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The Effects of Airline Deregulation: What’s The Counterfactual?

by Tom Bozzo

Crossposted with Marginal Utility.

Matt Welch at the Reason blog takes credit for airline deregulation on behalf of libertarianism:

The “worldview” of libertarianism suggested, back in the early 1970s, that if you got the government out of the business of setting all airline ticket prices and composing all in-flight menus, then just maybe Americans who were not rich could soon enjoy air travel. At the time, people with much more imagination and pull than Gabriel Winant has now dismissed the idea as unrealistic, out-of-touch fantasia. They were wrong then, they continue to be wrong now about a thousand similar things, and history does not judge them harsh enough.

Mark Kleiman observes that transportation deregulation was more directly the progeny of 1970s Brookings-esque neoliberalism (though I’d grant Welch that libertarians got there first), though Kleiman doesn’t take issue with the basic claim that deregulating prices and service offerings “was, on balance, a good thing.” This argument ultimately rests on the declines in airfares and resulting democratization of air travel that Welch cites; indeed that’s what the Brookings-esque neoliberals I know cite when they’re defending the deregulatory record.

The catch is that all such economic comparisons must be counterfactual: they must show an improvement not with respect to CAB-set fares of the late-1970s, but rather with respect to what reasonably competent regulation could have produced under the other circumstances of the deregulated era. (This, FWIW, is one of Robert W. Fogel’s central insights into what makes economic history economic history.) If the comparison exercise is tough by the (inappropriate) historical yardstick thanks to declines in (average) service quality and the airline industry’s trail of fleeced stakeholders, then the counterfactual comparison is going to be tougher still thanks to a couple of factors that should have produced large declines in airline costs and hence fares even in the absence of deregulation.

The factors of note are a pair of technological advancements — the development of high bypass ratio turbofans suitable for shorter-haul airliners and the demise of the flight engineer’s job thanks to cockpit automation, both of which have origins predating deregulation — and the long secular decline in oil prices through the deregulated era’s zenith prior the crash of the 1990s stock market bubble. Since a regulator could have promoted adoption of the cost-saving technologies and passed the resulting productivity improvements and input cost decreases through to fare-payers using elementary regulatory technologies, deregulation must have produced substantial fare reductions relative to the late CAB era to have a claim to constituting a true improvement.

One of the airline industry’s problems is that it isn’t “revenue adequate” or able to recover its total costs including a normal return to investors. If you thought airlines were incurring costs efficiently, then moving towards revenue adequacy would require more revenues and hence higher average fares. On the face of things, that wouldn’t look good for a regulated alternative providing more secure revenues to the industry. However, there are dynamic efficiency counterbalances to the apparent static inefficiency under regulation: revenue adequacy implies having money for efficiency-improving investments. For instance, U.S. legacy airlines have somewhat notoriously kept relatively aged fleets in the air. Partly, that was a deliberate strategy that blew up when the Goldilocks conditions of the late-90s ended, and partly they don’t have the money to turn over their fleets as fast as they arguably should.

The formerly regulated transportation industries shared, to one extent or another, cost structures under which an efficient carrier would go broke under econ 101 perfect competition with prices driven down to marginal costs. So the question isn’t so much whether carriers will exercise such market power as they have in order to survive, but how. Real firms might or might not do that better than a real regulator. I do think there’s a good case to be made for some degree of pricing and service liberalization with regulatory policing of “excessive” use of market power; that’s a one-sentence version of the Staggers Act’s approach to the (very successful) freight rail industry.

Added: Good comments at Economist’s View, too, particularly a long one from Bruce Wilder expanding on the cost structure issue, discussing pricing strategies, and opining on the sources of apparent gains from deregulation.

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Sumner is Now More Wrong

by Mike Kimel

Sumner is Now More Wrong

So there’s a a response from Sumner to my critique of his earlier post. And he clearly doesn’t get it. Again, I’ll focus on the low hanging fruit, but this time I’ll try to simplify a bit more.

First comment here:

Um, no you don’t want to adjust for inflation when comparing two countries at the same point in time, you want to adjust for PPP. Time for Angry Bear to go back to the Ivory Tower.

This by itself has a bunch of errors.

1. I agree that adjusting for inflation is un-necessary. That doesn’t mean you don’t want to do it. I picked the first measure I came upon that looked reasonable. Inflation adjusting in a single currency and PPP generally produce the same results. Apparently they aren’t doing it for Sweden to US comparisons for the years he picked. Very odd.
2. I am not Angry Bear. That’s the name of the blog. Several people post regularly at Angry Bear. Rdan, the site owner, is kind enough to put up my posts when I write one. But calling me Angry Bear is like me calling The MoneyIllusion.
3. To which Ivory Tower would he suggest I return? Last I checked, Sumner is the one whose bio says something about spending the last 27 years teaching at Bentley. Nothing wrong with that, of course. And for what its worth, I did the adjunct for five years too, which is the closest I’ve come to being an Ivory Tower guy. But I’ve been in the private sector – working for a Big 4 firm, two Fortune 500 companies, and as a consultant under my own shingle – since leaving grad school. So please, spare me.

Next he tells us how he picked his sample:

I didn’t have time to take all 200 countries, so I did what I thought would be interesting examples.

OK then. There’s a fine line between that and cherry picking unless we’re told more, and we aren’t being told more. Now, that doesn’t mean he isn’t cherry picking the data, but this is one heck of a “trust me” given what he’s trying to sell.

There’s a lot more here, but I’m going to focus on what I mean by what I wrote when I said Sumner clearly doesn’t get it. Let’s take this for instance:

Argentina ran statist policies in the 1980s and 2000s. There were reforms in the early 1990s, but free market policies don’t produce success when combined with contractionary monetary policy. Indeed that’s essentially the whole point of my blog. Argentina did very well for a while after it did some privatization, but of course their ultra-tight monetary policy put them into a depression at the end of the 1990s. Then they switched back to statism. I have no idea why a country with statist policies in the 1980s and 2000s and a deflationary monetary policy in the late 1990s, would be expected to do well.

As he said, that was the post of his earlier post. So its a good place to focus. But before I get started, let me warm up with a quibble…

Argentina was not doing well in the early to mid-90s. That was a, well, a Money Illusion. See, they sold off all the state owned enterprises (and the strangely enjoyable to look at water building ) and then lived high on the hog off the money. But living off a one-time chunk of revenue as if its a long term revenue stream may make you look impressive to folks who think that reading a newsmagazine qualifies as knowing how the world works, and it even fooled a lot of folks in Argentina, but it didn’t fool everyone even if most people in Argentina were hoping for the best. And it didn’t fool reality, and the money soon ran out. It always amazes me that most people who call themselves economists and mention Argentina haven’t figured out that detail.

And now to the meat (sadly, not Argentine) and potatoes… which can be summed up with this sentence: “I have no idea why a country with statist policies in the 1980s and 2000s and a deflationary monetary policy in the late 1990s, would be expected to do well.”

And yet, he bats not an eye in his first post when he points out that Japan and the US grew about the same. But Japan is probably more statist (think the Ministries) now than privatized Argentina, and the trend away from statism was certainly greater in Argentina during the 1980 to 2008 period than in Japan. As to deflationary monetary policy – exactly how long has Japan’s interest been about zero? So shouldn’t Japan count as a loss in Sumner’s book?

But that’s trivial. A bigger problem is that Argentina’s deflationary monetary policy could be summed up in one word: dollarization. The currency was pegged to the dollar, and the rest was a collection of details (some of which made life miserable for the average person in Argentina).

Now, regardless of the reasons given, the effect of a peg is the same. And it turns out that among the success stories on Sumner’s list was Hong Kong, which has been operating with a similar currency peg for a lot longer than Argentina ever did. (BTW, the Hong Kong government had a cool little study looking at their peg and Argentina’s here.)

I’m not all that familiar with Singapore, but I do know the Singaporean central bank is kind of an odd duck in that they use monetary policy to regulate the exchange rate (which is a fancy way of saying they peg the currency, but move the peg). Which is another way of saying that on the big issue, they follow the same monetary policy that Sumner thinks is a no-no with Argentina. And of course, if you had to pick which of two countries, Argentina which sold off its state owned assets, and Singapore which didn’t, liberalized more in the last three decades its a no-brainer. Singapore, complete with its canings, has a more functional rule-of-law, but in his post, Sumner talked about how ” neoliberal reforms after 1980 helped growth.” Argentina had ’em. I don’t know about Singapore. But he has Singapore as a success story, and Argentina not.

Moving on (this is getting to be a pain in the neck) we have Chile, the other Latin American country on his list… and like Hong Kong and Singapore, also a success story. Now, both Argentina and Chile chucked their military overlords between 1980 and 2008, but the Chicago Boys like to point out they were doing their thing during the Pinochet years too. Put another way, whatever liberalization happened in Chile post 1980 (off the top of my head, I’m thinking mostly a big change to mining law in the 90s… but note that CODELCO, the state owned copper firm, still runs the big show) pales in comparison with Argentina selling off its state owned assets during the same period.

Which leaves us with three of Sumner’s four success stories (Hong Kong, Singapore, and Chile) at odds with his point. And that’s out of 13 observations picked entirely not at random. What can I say – it seems more than a bit odd.

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I decided to look at the Scott Sumner blog post that Mike wrote a couple of days ago and again today.

The objective of the Sumner post was to disagree with Paul Krugman and others about a break in trend in US economic growth because of the Reagan revolution. But rather than look directly at the US data he undertook a complex, convoluted approach that indirectly tried to demonstrate that there had been a break in US growth because of the reforms around 1980.

My question is why go to such an indirect methodology? Why not just look directly at the very good US data? So that is what I have done.

Since the end of WW II the trend rate of growth of US per capita real GDP growth has been 2.1%– calculated as the exponential growth rate from 1945 to 2009. This chart shows the level of US real per capita growth in the post WW II era compared to the 2.1% growth trend.

When you look at this chart it is rather obvious that there was no break in the growth of average US living standards around 1980. If you really want to break the post WW II experience into sub periods, the best performance of the growth in real per capita GDP actually appears to be from the late 1950s to the late 1970s. But that is really just as much, if not more, of an economic trough to economic peak comparison that tends to overstate growth just as the comparison from the early 1980s to 1990 appears to be above average when it is really just another biased trough to peak comparison.

So when you look at the actual US data it does not appear that there was an improvement in the US economic performance after 1980. The convoluted Scott Sumner comparisons are just an attempt to fool readers. OK, Scott attacks Mike on his questioning the data that Scott had used. So I’ll just ask Scott why he does not use the very good US data to demonstrate that there was a break in US economic performance around 1980?

While I am on the subject of Libertarian economic analysis I thought I would also look at another claim by Libertarians that the post WW II era of the US mixed economy with big government was harmful to US economic performance. As of about 1850, all of the major elements of modern, free market, capitalist economies were in place with the limited liability corporation, professional management and large scale bond and stock markets where corporation could raise capital. Consequently, it would seem to be a fair comparison to compare the performance of the US economy from 1850 to 1950 to that of the post WW II era. The biggest difference in the two eras was the size of the federal government. For the most part it was about 2% of GDP prior to the Great Depression and it has been around 20%
of GDP since WW II. Moreover, government transfer payments were insignificant prior to the Great Depression of the 1930s.

So how did the economy perform from 1850 to 1950 with essentially modern financial corporations, free market capitalism and small government compared to the post WW II era with large scale government. It seems that from 1850 to 1950 that trend real per capita GDP growth was some 1.6%, or significantly less than the 2.1% trend in the more recent era of big government. Moreover, the big swings in the 1930-40s era did not impact this comparison as the 1850 to 1929 trend growth rate of per capita real GDP was also 1.6%. Just as an aside, from 1790 to 1850 trend per capita real GDP growth was about 1.0%.

Just a couple of quick observations. Libertarians like to point to the 1920s as a great era of growth. Superficially, if you just look at that era one could reach that conclusion. But look what preceded the 1920s. From 1907 to the early 1920s real per capita GDP growth stagnated and did not really break above the 1907 peak until the mid-1920s. That is what the green dashed line on the chart shows. Given the well over a decade of stagnate real per capita GDP growth preceding the 1920s boom, it is very easy to make the argument that the 1920s was just a catch-up phase from the poor economic performance over the preceding era.

While I’m down on Libertarians, what about the recent argument by Bryan Caplan of George Mason University, who blogs at He recently argued that the decade of 1870’s was the peak for Libertarian freedom and economics. Maybe, but I wonder if he is even aware that economic historians label the 1870’s as the “Long Depression”. I find it really amusing that he so proud of what others call a depression — typical Libertarian. Since I am already banned from that web site for pointing out factual problems with their analysis I guess this comment will not make much difference.

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More on Carried Interest

by Linda Beale
crossposted with Ataxingmatter

More on Carried Interest

As most ataxingmatter readers know (Rdan…and Angry bear readers), there is currently under consideration in Congress legislation that would extend some of the Bush tax breaks and in return pay for those extensions by taxing service partners’ profits interests at ordinary income rates (or, under one version now being put forward to mollify the wealthy service partners who don’t want to pay tax on their wages like other people do, partially under ordinary rates and partially under capital gains rates).

Not surprisingly, there are strong lobbyist pushes against the legislation. Although you’d think this would be a no-brainer, it has been hard for Congress, especially the Senate, to pass the reform. The House has proposed and passed a carried interest bill several times, but the Senate has balked. Wealthy interests wield quite a bit of power, and they tend to wield it in their own favor.

Robert Reich notes in his Sunday piece “The Challenges of Closing Tax Loopholes for Billionaires” May 23, 2010.

Who could be opposed to closing a tax loophole that allows hedge-fund and private equity managers to treat their earnings as capital gains – and pay a rate of only 15 percent rather than the 35 percent applied to ordinary income?

Answer: Some of the nation’s most prominent and wealthiest private asset managers, such as Paul Allen and Henry Kravis, who, along with hordes of lobbyists, are determined to keep the loophole wide open.

The House has already tried three times to close it only to have the Senate cave in because of campaign donations from these and other financiers who benefit from it.

Now, if we are going to give more tax breaks to corporations in an extender bill, somebody has to pay. The logical choice is the group that is getting a tax break already that is not justifiable–either because it is just too unfair to leave in place or because it doesn’t even do the job that the tax expenditure was intended to do. Here’s what Reich has to say on this issue.

It’s not as if these investment fund managers are worth a $20 billion subsidy. Nonetheless they argue that if they have to pay at the normal rate they’ll be discouraged from investing in innovative companies and startups. But if such investments are worthwhile they shouldn’t need to be subsidized.

That’s right–the cost of this subsidy is $20 billion in tax revenues. And these investment fund managers argue that if they have to pay ordinary taxes on their compensation like ordinary people have to pay, then they just might not invest in innovative companies and startups nearly so much as they otherwise would. That surely is a weak argument, as Reich notes, since worthwhile investments will call out for someone to make money off them, even if they do have to pay taxes at a slightly higher rate on the profits they make. So there will be decent investments and managers shouldn’t be “discouraged” just because they have to pay more taxes. Will managers have slightly less money to invest? Maybe, maybe not. It depends on what they were doing with those excess millions anyway. They could probably invest the same and just waste less of it on charter flights, limos, and million dollar birthday parties (remember Ken Lay and Enron?). A lot of money invested in startups just goes down the drain. So taxes takes a bite, losing investments take a bite. It’s not that different and nobody is claiming that venture capitalists won’t invest if one of their investments comes up a loser. These arguments are, ikn other words, very weak when they suggest that investment in innovative companies will tank if the people who make millions (or billions) from servicing those partnerships have to pay taxes like the trucker and the teacher and the policeman and the fireman.

And if Congress doesn’t pay for its tax extenders with this provision, it is more likely to hit middle income taxpayers. Which is fairer–taxing carried interest like the compensation income it is, or hitting middle income taxpayers with higher taxes when they’ve already lost value in their primary asset (their home) and are having generally a tough time of it? Again, looks like a no-brainer. Just remember that these investment fund managers make hundreds of millions in one year–with the top twenty five, as Reich noted, taking home a billion dollars each in 2009!

Meanwhile, these ultra wealthy fund managers don’t seem to offer their lucractive compensation arrangements as a target for reducing the federal deficit but rather argue that pensions must be cut (the labor unions are always to blame, according to the right) and Social Security must be cut, and ordinary people should work longer for their benefits, etc. As Reich notes:

The senior chairman and co-founder of the Blackstone Group, one of the largest private equity funds, is Peter G. Peterson, who never tires of telling the nation it faces economic ruin if deficits aren’t brought under control. Curiously, I have not heard Peterson advocate closing this tax loophole as one way to further the cause of fiscal responsibility.

Then there are the academic apologists for the corporatist agenda and the wealth of the ultra wealthy. A good example is John Rutledge, a “senior research professor at the Claremont Graudate University and chief investment strategist at Safanad, an investment firm in Geneva,” who worte an op-ed in the Wall Street Journal todayh on the issue. See Rutledge, Congress’s Carried Interest Tax Folly, Wall St. J., May 24, 2010, at A17.

Rutledge repeats several times the corporatist and business right wing’s standard view–if you raise a key tax rate on long-term investment, you will “discourage capital investment, increase the cost of money to start and grow businesses, and depress real-estate and stock prices.” He says that the “economic impact of the proposed tax hike is unequivocally negative for long-term investment”. He claims that carried interest is clearly a tax on capital gains merely because the capital gains on investments in the partnership is passed through to the service partners, and the service partners have taken the position that those gains should retain their character. In fact, most of the op-ed piece involves several repetitions of these same old things, with a parade of horribles that will ensue, he says, from causing service partners to pay ordinary rate tax on their compensation income instead of getting the (undeserved) capital gains preferential rate that they’ve enjoyed through 20 years of the booming equity fund business;-“less capital formation, less construction activity, less manufacturing activity for capital goods makers and their suppliers, fewer start-ups, fewer jobs, lower productivity growth, and lower wages.”

First, there is not indication that increasing rates on real capital investment actually discourages capital investment. What are you going to do with all that excess cash? Hide it under a mattress to avoid investing it for a return because the return will be taxed? I don’t think so. Yes, the manager who pays tax will have somewhat less money after taxes. That is true of anyone who pays tax. But will that reduce investment by huge amounts? Depends on what else that manager ordinarily does with after-tax income, and whether there are lots of sound investment opportunities to use it for. It might decrease the amount that is reinvested or it might not. It certainly won’t make investment funds quit functioning or make managers of those funds quit managing. Their after tax income is still in the top 1% of the country.

Second, of course, is the point that the carried interest is not itself a return on a capital investment. A carried interest is usually 20% of the partnership’s profits which is the agreed upon compensation for the general manager of the fund (hedge funds, private equity funds, etc.) on top of the management fee which is generally 2% of assets under management. Managers’ payments are set up this way in order to let the service partner claim a lower tax rate on the vast majority of the compensation paid to it for its services. But service partners who receive an allocation of partners in payment of their “carried interest” are not receiving a return on a capital investment. They generally have made no capital investment (and even if they have, that is separate from the carried interest allocation). They are receiving compensation for services but attempting to use the partnership pass-through to arbitrage that ordinary income into capital gains treatment at a much lower tax rate. In other words, the game with carried interest is to claim that a partner who provides services to a partnership can be paid a percentage of the profits (income or gains) from the partnership and be treated as getting a pass-through of partnership income and gains rather than being treated as getting compensation for services taxable at ordinary rates, even though that partner has made no contribution to capital on which to get an allocation of partnership income. The tax treatment of such profits interests has been unclear in the caselaw and authorities, so it is time to resolve it and do so in a way that prevents this ordinary-capital arbitrage use of partnerships. It’s a fairly easy question to see that fairness and economic efficiency favor taxing that compensation at ordinary rates just like other workers are taxed.

Rutledge argues that the carried interest provision would go against “two long-accepted tax practices” of the preferential capital gains rate and the pass-through treatment of partnerships. I’d counter that

1. the preferential capital gains rate has had ups and downs, ranging from complete elimination in the 1986 tax reform act, to rates much closer to ordinary income rates at various times. The capital gains preference is difficult to justify, has no clear scope, and creates arbitrage opportunities that make enforcement difficult. It would be just as good to say that the preference for capital gains has had a troubled history and this is one place where it behooves Congress to make clear that it doesn’t apply.

2. the pass-through treatment of partnerships works for those who have a capital interest in the partnership, but the treatment of profits interests has a long history of uncertainty, in part because it seems to convert what should be ordinary income into capital gains, counter to fundamental tax principles about maintaining characterization of income. It behooves Congress to clarify that such a profits interest is ordinary income taxable at ordinary income rates.

3. further, there is a fundamental concept of equity in the income tax system, and equity demands that those who provide services be treated similarly. If an hourly worker is taxed at ordinary rates on the compensation he receives, then a fund manager should be taxed at ordinary rates on the compensation he receives for providing services. Those fairness principles are more important than the uncertain and weak arguments Rutledge provides ostensibly from economic efficiency in favor of tax subsidies for long-term investments (even though, as I have said, there is no long-term investment to be subsidized in the profits interest in the first place; not to mention that a more efficient tax system would, of course, tax all income at the same rate, and avoid the possibility of mischaracterization, characterization disputes, or arbitrage between character types).

PS if you want to get into the mind of a hedge fund manager, you might enjoy this. Mark Ames, Top Billionaire Hedge Funder Sees Himself as a Hyena Devouring Wildebeests, The Exiled, May 22, 2010 (discussing Ray Dalio, the hedge fund manager that made $780 million in 2008) (hat tip to The Something Awful Forums).

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Social Security and the Infinite Future: From 1997 to Heat Death

by Bruce Webb

Eric Laursen in his post Cato Premieres its Latest Horror Show points us to a new book forthcoming called ‘Social Security; A Fresh Look at Policy Alternatives’ by senior Cato fellow Jagadeesh Gokhale. Gokhale along with his oft-time collaborator Kent Smetters seems to be the father of ‘intergenerational equity’ and lead advocate for measuring that over the ‘Infinite Future Horizon’.

Eric, backed up by people as varied as the American Academy of Actuaries and conservative economist Bruce Bartlett, does a nice job showing why Infinite Future is not a useful tool in this instance, a topic I have taken up from time to time and I urge people to read it. But what interested me is what it revealed about the curious timeline during which Infinite Future even became part of the Social Security Policy discussion. Details below the fold.

The key paragraphs come right up front in Eric’s piece:

In August 2003, Joe Lieberman, then in the early stages of launching a presidential bid, wrote a letter to Treasury Secretary John Snow in which he accused the administration of “stripping out” from its 2004 budget the findings of an internal Treasury paper that Snow’s predecessor Paul O’Neill had ordered up. Attempting to stake out a position as the toughest of the deficit hawks, Lieberman suggested that “this administration is trying to hide the true nature of our financial obligations from the American people in order to advance its agenda of cutting taxes indiscriminately.”

The paper was written by Gokhale, then at the Cleveland Fed, and Kent Smetters, then deputy assistant Treasury secretary for economic policy. Contrary of Lieberman’s claim, Smetters claimed it had been “for internal discussion only,” to try to help O’Neill “think about [the deficit] from an economic perspective.” There was no conspiracy to suppress it, he said; the administration considered including it in the budget but then decided against it. Gokhale and Smetters revised their paper and presented it four times in Washington in May 2003, including to the American Enterprise Institute. They then published it as an AEI monograph.

This suggests without saying so that this ‘internal Treasury paper’ was the work product of Sping 2003 and was suppressed during the preparation of the Budget that Fall. But this can’t be so, as Smetters and Gokhale pointed out in a July Op-Ed similar language had been included in the 2003 Social Security Report, itself signed off by newly installed Secretary Snow.

The 2003 Social Security Report was released on Mar 17, 2003, two weeks earlier than normal and coincidentally or not the week the invasion of Iraq was announced, to say that ‘nobody noticed’ was a gross understatement. In any event it contained this curious (to me) language.

“Even a 75-year period is not long enough to provide a complete picture of Social Security’s financial condition. Figures II.D6 and II.D7 show that the program’s financial condition continues to worsen at the end of the period. Some experts have noted that overemphasis on summary measures for a 75-year period can lead to incorrect perceptions and to policy prescriptions that do not move towards a sustainable system. In order to provide a more complete description of Social Security’s very long-run financial condition this year the Trustees present actuarial estimates over a time period that extends to the infinite horizon. These calculations show that extending the horizon indeed increases the unfunded obligation, indicating that much larger changes would be required to achieve solvency over the infinite future as compared to changes needed according to 75-year period measures.”

Who were ‘some experts’ and why was their advice privileged over say the statutory group of outside advisors Social Security Advisory Board (a group of which Gokhale is the newest advisor).

So whether or not Smetters and Gokhale are the ‘some experts’, clearly this idea was floating around early enough to be incorporated in a March Report, and if that ‘internal report’ had been prepared for Secty O’Neill, it would have had to come into being sometime before O’Neill left office in Dec 31, 2002. Meaning likely over the course of 2002.

Which leaves the lingering question of ‘who had the authority to have this included in the Reports to be signed by the Trustees on March 17?’ More importantly ‘why was this thought to be important or useful?’

Well a trip back to the timeline may be important. Although Bush didn’t run for office in 2000 heavily on the issue of Social Security clearly it was a high domestic priority, he had his CSSS Commission to Strengthen Social Security in place by June 2001, complete with charter and membership with a tight seven month deadline for reporting, by all indications he was ready to take this to the country in spring 2002. Well 9/11 changed his priorities, by the time the Report was released on Dec 21st we were engaged in Afghanistan, and the entirety of 2002 was eaten up building support for a War on Iraq, the time clearly wasn’t ripe to take on Social Security at the same time.

But this left the Report and its recommendations exposed, particularly CSSS Model 2 which was known to be the Administrations preferred plan (Model 1 & 3 mostly being variations on a fundamental theme. And during 2002 the CSSS Model 2 and related plans were subject to attack by places like EPI and CEPR . Because of a different timeline altogether.

From 1997 to 2004 Social Security was under tremendous outside pressure, not because its financial condition was degrading in the face of inactivity, instead it was improving year over year. In 1997 the projected 75 year payroll gap was 2.23% of payroll, by 2001 it was down to 1.86%. In 1997 the date of Trust Fund depletion was set at 2030, by 2001 it was 2039 and on way to being pushed back to 2042 by Report Year 2003. At this point what Baker and Weisbrot had identified in their 1999 book as Social Security: the Phony Crisis was looking pretty phony indeed. And the closer you looked at the internals the more phony it got.

The outlook for Social Security improved so dramatically from 1997 to 2002 for the very same reason that huge and growing Bush I deficits turned to small but growing Clinton General Fund surpluses and large and growing massive Clinton Social Security surpluses were turning into huge projected surpluses, we had just experienced an extended period of low inflation, high employment and significant Real Wage increases, all of which boosted revenues and cut projected cost. Moreover most of our economic elite, including most decidedly Fed Chair Alan Greenspan were insisting that this so-called Great Moderation was permanent, so much so that it justified huge tax cuts for the wealthy.

The problem is that the Great Moderation and Social Security Crisis were fundamentally at odds. Social Security Crisis in the yar 2000 relied on a relatively rapid and permanent slowdown in productivity and Real Wage over the next ten years. For example the 2002 Report (, the closest in time to the Dec 2001 release of the CSSS Report projected that Real Wage would drop from 2.8% in 2001, itself well down from the highs of the late 90’s to 1.1% in 2007 and stay there permanently (Table IV.B1). Likewise the IC model projected that unemployment already up sharply in 2001 to 4.8% would never get better and instead settle out permanently at 5.5% and that real GDP which maybe took a short term hit with the 2001 recession (which could be blamed on the last Administration) would never get back to the 4% plus rates of Clinton’s second term but instead was destined within ten-years to shrink to sub 2% a year FOREVER. (Table IV.B2). To which numbers a reasonable observer might ask: “What the hell is going to happen to this much vaunted Great Moderation?” and “This is the fricking miracle of tax cuts? Permanent 5.5% unemployment, 1.8% Real GDP, and 1.6% productivity?”

Given the outsized promises being made about the effects of tax cuts during the 2001-2002 time frame (i.e. all positive for everyone, capital and labor alike), and the promises that even bigger tax cuts would not materially reduce surpluses going forward, how could the Bush men still maintain Social Security ‘crisis’ with a straight face. Easy, you just redefine it as not being a crisis for this century, i.e. caused by Boomer retirement, but instead as a crisis for the NEXT century and the ones after that.

Thus the introduction of Infinite Future in time for the 2003 Report allowed the substitution of a 3.5% payroll gap for a 1.86% one and so gave cover for reform packages whose combination of benefit cuts and tax increases far exceeded the 75 year gap. For example the Liebman-MacGuineas-Samwick ‘Non-Partisan’ Plan proposes a combined 5.2% fix to a problem then scored at 1.92% (75 year) or 3.5% (infinite future). With a little slight of hand the LMS authors were able to hide 1.5% of the fix in the fine print and convince people that the difference between 3.7% and 3.5% would easily be made up by having an inheritable asset, the so-called ‘Ownership Society’. On close examination that breaks down, most workers wouldn’t end up with any estate out of their PRAs (unless they were lucky enough to drop dead right after retirement), but either way that was a lot easier to sell than the starker 5.2% vs 1.92%.

Now I can’t prove motivation for the switch to Infinite Future, but it is pretty clear that the original plan for the Bush Administration was to push the CSSS ‘Bi-Partisan’ Model 2 plan through Congress in 2002 in much the same way they tried to push the Social Security Crisis Tour through in 2005, or regrettably how Obama is allowing the Rubinistas to jam through cuts via the ‘Bi-Partisan’ Deficits Commission in 2011: assemble a theoretically ‘non-partisan’ group of ‘experts’, use some baked-up and bogus economic models and projections and then create a sense of inevitability around the whole thing. The key is to keep your eye on the numbers and not let them work out of two sets of books, one to predict crisis, and another implicitly to present solutions.

(For some earlier takes on this you might want to consult the first series of:, particularly VI, VII, and XII and then maybe follow up with selected posts from the third series:

The criticism came in mixed and matched form. First when compared to the productivity rates that were firmly being projected by Greenspan and used to argue for tax cuts, numbers in the out years seemed oddly muted. Where was this permanent productivity and GDP growth we were being promised? Second if the Trustees numbers were actually plausible how do you get the return on equities needed to fund PRAs (hence NELB and BDK)? All of which contributed to the biggest challenge of all: how do you put together a set of numbers that funds PRAs and Legacy costs all at a lower rate than a straight out tax fix would? Particularly when year over year the cost of that fix kept dropping?

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The Necessary and Improper Clause?

by Beverly Mann
crossposted with The Annarborist

The Necessary and Improper Clause?

“Is it possible that most of us haven’t noticed that the Supreme Court has just handed Congress broad authority to detain people merely because they show signs of future dangerousness?”
—Dahlia Lithwick, “Detention Slip: The Obama administration wants to hold terrorists. Did SCOTUS just give them a green light?” in Slate

The opinion Lithwick is discussing there is United States v. Comstock, a majority opinion by Justice Breyer, issued May 17. As Breyer explains at the outset, a federal civil-commitment statute, 18 U.S.C. § 4248, authorizes the Department of Justice to detain a mentally ill, sexually dangerous federal prisoner beyond the date the prisoner would otherwise be released. And, although it would seem that the obvious constitutional issue would be whether this violates constitutional due process guarantees, the Court already decided that issue, it turns out, in two cases, Kansas v. Hendricks, a 1997 opinion that interpreted the Fourteenth Amendment’s due process clause in relation to a Kansas statute that allowed the state to detain a mentally ill, sexually dangerous federal prisoner beyond the date the prisoner would otherwise be released, and Kansas v. Crane, a 2002 opinion that interpreted, well, Kansas v. Hendricks.

More about the two Kansas opinions later. For now, it is necessary and proper only to explain that Hendricks held that the Kansas statute did not violate the right to due process, and that Crane held that that statute did violate the right to due process clause because it did not contain a provision requiring the state to prove a volitional impairment as well as an emotional or personality disorder; without proof of volitional impairment, there was no indication that the person posed a continued danger—a prerequisite due-process justification for involuntary civil commitment. And that, since the federal statute does contain such a provision, and in any event since the Court was not asked in Comstock to decide the due process issue, the Court declined to address the constitutionality of the federal statute under due process jurisprudence and instead addressed it only under the Constitution’s Necessary and Proper Clause.

The lower federal court had held the statute unconstitutional solely on the ground that none of the Constitution’s “enumerated powers” accorded to the federal government enumerated the power to detain a mentally ill, sexually dangerous federal prisoner beyond the date the prisoner would otherwise be released, and that the Constitution’s Necessary and Proper Clause was insufficiently broad to authorize this particular federal legislation. The Necessary and Proper Clause, Article I, section 8, clause 18, which grants Congress the authority to enact legislation as “necessary and proper for carrying into Execution” the powers “vested by” the “Constitution in the Government of the United States”—a.k.a., the “enumerated powers.” So Breyer’s opinion in Comstock decides only whether under the Necessary and Proper Clause, Congress has the authority to enact legislation authorizing the Department of Justice to detain a mentally ill, sexually dangerous federal prisoner beyond the date the prisoner would otherwise be released.

Seven of the justices—all but Thomas and Scalia—think it does, but only five of them, Breyer, Roberts, Stevens, Ginsburg and Sotomayor, think the Clause is so broad and elastic that Comstock is causing some commentators, Lithwick and many others, to worry that the Court might have just handed Congress broad authority to detain people merely because they show signs of future dangerousness. A justification that, as Lithwick notes in her article, would authorize the permanent detention of anyone held without trial as an “enemy combatant.” But while I understand the reason for that concern, I don’t really share it.

Instead, count me among those who, like (as Lithwick mentions) Los Angeles Times Supreme Court correspondent David Savage, view Comstock not as really about the “enemy combatant” issue but instead about an even higher-profile political issue: whether the Necessary and Proper Clause gives Congress the authority to enact legislation such as new federal health-insurance legislation, and not about “enemy combatant” detainees, And such as the imminent financial-sector-reform legislation. And such as the perhaps-eventual climate-change legislation. I think that, for all the justices except Roberts, Comstock was really about neo-federalism.

Neo-federalism is the conservative legal philosophy that holds (among other things) that the federal government’s two-pronged powers—the right to legislate and the right to require that state and local governments not infringe upon the constitutional rights of individuals—are limited to the constitutional rights and to legislation that comport with the conservative Republican political and ideological agenda of that party’s business, law-and-order, and culture-wars supporters, circa 1985.

Under this legal theory, the Constitution bars, for example, state or municipal legislation that circumscribes gun sales and gun possession. But the Constitution does not require states or municipalities to comply with constitutional rights that are not quite so popular among some faction of the Republican base.

Breyer, Stevens, Ginsberg and (I suspect) Sotomayor, like most liberals who have a law degree, loathe neo-federalism. And for these justices, Comstock was almost entirely about establishing precedent that will be invoked later to defeat neo-federalist arguments and uphold the health-insurance law and the other domestic-agenda legislation that are current subjects of such hot political and ideological debate. For these justices, Comstock was not a proxy for rulings on the rights of “enemy combatant” detainees. Or for the rights of criminal defendants generally.

But, as Lithwick and others note, that would not prevent the Court from using the opinion to hold in a later case that Congress broad authority to detain people—designated “enemy combatants” or anyone else—merely because they show signs of future dangerousness, if Comstock does hold, by dint of some very strange analysis (such as it is) in that opinion, that Congress has this carte blanche authority.

But I don’t think it does.

Lithwick and many other commentators focus on the section of the opinion in which Breyer justifies his view of the Necessary and Proper Clause as broad enough to permit the statute at issue if that statute does not violate some other constitutional provision. Congress, Breyer says, has the authority to create prisons, to ensure the safety of prisoners, and to provide mental-health care to prisoners. He then pronounces the power to hold someone beyond his sentence reasonably related to those other functions if the purpose is to protect the public.

“If,” Breyer says, “a federal prisoner is infected with a communicable disease that threatens others, surely it would be ‘necessary and proper’ for the Federal Government to take action, pursuant to its role as federal custodian, to refuse (at least until the threat diminishes) to release that individual among the general public, where he might infect others.” And if such confinement is “necessary and proper,” then how could it not also be ‘necessary and proper’ to confine an individual whose mental illness threatens others to the same degree, he asks. Rhetorically.

He then says the statute at issue is “reasonably adapted” to Congress’ power to act as a responsible federal custodian—“a power that rests, in turn, upon federal criminal statutes that legitimately seek to implement constitutionally enumerated authority.” Joseph Heller couldn’t have phrased it better. The statements are a series of non sequiturs and tautologies. The conflation of punitive authority with public health authority is nonsensical. The former authority cannot logically justify the latter authority, and the punitive custodial authority does not naturally morph into a public health authority once the punitive custodial authority has, by law, ended.

Breyer appears, upon first impression, to have adopted current Solicitor General and Supreme Court nominee Elena Kagan’s argument to the Court—at least in part. Kagan herself presented the oral argument in Comstock, and, as Lithwick mentions, Orin Kerr, of Volockh Conspiracy, has described her argument to the Court in Comstock as shockingly broad. Kerr is spot-on in that assessment. He said Kagan argued “that the Constitution gives the federal government the general power ‘to run a responsible criminal justice system,’ and that anything Congress plausibly thought a part of running a ‘responsible criminal justice system’ was within the scope of federal power.”

Coming from a United States solicitor general and a Supreme Court nominee, that indeed is shocking. But, the loopy analogies aside, I don’t think Breyer’s Comstock opinion actually holds this. We are not like the old Soviet Union; our Constitution has been thought to bar the criminal justice system from incarcerating people in prisons, for “mental illness,” or even for mental illness, absent the commission of a crime, due process, and a definitive prison sentence.

Or at least were not, and I don’t think Comstock changes that.

True, Comstock does appear to conflate the criminal justice system and the public health system by saying that the proper constitutional authority under the Necessary and Proper Clause to prevent a deadly epidemic of a contagious disease is the criminal justice authority—or, to borrow from Kagan, the general power ‘to run a responsible criminal justice system. But the public-health authority, which does allow governments, state and now federal, to force civil commitments of mentally ill people who are dangerous to themselves or others, and to detain someone who has a disease that is both deadly and highly communicable by the person’s mere presence—but only under very specific, very high standards of both procedural and substantive due process. Substantive due process is a longstanding constitutional doctrine that limits the types of infringements upon individual freedoms that the government can legislate. (Roe v. Wade is the most famous substantive-due-process case.)

For Roberts and Alito, interpreting constitutional and statutory provisions is always easy, because it entails a mechanical formula: every provision of the Constitution, every statute, every government action, is interpreted in accordance with 1980s Republican political ideology, and always serves the interests of some faction of the Republican base. So, for example, the police powers of the federal government and of state and local governments never violate the Constitution unless the right at issue is a favorite of the political right. The law-and-order right likes the federal statute at issue in Comstock.

So for Roberts and Alito both, the statute at issue in Comstock is constitutional. And for both of these justices, the Necessary and Proper Clause does not authorize the new health-insurance statute, at least not all of it, Roberts’ agreement with Breyer’s entire opinion notwithstanding. Thomas and Scalia surely will side with them there, but their jurisprudence is at least more complicated, if only on a fair-weather basis.

And in Comstock, the weather was fair. Thomas nails it when he says in his dissent, “The fact that the federal government has the authority to imprison a person for the purpose of punishing him for a federal crime—sex-related or otherwise—does not provide the government with the additional power to exercise indefinite civil control over that person.” What, pray tell, does authority to build and maintain prisons, and the authority (and obligation) to provide medical treatment to ill inmates, and to isolate the general inmate population from an inmate who has a serious contagious disease, have to do with whether the federal government has the legal authority under the Necessary and Proper Clause to enact any legislation it wishes to incarcerate anyone beyond his or her sentence?

Kagan’s jurisprudential philosophy seems to be that any statute enacted by Congress, or any executive-branch administrative agency policy (promulgated “regulations”) is constitutional by sheer virtue of the fact that one of the elected branches of government enacted or promulgated the statute or regulation. But clearly, the current justices do not. Best as I can tell, not even one of them. The current ones, that is.

A broader view of Comstock would effectively nullify huge portions of the Constitution—every right accruing to individuals. Even those that the Right likes. Even Second Amendment rights! It would tacitly reverse Marbury v. Madison, the famous Supreme Court opinion that established the principle of judicial review of the constitutionality of federal statutes.

Again, including those that may infringe upon Second Amendment rights.

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A First Year (graduate) Microeconomics Lesson

Robert Waldmann

I think it is not clear to all readers why I assert that in the simplest possible model of financial markets all agents will invest proportionally in all tranches of all CDOs. I’m not sure I can present even the simplest model in plain ascii. Also the model is very simple and you will have to trust me (or not) when I claim that the results carry over to standard simple models. There are two key assumptions – 1) all assets are traded and 2) there are no transactions costs. Assumption 1 implies that agents don’t have risks from some source other than asset returns to hedge. In the real world, clearly farmers will have different positions in grain futures than non farmers. Assumption 2 implies that agents will take tiny positions, since there is no problem with odd lot fees or anything like that.

Simple math after the jump.

update: Down in a thread I made a big deal out of someone making an assumption without stating it, so I really should have made my assumptions more explicit (I considered them implied by “standard simple model”).

First I am assuming all agents have rational expectations so they know the conditional joint distribution of all variables conditional on their information.

Second I am assuming that they all have the same information so they agree on the contitional joint distribution of all variables.

Third I assume that there is a maximum possible expected utility for each agent, that is that no agent can achieve any level of expected utility up to infinity. Basically, I assume there are no riskless arbitrage opportunities.

Just to go on and address a point raised in comments a complete model would include a market price for the risky assets in period 1 say p_i. Each risky asset would turn into a stochastic amount of consumption good in period two — say v_i. Then 1+r_i = (v_i/p_i). To close the model, p_i would adjust until demand for the risky assets was equal to supply. This (with the assumptions of symmetric information and rational expectations) implies that there are no riskless arbitrage opportunities.

It also means that there is no excess demand for any risky security in equilibrium. Even if investors really want to hold lots of AAA debt instruments, there will be no shortage of AAA debt instruments, then the price of AAA debt instruments will rise (and the yield decline) until investors want no more than are supplied. In that equilibrium, no profits can be obtained by pooling and tranching and slicing and dicing assets.

End update except for the words and colons “proposition:” “comment:” and “proof:”.

So agents life two periods. There is a risk free asset (Treasury inflation protected securities or TIPS) which pays a return r. There are risky assets which pay r_i (these include ordinary t-bills which are risky because of not completely predictable inflation). Agents have wealth in period 1, they invest and then consume in period two.

Let’s say agent j has a have CRRA utility function with parameter a_j so utility is given by -exp(-a_jC_j) that is –e^(-a_jC_j) where C_j is consumption of agent j equal to agent j’s initial wealth plus the return agent j gets from investing. Agent j’s demand for the risk free asset is d_j. Agent j’s demand for asset i is d_ji.

d_j + sum_i (d_ji )= W_j, that is agent j’s initial wealth. C_j = d_j(1+r) + sum_i (d_ji(1+r_i)). It will help to write C_j = W_j(1+r) + sum_i (d_ji(r_i-r)) that is plug the period 1 budget constraint into the equation for C_j.

Proposition: Then d_ji = is b_i/a_j where b_i is some function of the the joint distribution of the risky returns.

Comment: Oh so note that the ratio of demand for asset i by agent j and agent k is equal to a_k/a_j and is the same for all risky assets. If a_j > a_k then agent j will buy less of each risky asset. However, it is not true that agent j will buy the less risky of the risky assets and agent k won’t.

Proof: This is basic micro. Consider a feasible change in agent j’s portfolio where d_j is decreased by x and d_ij is increased by x. For the optimal portfolio, the derivative of expected utility is zero at x=0. That is
0 = E((a_j exp(-a_jC_j))(r_i-r)) that is the derivative of expected utility is the expected value of the product of the marginal utility of consumption and the derivative of consumption (both of which are stochastic)
That is 0 = Exp(-a_j(w_j(1+r)) (a_j)E( exp-(a_j sum_i ((dji)(r_i-r))(r_i-r))
Dividing both sides by a constant gives
0 = exp(-(a_j sum_i(dji(ri-r))(r_i-r) = exp(-sum_i((a_jdji)(ri-r))(r_i-r)

Notice that the only part of the first order condition which depends on j (the agent) is a_jd_ji so to make the condition hold for all agents it is necessary that d_ji is of the form b_i/a_j so the first order conditions become
0 = exp(-sum_i((b_i)(ri-r))(r_i-r)
b_i is the solution to this equation.

If agents all have constant absolute risk aversion, then their demand for all risky assets is proportional. Agent j’s demand is a constant (whichdepends on the joint distribution of the returns) divided by agent j’s coefficient of risk aversion.
This means that agent j will buy equal amounts of all tranches of a CDO undoing the tranching.

A similar result holds for constant relative risk aversion. In that case, demand for risky assets is proportional to wealth divided by the coefficient of relative risk aversion.

The world lasts longer than two periods. The result carries over to optimal investment in continuous time (I won’t show the proof – trust me or don’t trust me).
In the standard simple models of asset demand, the profitability and existence of tranching is not explained by differences in risk aversion across agents. The ratio of demand for the safest tranche (which bears approximately only inflation risk) and the riskiest tranche is the same for extremely risk averse and less risk averse agents.

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Why Scott Sumner is Wrong

by Mike Kimel

Why Scott Sumner is Wrong

A number of the big libertarian & rightwing blogs are putting up links to this post by Scott Sumner. I’m kind of surprised because the argument seems to have more than a few weaknesses.

What Sumner is doing is trying to show that the policies pursued by Thatcher and Reagan were a success. He does this by taking the ratio of the GDP per capita of thirteen different countries and compares them to the ratio of GDP per capita of the US. He takes this ratio for each country for 1980, 1994, and 2008. The idea here is that if a country engaged in the kinds of policies Thatcher and Reagan would have approved of, they’d grow faster. So far so good.

Sumner ends concluding that:

So there you are, all these countries support my hypothesis that neoliberal reforms lead to faster growth in real income, relative to the unreformed alternative.

There are two kinds of economists. Those who read the Economist (or FT) every week, and have a pretty good sense of what is going on in the world, and who know why some countries are doing better than others. And those who are lost in their ivory tower doing arcane research. The latter group is often much more highly skilled than I am, and come up with more important new ideas than I ever will. But when talking to this group I often find they are totally oblivious to the neoliberal revolution of the past 30 years.

I have exactly twenty minutes left to write so keep in mind, I’m going to hit the low hanging fruit only.

Update: Rdan here…also see Brad DeLong

1. Without looking at the countries, its obvious to me, a non-ivory tower guy, that the data on Sweden on wrong. He shows Sweden’s GDP per capita as a % of US’ GDP per capita dropping from 1980 to 2008 from .868 to .794. Now, I don’t know offhand what the ratio really is, but it seems kind of funny, I waste two precious minutes pulling up the World Bank data to which he alludes and another finding the figures on the sheet. The numbers I get, going for the GDP per capita, constant 2000 US $ (obviously we want to adjust for inflation, right?) are .865 and .852. In other words, about the same. Sweden no longer works for his argument. I’m not going to look for the data on the rest of the countries.

2. The next question I have is why, when the World Bank has so many countries listed, he picked 13. Why 13? Why those 13? He doesn’t say, and its not exactly a choice that makes any sense. There are some rich European countries, some rich Asian countries, and then there’s Argentina. There’s a conspicuous absence of countries that not long ago folks on the right were calling raving successes and which would probably work according to Sumner’s ratio. I’m guessing Portugal, Hungary, Ireland, Spain, Russia and Latvia, off the top of my head, would fit the bill. But we all know they wouldn’t pass the giggle test these days.

3. I’d include Argentina among the conspicuous absences, except that Sumner has mentioned Argentina, but oddly, as an example that he thinks makes his point. See, his numbers show Argentina lost ground relative to the U.S., and he seems to believe Argentina is one of those countries that did nothing that Reagan or Thatcher would approve of. But that’s odd. Argentina was the success story for folks on the right in the early to mid-90s. (I know the Economist (or FT) covered Domingo Cavallo a number of times.) There’s no way to argue that the US went through anywhere close to the same level of privatization as Argentina did during the 1980 to 2008 period. Scratch Argentina from his argument.

4. Another country on his list is Germany. Now, Sumner acknowledges the whole East German West German thing, but seems to feel that since they lost ground relative to the US since 1994, its a sign that they mostly increased regulation relative to the US. Ignore the fact that East Germany went from a prison state to a piece of West Germany and pretend they somehow became more regulated and all the events on the ground happened with the flip of a switch.

5. I’m not sure exactly how much the Singaporean economy liberalized. Wikipedia tells me the government controls companies that account for 60% of the economy. If that’s Margaret Thatcher’s paradise, I cannot imagine what isn’t.

OK. Time’s up. Gotta go. Have at it.

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Your moment of: WTF

Taken from Your moment of: WTF

On Thursday a federal judge gave James O’Keefe a stern talking to about his deception in entering a US Senator’s office and trying to vandalize and muck about with the telephones. What could have been felony charges were reduced to misdemeanors by influential GOP lawyers previously and after the stern talking to – O’Keefe avoided trial.

Meanwhile in Georgia, a 14-year-old autistic boy with the mental function of a third-grader will face felony charges of terrorism for drawing a stick figure with a gun aimed at another stick figure with a teacher’s name above it.

Sounds about right.

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The Policy Debate vs The Policy Horse Race

Robert Waldmann

Senator Mark Warner said something about derivatives reform. I kept reading a version of what he said which seemed implausible to me. I had trouble finding a transcript or video of him speaking. In the end very beginning but I’m an idiot and didn’t notice: I found it. It confirms my suspicions.
Warner is described as saying that the conference committee will scrap the Senate’s derivatives reform provisions. In fact, he predicted that they would scrap the requirement that banks spin off derivatives trading desks, but he did not predict that they would scrap the requirements for exchange trading and a clearing system.
Important reforms vanished from the discussion, because their fate is no longer in doubt.
Much more (including links) after the jump.

I googled “Warner” “derivative”

Some articles quote Warner, so it is clear that he is talking about spinning off derivatives trading desks. They don’t mention the fact that there are other, more important, aspects of derivative-trading reform in the Senate bill.

Some don’t specify exactly what change Warner predicts and, if taken literally, falsely assert that he predicts removal of all the derivative trading reforms in the bill reported out of the Senate Agriculture committee

“Sen. Mark Warner (D-VA) appearing today MSNBC with Andrea Mitchell let the cat out of the bag that Sen. Lincoln’s derivative language will be striped [sic] out in the conference committee.”

This link sends me back to the one above

Hmm this is interesting. A very large fraction of the top relevant google hits in Warner and derivatives trading contain the same exageration and the same typo “in tact” for “intact.”

This post has a good summary but includes the typo. It might be the source

here is a search for “warner” “derivative” “in tact”

how about “warner” “senate” “derivative” “in tact”

The errors propogated over the internet. Both the typo and the important exageration. Many of the sites which copied from the Tolbert report, explicitly cite the Tolbert report so I am not accusing them of plagiary, just cut and paste journalism from a secondary source.
I also did “warner” “senate” “derivative” “intact”

This mostly sends me to an independent trove of exageration in which “derivative-reform” becomes “spinning of derivative trading desks” and nothing else. Much of the distortion is at, where they are campaigning hard against Lincoln and much inclined to claim that her derivative-reform will amount to nothing, because it will amount only to exchange trading and clearning requirements. I had considered titling this post “firedog feaver” as I think they excell at ignoring important policy issues to focus on their disagreements with conservadems. If conservadems are for it, it doesn’t exist over there.

The distorted descussion of derivative-reform is similar to the way there was more discussion of the cornhusker kickback allowing Nebraska to not pay part of the cost of medicaid expansion than of medicaid expansion itself. Quick pop quiz: How many more people will get medicaid due to health care reform (HCR) ? Who are they ? That is, who has family income below four thirds of the poverty line but no medicaid ? Where are they ? Is the geographic distribution similar to the distribution of people with income under four thirds of the poverty line ? These are important questions. One can’t have an informed opinion of HCR without answering them. They were discussed almost not at all, because there was no doubt that medicaid expansion would be part of the final bill.

The fate of medicaid expansion was not news. Also it was not a way to see who won the struggle between progressives and blue dog conservadems. So it only matters to the 16 million people who will get health insurance as a result.

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