It also means sending money to state governments to close their budget shortfalls, in addition to softening the blow of the downturn by extending jobless benefits (as flawed as the unemployment insurance system is).

Meanwhile, giving AIG that money has been a great investment.

Leonhardt finally gets to a positive:

The two leading candidates for Mr. Obama’s Treasury secretary — Timothy Geithner and Lawrence Summers — seem likely to be more aggressive than Henry Paulson, the current secretary. Mr. Geithner, the president of the Federal Reserve Bank of New York, has at times lobbied for a more proactive approach to the current crisis. He favored direct equity injections into banks, for instance, before Mr. Paulson did.

As early as last December (2007), meanwhile, Mr. Summers criticized policy makers for being “behind the curve.”

“More aggressive” translates to “actually know what they are doing.”

What will this mean? Leonhardt glosses the ending:

Whatever he decides, it probably has to involve more money — which will make the government’s budget problems even worse. Some economists think next year’s deficit could potentially exceed $900 billion. Relative to the size of the economy, that would be the largest deficit since the years just after World War II.

A deficit like that will indeed force Mr. Obama to change his approach to the economy’s long-term problems, mainly by coming up with new ways to pay for his solutions. But that is tomorrow’s problem. Today’s are big enough as it is.

What this means is that apparatchiks like EconomistMom* will be whining about “the deficit” and the evil of “having to pay the increasing costs of social programs.” (If you wonder why we question your motives, look at your list of Senators and Conngresssmen who are determined to “do something about the spectre of future deficits”—a large portion of whom are the same people who pushed through the 2001 and 2003 raping and pillaging of the same people whose benefits you want to cut now. We question your motives because, by your own Revealed Preferences, you’re crooked.)

Leonhardt wants to placate them. Dean Baker, for one, knows that’s not possible, and pushes for a more optimal solution.

*If I were being fair to Diane Rogers (who advertises her Clinton Administration credentials whenever she can, so that we can believe she’s one of The Good Ones even as she shills for Pete Peterson and the entitlements-for-me-but-not-for-thee crowd), I would say she was hired to argue that neo-Hooverism is A Good Thing—but she made that bed and chooses to lie in it, so sympathy is not something I’m inclined to. Others here disagree. You can look it up.

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Dust and debris counts

“Dust and debris” from counting votes could foul up machine that counts votes. Huh?

By Noni Mausa

In most districts the voting dust has all settled, but not in Minnesota, where a contested Senate seat is so finely balanced (by 0.01% or so) that a recount is mandated by election law.

I have been following the Al Franken (Dem) / Norm Coleman (Rep) Senate race in Minnesota, partly because it was on my ballot, and partly because I love the idea of a talented satirist in the Senate.

But it’s going to be a while before that’s settled (though Republican incumbent Coleman has already declared his victory and suggested his opponent should just concede already, and save everyone the bother of a recount).

In trying to find out what the delay was, I found a pretty detailed account today, and it appears the problem is … VOTING MACHINES! Yeah, I know you’re shocked.

Here’s the entire article:

And here are some interesting bits. The bolding is mine.


E-Voting Machines Used in Disputed Franken, Coleman Race Failed Tests

By Jason Leopold
The Public Record
Wednesday, November 05, 2008

Electronic voting machines that a Michigan election official said last week incorrectly tabulated vote counts during testing in the state were used in Minnesota where the senate race between Republican incumbent Norm Coleman and Democratic challenger Al Franken is in dispute.

According to an Oct. 24 letter sent to the federal Election Assistance Commission (EAC), Ruth Johnson, the Oakland County Clerk/Register of Deeds, warned that tabulating software in Election Systems & Software M-100 voting machines recorded “conflicting” vote counts during testing in her state.

The M-100 was also used in the Minnesota and in more than a dozen other states on Election Day. But there haven’t been reports from election officials in other states about irregularities. Nor have any of the congressional or senate races come as close as the Coleman and Franken battle.

On Wednesday, an unofficial vote count released by Minnesota election officials showed Coleman leading Franken by a razor-thin margin of less than .01%, or 462 votes.

That will lead to an automatic recount, …


Nearly 2.9 million Minnesota voters cast their ballots, with Coleman receiving 1,210,942 to Franken’s 1,210,371…

It’s possible that a recount, the results of which would not be known until December, could turn out in Franken’s favor. Franken told reporters Wednesday “this is a long election and it’s going to be a little longer.”


Johnson, the Oakland County Clerk, said in her letter last week to the EAC that the M-100 voting machines used in four communities Tuesday “reported inconsistent vote totals during their logic and accuracy testing.”

“The same ballots run through the same machines, yielded different results each time,” says the letter addressed to Rosemary Rodriguez, the chairwoman of the Election Assistance Commission. “ES&S determined that the primary issue [that caused the machines to formulate incorrect vote counts] was dust and debris build-up on the sensors inside the M-100” voting machine. “This has impacted the Digital to Analog Converter (DAC) settings for the two Contact Image Sensors (CIS).”

“This begs the question,” Johnson wrote. “On Election Day, will the record number of ballots going through the remaining tabulators leave even more build-up on the sensors, affecting machines that tested fine just initially? Could this additional build-up on voting tabulators that have not had any preventative maintenance skew vote totals?

“My understanding is that the problem could occur and election workers would have no inkling that ballots are being misread.”

A spokesman for ES&S did not return calls for comment.

Johnson said the warranties on the ES&S voting machines would be voided if clerks attempted to perform maintenance on the voting machines. The contract Michigan signed with ES&S does not include preventative maintenance. It’s up to each city or township clerk to pay ES&S separately to perform maintenance on the machines.

“ES&S has not performed any preventative maintenance under the state contract, since the machines were delivered three years ago,” Johnson wrote. “I would urge you to investigate whether vote totals could be affected by the failure to provide regular cleaning and preventative maintenance with the ES&S M-100 tabulators.”


Franken said Wednesday he was still in the race despite Coleman having declared victory. The former Saturday Night Live writer said his campaign was also looking into “voting irregularities”, including some polling places in Minneapolis that ran out of registration materials…


Remind me again, is the warranty voided if you perform maintenance on a pad of paper or a #2B pencil?

This must be a guy thing, these voting machines. My ex-husband, a certified Guy, hated to do the dishes in an ordinary sink with hot water and all that boring stuff. But when we bought a voting machine — sorry, dishwasher — he was all over it like a sports car, and would have run two loads a day if I had let him.


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Being President is a privilege

by cactus

What We Owe Obama

What we owe Obama is… nothing. Its the same thing we would owe McCain if he were elected President. Its what we owe anyone else who becomes President.

See, being President is a privilege. Its not a right, for anyone. There’s no situation in which you can say: “Well, he/she paid his dues, and its his/her time to be President of the United States now.” Nobody who becomes President gets there deserving it. They may deserve it more than their opponent, or more than recent holders of the job, but that doesn’t mean they deserve the job more than millions of other Americans.

So, the President, and the President-elect owe us. Its his job to perform. Period. End of story. If he cannot perform, he should step down. Not that anyone ever does, except when impeachment looms (a la Nixon), but a President who doesn’t have the competence to make things better should have the decency to step down. (Mr. 20%-and-Plummeting should definitely have stepped down, and he should have done it a while back.)

So back to Obama… he works for us. Sure, technically, his job is to uphold the Constitution. But the Constitution changes – if it didn’t, he’d be a slave and not the next President. The Constitution is what the public wants it to be – if enough people want something, it goes into the Constitution. (And no – enough doesn’t mean 50% + 1.) And if enough people don’t – it comes out of the Constitution. Put another way – in the end, the Constitution, the United States – its us, its people. Obama works for us. His job is make our lives better.

It doesn’t matter that Obama is inheriting a mess. It wouldn’t matter if he had inherited the world GW envisioned eight years ago. His job is to make our lives better. Regardless of what happens, of whether he succeeds or fails, he’s going to have some people who love him, and some people who hate him. But those people, both groups, are wrong. See, what is owed, is owed to us, and the only way we can know if we’re getting what is owed us is if we’re clear-eyed and watchful.

I voted for Mr. Obama, but that’s water under the bridge. He and I are back on square one as far as I’m concerned. I will support him when he’s right, and I will oppose him when he’s wrong. And I will be watching him. Its the same attitude I took toward the current resident of the White House, and I will take it toward whoever follows Obama in four years or eight. I hope the rest of you feel the same way.
by cactus

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The BradAltman Effect?

Is gay the New Black? Note this partial list of companies who said No on 8:

Most of the state’s highest-profile political leaders — including both U.S. senators and the mayors of San Francisco, San Diego and Los Angeles — along with the editorial pages of most major newspapers, opposed the measure. PG&E, Apple and other companies contributed money to fight the proposition, and the heads of Silicon Valley companies including Google and Yahoo took out a newspaper ad opposing it.

There is one CA-based company conspicuous by its absence, despite loud declarations of being a gay-friendly place and holding Gay Days in its Florida-based theme park.

Dear Californians, you got f*ck*d by The Mouse.

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