Economist's View

"Boiling the Frog"

What are we waiting for?:

Boiling the Frog, by Paul Krugman, Commentary, NY Times: Is America on its way to becoming a boiled frog?

I’m referring, of course, to the proverbial frog that, placed in a pot of cold water that is gradually heated, never realizes the danger it’s in and is boiled alive. Real frogs will, in fact, jump out of the pot — but never mind. The hypothetical boiled frog is a useful metaphor for a very real problem: the difficulty of responding to disasters that creep up on you a bit at a time. ...

I started thinking about boiled frogs recently as I watched the depressing state of debate over both economic and environmental policy. These are both areas in which ... it’s very hard to get people to do what it takes to head off a catastrophe foretold. ...

Start with economics: ...Most economic forecasters now expect gross domestic product to start growing soon, if it hasn’t already. But all the signs point to a “jobless recovery”...

Now, it’s bad enough to be jobless for a few weeks; it’s much worse being unemployed for months or years. Yet that’s exactly what will happen to millions of Americans if the average forecast is right — which means that many of the unemployed will lose their savings, their homes and more.

To head off this outcome — and remember, this isn’t what economic Cassandras are saying; it’s the forecasting consensus — we’d need to get another round of fiscal stimulus under way very soon. But neither Congress nor, alas, the Obama administration is showing any inclination to act. Now that the free fall is over, all sense of urgency seems to have vanished.

This will probably change once the reality of the jobless recovery becomes all too apparent. But by then it will be too late to avoid a slow-motion human and social disaster.

Still, the boiled-frog problem on the economy is nothing compared with the problem of ... climate change. ... At this point, the central forecast of leading climate models — not the worst-case scenario but the most likely outcome — is utter catastrophe, a rise in temperatures that will totally disrupt life as we know it... How to head off that catastrophe should be the dominant policy issue of our time.

But it isn’t, because climate change is a creeping threat rather than an attention-grabbing crisis. The full dimensions of the catastrophe won’t be apparent for decades, perhaps generations. ... Unfortunately, if we wait to act until the climate crisis is ... obvious, catastrophe will already have become inevitable.

And while a major environmental bill has passed the House, which was an amazing and inspiring political achievement, the bill fell well short of what the planet really needs — and despite this faces steep odds in the Senate.

What makes the apparent paralysis of policy especially alarming is that so little is happening when the political situation seems, on the surface, to be so favorable...

After all, supply-siders and climate-change-deniers no longer control the White House and key Congressional committees. Democrats have a popular president to lead them, a large majority in the House of Representatives and 60 votes in the Senate. And this isn’t the old Democratic majority, which was an awkward coalition between Northern liberals and Southern conservatives; this is, by historical standards, a relatively solid progressive bloc.

And let’s be clear: both the president and the party’s Congressional leadership understand the economic and environmental issues perfectly well. So if we can’t get action to head off disaster now, what would it take?

I don’t know the answer. And that’s why I keep thinking about boiling frogs.

Paul Krugman: The Stimulus Trap

Everybody makes mistakes. But not everyone can admit their mistakes, and then take the steps needed to overcome them:

The Stimulus Trap, by Paul Krugman, Commentary, NY Times: As soon as the Obama administration-in-waiting announced its stimulus plan — this was before Inauguration Day — some of us worried that the plan would prove inadequate. ...

The bad employment report for June made it clear that the stimulus was, indeed, too small. But it also damaged the credibility of the administration’s economic stewardship. There’s now a real risk that President Obama will find himself caught in a political-economic trap.

I’ll talk about that trap, and how he can escape it, in a moment. First, however, let me ... ask how concerned citizens should be reacting to the disappointing economic news. Should we be patient, and give the Obama plan time to work? Should we call for bigger, bolder actions? Or should we declare the plan a failure and demand that the administration call the whole thing off? ...

When there’s an ordinary, garden-variety recession, the job of fighting that recession is assigned to the Federal Reserve. ... Reducing rates a bit at a time, it keeps cutting until the economy turns around. At times it pauses to assess the effects of its work; if the economy is still weak, the cutting resumes. ...

Normally, then, we expect policy makers to respond to bad job numbers with a combination of patience and resolve. They should give existing policies time to work, but they should also consider making those policies stronger.

And that’s what the Obama administration should be doing..., stay calm in the face of disappointing early results,... the plan will take time to deliver its full benefit. But ... be prepared to add to the stimulus now that it’s clear that the first round wasn’t big enough.

Unfortunately, the politics of fiscal policy are very different from the politics of monetary policy. For the past 30 years, we’ve been told that government spending is bad, and conservative opposition to fiscal stimulus (which might make people think better of government) has been bitter and unrelenting even in the face of the worst slump since the Great Depression. Predictably, then, Republicans — and some Democrats — have treated any bad news as evidence of failure, rather than as a reason to make the policy stronger.

Hence the danger that the Obama administration will find itself caught in a political-economic trap, in which the very weakness of the economy undermines the administration’s ability to respond effectively. ... The question is what the president and his economic team should do now.

It’s perfectly O.K. for the administration to defend what it’s done so far. ... It’s also reasonable for administration economists to call for patience...

But there’s a difference between defending what you’ve done so far and being defensive. It was disturbing when President Obama walked back Mr. Biden’s admission that the administration “misread” the economy, declaring that “there’s nothing we would have done differently.” There was a whiff of the Bush infallibility complex in that remark, a hint that the current administration might share some of its predecessor’s inability to admit mistakes. And that’s an attitude neither Mr. Obama nor the country can afford.

What Mr. Obama needs to do is level with the American people. He needs to admit that he may not have done enough on the first try. He needs to remind the country that he’s trying to steer the country through a severe economic storm, and that some course adjustments — including, quite possibly, another round of stimulus — may be necessary.

What he needs, in short, is to do for economic policy what he’s already done for race relations and foreign policy — talk to Americans like adults.

Taking Complete Leave of their Senses

Some examples of economists who "write a piece for public consumption," and in doing so, seem to "take complete leave of [their] senses":

Example 1:

Missing the Point on High-Speed Rail, by Ryan Avent: Ed Glaeser is a fantastic economist. He has done magnificent work analyzing the economics of urban growth and written indispensable papers on the connection between housing regulations and migration.

But when the man picks up his pen to write a piece for public consumption, he tends to take complete leave of his senses. I realize that this is a common affliction among economists, but Glaeser suffers from a severe case of the syndrome.

In a Friday piece in the Boston Globe, Glaeser takes on the administration's push to fund construction of high-speed rail corridors around the country. In doing so, he combines the cognitive failures of every amateur train hater with a serious lapse in critical thinking. ...

Example 2:

Administrative Costs, by Paul Krugman: Whenever you encounter “research” from the Heritage Foundation, you always have to bear in mind that Heritage isn’t really a think tank; it’s a propaganda shop. Everything it says is automatically suspect.

Greg Mankiw forgets this rule, and approvingly (yes, it’s obvious he approves -no wiggling out) links to a recent Heritage attempt to explain away Medicare’s low administrative costs...

Well, whaddya know — this is an old argument, and has been thoroughly refuted. ...

You should always remember:

1. Don’t believe anything Heritage says.

2. If you find what Heritage is saying plausible, remember rule 1.

[Note: Krugman follow up here.]

Continuing with Example 2, Andrew Gelman can't understand why Greg Mankiw quotes the Heritage Foundation instead of someone from "Harvard's world-class Department of Heath Care Policy" with the authority and credibility to speak on these issues (hence the "Eagle Scout" reference):

Does Medicare actually have higher administrative costs than private insurers?, by Andrew Gelman: Greg Mankiw links to an article that illustrates the challenges of interpreting raw numbers causally. This would really be a great example for your introductory statistics or economics classes, because the article, by Robert Book, starts off by identifying a statistical error and then goes on to make a nearly identical error of its own! ...

I'm no expert in health policy. These are just my impressions as a teacher of statistics. It's great to find such examples that are so relevant to policy. I was surprised to see Mankiw quote the above article without criticism; but I'm pretty sure he's studied these issues in a lot more detail than I have, and so perhaps he has additional knowledge that makes him confident in the substance of Book's reasoning.

In particular, I expect that Mankiw has spent some time talking with the faculty at Harvard's world-class Department of Heath Care Policy. I don't know if any of their professors are Eagle Scouts, but they do have this guy, who was the founding editor of the Journal of Health Economics, a member of the editorial board of the New England Journal of Medicine, vice chair of the Medicare Payment Advisory Commission, etc etc. Also on the board of directors of Aetna so it looks like he has experience on both sides. Perhaps Newhouse or one of his colleagues has done a more detailed study that support's Book's conclusions.

Paul Krugman: HELP Is on the Way

We can afford health care reform:

HELP Is on the Way, by Paul Krugman, Commentary, NY Times: The Congressional Budget Office has looked at the future of American health insurance, and it works.

A few weeks ago there was a furor when the budget office “scored” two incomplete Senate health reform proposals — that is, estimated their costs and likely impacts over the next 10 years. One proposal came in more expensive than expected; the other didn’t cover enough people. Health reform, it seemed, was in trouble.

But last week the budget office scored the full proposed legislation from the Senate committee on Health, Education, Labor and Pensions (HELP). And the news — which got far less play in the media than the downbeat earlier analysis — was very, very good. Yes, we can reform health care. ...

[A] look at the U.S. numbers makes it clear that insuring the uninsured shouldn’t cost all that much, for two reasons.

Obama Economic Forecast

Spencer at Angry Bear:

The right is having a lot of fun commenting about the economic forecast by the Obama team being too optimistic. ... I guess they are right, Obama along with everyone else has massively underestimated the damage Team Bush did to our economy.

Stiglitz: The UN Takes Charge (Update: and The Economic Lessons of the Iraq War)

Joseph Stiglitz says the UN has a key role to play in "reforming the global financial and economic system":

The UN Takes Charge, by Joseph Stiglitz, Commentary, Project Syndicate: ...On June 23, a United Nations conference ... reached a consensus both about the causes of the downturn and why it was affecting developing countries so badly. It outlined some of the measures that should be considered and established a working group to explore the way forward...

The agreement was ... in many ways ... a clearer articulation of the crisis and what needs to be done than that offered by the G-20, the UN showed that decision-making needn’t be restricted to a self-selected club, lacking political legitimacy, and largely dominated by those who had considerable responsibility for the crisis in the first place. Indeed, the agreement showed the value of a more inclusive approach – for example, by asking key questions that might be too politically sensitive for some of the larger countries to raise, or by pointing out concerns that resonate with the poorest, even if they are less important for the richest.

One might have thought that the United States would have taken a leadership role, since the crisis was made there. Indeed, the US Treasury (including ... members of President Barack Obama’s economic team) pushed capital- and financial-market liberalization, which resulted in the rapid contagion of America’s problems around the world. ...[M]any participants were simply relieved that America did not put up obstacles..., as would have been the case if George W. Bush were still president. ...

The most sensitive issue touched upon by the UN conference – too sensitive to be discussed at the G-20 – was reform of the global reserve system. ... On the last day of the conference, as America was expressing its reservations about even discussing ... this issue..., China was once again reiterating that the time had come to begin working on a global reserve currency. Since a country’s currency can be a reserve currency only if others are willing to accept it as such, time may be running out for the dollar.

Emblematic of the difference between the UN and the G-20 conferences was the discussion of bank secrecy: whereas the G-20 focused on tax evasion, the UN Conference addressed corruption, too, which some experts contend gives rise to outflows from some of the poorest countries that are greater than the foreign assistance they receive.

The US and other advanced industrial countries pushed globalization. But this crisis has shown that they have not managed globalization as well as they should have. If globalization is to work for everyone, decisions about how to manage it must be made in a democratic and inclusive manner... The UN, notwithstanding all of its flaws, is the one inclusive international institution. This UN conference ... demonstrated the key role that the UN must play in any global discussion about reforming the global financial and economic system.

Update: Just noticed something else from Stiglitz, along with Linda J. Bilmes, on the economic lessons of the Iraq war:

The U.S. in Iraq: An economics lesson, by Linda J. Bilmes and Joseph Stiglitz, Commentary, LA Times: Tuesday, the U.S. "stood down" in Iraq, finalizing the pullout of 140,000 troops from Iraqi cities and towns -- the first step on the long path home. ...

But not so fast. The conflict that began in 2003 is far from over..., and the next chapter -- confronting a Taliban that reasserted itself in Afghanistan while the U.S. was sidetracked in Iraq -- will be expensive and bloody. ...

Meanwhile, in Iraq,... U.S. officials have said we are likely to station 50,000 troops at military bases in the country for the foreseeable future. This is because the ... country ranks high on lists of the most dangerous places on Earth, with a continual stream of suicide bombings and murders...

Moreover, the U.S. has barely begun to face the enormous financial bill for the war.

Paul Krugman: Betraying the Planet

Are the arguments against the need to act to prevent climate change based upon a morally defensible position grounded in science, or, given the predicted consequences of inaction, a morally indefensible position based upon ideology and political interests?:

Betraying the Planet, by Paul Krugman, Commentary, NY Times: So the House passed the Waxman-Markey climate-change bill. In political terms, it was a remarkable achievement.

But 212 representatives voted no. A handful of these no votes came from representatives who considered the bill too weak, but most rejected the bill because they rejected the whole notion that we have to do something about greenhouse gases.

And as I watched the deniers make their arguments, I couldn’t help thinking that I was watching a form of treason — treason against the planet.

To fully appreciate the irresponsibility and immorality of climate-change denial, you need to know about the grim turn taken by the latest climate research.

The ... planet is changing faster than even pessimists expected: ice caps are shrinking, arid zones spreading, at a terrifying rate. And according to a number of recent studies, catastrophe — a rise in temperature so large as to be almost unthinkable — can no longer be considered a mere possibility. It is, instead, the most likely outcome if we continue along our present course.

Thus researchers at M.I.T., who were previously predicting a temperature rise of a little more than 4 degrees by the end of this century, are now predicting a rise of more than 9 degrees. ...

Temperature increases on the scale predicted by ... researchers ... would create huge disruptions in our lives and our economy. As a recent authoritative U.S. government report points out, by the end of this century..., Illinois may have the climate of East Texas, and ... deadly heat waves ... may become annual or biannual events.

In other words, we’re facing a clear and present danger to our way of life, perhaps even to civilization itself. How can anyone justify failing to act?

Well, sometimes even the most authoritative analyses get things wrong. And if dissenting opinion-makers and politicians ... had carefully studied the issue, consulted with experts and concluded that the overwhelming scientific consensus was misguided — they could at least claim to be acting responsibly.

But if you watched the debate..., you didn’t see people who’ve thought hard about a crucial issue, and are trying to do the right thing. What you saw, instead, were people who ... don’t like the political and policy implications of climate change, so they’ve decided not to believe in it — and they’ll grab any argument, no matter how disreputable, that feeds their denial.

Indeed, if there was a defining moment in Friday’s debate, it was the declaration by Representative Paul Broun of Georgia that climate change is nothing but a “hoax” ... “perpetrated out of the scientific community.” ... Mr. Broun’s declaration was met with a round of applause from his Republican colleagues.

Given this contempt for hard science, I’m almost reluctant to mention the deniers’ dishonesty on matters economic. But in addition to rejecting climate science, the opponents of the climate bill made a point of misrepresenting ... studies of the bill’s economic impact, which all suggest that the cost will be relatively low.

Still, is it fair to call climate denial a form of treason? Isn’t it politics as usual?

Yes, it is — and that’s why it’s unforgivable.

Do you remember ... when Bush administration officials claimed that terrorism posed an “existential threat” to America,... [so] normal rules no longer applied? That was hyperbole — but the existential threat from climate change is all too real.

Yet the deniers are choosing, willfully, to ignore that threat, placing future generations of Americans in grave danger, simply because it’s in their political interest to pretend that there’s nothing to worry about. If that’s not betrayal, I don’t know what is.

"Pure Political Theater, and I Don't Like It"

Jim Hamilton:

On grilling the Fed Chair, Econbrowser: I got a bit angry at accounts of the latest appearance of Federal Reserve Chair Ben Bernanke before the U.S. Congress. ...

It is one thing to have different views from those of the Fed Chair on particular decisions that have been made-- I certainly have plenty of areas of disagreement of my own. But it is another matter to question Bernanke's intellect or personal integrity. As someone who's known him for 25 years, I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ. His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil. Whether you agree or disagree with all the steps he's taken, let's start with an understanding that that's been his overriding goal.

These interrogations reveal more about those doing the grilling than they reveal about Bernanke. I see this as pure political theater, and I don't like it.

If Congress wants to explore more usefully the wisdom and motives behind some of the decisions that have been made, it might want to investigate why some legislators are now pushing for Fannie and Freddie to guarantee a riskier category of mortgage condo loans.

Paul Krugman: Not Enough Audacity

Will Obama give away too much in an attempt to get health care reform legislation through congress?:

Not Enough Audacity, by Paul Krugman, Commentary, NY Times: When it comes to domestic policy, there are two Barack Obamas.

On one side there’s Barack the Policy Wonk, whose command of the issues ... is a joy to behold. But on the other side there’s Barack the Post-Partisan, who searches for common ground where none exists, and whose negotiations with himself lead to policies that are far too weak.

Both Baracks were on display in the president’s press conference earlier this week. First, Mr. Obama offered a crystal-clear explanation of the case for health care reform, and ... a public option competing with private insurers. “If private insurers say that the marketplace provides the best quality health care, if they tell us that they’re offering a good deal,” he asked, “then why is it that the government, which they say can’t run anything, suddenly is going to drive them out of business? That’s not logical.”

But when asked whether the public option was non-negotiable he waffled, declaring that there are no “lines in the sand.” ...

The big question here is whether health care is about to go the way of the stimulus bill. At the beginning of this year,... Mr. Obama made an eloquent case for a strong economic stimulus — then delivered a proposal falling well short of what independent analysts ... considered necessary..., presumably,... to attract bipartisan support. But ... Mr. Obama was able to pick up only three Senate Republicans...

At the time, some of us warned...: if unemployment surpassed the administration’s optimistic projections, Republicans wouldn’t accept the need for more stimulus. Instead, they’d declare the whole economic policy a failure. And that’s exactly how it’s playing out. ...

The point is that ... policy has to be good enough to do the job. You might think that half a loaf is always better than none — but it isn’t if the failure of half-measures ends up discrediting your whole policy approach.

Which brings us back to health care. ...[R]eform isn’t worth having if you can only get it on terms so compromised that it’s doomed to fail. What will determine the success or failure..? Above all,... successful cost control. We really, really don’t want to get into a position a few years from now where premiums are rising rapidly, many Americans are priced out of the insurance market despite government subsidies, and the cost of health care subsidies is a growing strain on the budget.

And that’s why the public plan is an important part of reform: it would help keep costs down through a combination of low overhead and bargaining power. That’s ... a conclusion based on solid experience. Currently, Medicare has much lower administrative costs than private insurance companies, while federal health care programs ... pay much less for prescription drugs than non-federal buyers. There’s every reason to believe that a public option could achieve similar savings.

Indeed, the prospects for such savings are precisely what have the opponents of a public plan so terrified. Mr. Obama was right: if they really believed their own rhetoric about government waste and inefficiency, they wouldn’t be so worried that the public option would put private insurers out of business. Behind the boilerplate about big government, rationing and all that lies the real concern: fear that the public plan would succeed.

So Mr. Obama and Democrats in Congress have to hang tough — no more gratuitous giveaways in the attempt to sound reasonable. And reform advocates have to keep up the pressure to stay on track. Yes, the perfect is the enemy of the good; but so is the not-good-enough-to-work. Health reform has to be done right.

Bernanke, Summers, or Yellen? None of the Above?

Should Ben Bernanke be reappointed as Fed chair?:

Bernanke Set to Defend Record as Reappointment Debate Begins, by Scott Lanman, Bloomberg: Federal Reserve Chairman Ben S. Bernanke will defend his unprecedented actions to prevent a financial collapse as debate on whether he should be reappointed begins. Bernanke, whose term expires Jan. 31, faces lawmakers at a hearing this week...

President Barack Obama has said the Fed chief has done an “extraordinary job” without committing to reappoint him. ...

At stake is whether Bernanke ... pilots the Fed into an expanded financial-supervision role after overseeing the most aggressive use of the Fed’s powers since the Great Depression. ...

Bernanke has helped thaw credit markets and put the economy on a path toward recovery. Odds favor the former Princeton University economist, a Republican: Reappointment may be less disruptive to investors, and no first-term president has replaced a sitting chairman in 30 years. Many on Wall Street and in Washington view it as likely Bernanke will be reappointed.

“There’s a very strong case for reappointment,” said Douglas Lee... “Removing a Fed chairman who is generally perceived to have done an outstanding job would be an enormous problem.” ...

Still, any Obama decision may be half a year away, and the economy and financial markets could shift again. ...

Besides keeping Bernanke, Obama’s options include appointing Summers or Janet Yellen...

Summers ... is considered the front-runner should the president want a change. San Francisco Fed President Yellen ... was previously a Fed governor and chairman of the Council of Economic Advisers and would be the first female Fed chief.

Summers wants the job...

House Financial Services Committee Chairman Barney Frank said he’s “very pleased” with Bernanke. “Beyond that I wouldn’t say” anything about a renomination...

I'd reappoint him. If forced to choose between Yellen and Summers, I'd choose Yellen.

Paul Krugman: Health Care Showdown

What's with the Blue-Cross Dogs?:

Health Care Showdown, by Paul Krugman, Commentary, NY Times: America’s political scene has changed immensely since the last time a Democratic president tried to reform health care. So has the health care picture: with costs soaring and insurance dwindling, nobody can now say with a straight face that the U.S. health care system is O.K. And if surveys ... are any indication, voters are ready for major change.

The question now is whether we will nonetheless fail to get that change, because a handful of Democratic senators are still determined to party like it’s 1993.

And yes, I mean Democratic senators. The Republicans ... role ... is ... shouting the old slogans — Government-run health care! Socialism! Europe! — hoping that someone still cares.

The polls suggest that hardly anyone does. Voters, it seems, strongly favor a universal guarantee of coverage, and they mostly accept ... that higher taxes may be needed... What’s more, they overwhelmingly favor precisely the feature ... that Republicans denounce most fiercely as “socialized medicine” —... a public health insurance option that competes with private insurers.

Or to put it another way, in effect voters support the health care plan jointly released by three House committees last week... Yet it remains all too possible that health care reform will fail...

I’m not that worried about the issue of costs ..., we can afford universal health insurance... Furthermore, Democratic leaders know that they have to pass a health care bill for the sake of their own survival. One way or another, the numbers will be brought in line.

The real risk is that health care reform will be undermined by “centrist” Democratic senators... What the balking Democrats seem most determined to do is to kill the public option, either by eliminating it or by ... replacing a true public option with something meaningless. For the record, neither regional health cooperatives nor state-level public plans, both of which have been proposed as alternatives, would have the financial stability and bargaining power needed to bring down health care costs.

Whatever may be motivating these Democrats, they don’t seem able to explain their reasons in public.

Thus Senator Ben Nelson of Nebraska initially declared that the public option — which, remember, has overwhelming popular support — was a “deal-breaker.” Why? Because he didn’t think private insurers could compete: “At the end of the day, the public plan wins the day.” Um, isn’t the purpose of health care reform to protect American citizens, not insurance companies?

Mr. Nelson softened his stand after reform advocates began a public campaign targeting him for his position on the public option.

And Senator Kent Conrad of North Dakota offers a perfectly circular argument: we can’t have the public option, because if we do, health care reform won’t get the votes of senators like him. “In a 60-vote environment,” he says (implicitly rejecting the idea, embraced by President Obama, of bypassing the filibuster if necessary), “you’ve got to attract some Republicans as well as holding virtually all the Democrats together, and that, I don’t believe, is possible with a pure public option.”

Honestly, I don’t know what these Democrats are trying to achieve. Yes, some of the balking senators receive large campaign contributions from the medical-industrial complex — but who in politics doesn’t? If I had to guess, I’d say that what’s really going on is that relatively conservative Democrats still cling to the old dream of becoming kingmakers, of recreating the bipartisan center that used to run America.

But this fantasy can’t be allowed to stand in the way of giving America the health care reform it needs. This time, the alleged center must not hold.

Saving Universal Health Care

Robert Reich has some advice for the president:

Memo to the President: What You Must Do To Save Universal Health Care, by Robert Reich:  Mr. President:

Momentum for universal health care is slowing dramatically on Capitol Hill. ...[A]s you know, the worst news came days ago when the Congressional Budget Office weighed in with awful projections about how much the ... plans would cost... Yet these projections didn't include the savings that a public option would generate by negotiating lower drug prices, doctor fees, and hospital costs, and forcing private insurers to be more competitive. Projecting the future costs of universal health care without including the public option is like predicting the number of people who will get sunburns this summer if nobody is allowed to buy sun lotion. ...

If you want to save universal health care, you must do several things, and soon:

Marx and Ideologies

Daniel Little discusses three components that underlie Marx's analysis of the political behavior of class. One component is the existence of ideologies (the other two are rationality and class consciousness):

...Marx’s theory of political behavior incorporates the concept of ideology. Ideologies, or "false consciousness", are systems of ideas that affect the worker's political behavior by instilling false beliefs and self-defeating values in the worker. An ideology may instill a set of values or preferences that propel individual behavior in ways that are contrary to the individual's objective material interests. Further, ideologies modify purposive individual action by instilling a set of false beliefs about the causal properties of the social world and about how existing arrangements affect one's objective interests. Rational individuals, operating under the grip of an ideology, will undertake actions that are contrary to their objective material interests, but are fully rational given the false beliefs they hold about the social world they inhabit and their mistaken assumptions about their real interests and values. An ideology is an effective instrument, then, in shaping political behavior within a class system; it induces members of exploited classes to refrain from political action directed at overthrowing the class system. And this is indeed Marx's use of the concept; an ideology functions as an instrument of class conflict, permitting a dominant class to manipulate the political behavior of subordinate classes. It is an important task to try to identify the institutions and mechanisms through which an ideology is conveyed to a population.

Interesting how much Marx's theory of ideology sounds like the right wing's "Noise Machine," and how it relates to questions like this:

What's the matter with San Francisco?, by Andrew Leonard: Are "rich liberals" who vote for Democrats and higher taxes for themselves displaying the same irrational behavior as working-class men and women who vote for Republicans and lower taxes... for the rich?

Yes, says Derek Thompson, blogging at the Atlantic Business Channel (which he also produces). ...

Thompson is annoyed with Thomas Franks' argument in "What's the Matter with Kansas" suggesting that Republicans "tricked" working class voters to go against their economic self-interest by mobilizing them on social "value" issues like abortion and gay rights. Thompson's position is that liberals who believe that government will actually improve the lives of Americans with their taxpayer dollars are demonstrating their own economically irrational "values" voting behavior. ...

But to take that position seems to me to be ignoring the reality of what we've just witnessed in this country. In a time of great economic turmoil, working class voters appear to have suddenly decided that Republican "family values" aren't such a sexy turn-on after all. The latest polling indicates that only 25 percent of the country views the GOP favorably. As far as I can guess, rich liberals did not change their views of what the government economic policy should be because of the downturn, but working class voters experienced a sudden dose of "rationality."

So yeah, working class voters who voted Republican did get tricked. Either that, or they just rationally changed their mind when they saw that trickle-down economics and irresponsible deregulation was a big failure.

Obama's Wall Street Joural Interview

Given recent debates around here on regulating the shadow banking sector, it was nice to see that the first thing Obama mentions in response to a question about why financial markets failed is an outdated "regulatory system that ... did not encompass the non-bank sector":

Transcript of Obama’s Interview With the Journal, Washington Wire:  A transcript of The Journal’s interview with President Obama, which touches on financial-regulatory reform, the power of free markets, health care and Bernanke’s future at the Fed. ...

Question: Thank you for doing this, very much. ... Obviously a lot of things went wrong in the markets in the last year. Where do you think they failed?

THE PRESIDENT: Well, I think that there are some immediate and obvious culprits. We had a regulatory system that was outdated that did not encompass the non-bank sector. We had a securitization market that had separated borrowers and lenders and investors in ways that allowed everybody to take risks, with nobody feeling accountable or feeling their money was at stake. We had I think banks who were incented to boost their profits with some of these same risky financial instruments, and you didn’t have the kind of systemic oversight that would anticipate the enormous failures that could arise if any link in the chain broke. So that set of regulatory problems is what we are looking to solve in the proposals I’ll put forward tomorrow.

You then have, though, just to finish up, I think you’ve got a broader structural problem in our economy in which our last two recoveries had been based on bubbles, and a massively overleveraged consumer, a massively overleveraged corporate sector, and a financial system that didn’t have much restraint.

And so the question for us is how do we create the foundation for a more sustainable model of economic growth, one that doesn’t impinge on the dynamism of the free market, the innovative products that are critical and the entrepreneurship that creates jobs, but also recognizes that the levels of debt and a model that’s premised on an endless supply of foreign dollars is not one that is going to be sustainable over the long term. ...

Why Op-Eds?

Here's something I've been wondering. Now that we have blogs and the internet, why do high ranking government officials - Timothy Geithner and Larry Summers today in the Washington Post, or Peter Orszag in the Financial Times for example - publish op-eds behind paywalls?

Why should people be forced to pay to hear read important policy discussions? Doesn't that exclude a lot of people from participating in the discourse? Even if the policy discussions aren't behind paywalls, other papers don't reprint the remarks in full, at least hardly ever, so the distribution is still limited.

When, say, the president wants to say something, why publish it on the op-ed pages of the New York Times, the Washington Post, the Wall Street Journal, the Financial Times, etc.? Why not simply post it on the White House web site, and make it absolutely clear that anyone who wants to can republish it in its entirety. Instead of one paper publishing the remarks, wouldn't they likely appear in several if not all major papers, or at least be discussed in some fashion, and wouldn't the remarks also be reprinted in local papers and in many blogs? Wouldn't a lot more people be able to read the discussion, and, in fact, wouldn't it be likely that a lot more people would read it?

So why do they still use the old model? Is it because the general public isn't the real target of these communications, or have I missed something essential? [Note: added a bit more in comments.]

Update: My daughter Amy is political consultant, and she helps politicians and others build support for their candidacy or for a particular side of an issue (and her dad thinks she is very good at it). She sends this along to straighten me out:

There are a few reasons for putting op-eds in Tier 1 newspapers:

1.  Having your op-ed in a newspaper that is well-established gives your point a seal of legitimacy.

2.  Once your op-ed is published, the goal is to move it around to bloggers, other reporters, etc. who will reprint it. But, being in “old media” gives your point gravitas.

3.  The audience is NEVER the general public, ever. Your audience is always opinion leaders, policy makers and lobbyists. Oh, and reporters who may be covering your issue.

4.  There is value to being able to use the masthead of the paper where your op-ed was published in campaign commercials, mailers, etc. You can only do that if it’s been published.

5. Not everyone is new media savvy.

That’s all.

Paul Krugman: The Big Hate

The conservative media and political establishment are aiding and abetting "the mainstreaming of right-wing extremism":

The Big Hate, by Paul Krugman, Commentary, NY Times: Back in April, there was a huge fuss over an internal report by the Department of Homeland Security warning that current conditions resemble those in the early 1990s — a time marked by an upsurge of right-wing extremism that culminated in the Oklahoma City bombing.

Conservatives were outraged. ... But with the murder of Dr. George Tiller by an anti-abortion fanatic, closely followed by a shooting by a white supremacist at the United States Holocaust Memorial Museum, the analysis looks prescient.

There is, however, one important thing that the D.H.S. report didn’t say: Today, as in the early years of the Clinton administration but to an even greater extent, right-wing extremism is being systematically fed by the conservative media and political establishment.

Now, for the most part, the likes of Fox News and the R.N.C. haven’t directly incited violence, despite Bill O’Reilly’s declarations that “some” called Dr. Tiller “Tiller the Baby Killer,” that he had “blood on his hands,” and that he was a “guy operating a death mill.” But they have gone out of their way to provide a platform for conspiracy theories and apocalyptic rhetoric, just as they did the last time a Democrat held the White House.

And at this point, whatever dividing line there was between mainstream conservatism and the black-helicopter crowd seems to have been virtually erased.

Exhibit A for the mainstreaming of right-wing extremism is Fox News’s new star, Glenn Beck...—... a commentator who, among other things, warned viewers that the Federal Emergency Management Agency might be building concentration camps as part of the Obama administration’s “totalitarian” agenda (although he eventually conceded that nothing of the kind was happening).

But let’s not neglect the print news media. ...The Washington Times ... saw fit to run an opinion piece declaring that President Obama “not only identifies with Muslims, but actually may still be one himself,” and that in any case he has “aligned himself” with the radical Muslim Brotherhood.

And then there’s Rush Limbaugh. ...[W]hen Mr. Limbaugh peddles conspiracy theories — suggesting, for example, that fears over swine flu were being hyped “to get people to respond to government orders” — that’s a case of the conservative media establishment joining hands with the lunatic fringe.

It’s not surprising, then, that politicians are doing the same thing. The R.N.C. says that “the Democratic Party is dedicated to restructuring American society along socialist ideals.” And when Jon Voight, the actor, told the audience at a Republican fund-raiser this week that the president is a “false prophet” and that “we and we alone are the right frame of mind to free this nation from this Obama oppression,” Mitch McConnell, the Senate minority leader, thanked him, saying that he “really enjoyed” the remarks.

Credit where credit is due. Some figures in the conservative media have refused to go along with the big hate... But this doesn’t change the broad picture ... that supposedly respectable news organizations and political figures are giving aid and comfort to dangerous extremism.

What will the consequences be? Nobody knows, of course, although the analysts at Homeland Security fretted that things may turn out even worse than in the 1990s — that thanks, in part, to the election of an African-American president, “the threat posed by lone wolves and small terrorist cells is more pronounced than in past years.”

And that’s a threat to take seriously. Yes, the worst terrorist attack in our history was perpetrated by a foreign conspiracy. But the second worst, the Oklahoma City bombing, was perpetrated by an all-American lunatic. Politicians and media organizations wind up such people at their, and our, peril.

Regulatory "Interagency Turf War"

From Free Exchange, a follow-up to the post below this one on regulation of the financial industry:

VIA Kevin Drum, comes this, from the Wall Street Journal:

The Obama administration is backing away from seeking a major reduction in the number of agencies overseeing financial markets, people familiar with the matter say, suggesting that the current alphabet-soup of regulators will remain mostly intact.

....The administration, for example, is unlikely to call for merging the Commodity Futures Trading Commission and the Securities and Exchange Commission, an idea it had considered, these people say. It also isn't expected to call for the Federal Reserve, Federal Deposit Insurance Corp. or the Office of the Comptroller of the Currency to cede their primary authority to supervise banks, they say....Officials worry that trying to start from scratch could ignite messy turf battles that might slow or even derail the entire process.

I could understand a situation in which regulatory changes which needed to be approved by Congress faced constraints based on the banking industry's political leverage in Washington. But an inter-agency turf war? What power do these agencies have over the decision makers in the government? What constituency is going to rise up and defend the right of the Office of the Comptroller of the Currency to continue regulating some subset of financial firms?

If it is outside interests who believe they stand to lose from reorganisation, then that makes sense, but that's not what the Journal is reporting. Colour me confused.

Me too. Small, fractured regulatory authority is no match for too big and too interconnected to fail institutions.

The problem with multiple regulatory authority, or one problem anyway, is that firms can shop around for the lightest regulation, then do their best to redefine what they do through creative financial engineering until it fits under the less restrictive umbrella (and prior to the crash, firms did just that). In addition, they also put pressure on both legislators and regulators to support those redefinitions. The result is, essentially, regulatory capture through arbitrage and less than effective regulation. The same forces that cause the turf war described above will also cause agencies to compete for regulation business to increase the agency's importance and prestige, and the process bids down the level of regulation below acceptable levels.

Update: From comments:

The first half of last week's This American Life captured the regulatory shopping angle quite well. The Office of Thrift Supervision made itself so appealing that GE, GM, and AIG each opened up a thrift so that their whole company would be regulated by OTS. OTS was the agency that had the famous chainsaw press conference (see bottom of CR blog post).

Paul Krugman: Gordon the Unlucky

Paul Krugman, writing from London, has a message for the Obama administration's economic team:

Gordon the Unlucky, by Paul Krugman, Commentary, NY Times: What would have happened if hanging chads and the Supreme Court hadn’t denied Al Gore the White House in 2000? Many things would clearly have been different over the next eight years.

But one thing would probably have been the same: There would have been a huge housing bubble and a financial crisis when the bubble burst. And if Democrats had been in power when the bad news arrived, they would have taken the blame, even though things would surely have been as bad or worse under Republican rule.

You now understand the essentials of the current political situation in Britain ..., the Bush bust in America is the Brown bust here.

Do Mr. Brown and his party really deserve blame for the crisis here? Yes and no.

Mr. Brown bought fully into the dogma that the market knows best... In 2005 he called for “trust in the responsible company, the engaged employee and the educated consumer” and insisted that regulation should have “not just a light touch but a limited touch.” It might as well have been Alan Greenspan speaking.

There’s no question that this zeal for deregulation set Britain up for a fall. Consider the counterexample of Canada... where Reagan/Thatcher-type financial deregulation never took hold. Sure enough, Canadian banks have been a pillar of stability in the crisis.

But here’s the thing. While Mr. Brown and his party may deserve to be punished, their political opponents don’t deserve to be rewarded.

After all, would a Conservative government have been any less in the thrall of free-market fundamentalism, any more willing to rein in runaway finance, over the past decade? Of course not.

And Mr. Brown’s response to the crisis — a burst of activism to make up for his past passivity — makes sense, whereas that of his opponents does not.

The Brown government has moved aggressively to shore up troubled banks. This has potentially put taxpayers on the hook for large future bills, but the financial situation has stabilized. Mr. Brown has backed the Bank of England, which, like the Federal Reserve, has engaged in unconventional moves to free up credit. And he has shown himself willing to run large budget deficits now, even while scheduling substantial tax increases for the future.

All of this seems to be working. Leading indicators have turned (slightly) positive, suggesting that Britain, whose competitiveness has benefited from the devaluation of the pound, will begin an economic recovery well before the rest of Europe.

Meanwhile, David Cameron, the Conservative leader, has had little to offer other than to raise the red flag of fiscal panic and demand that the British government tighten its belt immediately.

Now, many commentators have raised the alarm about Britain’s fiscal outlook, and one rating agency has warned that the country may lose its AAA status (although the others disagree). But markets don’t seem unduly worried: the interest rate on long-term British debt is only slightly higher than that on German debt, not what you’d expect from a country doomed to bankruptcy.

Still, if an election were held today, Mr. Brown and his party would lose badly. They were in power when the bad stuff happened, and the buck — or in this case, I guess, the quid — stops at No. 10 Downing Street.

It’s a sobering prospect. If I were a member of the Obama administration’s economic team — a team whose top members were as enthusiastic about the wonders of modern finance as their British counterparts — I’d be looking across the Atlantic and muttering, “There but for the disgrace of Bush v. Gore go I.”

[More on the economic team here.]

Snowe's Public Option "Trigger"

Robert Reich says the public option is slipping away:

The Public Option, Smokescreens, Olympia Snowe, and What You Need to Do Right Now, by Robert Reich: I'ved poked around Washington today, talking with friends on the Hill who confirm the worst: Big Pharma and Big Insurance are gaining ground in their campaign to kill the public option in the emerging health care bill. ...

You know why, of course. They don't want a public option that would compete with private insurers and use its bargaining power to negotiate better rates with drug companies. ... To Pharma and Insurance, "unfair" is anything that undermines their profits. So they're pulling out all the stops...

Enter Olympia Snowe. Her move is important, not because she's Republican (the Senate needs only 51 votes to pass this) but because she's well-respected and considered non-partisan, and therefore offers some cover to Democrats that may need it. Last night Snowe hosted a private meeting between members and staffers about a new proposal Pharma and Insurance are floating, and apparently she's already gained the tentative support of several Democrats (including Ron Wyden and Thomas Carper). Under Snowe's proposal, the public option would kick in years from now, but it would be triggered only if insurance companies fail to bring down healthcare costs and expand coverage in he meantime.

What's the catch? First, these conditions are likely to be achieved by other pieces of the emerging legislation... If it ever comes to it, Pharma and Insurance can argue that their mere participation fulfills their part of the bargain, so no public option will need to be triggered. Second, as Pharma and Insurance well know, "years from now" in legislative terms means never. There will never be a better time than now to enact a public option. ...

Much the same dynamic is occurring in the House. Two members who had originally supported single payer told me that Pharma and Insurance have launched the same strategy there, and many House members are looking to see what happens in the Senate. Snow's "trigger" is already buzzing among members.

All this will be decided within days or weeks. And once those who want to kill the public option without fingerprints converge on a proposal -- Snowe's "trigger" or any other -- it's going to be very hard to undue. The White House must insist on a genuine public option. And you ... must insist as well. ...

Paul Krugman: Keeping Them Honest

Will the health care reform plan include an effective public option?:

Keeping Them Honest, by Paul Krugman, Commentary, NY Times: “I appreciate your efforts, and look forward to working with you so that the Congress can complete health care reform by October.” So declared President Obama in a letter this week to Senators Max Baucus and Edward Kennedy.

The big health care push is officially on. But ... reform will fail unless we get serious cost control... So let me offer Congress two pieces of advice:

1) Don’t trust the insurance industry.

2) Don’t trust the insurance industry.

...It’s a sign of the way the political winds are blowing that ... the president of America’s Health Insurance Plans, the industry lobby known as AHIP, has explicitly accepted the need for “much more aggressive regulation of insurance.”

What’s still not settled, however, is whether regulation will be supplemented by competition, in the form of a public plan that Americans can buy into as an alternative to private insurance.

Now nobody is proposing that Americans be forced to get their insurance from the government. The “public option,” if it materializes, will be just that — an option Americans can choose. And the reason for providing this option was clearly laid out in Mr. Obama’s letter: It will give Americans “a better range of choices, make the health care market more competitive, and keep the insurance companies honest.”

Those last five words are crucial because history shows that the insurance companies will do nothing to reform themselves unless forced to do so.

Consider the seemingly trivial matter of making it easier for doctors to deal with multiple insurance companies. Back in 1993,... William Kristol ... acknowledged that some things needed fixing, calling for, among other things, “a simplified, uniform insurance form.”

Fast forward to the present. A few days ago, major players in the health industry laid out what they intend to do to slow the growth in health care costs. Topping the list of AHIP’s proposals was “administrative simplification.” Providers, the lobby conceded, face “administrative challenges” because ... each insurer has its own distinct telephone numbers, fax numbers, codes,... forms and administrative procedures. “Standardizing administrative transactions,” AHIP asserted, “will be a watershed event.”

Think about it. The insurance industry’s idea of a cutting-edge, cost-saving reform is to do what William Kristol — William Kristol! — thought it should have done 15 years ago. ...

The ... purpose of the public option is to make sure that the industry doesn’t waste another 15 years — by giving Americans an alternative if private insurers fall down on the job.

Be warned, however. The insurance industry will do everything it can to avoid being held accountable. At first the insurance lobby’s foot soldiers in Congress tried to shout down the public option with the old slogans: private enterprise good, government bad. ...

The most recent ruse is the proposal for a “trigger” — the public option will only become available if private insurers fail to meet certain performance criteria. The idea, of course, is to choose those criteria to ensure that the trigger is never pulled.

And here’s the thing. Without an effective public option, the Obama health care reform will be simply a national version of the health care reform in Massachusetts: a system that is a lot better than nothing but has done little to address the fundamental problem of a fragmented system, and as a result has done little to control rising health care costs.

Right now the health insurers are promising to deliver major cost savings. But history shows that such promises can’t be trusted. As President Obama said in his letter, we need a serious, real public option to keep the insurance companies honest.

"One-Party State Watch"

Arnold Kling on the future of the Republican Party:

One-Party State Watch, Econlog: I went to an event on the future of conservatism, described here.

No one was raising bright prospects for the Republican Party. At one point, Governor Daniels, the cover boy for National Review this week and the featured speaker, referred to the Republican Party as an "old jalopy." I believe it was also Governor Daniels who said that "we're in the penalty box." Rich Lowry said that a party's success depends on leaders, tone, policies, and circumstances, and that the Republicans have none of these going for them at the moment. At various points, it was noted out that the Republicans are hurting with young voters, Hispanics, and with intellectuals (a Republican committee staffer made the latter point during the question period). Lowry compared his coming of age under Reagan to today's young voters coming of age under Obama. I estimated the audience as 2 percent Black, 0 percent Hispanic, 2 percent Asian (including South Asians), and 96 percent white.

My question was whether, given all of the baggage of the Republican Party, conservatism ought to look elsewhere. The answers the panelists gave were that the Republicans are pretty much the only game in town for conservatives, and that sooner or later the Democrats will mess up and/or the public will get tired of the Democrats winning all the time.

I would not bet a whole lot on the theory that the American people will vote Republican because they love good competition. ... As the Republicans lose competitiveness... [w]e will ... be under ... the one-party state. ...

Today we heard an attempt to walk back on previous statements as Limbaugh now says maybe he could vote for Sotomayor - though he attached a poison pill to the proposition that tries to incite pro choice Democrats against her - and Gingrich now says it was a mistake to call her a racist. They are clearly worried.

A Lump of Coal for Obama

More disappointment with the new leader:

Obama walks a fine line over mining, by Tom Hamburger and Peter Wallsten, LA Times: With the election of President Obama, environmentalists had expected to see the end of the "Appalachian apocalypse," their name for exposing coal deposits by blowing the tops off whole mountains.

But in recent weeks, the administration has quietly made a decision to open the way for at least two dozen more mountaintop removals. ... The list included some controversial mountaintop mines. ...

The administration's decision ... sheds on relations between the mining industry and the Obama White House,... environmentalists ... say they feel betrayed...

The issue is politically sensitive because environmentalists were an active force behind Obama's election, and the president's standing is tenuous among Democratic voters in coal states. ... Moreover,... halting mountaintop mining could eliminate jobs and put upward pressure on energy prices in a time of economic hardship.

Coal advocates have solicited help from officials as high up as White House Chief of Staff Rahm Emanuel. And the issue has sparked contentious debates within the administration, including one shouting match...

Although environmentalists had expected the new administration to put the brakes on mountaintop removal, Rahall and other mining advocates have pointed out that Obama did not promise to end the practice and was more open to it than his Republican opponent, Arizona Sen. John McCain.

A review of Obama's campaign statements show that he had expressed concern about the practice without promising to end it. ... And his EPA administrator, Lisa Jackson, has said that the agency ... would "use the best science and follow the letter of the law in ensuring we are protecting our environment." Soon afterward, the agency in effect blocked six major pending mountaintop removal projects...

But this month, after a series of White House meetings with coal companies and advocates..., the EPA released the little-noticed letter giving the green light to at least two dozen projects. ...

Ed Hopkins, a top Sierra Club official, said some of the projects that have now obtained the EPA's blessing "are ... large and potentially destructive..." "It makes us wonder what standards -- if any -- the administration is using," Hopkins said. ...

Environmentalists were stunned to learn from Rahall's office May 15 that the EPA had given its blessing to 42 out of the 48 mine projects it had reviewed so far -- including two dozen mountaintop removals.

The news came in a letter ... from ... the EPA's acting assistant administrator, who wrote, "I understand the importance of coal mining in Appalachia for jobs, the economy, and meeting the nation's energy needs."

George Bush and Bill Clinton Love Fest

What's the deal with this?:

Bush-Clinton Policy Talk Strikes a Congenial Tone, by Jim Rutenberg, NY Times: Former President Bill Clinton really misses the presidency. ... Former President George W. Bush hardly misses it at all....

But that was practically where the differences stopped as the two former presidents appeared for the first time on a stage together to discuss national and international policy. Each earned more than an estimated $150,000 for the appearance. ...

And as they settled into overstuffed chairs, Mr. Bush and Mr. Clinton became something of an ex-presidents’ support group, avoiding direct critiques of each other, or, for that matter, their future club member, President Obama...

When Mr. Clinton said one of his biggest regrets was the lack of United States action during the mass killings in Rwanda, saying “I have no defense,” Mr. Bush responded, “I think you’re being a little tough on yourself.” He added that Mr. Clinton’s lament that he should have sent troops ignored the fact that such deployments are not so simply done.

When Mr. Bush ... defended his policy toward the Darfur region of Sudan, Mr. Clinton got his back, in return. “I think he did about all he could do,” he said. ...

If there was anything that even bordered on a sharp exchange, it was the discussion over Iraq.

Mr. Clinton said he would have preferred for Mr. Bush to have given weapons inspectors more time in Iraq before invading and, in the meantime, “concentrated on Afghanistan.”

Mr. Bush said, with a hint of irritation, “I don’t buy the premise that our attention was distracted,” a rejection of the argument that the Iraq war came at the expense of progress in Afghanistan. ...

Afterward, even audience ... expressed surprise at the level of congeniality. ...

"Liberaltarians"

In my heart of hearts, I'm pretty libertarian. I really don't want government looking over my shoulder and telling me what I can and cannot do.

Where I part with many libertarians - perhaps due to my background - is in the idea that government is almost always at odds with liberty. In my case, government played a key role in providing me with opportunity - education is one example, without tuition of $100 per semester at a state school, I probably would not have gone to college - but the opportunities government provided me go beyond education (and also see the examples given in the article for women and minorities).

Governments also need to intervene to prevent monopoly and political power from building up. Without such interventions, power will tend to concentrate and we will likely be exploited in one way or another, so government needs to ensure that our opportunity to enter a particular business - that our economic opportunities generally - are not limited by these factors.

I'm doing this in a bit of a rush (during a seminar, but don't tell), so one more quick point. I was very disappointed in the silence from many libertarians when the Bush administration was taking away, one by one, many of the liberties we enjoy. It was hard not to conclude that for many, the label of libertarian is simply an excuse to be concerned with little more than their own pocketbook.

In any case, I agree with much of what Bruce Bartlett has to say:

Liberaltarians?, by Bruce Bartlett, Commentary, Forbes: I recently attended a dinner with a group of prominent liberal and libertarian bloggers to see if there is a community of interest that might lead to closer cooperation on some issues.

On the surface, there would appear to be potential for an alliance. Libertarians tend to be liberal on social issues, favoring such things as gay marriage and drug legalization; and also liberal on defense and foreign policy, opposing the wars in Iraq and Afghanistan, and opposing torture and restrictions on civil liberties in the name of national security.

But libertarians are conservative on economic policy--favoring a free market with virtually no government intervention except the enforcement of contracts, and no government spending or taxes except those to pay for a very minimal police force and military.

Libertarians' views on social policy and national defense make them sympathetic to the Democrats, while their views on economic policy tend to align them with the Republicans. If one views social, defense and economic policy as having roughly equal weight, it would seem, therefore, that most libertarians should be Democrats. In fact, almost none are. Those that don't belong to the dysfunctional Libertarian Party are, by and large, Republicans.

The reason for this is that most self-described libertarians are primarily motivated by economics. In particular, they don't like paying taxes. They also tend to have an obsession with gold and a distrust of paper money. As a philosophy, their libertarianism doesn't extent much beyond not wanting to pay taxes, being paid in gold and being able to keep all the guns they want. Many are survivalists at heart and would be perfectly content to live in complete isolation on a mountain somewhere, neither taking anything from society nor giving anything.

An example of this type of libertarian thinking can be found on the Web site of a group called the Campaign for Liberty. It pays lip service to the libertarian philosophy on foreign and social policy, but says little about them. The discussion of economic policy, however, is much greater. But its only major proposal is abolition of the income tax. No ideas on how government spending would be cut to make this possible are put forward except to eliminate the congressional pay raise. Perhaps this group really believes that will be enough to abolish the income tax, but I suspect not. Whoever wrote these talking points is simply pandering to the stupid, the ignorant and the unsophisticated.

One is not likely to run into that type of libertarian at a Washington dinner party. These libertarians tend to be well-educated, arriving at his or her philosophy through reading obscure books or random contact with some libertarian in graduate school. They don't own guns--probably never even fired one, don't mind paying taxes too much, have no particular nostalgia for the gold standard and certainly would not choose to live in isolation on a mountaintop. They are cosmopolitan, urbane, articulate and interested in ideas more than just about anything else. They are not especially career-oriented--they are happy to be paid less than they probably could make as long as they don't have to compromise their principles and can do work that advances the cause. For the most part, they aren't family-oriented or religious, and they mostly fit the stereotype of a nerd.

But even these metro-libertarians tend to be more concerned about economics than social or foreign policy. The Cato Institute publishes an annual survey of economic freedom throughout the world, but produces no surveys of what countries have the most political or social freedom or those that have the most libertarian foreign policy.

Paul Krugman: The Big Inflation Scare

Money sitting in banks doing nothing but providing insurance is not inflationary, and worries that rising government debt will force policymakers to generate inflation are unfounded:

The Big Inflation Scare, by Paul Krugman, Commentary, NY Times: Suddenly it seems as if everyone is talking about inflation. Stern opinion pieces warn that hyperinflation is just around the corner. And markets may be heeding these warnings: Interest rates on long-term government bonds are up, with fear of future inflation one possible reason...

But does the big inflation scare make any sense? Basically, no — with one caveat I’ll get to later. And I suspect that the scare is at least partly about politics...

First.... It’s important to realize that there’s no hint of inflationary pressures in the economy right now. ... Deflation ... is the ... present danger.

So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.

The first story is just wrong. The second could be right, but isn’t.

Now, it’s true that the Fed has ... been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.

Still, don’t such actions have to be inflationary sooner or later? No. The Bank of Japan ... purchased debt on a huge scale between 1997 and 2003. What happened to consumer prices? They fell. ...

Is there a risk that we’ll have inflation after the economy recovers? That’s the claim of those who look at projections that federal debt may rise to more than 100 percent of G.D.P. and say that America will eventually have to inflate away that debt...

Such things have happened in the past. ... But ... modern examples are lacking. Over the past two decades, Belgium, Canada and ... Japan have all gone through episodes when debt exceeded 100 percent of G.D.P. And the United States itself emerged from World War II with debt exceeding 120 percent of G.D.P. In none of these cases did governments resort to inflation to resolve their problems.

So is there any reason to think that inflation is coming? Some economists have argued for moderate inflation as a deliberate policy, as a way to encourage lending and reduce private debt burdens. I... made a similar case for Japan in the 1990s. But the case for inflation never made headway ... then, and there’s no sign it’s getting traction with U.S. policy makers now.

All of this raises the question: If inflation isn’t a real risk, why all the claims that it is?

Well,... it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.

Needless to say, the president should not let himself be bullied. The economy is still in deep trouble and needs continuing help.

Yes, we have a long-run budget problem, and we need to start laying the groundwork for a long-run solution. But when it comes to inflation, the only thing we have to fear is inflation fear itself.

Bill Clinton: I Should Have Raised More Hell About Derivatives Being Unregulated

Bill Clinton gives, to use David Leonhardt's term, an "impressively honest" analysis of his role in bringing about the financial crisis, particularly the failure to adequately regulate derivative markets:

Bill Clinton, on His Economic Legacy, by David Leonhardt: Given the range of issues Peter Baker covers in his article about Bill Clinton for the coming New York Times Magazine, there was not room for anything close to Mr. Clinton’s entire comments on his economic record. ... So we’re going to post, below, the transcript of that portion of the discussion between Mr. Clinton and Mr. Baker. ...

NEW YORK TIMES: Speaking of banks and toxic assets... You know that Time magazine named you and said you should have done this, that or the other thing. What do you say to that? Is there anything you would have done differently? ...

Mr. CLINTON: Now, there basically have been three charges,... one, because I enforced the Community Reinvestment Act for the first time and over 90 percent of all lending done under that law was done when I was president, $300 billion, that part of that was a lot of little banks made loans to people they had no business making loans to to buy houses so they could check the box for the Community Reinvestment Act. That’s the right-wing argument.

Then there’s the argument from the left that I shouldn’t have signed the bill that got rid of the Glass-Steagall law because that enabled banks and investment banks in effect to merge their functions.

And then there’s the argument that I make, which is that I should have raised more hell about derivatives being unregulated. I believe the last one is by far the most valid … although I don’t think that the Congress would have permitted anything to be done because Alan Greenspan was against it.

So let’s take them in reverse order. The argument against regulating derivatives, which Greenspan urged — and this is one of the few things I think — I think Bob Rubin and Larry Summers and those guys have gotten a little bit of a bum rap on this lately...

But I do believe on the derivatives they made the argument, the people who were against regulating it, that people like you weren’t buying derivatives. It wasn’t like you were investing your 401(k) in derivatives. You were investing your 401(k) in mutual funds, which were subject at least under normal times to the jurisdiction of the S.E.C., which was supposed to be minding the store. And so because we had a hostile Republican Congress which threatened not to fund ... the S.E.C. because of what Arthur Levitt was doing to try to protect the American economy from meltdowns. They said, “Oh, he’s interfering with a free market” and all that. This is what he’s supposed to do.

They argued that nobody’s going to buy these derivatives, we’ll do it without transparency, they’ll get the information they need. And it turned out to be just wrong; it just wasn’t true. ... That rested on a lot of assumptions, including the fact that the ratings agencies would do a good job, which didn’t happen, in evaluating risk. So I very much wish now that I had demanded that we put derivatives under the jurisdiction of the Securities and Exchange Commission and that transparency rules had been observed... That I think is a legitimate criticism of what we didn’t do.

On the Glass-Steagall, I’ve really thought about that because No. 1, nonbank banking was already a major part of American life at that time. Letting banks take investment positions I don’t think had much to do with this meltdown. And the more diversified institutions in general were better able to handle what happened. ...

I believe if you look at the blurring of the lines which already existed before that bill was signed — the bill arguably gave us a framework, at least, for which this process, which was happening anyway, could be regulated. So I don’t think that’s such a good criticism.

I think actually, if you want to make a criticism on that, it would be an indirect one; you could say that the signing of that legislation sped up what was happening anyway and maybe led some of these institutions to be bigger than they otherwise would have been and the very bigness of some of these groups caused some of this problem...

And the first argument, I think it’s totally without merit. If you look at the community banks in this country — actually I never believed I’d cite her as an authority, but Arianna Huffington had a great piece on the success of community banks yesterday in the Huffington Post. You ought to get it —

NEW YORK TIMES: Do you read the Huffington Post?

Mr. CLINTON: A lot. I read a lot of the blogs. ...

That’s my take on it. The Time magazine thing,... if you actually read what they said, they kind of hedged. They said “Well, here are some of the things people say.” But if you ask me to write the indictment, I’d say, “I wish Bill Clinton had said more about derivatives. The Republicans probably would have stopped him from doing it but at least he should have sounded the alarm bell.” ...

But you got to understand, again, we were living in a different world. We had a lot of confidence in the S.E.C. We had a lot of confidence in the broad-based nature of our economic growth. We never dreamed there’d be a time like in the first five years of this decade where literally the whole growth of the country would be in the housing, finance and consumer spending because we had no other investment strategy. ...

I made the best call I could. But I do wish — I always felt a little queasy about the derivative issue. Otherwise, I think we did a good job and I do not believe — when anybody asks me that, I ask them, I look at them and ask them, “Do you think this would have happened if we had been there? Look me in the face and say yes.” I haven’t found any takers yet.

That's the part I'm not so sure about. If a Clinton clone had been in charge rather than Bush, would this have still happened? I can't be sure, of course, and maybe the clone administration would have stepped in before things got out of hand, but little cues like the deference to Greenspan he indicates above (who would have opposed trying to prick the bubble if he had admitted a bubble was inflating) makes me wonder. So I think it probably would have happened anyway.

But, and this is important, perhaps the Treasury wouldn't have dragged its feet for months and months only to turn the problem over to the next administration if there had been more continuity, and I believe that acting faster to solve the toxic asset problem could have made a big difference in limiting the severity of the resulting downturn. In addition, without Republicans standing in the way with veto power, the shape of the initial and subsequent stimulus packages would have been different as well. So while I'm not so sure that the outcome would have been different in terms of the bubble, I do believe the response would have been quite a bit different, and much better than what actually occurred.

"Credit Crisis Cassandra"

This explains a lot. Brooksley Born, head of the Commodity Futures Trading Commission from 1996-1999, wanted to regulate the financial markets that have caused us so much trouble, but Greenspan, Rubin, Summers, and Levitt stood in the way and would not allow it. I wonder if they patted her on the head as they explained "that they understood finance better than she did."

I have argued that the attitudes toward regulation were the biggest problem in creating this crisis, and this article reinforces that view. The people in charge of the regulatory agencies were convinced that unregulated markets were self-correcting, and that regulation was not needed and would more likely do harm than good. As this shows, no amount of convincing from people who weren't as smart as the smartest guys in the room was going to change that. The question for me is whether those in charge now, Summers for example, have learned their lesson and the humility to be derived from it, or whether they will be defensive of their own role to the extent that it affects the type of regulation they can support. I'd very much like to believe they have learned their lesson, though humility seems to be lacking, but watching Summers and others argue that the private sector and the market is preferable to temporary government takeover of banks (i.e. his and the administration's opposition to temporary nationalization),  - the continued faith that the market always knows best - makes me wonder if they have.

One more note on Summers. I wasn't in favor of him when he was picked to be part of the administration because I thought he carried far too much political baggage. If he has value, it is not as a spokesperson for the administration. But again and again I heard that he was the only one smart enough to do this job. I don't believe that and never will, but if it's true, fine, put him in an office somewhere, let him be smart and helpful, but above all keep him out of the public eye. He does not help as a spokesman for the administration, he hurts the cause every time he opens his mouth. At first it seemed like he was going to be the key spokesperson on financial matters and as I said, I thought that was a mistake. But lately I haven't heard much from him, most of his work appears to be behind the scenes, and as far as I'm concerned, that's a very good development in terms of the public presentation of the administration's views:

Credit Crisis Cassandra, by Manuel Roig-Franzia, Washington Post: Friends ... want Brooksley Born to say four words, four simple words: "I told you so." Ah, but she won't... Not even in a quiet moment in her living room, giving her first interview with a major news organization...

A little more than a decade ago, Born foresaw a financial cataclysm, accurately predicting that exotic investments known as over-the-counter derivatives could play a crucial role in a crisis much like the one now convulsing America. Her efforts to stop that from happening ran afoul of some of the most influential men in Washington, men with names like Greenspan and Levitt and Rubin and Summers...

 [F]rom 1996 to 1999, when Born was the chairman of the Commodity Futures Trading Commission, the U.S. economy was roaring and she was getting nowhere with predictions of doom. ... She woke repeatedly "in a cold sweat," agonizing that a financial calamity was coming, she recalled one recent afternoon. "I was really terribly worried," she said.

Before taking office, Born had been a high-octane attorney... But ... she... was taking on Beltway pros... She marched into congressional hearing after congressional hearing -- pin neat, always with a handbag -- but no one really wanted to listen.

The Wall Street Journal declared that "the nation's top financial regulators wish Brooksley Born would just shut up." The Bond Buyer newspaper compared her to a salmon "swimming against raging currents." ... Now ... she ... may be closer than ever to vindication...

Born's baptism as a new agency head in 1996 came in the form of an invitation. Federal Reserve Chairman Alan Greenspan ... wanted her to come over for lunch.

Greenspan had an unusual take on market fraud, Born recounted: "He explained there wasn't a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him."

This made no sense to her. She'd spent much of the 1980s defending clients caught up in a vast conspiracy by two wealthy brothers, Nelson and William Hunt, who duped investors while trying to corner the world silver market. "After all," Born said, looking back, "I'm a lawyer, and I think the existence of fraud prohibitions is critically important."

But Greenspan was insistent, she said. Finally, he said, "Well, Brooksley, I guess you and I will never agree about fraud." ...

That was just the beginning. By early 1998, Born had also tangled with Treasury Secretary Robert Rubin, his deputy, Summers, and Securities and Exchange Commission head Arthur Levitt, not to mention members of Congress, financial industry heavyweights and business columnists. She wanted to release a "concept paper" -- essentially a set of questions -- that explored whether there should be regulation of over-the-counter derivatives. ...

They warned that if she did so, the market would implode and predicted tidal waves of lawsuits. On top of that, Rubin told her, she didn't have legal authority to regulate the derivatives anyway. She wasn't buying any of it, and she wasn't backing down. ...

Based on her lunch with Greenspan, Born knew she would run into heavy resistance. ... In early 1998, Born's plan to release her concept paper was turning into a showdown. Financial industry executives howled, streaming into her office to try to talk her out of it. Summers, then the deputy Treasury secretary, mounted a campaign against it, CFTC officials recalled. ...

In one call, Summers said, "I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II," recounted Greenberger, a University of Maryland law school professor who was Born's director of the Division of Trading and Markets. ...

The discordant notes crescendoed in April 1998 during a tension-filled meeting of the President's Working Group, a gathering of top financial regulators that periodically met behind closed doors at the Treasury Department. At that meeting, Greenspan and Rubin forcefully opposed Born's plans, Waldman said. "Greenspan was saying we shouldn't do it," Waldman recalled. "Rubin was saying we couldn't do it."

The next month, Born released her concept paper anyway. Within weeks, she was under attack. ... Greenspan, Rubin and Levitt jointly urged Congress to pass a moratorium on the CFTC regulating over-the-counter derivatives.

With emotions running high, Born was summoned to the office of House Banking Chairman Jim Leach, a Republican from Iowa, to meet with top officials from the Fed and the Treasury. ...

"The feelings in the room were very tense," recalled Leach... "There were some very profound personality clashes between Rubin and [Born], and Greenspan and her," Leach said. "They felt, I think, that they understood finance better than she did." ...

"If you could fault her for anything, it's not recognizing the politics," Waldman said. "She assumed the force of her ideas were going to be sufficient."

But then, in September 1998, a huge hedge fund that had bet heavily on derivatives -- Long-Term Capital Management -- nearly failed and had to be bailed out by a group of banks. Here was a living example of Born's prophecy. Even Leach, who supported the moratorium on CFTC regulatory action, introduced Born at a hearing by saying, "You're welcome to claim some vindication, if you want."

Born responded: "I certainly will not do so." But she went on to tell the committee that the Long-Term Capital debacle "should serve as a wake-up call about the unknown risks in the over-the-counter derivatives market."

No one woke up. That same month, Congress passed the moratorium. Born says they were "muzzling an independent agency." Two months later, Born announced that she would not seek reappointment to a second term. ...

Last week,... she traveled to Boston to receive the John F. Kennedy Profiles in Courage award. Finally, though perhaps too late, everyone wanted to listen to Brooksley Born. She once again warned about the danger of Dark Markets... "If we fail now to take the remedial steps needed to close the regulatory gap," Born said, "we will be haunted by our failure for years to come." ...

Is Colin Powell the Answer?

Bruce Bartlett:

Colin Powell: Republican, by Bruce Bartlett: Yesterday, Colin Powell restated his continued membership in the Republican Party. But he didn’t really explain why. It seemed more like an act of defiance than a statement of fact—no one is going to tell him what part of the bus he can sit in and no one is going to tell him what political party he can be a member of. That’s fine, but if Powell is going to make a point of staying in a party that doesn’t particularly want him—former Vice President Dick Cheney has more or less told him to leave—then Powell has a responsibility to do more than give the occasional television interview criticizing the GOP’s lack of inclusiveness; he needs to engage it on a systematic basis.

Powell has to accept that he is in a unique position to command attention and lead the Republican Party—or at least that part of it that isn’t consumed with defending the indefensible on torture or living in a fantasy world where the economy would be booming today if it just wasn’t for Obama’s budget deficits.

Paul Krugman: State of Paralysis

Will California be a trend setter once again?:

State of Paralysis, by Paul Krugman, Commentary, NY Times: California, it has long been claimed, is where the future happens first. But is that still true? If it is, God help America.

The recession has hit the Golden State hard. The housing bubble was bigger there than almost anywhere else, and the bust has been bigger too. ... What’s really alarming about California, however, is the political system’s inability to rise to the occasion.

Despite the economic slump,... California has immense human and financial resources. It should not be in fiscal crisis; it should not be on the verge of cutting essential public services and denying health coverage to almost a million children. But it is...

The seeds of California’s current crisis were planted more than 30 years ago, when voters overwhelmingly passed Proposition 13... Property tax rates were capped, and homeowners were shielded from increases in their tax assessments even as the value of their homes rose.

The result was a tax system that is both inequitable and unstable. ... Even more important, however, Proposition 13 made it extremely hard to raise taxes, even in emergencies: no state tax rate may be increased without a two-thirds majority in both houses of the State Legislature. And this provision has interacted disastrously with state political trends.

For California, where the Republicans began their transformation from the party of Eisenhower to the party of Reagan, is also the place where they began their next transformation, into the party of Rush Limbaugh. As the political tide has turned against California Republicans, the party’s remaining members have become ever more extreme, ever less interested in the actual business of governing.

And while the party’s growing extremism condemns it to seemingly permanent minority status ... the Republican rump retains enough seats in the Legislature to block any responsible action in the face of the fiscal crisis.

Will the same thing happen to the nation as a whole? ... America’s projected deficits may sound large, yet it would take only a modest tax increase to cover the expected rise in interest payments — and right now American taxes are well below those in most other wealthy countries. The fiscal consequences of the current crisis, in other words, should be manageable.

But that presumes that we’ll be able, as a political matter, to act responsibly. The example of California shows that this is by no means guaranteed. And the political problems that have plagued California for years are now increasingly apparent at a national level.

To be blunt: recent events suggest that the Republican Party has been driven mad by lack of power. The few remaining moderates have been defeated, have fled, or are being driven out. What’s left is a party whose national committee has just passed a resolution solemnly declaring that Democrats are “dedicated to restructuring American society along socialist ideals,” and released a video comparing Speaker of the House Nancy Pelosi to Pussy Galore.

And that party still has 40 senators.

So will America follow California into ungovernability? Well, California has some special weaknesses that aren’t shared by the federal government. In particular, tax increases at the federal level don’t require a two-thirds majority, and can in some cases bypass the filibuster. So acting responsibly should be easier in Washington than in Sacramento.

But the California precedent still has me rattled. Who would have thought that America’s largest state, a state whose economy is larger than that of all but a few nations, could so easily become a banana republic?

On the other hand, the problems that plague California politics apply at the national level too.

Update:

Oops — column notice: Alert readers may notice that the last sentence of today’s column doesn’t seem to make sense in context. That’s because it’s not supposed to be there; it’s a fossil from an earlier draft. My fault — I was filing from a remote location in a very different time zone, and didn’t check properly. Urp.

The Party of Stale Ideas

Bruce Bartlett offers his cure for the Republican Party's problems:

Finding The Next Kemp, by Bruce Bartlett, Forbes: Perhaps the saddest part of attending the funeral for Jack Kemp on May 8 was the realization that he was the last of an era: a politician who really cared about ideas.

At the reception afterward, a few of the old-timers who were with Kemp back in the days when he was creating supply-side economics and bringing the Republican Party back from the brink of extinction got to talking. We all lamented that there just didn't seem to be any politician out there these days that we felt we could get behind.

The reason isn't that there aren't members of Congress who would like to be the next Kemp--one, certainly, is former Kemp staffer Rep. Paul Ryan of Wisconsin. The real problem is the culture of Washington politics, which has changed dramatically since the late 1970s when Kemp was at the pinnacle of his influence.

Paul Krugman: Blue Double Cross

How will Obama react to the duplicitous actions of the medical-industrial complex?:

Blue Double Cross, by Paul Krugman, Commentary, NY Times: That didn’t take long. Less than two weeks have passed since much of the medical-industrial complex made a big show of working with President Obama on health care reform — and the double-crossing is already well under way. ...

The story so far: on May 11 the White House called a news conference to announce that major players in health care ... had come together to support a national effort to control health care costs.

The fact sheet on the meeting, one has to say, was classic Obama in its message of post-partisanship and, um, hope. ... But just three days later the hospital association insisted that it had not, in fact, promised what the president said it had promised... And the head of the insurance lobby said that the idea was merely to “ramp up” savings, whatever that means.

Meanwhile, the insurance industry is busily lobbying Congress to block one crucial element of health care reform, the public option — that is, offering Americans the right to buy insurance directly from the government as well as from private insurance companies.

And at least some insurers are gearing up for a major smear campaign. ... The Washington Post reported that Blue Cross Blue Shield of North Carolina was preparing to run a series of ads attacking the public option. The planning for this ad campaign must have begun quite some time ago.

The Post has the storyboards for the ads, and they read just like the infamous Harry and Louise ads that helped kill health care reform in 1993. ... “We can do a lot better than a government-run health care system,” says ... one of the ads. To which the obvious response is, if that’s true, why don’t you? Why deny Americans the chance to reject government insurance if it’s really that bad?

For none of the reform proposals currently on the table would force people into a government-run insurance plan. At most they would offer Americans the choice of buying into such a plan.

And the goal of the insurers is to deny Americans that choice. They fear that many people would prefer a government plan to dealing with private insurance companies that, in the real world as opposed to the world of their ads, are more bureaucratic than any government agency, routinely deny clients their choice of doctor, and often refuse to pay for care.

Which brings us back to Mr. Obama.

Back during the Democratic primary campaign, Mr. Obama argued that the Clintons had failed in their 1993 attempt to reform health care because they had been insufficiently inclusive. He promised instead to gather all the stakeholders ... around a “big table.” And that May 11 event was, of course, intended precisely to show this big-table strategy in action.

But what if interest groups showed up at the big table, then blocked reform? Back then, Mr. Obama assured voters that he would get tough: “If those insurance companies and drug companies start trying to run ads with Harry and Louise, I’ll run my own ads as president. I’ll get on television and say ‘Harry and Louise are lying.’ ”

The question now is whether he really meant it.

The medical-industrial complex has called the president’s bluff. It polished its image by showing up at the big table and promising cooperation, then promptly went back to doing all it can to block real change. The insurers and the drug companies are, in effect, betting that Mr. Obama will be afraid to call them out on their duplicity.

It’s up to Mr. Obama to prove them wrong.

"Foolish Consistency"

Paul Krugman says:

Prodigal intellectuals: So I see Richard Posner has decided that modern conservatism is intellectually bankrupt. And Bruce Bartlett has a new book saying it’s time to let go of Reagan.

At one level it’s good to see decent people showing some intellectual flexibility (Bartlett, in particular, has always come across as someone with whom one can have honest disagreements.) And yet — why, exactly, should we listen to people who by their own admission completely missed the story? I mean, anyone who actually listened to what Newt Gingrich and Dick Armey were saying in 1994, let alone what passed for thought in the Bush administration, should have realized long ago that if there ever was an intellectual basis for modern conservatism, it was long gone.

And the truth is that the Reaganauts were a pretty grotesque bunch too. Look for the golden age of conservative intellectualism in America, and you keep going back, and back, and back — and eventually you run up against William Buckley in the 1950s declaring that blacks weren’t advanced enough to vote, and that Franco was the savior of Spanish civilization.

So the idea that we should pay any attention to people who somehow failed to see all this until very late in the game — and, in the case of Posner (not Bartlett), waited to express their doubts until conservatism had lost power …

Bruce Bartlett emails:

Paul Krugman says nice things about me.

I posted a comment that has not yet appeared saying that Washington tends to enforce a foolish consistency. If you are someone of some prominence whose views are known publicly, then everything you have ever said in the past tends to be projected forward and everything you say today is projected backward. Any discrepancy potentially brings charges of flip-flopping or hypocrisy or selling-out or whatever. Certainly, these charges are valid in many cases, but the simple possibility that circumstances have changed or that experience or new evidence has caused one to change one’s mind seems never to be seriously entertained. The result is to force people to stick with positions they know are wrong because they less fear being foolishly consistent than being attacked for flip-flopping.

Part of this is the clash of economic and social conservatism and the inherent conflict between the two groups within the GOP. Social conservatives are anything but anti-government no matter how much they might want you to think otherwise. Gary Becker highlights this:

Paul Krugman: The Perfect, The Good, The Planet

Is the proposed climate change bill good enough to support, or have compromises watered it down so much that it would be better to hold out in the hopes of getting something better?:

The Perfect, The Good, The Planet, by Paul Krugman, Commentary, NY Times: In a way, it was easy to take stands during the Bush years: the Bushies and their allies in Congress were so determined to move the nation in the wrong direction that one could, with a clear conscience, oppose all the administration’s initiatives.

Now, however, a somewhat uneasy coalition of progressives and centrists rules Washington, and staking out a position has become much trickier. Policy tends to move things in a desirable direction, yet to fall short of what you’d hoped to see. And the question becomes how many compromises, how much watering down, one is willing to accept. ...

If we’re going to get real action on climate change any time soon, it will be via some version of legislation proposed by Representatives Henry Waxman and Edward Markey. Their bill would limit greenhouse gases by requiring polluters to receive or buy emission permits, with the number of available permits — the “cap” in “cap and trade” — gradually falling over time.

It goes without saying that the usual suspects on the right have denounced Waxman-Markey: global warming isn’t real, emission limits will destroy the economy, yada yada. But the bill also faces opposition from some environmentalists, who are balking at the compromises the sponsors made to gain political support. ...

Al Gore has praised the bill... A number of environmental organizations ... have also come out in strong support. But Greenpeace has declared that it “cannot support this bill in its current state.” And some influential environmental figures ... oppose the whole idea of cap and trade, arguing for a carbon tax instead.

I’m with Mr. Gore. The legislation now on the table isn’t the bill we’d ideally want, but it’s the bill we can get — and it’s vastly better than no bill at all.

One objection — the claim that carbon taxes are better than cap and trade — is, in my view, just wrong. In principle, emission taxes and tradable emission permits are equally effective at limiting pollution. In practice, cap and trade has some major advantages, especially for achieving effective international cooperation.

Not to put too fine a point on it, think about how hard it would be to verify whether China was really implementing a promise to tax carbon emissions, as opposed to letting factory owners with the right connections off the hook. By contrast, it would be fairly easy to determine whether China was holding its total emissions below agreed-upon levels.

The more serious objection to Waxman-Markey is that ... in the first years of the program’s operation more than a third of the ... emission permits would be handed over at no charge to the power industry.

Now, these handouts wouldn’t undermine the policy’s effectiveness..., polluters ... still have an incentive to reduce their emissions, so that they can sell their excess permits to someone else. ... But handing out emission permits does, in effect, transfer wealth from taxpayers to industry. So if you had your heart set on a clean program, without major political payoffs, Waxman-Markey is a disappointment.

Still, the bill represents major action to limit climate change. ... And by all accounts, this bill has a real chance of becoming law in the near future. So opponents of the proposed legislation have to ask themselves whether they’re making the perfect the enemy of the good. I think they are.

After all the years of denial, after all the years of inaction, we finally have a chance to do something major about climate change. Waxman-Markey is imperfect, it’s disappointing in some respects, but it’s action we can take now. And the planet won’t wait.

"Stay the Course"

Having made the same points about not pulling back on monetary and fiscal policy too soon, I can hardly disagree with this call to "avoid a replay of the policy disasters of 1936-37":

It’s No Time to Stop This Train, by Alan Blinder, Commentary, NY Times: Contrary to what you may have heard from some doomsayers, 2009 is not 1930 redux. ... But even if another depression is next to impossible, there is still the danger that next year, or the year after, might turn into 1936. Let me explain.

From its bottom in 1933 to 1936, the G.D.P. climbed spectacularly (albeit from a very low base), averaging gains of almost 11 percent a year. But then, both the Fed and the administration of Franklin D. Roosevelt reversed course.

In the summer of 1936, the Fed looked at the large volume of excess reserves piled up in the banking system, concluded that this mountain of liquidity could be fodder for future inflation, and began to withdraw it. This tightening of monetary policy continued into 1937, in a weak economy that was ill-prepared for it.

About the same time, President Roosevelt looked at what seemed to be enormous federal budget deficits, concluded that it was time to put the nation’s fiscal house in order and started raising taxes and reducing spending. This tightening of fiscal policy transformed the federal budget... — a swing of four percentage points in a single year. (Today, a swing that large would be almost $600 billion.)

Thus, both monetary and fiscal policies did an abrupt about-face in 1936 and 1937, and the consequences were as predictable as they were tragic. The United States economy, which had been rapidly climbing out of the cellar from 1933 to 1936, was kicked rudely down the stairs again... The moral of the story should be clear: Prematurely changing fiscal and monetary policies ... can be hazardous to the economy’s health.

Wow, we’ve learned a lot since the ’30s, right? Well, maybe not. For the echoes of 1936 are being heard right now, even before the current recession hits bottom. If you’ve been paying attention, you know that a number of critics of the Fed are sounding alarms over the huge stockpile of excess reserves it has created... The clear inference is that some of it should be withdrawn before it’s too late.

On the fiscal side, many of President Obama’s critics are complaining vociferously about the huge federal budget deficits. Try to ignore, if you can, the sheer hypocrisy of many Congressional Republicans... But whatever the motives, the worries of today’s deficit hawks sound eerily reminiscent of Roosevelt in 1936 and 1937.

Fortunately, Mr. Bernanke is a keen student of the Great Depression who will not allow the Fed to repeat the errors of 1936-37. But his critics, both inside and outside the Fed, are already branding his policies as dangerously inflationary, and no Fed chairman wants to be called an inflationist.

Similarly, I hope and believe that President Obama will not transform himself from the spendthrift Roosevelt of 1933 to the deficit-hawk Roosevelt of 1936 — at least not until the economy is back on solid ground. That said, a growing flock of budget hawks are already showing their talons. They will have their day — but please, not yet. To avoid a replay of the policy disasters of 1936-37, both the Fed and our elected officials must stay the course. ...

We'll see. I'm not as sure as he is that the desire to get health care reform passed this fall won't dominate the need to maintain stimulative policies. One of the big objections to health care reform is how we will pay for it (a preliminary CBO estimate suggests it will cost a little over 1 trillion). Suppose the economy continues to stay recessed and the choice becomes health care reform verus another stimulus package. What will be chosen? What should be chosen? (The answer is that one shouldn't be traded against the other, we should do both since they deal with different problems. One problem is to stabilize the economy in the short-run. The other is to provide health care universally and at the same time rein in health care costs to bring the budget into balance in the longer run. While each stands on its own merits, the politics would be unlikely to allow us to do both, and I'm guessing health care reform will be the administration's first priority.)

Becker: The Serious Conflict in the Modern Conservative Movement

Gary Becker says the Republican Party needs to get rid of social conservatives who are worried about "gays in the military, gay marriage, abortions, cell stem research, and ... many other issues of this type," and "return to its roots of skepticism toward governmental actions":

The Serious Conflict in the Modern Conservative Movement, Gary Becker: The roots of conservatism go back to philosophers of the 17 and 18th centuries, such as John Locke, David Hume, and Adam Smith. They opposed big government, and favored private decision-making, primarily because they argued that individuals were generally better able to protect their interests than could government officials tied down by bureaucracy and special interests. They claimed further that making decisions for oneself and suffering the consequences were usually good for people, even when these decisions led to bad outcomes, because learning from one's own mistakes helps improve future choices.

Modern conservatism is only partly built on these roots. Its support of competition and private markets, and hostility to sizable regulations, is a direct descendant of the classical liberal views, as espoused for example in Smith's Wealth of Nations. ... To such conservatives, the present US government's management of the American auto industry is an invitation to disaster... It would be much better to have allowed GM and Chrysler several months ago to be reorganized through bankruptcy proceedings. Classical conservatism would recognize that the intervention of the Fed and Treasury in the finance sector may be necessary, given the crisis in that sector, but classical conservatives would look for this involvement to end as soon as possible.

The other pillars of modern conservatism are aggressive foreign policy to promote democracy in other countries, and government actions to further various social goals, such as fewer abortions or outlawing gay "marriage". These views fit less comfortably in the conservative tradition that is hostile to big government and skeptical about the use of government power to override individual decisions. Classical conservatives would argue that governments are no more effective at interventions internationally or on social issues than they are on economic matters. So governments should usually not get involved in such issues, except when its intervention has enough benefits to compensate for governmental inefficiency and ineffectiveness. This usually is not the case. ...

The ... Republican Party under the leadership of Eisenhower and Reagan had a more consistent classical conservative philosophy... Neither Eisenhower nor Reagan was particularly religious, and they did not have strong views about gays or abortion rights. The shift in the attitudes of the Republican Party toward more interventionist views on social issues, and to some extent also on military involvement to create more democratic governments in other countries, has created this crisis in conservatism. Better stated, it has created this crisis in the conservatism of the Republican Party.

I believe that the best way to restore the consistency and attractiveness of the conservative movement is for modern conservatism to return to its roots of skepticism toward governmental actions. ... Such a shift in attitudes would require more flexible approaches toward hot button issues like gays in the military, gay marriage, abortions, cell stem research, and toward many other issues of this type. It will not be easy for the Republican Party to emerge from the doldrums if it cannot embrace such a consistently skeptical view of government.

From comments:

Bruce Wilder says: While Becker is purifying the Republican Party, economists ought to be purifying the Economics Party, by kicking out Becker and his fellow libertarians.

Becker's "classical liberalism" is out-dated politics, but, even worse, it is an Economics of Stupid. The know-nothing Economics expressed in the hostility of many of his fellow Chicagoans to the Obama stimulus package ought to be their ticket out of the profession and into a deserved obscurity.

The U.S. needs a healthy, intelligent conservative party, to advocate from conservative viewpoints. Democracy needs that, to function. And, there's no doubt that the Republican Party, at the moment, is not healthy, and hasn't been for a long time.

But, Becker shouldn't be able to get away with blaming the social conservatives, who saw very little of their agenda enacted in 30 years of supporting the Reaganauts. The present collapse of Republican Power has little to do with their anti-abortion agenda or Michelle Bachman's craziness or stem cells or Terry Schiavo. It has to do with the abject failure of Republican foreign policy and, most importantly, economic policy.

The economic policy of Gary Becker's Republican Party has been an on-going catastrophe for the country. And, that's why the Republican Party is out of power, and, apparently, down for the count. I don't see how anyone can blame the social conservatives for that.

The "Apparent Abdication of Responsibility"

Tyler Cowen says congress is letting others take the responsibility - and the potential blame - for decisions it ought to be making:

There’s Work to Be Done, but Congress Opts Out, by Tyler Cowen, Economic View, NY Times: The longer the financial crisis runs, the more policy makers at the Treasury, the White House and the Federal Reserve are working around Congress rather than with it. It’s not that anyone is behaving illegally or unconstitutionally, but rather that Congress seems to want to be circumvented and to delegate more power to the executive branch as well as to the Fed, at least temporarily.

While Congressional leaders are consulted on the major policies, Congress is keeping its distance, perhaps to minimize voter outrage. This way, Congress can claim credit if a recovery comes, but deny responsibility if the price tag ends up higher than advertised or if banks seem to be receiving unfair benefits from the government.

Trillions of dollars of financial commitments have been made without explicit Congressional approval. ... The traditional division of labor among policy makers was that the Fed determined the quantity of money in the economy — it set monetary policy — and Congress decided precise government expenditures — it handled fiscal policy. These new programs blur that distinction and, in essence, the Fed is running some fiscal policy. ... A full description of important financial policies handled outside of Congress would more than fill this column and would add up to trillions of dollars in potential commitments and guarantees.

Many economists are happy to see technocrats play such a big role in the current emergency in the belief that the Obama administration and the Fed have more economic expertise — and more incentives to care about policy at the national level — than Congress does. But if that is true, we should be nervous about the future. A Congress that won’t accept much responsibility for the financial bailouts, for example, is unlikely to rise to the occasion when the time comes to make tough decisions on the budget. ...

Both Democrats and Republicans are at fault for this apparent abdication of responsibility. The Republicans are focused on blaming the Democrats for bailouts, since they know the policies can go through without their support. The Democrats want to enjoy the benefits of making commitments and guarantees without accepting accountability or responsibility for them.

It's a common theme in American history that crises expand the power of the executive branch of government, and that is part of what is happening here. Even the Federal Reserve, which ... is supposed to be quasi-independent, has ceded much of its power to the Treasury. ... Just as the Bush administration brought a growth of executive power in foreign policy and surveillance, so executive power has grown when it comes to economic policy; that development spans the administrations of both Mr. Obama and George W. Bush.

On any single policy, the abdication of Congressional responsibility may not be a problem. Sometimes it is good to let the technocrats have their way. In the longer run, though, the United States requires a Congress courageous enough to accept responsibility for potentially unpopular policies. We are moving further away from that every day.

The Social Security Obsession

Something to keep an eye on, the "Very Serious People" inside the beltway are at it again:

Lawmakers Seeking Consensus On Social Security Overhaul, by Lori Montgomery, Washington Post: Key lawmakers from both parties have held tentative talks about overhauling the Social Security system, and Congress could turn its attention to the federal retirement program as soon as this fall if a bipartisan consensus emerges...

So far, Democrats have found a willing partner in the Senate, where Sen. Lindsey O. Graham (R-S.C.) has stated his desire to work with President Obama to make changes to keep Social Security solvent. ... Graham said yesterday that he has spoken to Hoyer and Sen. Richard J. Durbin of Illinois, the second-ranking Senate Democrat, about the issue and that he stands ready "as a Republican to more than meet the president in the middle."

"I know what it takes to get a solution," Graham said. "I think we can get double-digit Republican support for a reasonable compromise. But the key to this, at the end of the day, is presidential leadership."

Graham ... sketched out a plan that would include lower benefits for wealthy Americans, a higher retirement age and additional revenues. With the stock market devastated by the recession, the traditional Republican option of diverting Social Security taxes to new private retirement accounts is, he said, "off the table." ...

Hoyer is expected to sketch out a similar plan in a speech today... According to an advance copy of the speech, Hoyer will suggest that Congress could approve "more revenues," "restrain the growth of benefits, particularly for higher-income workers," "and/or we can raise the retirement age, recognizing that our life expectancy is higher today."

"What is missing here is not ideas -- it is political will," the speech says. ...

"Right now energy and health-care bills are the major focus," Hoyer said. But if those issues are finished by the August break, he said, "we could start focusing on . . . Social Security early this fall." ...

"At the end of the day, most Americans would embrace a balanced solution that did not require Draconian impact. They are ready to make some hard decisions for the benefit of future generations," Graham said. "If there were ever a time to do it, it's now."

Remember that the "Beltway obsession with Social Security reflects ideology and fashion, not the real problems facing America." They may think that they can wait until health care reform is completed before turning to this issue, but if they continue to have these meetings and push this agenda, there's a good chance Social Security will become a bargaining chip during the health care debate. However, trading Social Security against health care is not an outcome I'd like to see. There is no pressing need to modify the Social Security program, fairly minor changes will solve whatever problems the program has, and there are many other possible tradeoffs within the budget that could fund a new health care system (on both the revenue and spending sides). But I'm sure conservatives would love the chance to pit these two porgrams against each other as part of the health care reform process.

"Genus Institutionalist; Species: Galbraithian"

Jamie Galbraith versus Phil Gramm:

Causes of the Crisis, by James K. Galbraith, Commentary, Texas Observer: Editor’s note: These remarks were delivered ... at a debate between University of Texas professor James Galbraith ... and former Majority Leader Richard Armey, chief instigator of the recent Astroturf “tea party" protests. Armey had begun his remarks by noting that his rule in life was “never trust anyone from Austin or Boston,” and proceeded to declare his allegiance to the “Austrian School” of economics, a libertarian view that regards public intervention in private markets as socialism.

It is of course a pleasure to be with you today. I was born in Boston, and I am proud of it. And I have lived 24 years in Austin—and I’m proud of that.

Leader Armey spoke to you of his admiration for Austrian economics. I can’t resist telling you that when the Vienna Economics Institute celebrated its centennial, many years ago, they invited, as their keynote speaker, my father [John Kenneth Galbraith]. The leading economists of the Austrian school—including von Hayek and von Haberler—returned for the occasion. And so my father took a moment to reflect on the economic triumphs of the Austrian Republic since the war, which, he said, “would not have been possible without the contribution of these men.” They nodded—briefly—until it dawned on them what he meant. They’d all left the country in the 1930s.

My own economics is American: genus Institutionalist; species: Galbraithian.

This is a panel on the crisis. Mr. Moderator, you ask what is the root cause? My reply is in three parts.

First, an idea. The idea that capitalism, for all its considerable virtues, is inherently self-stabilizing, that government and private business are adversaries rather than partners...; the idea that regulation, in financial matters especially, can be dispensed with. We tried it, and we see the result.

Second, a person. It would not be right to blame any single person for these events, but if I had to choose one to name it would be... former Senator Phil Gramm. I’d cite specifically the repeal of the Glass-Steagall Act—the Gramm-Leach-Bliley Act—in 1999, after which it took less than a decade to reproduce all the pathologies that Glass-Steagall had been enacted to deal with in 1933. I’d also cite the Commodity Futures Modernization Act, slipped into an 11,000-page appropriations bill in December 2000 as Congress was adjourning following Bush v. Gore. This measure deregulated energy futures trading, enabling Enron and legitimating credit-default swaps, and creating a massive vector for the transmission of financial risk throughout the global system. ...

Third, a policy. This was the abandonment of state responsibility for financial regulation... This abandonment was not subtle: The first head of the Office of Thrift Supervision in the George W. Bush administration came to a press conference on one occasion with a stack of copies of the Federal Register and a chainsaw. A chainsaw. The message was clear. And it led to the explosion of liars’ loans, neutron loans (which destroy people but leave buildings intact), and toxic waste. That these were terms of art in finance tells you what you need to know. ...

The consequence ... is a collapse of trust, a collapse of asset values, and a collapse of the financial system. That is what has happened, and what we have to deal with now.

Can “stimulus” get us out?

As a matter of economics, public spending substitutes for private spending. ... But it is not self-sustaining in the absence of a viable private credit system. The idea that we will be on the road to full recovery and returning to high employment in a year or so therefore seems to me to be an illusion. And for this reason, the emphasis on short-term, “shovel-ready” projects in the expansion package, while understandable, was a mistake. As in the New Deal, we need both the Works Progress Administration ... to provide employment, and the Public Works Administration ... to rebuild the country. ...

The risk we run, in public policy, is not inflation. It is lack of persistence, a premature reversal of direction, and of course the fear of large numbers. If deficits in the trillions and public debt in the tens of trillions scare you, this is not a line of work you should be in.

The ultimate goals of policy are not measured by deficits or debt. They are measured by the performance of the economy itself. Here Leader Armey and I agree. He spoke with approval, in his remarks, of the goals of 3 percent unemployment and 4 percent inflation embodied in the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978. Which, as a 24-year-old member of the staff of the House Banking Committee in 1976, I drafted.

Who will be the Chosen One?

In case you want to comment on this:

Souter Said to Be Leaving Court in June

Same as it Ever Was

I'm in a session called What's the Grand Old Party to Do? (Andrew Breitbart, Jonah Goldberg, Amy Holmes, Kathryn Lopez, Byron York, William Bennett) (update: video). So far the themes have been how much more respect they have shown to Obama than Democrats showed Bush (they are the more "civilized party"), and how proud they are that they have rejected Identity politics.

They don't appear to believe they need to change, the key appears to be to hope and work for Obama's failure - they cannot believe that his policies will be successful (because they aren't their policies). So no need to change, just wait for the other side to fail and the country will come back to them. For example, Jonah Goldberg just said we should make a list of "I told you so's" and bring them out later after Democrats fail. It's a pretty clear denial that they need to change direction. It sounds a lot like a ditched spouse telling themselve all the things that are wrong with the new partnership, and hoping and believing the spouse who left will see all the things wrong with the new situation and come running back. Eventually, they believe, the country will realize their mistake, see the light, and come running back.

Just heard "conservatives are winning the arguments" so let's start pointing that out. Yes, please do. Now they are citing polls showing that the majority of the American people are conservative, so the key is to speak to their issues.

I expected to hear real proposals for change, and I'm very glad to be disappointed to hear nothing but a return to the same old failed strategies. (But we still have about an hour left...) (update: video)

Update: I don't recall Specter being mentioned, though I did drift in and out while they were talking so it may have come up briefly. Also, during the Q&A, the audience tried to ask about and push for change, but the panel was resistant. But I'll post the video soon so you can judge for yourself.

Currently in a session with Barry Eichengreen and others on The Rise and Fall of the U.S. Mortgage and Credit Markets Roundtable. (update: video)

Update: While I'm thinking about it, I didn't get to it, but several people have recommended this session: Credit Markets (video) (David Malpass, Stephen Nesbitt, Steven Tananbaum, James Walker, moderator: Michael Milken)

"A Political Discussion"

I was glad we finished eating before Rush started talking:

Dinner Panel: A Political Discussion

Speakers:

• Willie Brown, Former Mayor of San Francisco; former Speaker, California State Assembly
• Harold Ford Jr., Chairman, Democratic Leadership Council; Visiting Professor of Public Policy, Vanderbilt University
• Ed Gillespie, Former Chairman, Republican National Committee (RNC); former Counselor to President George W. Bush
• Rush Limbaugh, Host, "The Rush Limbaugh Show"

Moderator:

• Frank Luntz, President, The Word Doctors.com

If you have the stomach for it, the video is here.

The first distortion I caught was Gillespie's claim that the energy proposal would, according to an MIT study, cost households $260 per month. Here's the Financial Times energy blog on that estimate:

Earlier this year the Republican party, using a study by MIT, argued that the cost would be $3,128 for every household [$3128/12=$261]. This was based on taking MIT’s estimate that such a scheme would raise $366bn a year, and dividing that figure for each household - something that one of the study’s authors said was ‘so wrong it’s hard to know where to begin‘.

I wish one of the other panelists would have challenged this, or any of the other distortions, e.g. Rush's claim that tax cuts pay for themselves - he used the Reagan tax cuts as an example - was not challenged at all. I didn't think the Democrats on the panel did a very good job with the tax cut questions for the most part, and I can't say I was much impressed with Harold Ford. I was, however, very surprised with the grade the audience gave to Obama given my perception of the political makeup of the attendees (we had clickers at the tables). We were asked to give an A, B, C, D, or F:

[A=37%, B=32%, C=24%, D=5%, F=2%]

"What's the Grand Old Party to Do?"

Here's one of the session's I plan to attend at this year's Milken Institute Global Conference:

What's the Grand Old Party to Do? The Future of the Conservative Movement

Speakers:

Andrew Breitbart, Publisher, Breitbart.com and Big Hollywood; Columnist, Washington Times

Jonah Goldberg, Columnist, The Los Angeles Times

Amy Holmes, Political Analyst; former Senior Speechwriter for Senate Majority Leader Bill Frist

Kathryn Lopez, Editor, National Review Online

Byron York, Chief Political Correspondent, Washington Examiner

Moderator:

William Bennett, Former U.S. Secretary of Education; Author, America: The Last Best Hope

The Republican Party has suffered major losses in the last two elections. Democrats are now in control of Congress and the presidency. Polls show the GOP's popularity at near-record lows. And the recent spat over who is the leader of the party — Rush Limbaugh? — showed that Republicans have some work to do in order to restore the party's focus and popularity. In this panel, leading conservatives will offer their views on how to rebuild the GOP.

The rest of the sessions I'll attend are mostly economics and finance related, but this one caught my eye. I'll let you know how it goes.

Paul Krugman: Reclaiming America’s Soul

We need to "regain our moral compass":

Reclaiming America’s Soul, by Paul Krugman, Commentary, NY Times: “Nothing will be gained by spending our time and energy laying blame for the past.” So declared President Obama, after his commendable decision to release the legal memos that his predecessor used to justify torture. Some people in the political and media establishments have echoed his position. We need to look forward, not backward, they say. No prosecutions, please; no investigations; we’re just too busy.

And there are indeed immense challenges out there: an economic crisis, a health care crisis, an environmental crisis. Isn’t revisiting the abuses of the last eight years, no matter how bad they were, a luxury we can’t afford?

No, it isn’t, because ... never before have our leaders so utterly betrayed everything our nation stands for. “This government does not torture people,” declared former President Bush, but it did, and all the world knows it.

And the only way we can regain our moral compass ... is to investigate how that happened, and, if necessary, to prosecute those responsible.

What about the argument that investigating the Bush administration’s abuses will impede efforts to deal with the crises of today? Even if that were true — even if truth and justice came at a high price — ...laws aren’t supposed to be enforced only when convenient. But is there any real reason to believe that the nation would pay a high price for accountability? ...

Tim Geithner ... wouldn’t be called away... Peter Orszag, the budget director, wouldn’t be called away... Even the president needn’t, and indeed shouldn’t, be involved. All he would have to do is let the Justice Department do its job... America is capable of uncovering the truth and enforcing the law even while it goes about its other business.

Still, you might argue — and many do — that revisiting the abuses of the Bush years would undermine the political consensus the president needs to pursue his agenda.

But the answer to that is, what political consensus? There are still, alas, a significant number of people in our political life who stand on the side of the torturers. But these are the same people who have been relentless in their efforts to block President Obama... The president cannot lose their good will, because they never offered any.

That said, there are a lot of people in Washington who ... probably just don’t want an ugly scene... But the ugliness is already there, and pretending it isn’t won’t make it go away.

Others, I suspect, would rather not revisit those years because they don’t want to be reminded of their own sins of omission.

For the fact is that officials in the Bush administration instituted torture as a policy, misled the nation into a war they wanted to fight and, probably, tortured people in the attempt to extract “confessions” that would justify that war. And during the march to war, most of the political and media establishment looked the other way.

It’s hard, then, not to be cynical when some of the people who should have spoken out against what was happening, but didn’t, now declare that we should forget the whole era — for the sake of the country, of course.

Sorry, but what we really should do for the sake of the country is have investigations both of torture and of the march to war. These investigations should, where appropriate, be followed by prosecutions — not out of vindictiveness, but because this is a nation of laws.

We need to do this for the sake of our future. For this isn’t about looking backward, it’s about looking forward — because it’s about reclaiming America’s soul.

I wrote this several days ago, but never posted it. It echoes much of the above:

When asked whether people will be held accountable for their actions during the time the last administration was in power, this administration says that it's time to move on, to put the past behind us, to let bygones be bygones. But that is not a reason to prevent people from having to take responsibility for their actions.

Using Anti-Trust Law to Break Up Banks that are Too Big to Fail

Simon Johnson wants to apply anti-trust laws to financial markets and use it to break up banks that are too big too fail. More vigorous enforcement of anti-trust laws is something I've been pushing here for a long time, and as I explain below I agree with this idea, but as I understand it, current anti-trust law is inadequate for this task (particularly on dimensions such as connectedness and systemic risk). So it will likely take Congressional action before we can proceed.

The reason for bringing this up is that I want to amend remarks I made in the past. I have said that there is no single villain in this crisis, no one person, not one change in the law, etc., that caused this. It was a combination of things. But as I think about it more and more, I'm not so sure. The reason? According to the story I've been telling about why the crisis happened, there were incentive failures at just about every step in  the process. Homeowners had no recourse loans giving them one way bets on home values, real estate agents are paid in a way that causes them to maximize the value of sales, mortgage brokers faced no long-run consequences from bad loans, real estate appraisers had incentives to validate sales, ratings agencies were paid by the people whose assets were being rated, CEOs and upper level management had incentives to maximize something other than shareholder value, there was a lack of transparency giving insiders an advantage, it goes on and on.There is not a single step in the process that wasn't compromised by an incentive or market failure of some type.

Looking at this at first, I concluded that it was all of these things, and more, that caused the crisis, and that it could have been stopped at any one of these steps. Had anyone at any one of the steps from the sale of the house to the complex securities traded in the shadow banking system said no, we're not doing that, the money could not have kept flowing through the system and blowing up the bubble. For example, if the mortgage brokers would have taken personal losses on mortgages that later went bad, they might have refused to finance them, and the money could not have been passed upwards to the shadow banking system where it caused such big problems. But instead, the brokers simply passed the contracts along, sliced and diced as necessary, to the next person in the finance chain.

But what should we make of the fact that every singe step in the process is compromised? Every market that was supposed to self-regulate failed? Does every single market in the chain fail at the same time through some highly unlikely coincidence? What are the chances that, on their own, independently, each and every step in the chain would have been subject to a market failure that just happened to let the bubble keep inflating? Whatever it took to keep the money flowing through the system seems to have come to pass.

So more and more I'm starting to thing there may be a single explanation after all, that the regulators of these markets were captured by powerful forces that wanted the game to continue. The power of regulators, and the will to enforce the regulations, must match - in fact exceed - the will and power of those being regulated to resist having constraints placed on their behavior. I've talked about why ideology may have eroded the will of regulators, but their will is partly a function of their power. So long as we allow huge, clearly over-sized financial institutions to exist, this problem will potentially be present.

Therefore, if the current anti-trust legislation is adequate to the task, then yes, let's give regulators the power to enforce it, and ensure we have people in place with the will to do so. But as I said above, I think current law may have glaring legal holes that need to be closed before we can use this section of the law effectively. If so, then it's time to get started crafting new legislation that is up to the task, and I hope Simon Johnson is successful in getting movement in this direction. He has my support.

Self-Regulation Doesn't Work

The last entry in the Blog War over regulation of the financial sector:

Why Self-Regulation of the Financial System Won’t Work, by Mark Thoma: I want to finish up by broadening the discussion beyond the regulation of hedge funds to the more general topic of how attitudes toward regulation have changed in recent years, how that helped to set the stage for the crisis we are in, and what we need to do to prevent it from happening again. In the process, I also want to take on Houman's point that regulators fell down on the job and let this crisis happen, so we cannot trust them in the future.

As I described in my first post, after decades and decades of instability in the 1800s and early 1900s, followed by the massive bank failures of the early 1930s, regulations were imposed to stabilize the banking system. The result was sixty years of calm in the financial sector. That's hardly a failure of regulation. It wasn't until the shadow banking system began growing outside of the regulatory umbrella that problems began to reemerge. A central theme of the posts this week has been that bringing about another decades long period of relative stability will require the regulatory umbrella to be extended to cover all firms within both the traditional and non-traditional (or shadow) banking system, hedge funds included.

I believe we made two regulatory mistakes that contributed to the present financial crisis. First, there was a push for deregulation beginning in the 1970s based upon the belief that markets are self-regulating - even to the extent of self-repairing market failures - and that caused us to go too far toward deregulation. Even the regulation that was left in place was, in many cases, not enforced vigorously, and there was little chance of new, substantial regulatory changes being put in place to match the changes in the financial marketplace brought about by rapid financial innovation. In some cases, deregulation was needed, but in many other cases the deregulation went much too far.

Second, we didn’t focus enough on macroeconomic stability. I think we came to believe that a large crash of the economy was extremely unlikely, particularly one driven by problems in the financial sector. Several factors were responsible for this. The transformative financial innovation of recent decades - particularly the slicing and dicing (securitization) of mortgages and other assets into many complex financial products - was supposed to distribute risk broadly and prevent collapse. We had the "Great Moderation" after the mid 1980s when the variability of output fell significantly and inflation stabilized at low levels, and this was widely attributed to the skill of policymakers and the deregulation of the economy. Because policy had improved, and because we believed the economy was more stable due to deregulation, we let our guard down. We continued to recognize that garden variety fluctuations in output were still possible, though we thought the Fed could mostly handle those, but big crashes were a thing of the past. Or so we thought.

Hopefully, we have been adequately reminded that large recessions can still happen, and that will motivate us to take the regulatory steps needed to bring more stability to the financial system. Some people argue that any new regulation needs to wait until the financial sector has re-stabilized to avoid creating another source of uncertainty, a view that has merit. But the will and hence our ability to impose new regulation tends to diminish when the economy recovers, and if we wait too long to get started, the opposition to any new regulation may carry the day and we'll fail to get the measures we need put into place. The time to start is now.

But what of the charge that regulators blew it and caused this crisis, and therefore we are foolish to rely upon them for stability in the future? First, as I've said, I don't think decades of stability is a failure by any definition, and the recent failure was driven by an ideological belief that markets are self-regulating and hence best left alone. Most markets can be left alone, but as Alan Greenspan has recently acknowledged, financial markets are not among them. Second, I believe the recent failure did not happen because regulators were incapable of doing better than they did, it was their belief in the self-healing power of markets - their belief that what just happened was next to impossible - that stopped them from intervening as needed. With different beliefs and a different framework for approaching the problem, the outcome is much different.

So I am not ready to throw up my hands and say this is too hard, either the private sector finds a way to take care of itself, or it doesn't get done at all. We have the capacity to learn from our mistakes, to drop ideologies and theoretical constructs that led us astray, and I have faith we will do just that (Alan Greenspan's conversion is a prime example). With comprehensive regulation to prevent the excesses that caused the problems we are having, with the flexibility for regulations to evolve as new innovations come to the financial marketplace, and with regulators who have learned the lessons of the past, we can look forward to another decades long period of stability. But if we fail to take the steps that are needed and rely too much on private markets to regulate themselves, we are setting ourselves up for this to happen again.

Houman's response is here (it's partly in response to the previous post).

Feldstein: Inflation is Looming

Martin Feldstein is worried about inflation

Inflation is looming on America’s horizon, by Martin Feldstein, Commentary, Financial Times: ...The unprecedented explosion of the US fiscal deficit raises the spectre of high future inflation. According to the Congressional Budget Office, the president’s budget implies a fiscal deficit of 13 per cent of gross domestic product in 2009 and nearly 10 per cent in 2010. Even with a strong economic recovery, the ratio of government debt to GDP would double to 80 per cent in the next 10 years.

There is ample historic evidence of the link between fiscal profligacy and subsequent inflation. But historic evidence and economic analysis also show that the inflationary effects can be avoided if the fiscal deficits are not accompanied by a sustained increase in the money supply and, more generally, by an easing of monetary conditions. ...

A fiscal deficit raises demand when the government increases its purchase of goods and services or, by lowering taxes, induces households to increase their spending. ... If the fiscal deficit is not accompanied by an increase in the money supply, the fiscal stimulus will raise short-term interest rates, blocking the increase in demand and preventing a sustained rise in inflation.

So the potential inflationary danger is that the large US fiscal deficit will lead to an increase in the supply of money. This inevitably happens in developing countries that do not have the ability to issue interest-bearing debt and must therefore finance their deficits by printing money. ...

[T]he large US fiscal deficits are being accompanied by rapid increases in the money supply and by even more ominous increases in commercial bank reserves that could later be converted into faster money growth. ...

The link between fiscal deficits and money growth is about to be exacerbated by “quantitative easing”, in which the Fed will buy long-dated government bonds. While this may look like just a modified form of the Fed’s traditional open market operations, it cannot be distinguished from a policy of directly monetising some of the government’s newly created debt. Fortunately, the amount of debt being purchased in this way is still small relative to the total government borrowing.

The Fed is also creating a massive increase in liquidity by its policy of supplying credit directly to private borrowers. Although these credit transactions do not add to the measured fiscal deficit, the unprecedented Fed purchases of more than $1,000bn of private securities have led to the enormous $700bn increase in the excess reserves of the commercial banks. The banks now hold these as interest-bearing deposits at the Fed. But when the economy begins to recover, these reserves can be converted into new loans and faster money growth.

The deep recession means that there is no immediate risk of inflation. ... But when the economy begins to recover, the Fed will have to reduce the excessive stock of money and, more critically, prevent the large volume of excess reserves in the banks from causing an inflationary explosion of money and credit.

This will not be an easy task since the commercial banks may not want to exchange their reserves for the mountain of private debt that the Fed is holding and the Fed lacks enough Treasury bonds with which to conduct ordinary open market operations. It is surprising that the long-term interest rates do not yet reflect the resulting risk of future inflation.

The government budget constraint is:

(Government spending including interest on the debt) - (Taxes) =
      (Change in the Money supply) + (Change in the Bond supply)

Or, more simply:

G - T = ΔM + ΔB

The left-hand side, government spending (G) - taxes (T), is the government deficit (surplus if the value is negative). The right-hand side shows the two ways of paying for the deficit, printing new money, ΔM, (the change in the money supply can raise prices) and borrowing from the public by issuing new bonds, ΔB (the change in debt can raise interest rates and lower growth).

Let's start with Feldstein's comments about developing countries. Suppose you are a developing country and you want to improve your country's growth rate, and you think the key is infrastructure spending. You run a deficit to accomplish this, fully intending to pay it back out of higher future growth (which may not actually happen).

But how will you pay for that spending on new infrastructure? You, as the dictator, could raise taxes but you are a poor country and the wealth and income base just isn't there to support a higher tax level. You could borrow the money, but once again the wealth level in your own country isn't high enough to allow that, so if you borrow, it will have to be from foreigners. But, unfortunately, there are some defaults in your country's recent past and the international community won't lend to you without restrictions that you just aren't willing to take on.

So once international credit dries up, becomes prohibitively expensive, or comes with too many restrictions, and if taxes cannot be raised enough, there is but one choice to pay for the infrastructure spending and the deficit it causes, print the money, and it's a choice developing countries often find themselves making. The result of these persistent deficits, then, is persistent growth in the money supply - month after month more money has to be printed to cover government operations - and the result is inflation.

Feldstein's point about quantitative easing monetizing debt can also be explained in terms of this equation. Under quantitative easing, the Fed prints new money, and uses it to purchase long-term government bonds. Thus, the right-hand side of the equation above is unchanged overall, but the money component gets larger while the bond component gets smaller as the Fed purchases government debt. (Note that the money supply also goes up if the Fed purchases private sector bonds rather than government bonds since new money has to be printed to pay for them, another one of Feldstein's points.)

Once we begin to recover, there are three ways to reduce the inflationary pressures from the growing money supply. First, we could simply reduce the money supply. How do you do that? By selling bonds to the public. Feldstein's worry is that the Fed has bought so many private sector bonds (and traded for government bonds in the process) that it won't have enough government bonds to reduce the money supply by as much as needed, and nobody will want to purchase the private sector bonds unless the price is very low, or, saying the same thing, the interest rate is [excessively] high. But high interest rates are undesirable so reducing the money supply may be difficult.

The second choice is to raise taxes. It might happen, but my inclination is to say good luck with that. But I hope I'm wrong, and maybe we can make some headway here. Third, we could reduce government spending. I don't know what the administration's goals are as to the size of government over the long-term, so I can't say for sure how much of the stimulus spending is considered to be temporary, and how much is intended to be permanent, e.g. for health care reform. But much of it was sold to the public as temporary, and I expect the administration to make good on that commitment (though "good luck with that" comes to mind again, but I'm still hopeful). If it doesn't, other goals such as health care reform could be compromised.

And speaking of health care reform, that's where the focus needs to be. The budget worries twenty years from now have little to do with the temporary stimulus measures we are taking today, going forward health care costs are the most important issue by far in terms of the budget, and everything else revolves around solving that problem.

So am I worried about inflation? Somewhat, particularly when I hear that the Fed's independence is likely to come under review by congress. Whatever doubts you have about the Fed's commitment and ability to keep inflation low in the future, I have little doubt that congress would choose to monetize the debt when faced with tough choices about how to solve a deficit problem (would congress have done what Volcker did?). I still have faith in the Fed, but as you can see from the government budget constraint above, what the Fed can do is dependent upon the actions of congress. If deficits persist, it could come down to a choice by the Fed to monetize the deficit - and risk inflation - or allow government debt to pile up and risk high interest rates. Volcker chose low inflation over high interest rates when confronted with a similar choice, but it's not completely clear to me at this point what this Fed will do in the same situation, and how much cooperation they can expect from congress in terms of reducing the deficit.

"Bank Regulators Clash Over Endgame"

The bank stress tests are nearly complete, and there's apparently a debate over what to do with the stress test information on individual banks. Shouldn't Geithner have known what they were going to do with the stress test information before announcing the program in February? Or maybe figured out what those plans were over the last two months as they've been conducting the tests? Did they have plans and then realize they hadn't fully thought them through? Didn't we learn the dangers of going to battle without thinking carefully about the endgame and planning accordingly?

This exercise was supposed to build confidence in the system, but that doesn't happen when you put a policy in place before thinking it through thoroughly. Instead of testing banks, it's ending up as a test of Geithner's credibility as a policymaker, and instead of building confidence, it threatens to undermine it:

Bank Regulators Clash Over Endgame of U.S. Bank Stress Tests, by Robert Schmidt, Bloomberg: The U.S. Treasury and financial regulators are clashing with each other over how to disclose results from the stress tests of 19 U.S. banks, with some officials concerned at potential damage to weaker institutions.

With a May 4 deadline approaching, there is no set plan for how much information to release, how to categorize the results or who should make the announcements... While the Office of the Comptroller of the Currency and other regulators want few details about the assessments to be publicized, the Treasury is pushing for broader disclosure.

The disarray highlights what threatens to be a lose-lose situation for Treasury Secretary Timothy Geithner: If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers. ...

Fed officials have pushed for the release of a white paper laying out the methodology of the assessments in an effort to bolster their credibility. ... A statement on the methods is scheduled for release April 24. ... The 19 companies may get preliminary results as soon as April 24, a person briefed on the matter said.

Regulators, all of which regularly administer exams to the lenders they oversee, have privately expressed concern about the tests and whether they will be effective, the two people said.

While weaker banks deemed to need additional capital will be given six months to raise it, financial markets may have little more than six minutes of patience before punishing them if the information is publicly released, one official said.

Geithner has said he crafted the stress test program in an effort to provide more transparency about the health of banks’ balance sheets. ... How the market handles the results is a chief worry of banks and regulators... Banking lawyers and industry officials said that the Treasury needs to be very clear with the public about the reviews, which by their design test events that may not happen. ...

"Tax Tea Party Time"

Bruce Bartlett says tax protesters "are not entitled to be taken seriously":

Tax Tea Party Time, Part Two, by Bruce Bartlett, Commentary, Forbes: Last week, I presented data comparing taxation in the United States to other major countries and concluded that Americans are not especially overtaxed. ... But what if we compare U.S. taxes today to those in the past? Are Americans more heavily taxed than those in earlier years, and do polls show greater dissatisfaction with taxes today? ... [I]t is hard to find evidence that taxes are rising or unusually high. ...

In response to these facts, some critics say that it is not today's taxes that concern them, but those that will have to be paid in coming years as a result of the large spending and deficits being projected. ...

I have problems with this argument as a justification for the sudden appearance of tea parties to protest taxes. First, many protesters implicitly assume that that the deficit has increased solely as a result of Barack Obama's policies. But in fact, the Congressional Budget Office was projecting a deficit of more than $1 trillion this year back in January...

It's true that projected deficits have gotten larger since January. But much of this resulted from deteriorating economic conditions that would have occurred even if John McCain were president. Moreover, it is absurd to assume that McCain would not have enacted any stimulus programs had he been elected.

More than likely, McCain would have proposed a stimulus plan of roughly the same size as that proposed by Obama. No doubt, it would have had a different composition--heavier on tax cuts, different kinds of tax cuts, less spending, different spending--but it wouldn't have been all that different from Obama's package given large Democratic majorities in the House and Senate and the pressure to act quickly.

I strongly suspect that many of those that loudly denounced the Obama stimulus package for its impact on the deficit would have cheered the McCain stimulus package even though it would have increased the deficit by about the same amount.

Proof of this proposition is that there were no tea parties during the years when George W. Bush was turning the surpluses of the Clinton years into massive deficits. ... Those protesting this week were only protesting because it is a Democrat who has increased the deficit. When a Republican did worse, it's like Emily Litella used to say, "Never mind."

Of course, people are free to protest whatever they want whenever they want, and are also free to change their minds. Maybe this week's tax protesters would have been out protesting even if McCain were president, but I don't think so. I believe this was largely a partisan exercise designed to improve the fortunes of the Republican Party, not an expression of genuine concern about taxes or our nation's fiscal future.

People should remember that while they have the right to their opinion, they are not entitled to be taken seriously. That only comes from having credibility gained by the correct presentation of facts and analysis and a willingness to be even-handed--criticizing one's own side when it is wrong and not only speaking up when the other party does the same thing.

"The Asset Bubble Theory of Income Inequality"

Awhile back, I asked "Do large bubbles cause income to become more concentrated, or does the concentration of income cause the bubbles?" There are other possibilities too, causation could be simultaneously and run in both directions, or it could be that there is no causation at all and both bubbles and inequality are driven by a third factor. Justin Fox says he's looked at the data, and the answer is that inequality is driven by bubbles:

The asset bubble theory of income inequality, by Justin Fox: There's been a debate going on for a few years about whether the big rise in income inequality in the U.S. over the past three decades has been at least partly a political phenomenon or purely an economic one. The first camp, whose members include political scientist Larry Bartels and economists Thomas Piketty and Emmanuel Saez (pdf), argues that decisions about taxing and government spending made since the early 1980s have increased the disparity of incomes. The second ... contends that globalization and technological advance have increased the rewards to the most skilled and reduced pay for those whose work can be done by machines or lower-paid workers overseas. Since globalization and technological advance are good things, the increase in inequality thus isn't really something we'd want to stop.

Well now, after looking at the data about the country's 400 highest earners and reading the comments by pneogy and shepherdwong, I am ready to offer an important new theory (well, not entirely new): The rise in income inequality over the past 30 years has to a significant extent been the product of a series of asset-price bubbles. Whenever the market (be it the market in stocks, junk bonds, real estate, whatever) booms, the share of income going to those at the very top increases. When the boom goes bust, that share drops somewhat, but then it comes roaring back even higher with the next asset bubble. It's not the same people raking it in every time—there's lots of turnover in the top 400—but skimming the top off of asset bubbles appears to have become the leading way to get rich in these United States in the past three decades. ...

"Kooks, Demagogues, and Right-Wingers On Tax Day"

Robert Reich is tired of hearing complaints about taxes:

A Short Citizen's Guide to Kooks, Demagogues, and Right-Wingers On Tax Day, by Robert Reich: No one likes to pay taxes, so tax day typically attracts a range of right-wing Republicans, kooks, and demagogues, all of whom tell us how awful we have it. Herewith a short ... guide ... responding to the predictable charges:

1. "Americans pay too much in taxes." Wrong: The United States has the lowest taxes of all developed nations.

2. "The rich pay too much! The top ten percent of income earners pay over 72 percent of all income taxes!" Misleading: The main reason the rich pay such a large percent is they've become so much richer ... in recent years. If you look at what they pay as individuals ... you'll see a steady decline over the years. ...

3. "The bottom 60 percent pay only 3.3 percent of the taxes!" Misleading again. Most Americans are paying more in sales taxes than they ever have. Property taxes have also been rising at a steady clip. And Social Security taxes have also risen (thanks to the Greenspan Commission), while earnings over about $100,000 aren't subject to Social Security taxes. So-called "sin" taxes (mostly beer and cigarettes) have also skyrocketed. All of these taxes take a bigger bite out of the paychecks of people with lower incomes than they do people with higher incomes.

4. "Obama is raising your taxes!" Wrong. Obama is cutting taxes for 95 percent of Americans, by about $400 per person a year... Only the top 2 percent will have a tax increase, but even this tax increase is modest. Basically, they go back to the rates they were paying under Bill Clinton... And they won't start paying this until 2011 anyway.

5. "The huge debts we're wracking up will cause your taxes to rise!" Wrong again. When it comes to the national debt, as I've said before, the relevant statistic is the ratio of debt to the gross domestic product. The only sure way to bring that debt down and make it manageable in future years is to get the economy growing again -- which requires that, in the short term, the government spend a lot of money... In the long term, the biggest source of concern is rising health-care costs. And that's something Obama and Congress are aiming to tackle.

6. "We have a patriotic duty to stand up against Washington taxes!" Just the opposite. We have a patriotic duty to pay taxes. ... President Teddy Roosevelt made the case in 1906 when he argued in favor of continuing the inheritance tax. "The man of great wealth owes a particular obligation to the state because he derives special advantages from the mere existence of government."

An acquaintance from law school, now a partner in one of Washington's biggest and wealthiest law firms, explained to me one day over lunch how he and his partners use tax rules to create offsetting taxable gains and losses, and then allocate the gains to the firm's foreign partners who don't pay taxes in the United States. That way, they keep the losses here and shelter their income abroad. I noticed he had an American flag lapel pin. "You're supporting our troops," I said, referring to his pin. "Yup," he replied, entirely missing my point.

True patriotism isn't cheap. It's about taking on a fair share of the burden of keeping America going.