Wichita Eagle: Tanker contract looks promising: I haven't been counting, so I'm not sure whether this is the 30th or the 300th editorial or op-ed column the Eagle has run in favor of wasting $35 billion taxpayer dollars to give the Air Force something they don't need and that will only be used to get the US involved in foreign conflicts faster than ever. This is a monumentally bad program which can and should be attacked on numerous grounds: it is a colossal waste; the whole program has been fraught with corruption (with one Boeing official, Darleen Druyun, winding up in jail, and several other resignations); and it makes a long-term strategic commitment to extending our worst desires to act as the world's police force. It isn't even much of a jobs program: this editorial, like every other, leads off with promises of jobs: the usual share promised to Wichita has been 1000, although lately Boeing has been backing down on that as they find they need to spread more jobs around to lock up more congressional support. That political clout came in handy in 2008 when the Air Force awarded the contract to Northrop and their proposal to modify Airbus airliners -- a deal which has its own cadre of congressional flacks, starting with Sen. Richard Shelby (R-AL). All that political pressure resulted in rebidding the deal on terms more favorable to Boeing.

You have to wonder why Boeing's lobbyists even bother to plant so much propaganda in the Wichita Eagle, given that the whole state's congressional delegation has long been bought and paid for. Leading the fight is ex-Boeing employee Rep. Todd Tiahrt (R-KS), who has been obsessing about tankers so long that Bush wound up nicknaming him Tanker Todd. One thing that's curious about all of this is that the current tanker fleet, based on venerable Boeing 707 aircraft that have been periodically upgraded with new wings and engines, are based and maintained here in Wichita, a steady source of jobs that would be phased out with new tankers. Even if Boeing wins the contract, they're always happy to auction the jobs to the highest (or more often the lowest) bidder. They've already wiped out 90% of their Wichita plant, and they moved their headquarters from Seattle to Chicago so the executives would be less likely to run into unemployed plant workers. Meanwhile, they've spread out facilities all over the country, wherever they could find political favor, plus they've pawned much of their work off on China and Japan -- including the wings on their new 787 Dreamliner, something hitherto regarded as the crown jewels of the airframe industry. (They've even sublet their real crown jewels -- their lobbying organization -- to China back in the 1990s to press for "most favorable nation" trade status.)

Boeing cooked up the tanker scam about 10 years ago as a way to extend their soon-to-be-obsolete 767 production line. The Air Force didn't have any interest in new tankers, and certainly didn't have any budget for it, so Boeing proposed to finance the tankers privately and lease them to the Air Force, where they'd be buried in the operating budget, away from the more competitive procurement budget. Needless to say, the lease scheme opened up hitherto unimagined avenues for ripping off the government. John McCain played a small role in shooting the lease scam down, but eventually Boeing got the Air Force to put the deal on its procurement wish list, but that wound up inviting EADS into the bidding -- after all, Airbus has their own obsolescent airliners, the US desperately needs European support for its NATO disaster in Afghanistan, and Northrup, with their own roster of paid politicians, was eager to partner with them on a cushy deal.

So now we have lobby money flying thicker than ever, but all you ever read is how many jobs would be created -- numbers that seem really paltry compared to the $35 billion outlay -- and maybe a bit about how old the KC-135s are. The antiwar movement has missed a golden opportunity to shoot this turkey down, because it raises so many issues, especially about how we view the future role of the US in world affairs, but also about how business and politics colludes in the US, and how the Defense Department juggernaut keeps feeding conflicts by investing in them.

Glenn Greenwald: Wall Street Owners Angry with their Purchase: Starts with a New York Times article where anonymous Wall Streeters are grousing about how Obama has turned on them, saying unkind things, "rousing the dirty rabble with their anti-banker rhetoric." They're so upset they're threatening to pull the plug on their contributions and flock to the Republicans -- after all, who among the Republicans would talk trash about them? Given how much influence the megabanks have had over Obama and his team, how mild his actual statements have been, they're showing awful thin skin. The arrogant sense of entitlement is shocking. It's as if they thought the backroom deals with cooked up with the Fed and Treasury were brought on by popular acclaim, or (more likely) that public opinion is totally irrelevant anymore. The Republicans have done the banks a lot of favors thus far, not least by raising such a stink over any attempt to use the same sort of restructuring the Republicans used to clean up the S&L mess -- what they called "nationalizing" the banks. The result of that was that Obama wound up rescuing the bank shareholders while leaving the banks under the same management that broke them -- and a big chunk of the real economy -- in the first place.

Simon Johnson: President Obama on CEO Compensation at Too Big to Fail Banks: Start here, but also read Paul Krugman's Clueless and Wall Street Damage Control (which includes the clueless quotes in broader context). Thanks to the federal government's "too big to fail" bank bailouts, Jamie Dimon of JP Morgan Chase and Lloyd Blankfein of Goldman Sachs will get bonuses of $17 and $9 million respectively. Obama's reaction: "I know both of those guys; they are very savvy businessmen," and "I, like most of the American people, don't begrudge people success or wealth. That is part of the free-market system." Most of the flak thus far has been technical: how can you consider a bank where the federal government steps in to whitewash its bad debts and dumb investments part of the free-market system? Johnson makes more sense when he calls it "the antithesis of a free-market system."

In some ways my reaction is less visceral than Krugman's -- "Oh. My. God." But I think there are many layers of error here, and we should start unpeeling them. For starters, Obama likens these bank titans to baseball stars who make as much or more, leading Krugman to point out that at least the ballplayers didn't start a recession. Still, it's not that simple. For one thing, ballplayer salaries aren't all that generously accepted: go into any sports bar in the country and strike up a conversation on the subject. I'd be surprised if you can find anyone who doesn't think athletes are overpaid. As for CEOs, this isn't a brand new topic. The explosion of CEO pay has been a scandal for several decades now. The beggar banks are a particularly egregious example, and not just for the numbers: it smells funny that any business could totter between the edge of the abyss and enough profit to make such bonuses possible.

In fact, the whole bonus structure of the banking business smells funny. Banking used to be a simple game of percentages: people trust you with their savings, you take those savings and loan them out to businesses and people who repay those loans with interest, some of which in turn gets credited back to the depositors, with expenses and some margin of profit for the banker covered in the difference. Usually bankers did relatively well for themselves, but they mostly did well if the community did well, and they were a part of that. These days it's not so clear. In 2007 the banking-financial services industry was responsible for about 20% of the nation's GDP, but took 41% of all corporate profits. There are two obvious problems in that sentence: one is that it's impossible to imagine why one out of every five dollars we spend should be for credit or insurance; you'd think we could do something that important a little more efficiently, especially with all the advances in computers and telecommunications. The other is that if finance is more than twice as profitable as the rest of the economy, it seems likely that a lot of the money that passes through bankers' hands is getting stuck (or sucked up) along the way.

For instance, consider this example. We have an old friend: a longtime community organizer, good politics, decent in every way. He moved to New York and got a job with one of those "socially responsible" investment firms, eventually parlaying that into his own financial services business (although he's still attached to some megabank). We put $50k into an account with him nearly a decade ago. That account is now worth $48k, which isn't the worst total imaginable but hasn't impressed us enough to up our ante. On the other hand, our friend got written up in the New York Times a while back: an article on a fancy rehab to his $1 million apartment, so evidently he's pulling in pretty good income regardless of what his clients are getting back. Now, I don't begrudge him his success -- certainly no more than Obama, who's a pretty savvy businessman in his own right, begrudges Dimon for pulling down 50+ times Obama's salary. But this still smells funny, like the entire financial services industry has turned into a giant scam for sucking up as much loose change as possible.

This suggests several things to me. For one thing, even before the bailouts the banking system wasn't functioning as a real free market. Had it been, there would have been competitive pressure to drive prices down and reward efficiency. Instead, what we see is basically an orgy of escalating fees. Competition would also drive wages down, and that would have put a lid on bonuses. It's one thing for a CEO to rape the stockholders -- that happens in practically every industry these days -- but it's extraordinary when you start handing out million-dollar bonuses just for sales commissions. You can't do that and still deliver cost-competitive product if there's any competitive pressure. The only reason for payouts like that is that you're robbing someone and feel obliged to split the take -- if for no other reason than to keep the buyer in the dark.

The net effect of doing business like that is a culture of rapaciousness -- a culture so pervasive in the industry now that the movers and shakers expect "retention bonuses" even when they fail. Joseph Stiglitz writes in his new book, Freefall (p. 80):

But even the collapse of the system did not curb their avarice. As the government provided the banks with money to recapitalize and ensure a flow of credit, they instead used the money to pay themselves record bonuses -- for the record losses! Nine lenders that combined had nearly $100 billion in losses received $175 billion in bailout money through TARP and paid out nearly $33 billion in bonuses, including more than $1 million apiece to nearly five thousand employees. Other money was used to pay dividends, which are supposed to be a sharing of profits with shareholders. In this case, though, there were no profits, just government handouts.

This doesn't follow the expected rules of capitalism, so what is really going on here? If you have no profits but pay dividends and bonuses, what exactly are you paying people for? I'll hazard a guess and say influence: the banking racket is held together by its profiteering, and threatens to fly apart if people don't get their expected cut. Lucky thing for the banks that the government stepped in to pick up the tab, or is it so lucky? Although oil, arms, and (lately) health care buy a lot of influence in Washington, do any of them have remotely as much clout as the banks? We know, for sure, that the auto industry, which back when America built things was the largest sector of the economy, doesn't come close: not only isn't GM paying out bonuses and dividends, their management has been canned and their shareholders liquidated in bankruptcy, all for chump change -- $30 billion, compared to the trillion-plus the banks have racked up. This didn't just happen: the banks have been clawing away at the regulations Roosevelt put in place in 1933 after the last time unregulated banking wrecked the economy. They finally got rid of the Carter-Glass Act in 1999, and less than 10 years later they brought back memories of 1929.

If ever a lesson was obvious, this is it. Even Obama understands that new regulations are in order. The problem is that he severely underestimates the enemy. One proof of this is that he regards bank CEOs like Dimon and Blankfein as "savvy businessmen" -- as opposed to reckless buccaneers (to put it kindly) or greedy crooks (which is more like it). There's also the problem of his team, all of whom are deeply bred in the banking culture. More generally, he has a real serious problem with deferring to rich people. That is the world he aspired to and catered to, in fact sucked up to so much that he raised more money in his presidential run than McCain or Clinton. He knows people like Dimon and Blankfein because he's cultivated them for years. In doing so he's overlooked what they really do, and bought into the myth that what's good for America's rich is good for America.

It shouldn't take more than a minute of reflection to see that that's nonsense. The banking industry is a predatory racket, backed by legal favors from Washington and, in a pinch, trillions of tax dollars. One way to prove this is to look at the fine print on your credit card bill: the interest rates are beyond usurious, and you're likely to be smacked with fees coming and going for the slightest slip-up on your part. Given the costs and risks, why would anyone do business with that credit card company? Well, try to find one that will give you a better deal. Or take mortgages: Stiglitz has a whole chapter on mortgage scams, most predatory, many flat-out fraudulent. In the lead-up to the crisis, mortgage brokers went out of their way to write bad mortgages, which could then be passed on through banks who securitized them to investors who were deliberately misled on what they were buying and what the real risks were. The only reason Bernie Madoff is in jail and Dimon and Blankfein are rolling in fresh cash is that the latter covered their tracks with more confusing paperwork and a lot of political graft.

Krugman is right that Obama is clueless here. He doesn't have the instinct to trash a rich athlete, let alone a big contributor, and he doesn't have the touch to connect with the rage so many Americans feel about his insider deals. (That is, by the way, why Michelle Malkin scored so successfully with her utterly hypocritical Culture of Corruption: Obama and His Team of Tax Cheats, Crooks, and Cronies, and that's precisely the same sense of rage that drove the Democrats out of Congress in 1994.) But he's got an even bigger problem than being clueless, and that's being dumb. He fails to recognize that what makes the banking industry so troublesome is how they use their political and financial leverage to strip the economy, and that in the process they're making everyone else's lives poorer and riskier. Moreover, it's not just the bankers who are devouring the nation. Same thing is going on with the health care industry, which got some press last week for topping 17% of GDP. Lots of people in America are smart and work hard and never get rich. The people who get rich have angles they can leverage, which could be a distinctive brand or a patent or some market niche they've cornered and rendered noncompetitive; increasingly, it's a lobbyist on K Street who perverts the government from serving the public into favoring a special interest. But what lets all of these special interests get away with it is that we're brought up to esteem the rich and successful -- indeed, is there any definition of conservative that matters other than to serve the rich?

Obama's proving himself to be a complete conservative. Guess I'm going to have to go back to describing the Republicans as something else, like neo-fascists.

Needless to say, Ben Bernanke was an improvement over Alan Greenspan, whom he replaced as chairman of the Federal Reserve, although much of that was just the relief of seeing a new face. Greenspan never deserved the reverence he cultivated, which is part of the reason his reputation collapsed so completely when his bubble burst. But Bernanke came into power the same way Greenspan did: as a senior economic adviser to a far right Republican president, promising to be a hawk against inflation. Fighting inflation -- which ever since 1980 has meant keeping wages down; it certainly has nothing to do with the prices of oil, medicine, or education -- was his game plan, and while it became pointless in a severe recession you have to figure it will again be his game plan as soon as conditions warrant -- e.g., unemployment drops to a point where workers start to have some job options.

So why did Obama nominate Bernanke for a second term? That he behaved less egregiously than Hank Paulson during the bank meltdown wasn't much of a reason. He is, after all, a respected academic, whereas Paulson was not just a businessman but an icon of the same greed that caused the crisis. Still, Bernanke got way too much credit for pulling us back from "the brink of the abyss" -- the phrase that was endlessly repeated -- and he even started basking in his own Greenspan-like cult of adulation. At one point, Paul Krugman exclaimed "thank God for Ben Bernanke"; before long, the list of econobloggers who endorsed a second term extended as far left as Dean Baker. Still, it wasn't Krugman and Baker who moved Obama to nominate Bernanke. More likely he saw it as a way to reassure the banks that nothing much will change after the crisis runs its course. Moreover, it seemed like a safe non-partisan gesture to the Republicans Obama thought he could woo (or at least reason with).

Still, I never liked the idea of keeping Bernanke on. As Bush appointments went, Bernanke was one of the least worst. (Back when his arrogance was flying full staff, you could imagine Bush handing the job over to someone like Phil Gramm.) I don't doubt that whoever holds the job should focus primarily on keeping the financial system stable and viable, and that means profitable, but lurching between bubble and bust doesn't seem like a very good way of doing that. Moreover, there is a big difference between keeping banks profitable and maximizing their profits, since the latter is often at the expense of everyone else. I'm a believer in the notion of countervailing power, so what I'd like to see is a Fed chairman who can pull against the worst instincts of the bankers, and who can provide some balance of other interests at the table: most importantly now, someone who cares about the plight of unemployed and underemployed workers. There is no reason to think that Bernanke would fill that bill.

We're finally seeing some politicians and pundits having second thoughts on Bernanke:

Matthew Yglesias: Maybe Ben Bernanke Is a Conservative Republican: Starts quoting Noam Scheiber wondering why Bernanke doesn't "show a little more savvy" by responding to popular rage against the banks, then goes on to explain:

I think a lot of apparently mysterious things about Ben Bernanke's career can be solved if you just assume that Ben Bernanke is doing things that a conservative Republican would do because he is a conservative Republican. For example, remember when conservative Republican George W Bush was president and made Ben Bernanke chairman of the Council of Economic Advisors? And remember when Bush put Ben Bernanke in charge of the Fed? And remember when Ben Bernanke didn't see the underlying problems in the financial system? But remember how, in a moment of crisis, Bernanke did turn out to believe in forceful government intervention on behalf of financial institutions and asset owners? And that time when, having stabilized asset markets, Bernanke stopped caring about unemployment and wages? And then, of course, there was the time Bernanke opposed the creation of an independent Consumer Financial Protection Agency.

If it looks like a duck and quacks like a duck, then it's probably a duck. As Paul Krugman says Bernanke "is a great economist" and he's acting just how you would expect a great economist to act, were he a conservative Republican. The only thing that's weird about this is why Barack Obama, who's not a conservative Republican, would appoint him to the single most important domestic policy job in the country.

Paul Krugman: The Bernanke Conundrum: Krugman has always been very flattering to Bernanke, whom he seems to regard as a friend -- Bernanke was chairman of Princeton's economics department when Krugman was hired there -- as well as a distinguished colleague. Still, he expresses some concerns:

The second is that since the acute phase of the crisis came to an end, and especially since his renomination, Bernanke has seemed out of touch with the severe problems that remain. He hasn't engaged in any self-criticism, at a time when we really need to know that policymakers can learn from their mistakes. He hasn't been a strong voice for financial reform. And most important from my point of view, he has seemed deeply worried about defending himself against the inflation hawks, not at all concerned with the question of whether the Fed is doing all it should to fight catastrophically high unemployment. (It isn't).

As I see it, the two things that worry me about Bernanke stem from the same cause: to a greater degree than I had hoped, he has been assimilated by the banking Borg. In 2005, respectable central bankers dismissed worries about a housing bubble, ignoring the evidence; in the winter of 2009-2010, respectable central bankers are worried about nonexistent inflation rather than actually existing unemployment. And Bernanke, alas, has become too much of a respectable central banker.

Calculated Risk: On Bernanke's Reconfirmation: Starts with some links noting increasing resistance to confirming Bernanke for a second term, then sums up:

Bernanke definitely supported policies that contributed to the crisis, and he failed to see the problems coming. However once Bernanke started to understand the problem, he was very effective at providing liquidity for the markets.

But since his renomination, he hasn't done himself any favors. He has admitted the Fed failed as a regulator, but he hasn't explained why -- or outlined a clear path forward. And Bernanke keeps saying really dumb things, like claiming incorrectly to have an exploding adjustable rate mortgage. That was an ignorant remark considering his position as Fed Chairman and the plight of so many Americans. And quoting a bank robber in testimony to Congress when addressing the long term deficit (suggesting Congress steal from middle class Americans?), and this right after he claimed he wouldn't comment on areas outside of the Fed's authority. Dumb.

One thing I'm struck by here is that even if Bernanke was exceptionally, extraordinarily "effective at providing liquidity for the markets" when it was most needed -- if, in other words, we were just plain lucky to have him in office at the time, that in itself doesn't make him the right person to run the Fed for the next four years. That's a fairly common logical fallacy, a variation of which was long ago dubbed the Peter Principle ("every employee tends to rise to the level of his incompetence"). Or, at Matt Zeitlin puts it:

The best positive case for Bernanke is that he did a good job when shit hit the fan. Which is true, but sort of irrelevant. The question is whether or not he should continue to be Fed chairman, not whether he should get a merit badge for his actions during the crisis.

The reasonable assumption here is that given another term Bernanke will revert to type, which means he will be tight with money to fight inflation and insensitive to joblessness, which is a much truer gauge of recession than what bank profit statements and stock market indexes show.

Of course, the political calculus is bizarre at this point. It's unlikely that enough Democrats would revolt to stop Bernanke if he had Republican support, but with Republicans opposing Obama at every turn, a left-right combination could work, especially if it only takes 41 votes. On the other hand, the Republicans could fillibuster any more progressive candidate -- if, indeed, Obama had any inclination to nominate one. Still, opposing Bernanke is a good talking point. Obama might be better off with the Republicans stonewalling a better candidate than trying to rationalize giving them this gift.

For more on the politics, see Yglesias.

Paul Krugman: Free to Lose. Notes that while the US and Germany have suffered similar recessions, in the US this has pretty much doubled the number of unemployed, whereas in Germany the rise in unemployment has been a small fraction of that.

Here in America, the philosophy behind jobs policy can be summarized as "if you grow it, they will come." That is, we don't really have a jobs policy: we have a G.D.P. policy. The theory is that by stimulating overall spending we can make G.D.P. grow faster, and this will induce companies to stop firing and resume hiring.

Germany's answer was to spread the pain more evenly by cutting back on hours rather than lopping whole workers off the payrolls, like we do here. But then workers have rights and political clout in Germany, unlike here, and that's something we're unlikely to change. Krugman's answer would be to do New Deal-style jobs programs, which also seem to be beyond the limits of our political vision -- Krugman admits as much, which gets him back to harping on how the stimulus wasn't big enough in the first place. As such, this actually brings him back to the mainstream argument that GDP growth delivers jobs. I'm not so sure.

One distinctive feature of unemployment in America is that the safety net is so thin that people cut loose from skilled jobs can't afford to hold out until those jobs come back. Rather, they have to take lesser jobs, and this has a bunch of effects, including creating bloat in the low-wage service sector. A lot of those jobs came into being because the labor was cheap and available, but over time they will get swallowed up by productivity, just like more lucrative jobs. Once upon a time 90% of American jobs were on the farm, but production efficiency reduced that number to 3%. Manufacturing peaked a bit less and was reduced to not much more. Same thing is well on its way in services: one harbinger is the pandemic of self-checkout machines, even though the labor replaced -- or more accurately sloughed onto customers -- is so cheap that it's hard to see any payback. In tough times (and afterward) businesses are likely to squeeze as much as they can from productivity gains before they offer more jobs. We've seen for the last several business cycles how jobs trail GDP recovery, and the trend has if anything been growing. I expect it to be worse than ever this time, because the usual business druthers are building on top of this major trend.

The general rule here is that productivity gains always eliminate jobs. It does lag a bit on an economic upswing, and it accelerates again on a downturn. You only get more jobs when you start doing new kinds of work, or vastly increase production -- the latter can only happen when you greatly increase the buying power of those who are consuming far less than they can handle (e.g., the poor), something all the less likely in a recession. Same, really, for inventing new kinds of work. One thing I wonder about here is whether the previous series of jobless recoveries isn't a trendline toward catastrophe: a point where the lagging job recovery becomes a constant state.

James Surowiecki: The Debt Economy. Good piece here on how government tax policy has led both homeowners and businesses to assume extra debt and therefore create risk in the financial system. One thing we can add is that the home interest deduction has consistently helped to inflate housing prices. On the other hand, eliminating the deduction would cause house prices to deflate, which in the short term would make owners' balance sheets look worse but as housing costs drop would actually amount to an increase in real wages. That sounds like a good idea to me. On the business side, things get far crazier. As far back as the 1980s we saw numerous leveraged buyouts where corporate assets were stripped and replaced with ridiculous debt loads. One of many ways this has hurt the economy is that it led us to value accounting tricks more than business fundamentals. Needless to say, as soon as that became possible, investors went wild with it. As Surowiecki points out in his notes, this isn't necessarily a partisan or ideological issue. But it is a case where a bunch of people think they benefit from the current scheme, and practically no one else understands how the status quo hurts them.

Given how stuck we still are in the thinking that brought these crises on, one wonders how bad it has to get before before we're willing to break loose and try something different. Health care and Iraq/Afghanistan are two things that should be perfectly clear, yet somehow aren't. Looking back in history, we see that the Great Depression was sufficient to get us a president who was willing to try new things. Maybe we're not in such bad shape yet, but I have to wonder if we were would we be up to the task. It sure doesn't look like we're up to the task of facing the real problems we do have.

Matthew Yglesias: The New Economy: Another chart, from CBPP on income inequality, contrasting the 1946-76 and 1976-2007 periods:

The obvious point is that while income for the top 1% exploded after 1976, income was virtually flat not just for the poor but all the way up to 90 percentile. Of course, we knew that, not that it's not worth pointing out again and again. But two more things this shows clearly: one is that during 1946-76 top 1% income growth was depressed relative to lower income groups: the economy has a whole did better when the rich were held back; the other is that the shift to a far richer top 1% was not a zero sum game: more income for the top 1% cost everyone on average ("per capita national income") more than the rich gained. I suppose you could propose other factors for the drop in per capita national income between the two 30-year periods, but these results do prove that government policies to promote the interests of the rich -- e.g., a massive reduction in income tax progressivism -- don't help the economy as a whole, especially the vast majority of people. This not only calls into question policies that benefit and promote the rich. It suggests we should be doing the opposite, at least returning to 1950s levels of progressive taxation, union membership, education funding, etc. -- things that tip the balance of power back towards the people who do the work.

Matthew Yglesias: The Next Tax Revolt: Had this stuck in a window for a week now, and didn't want to lose it, even though I don't have time to dig into it. Interesting point:

The United States already does about as much as any other country to curb inequality through the tax code. Where we fall short is in fighting inequality through government spending -- we just don't spend very much. If you care about inequality, in other words, the thing to focus on is not soaking the rich through the tax code but rather ensuring that there's enough tax revenue to finance generous public services. Broad social-insurance schemes like Social Security and unemployment insurance, as well as government operations more generally, are strongly progressive in their impact.

The most important issue is whether or not the government has the revenue needed to finance generous spending on social services. The Scandinavian model of a cradle-to-grave welfare state financed largely through regressive taxation is not regarded as punitive to the poor. By contrast, the pre-New Deal United States had an extremely progressive tax structure -- a simple income tax levied only on the wealthy -- but it resulted in meager revenue and financed no noteworthy social-insurance system or public services.

One thing that seems to be a general rule of US tax policy is to make taxation as visible, and therefore as painful, as possible. This actually runs counter to one of the basic (and oft-repeated) considerations in taxation: the belief that taxes disincentivize behavior. This is even considered a selling point for sin taxes. But if taxes are such a drag on the economy, it would make much more sense to make them less visible, as well as to focus them on cases where disincentives are trivial or non-existent -- e.g., taxing dead people. For the living, the least painful time to tax is whenever a transaction occurs: when you buy and sell something, or when you pay someone a wage or other remuneration. With few (if any) exceptions, the robust tax base countries Yglesias favors raise most of their taxes through a VAT, which (unlike American sales taxes) is generally buried within the cost of the purchase. VATs raise prices, which has some negative effect on demand, but they don't hit you out of the blue like property taxes do. It also helps if the burden of tax collection is placed primarily on business, which used to be the case in the US but is less so now: it is both less visible to most people and it fits in with accounting procedures that businesses need to do anyway.

I can't vouch for Yglesias's assertion that the US tax code is relatively progressive compared to other countries. One thing that is certain is that it is much less progressive than it used to be. There are a lot of ways that progressivism could be used that aren't now. In particular, I would make both corporate income and VAT taxes mildly progressive based on company size: a break for small and especially new competitors and a brake against WalMart-sized monopolies. I also think that unearned income -- interest, dividends, capital gains, gifts, estates -- should be taxed progressively according to total lifetime gains: a break for anyone starting to build a nest egg, and a brake on excessive accumulation.

Of course, there's no point raising taxes unless you plan on spending the revenues on something useful. I can come up with a long list there, too -- subjects for many future posts.

Getting ready to take a vacation of sorts. A long road trip, anyhow. Some interesting articles that I had kept open with some vague notion of writing something about them, but now will have to pack up:

• Tony Judt: Fictions on the Ground: On Israel's settlement occupation.
• Tony Karon: Iran's Crisis: The Opposition Weighs Its Options: Realistically, it's a long shot to bet against the house.
• Ezra Klein: Wealth-Care Reform: Yes, it's more about money than medicine, which is the reason health care reform is such a struggle: a lot of money is at stake, for uncertain medical outcomes.
• Paul Krugman: Not Enough Audacity. On health care: "The point is that if you're making big policy changes, the final form of the 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." Also: "Indeed, the prospects for such savings are precisely what have the opponents of a public plan so terrified."
• Kathleen Parker: Runaway Goveror: The Sequel: On Gov. Sanford, more or less, before all the facts were in, which is why she had time/space to survey the rest of the GOP. Don't miss the Newt bit at the end.

By the way, Iraq is getting bloody again, with over 200 civilian deaths this past week. I've just slogged through Thomas Ricks's Surge-celebratory The Gamble, and it's worth noting that the intelligent people behind the strategem -- a group excluding politicians like McCain and Lieberman, pundits like Kristol, and self-appointed experts like Fred Kagan -- never saw as anything more than a beachhead that would depend on significant political reconciliation to secure. The latter didn't happen for a lot of reasons, and now it's closing. Of course some people, including Ricks in his prognosticating epilogue, will attribute this to the imminent US withdrawals, implying that we can fix the problem by launching Surge II. But the fact is that there will always be a day of reckoning when US forces leave, and putting that off tries the patience of everyone in Iraq who wants to get this war settled. The idea that Iraq is a "forever war" is stuck in the heads of a few American hawks who invested heavily in it, but it's plainly absurd to most Americans, who sooner or later will manage to pull the plug. When that happens, Iraq will sink or swim. I've always felt that Iraq's odds would be better if the country is not tied to the dead weight of American imperialism. Nothing that has happened, including the adjustments Petraeus and Odierno made, has changed that.

One more small point about the Jim Lehrer-Tim Geithner interview. Geithner kept referring to how we had faced "the edge of the abyss" late last year. Lehrer kept wondering what that meant. It's one of those metaphors you hear a lot, and just casually accept given any real understanding of how badly the financial system was falling down. Still, if you're as ignorant as Lehrer evidently is, that's a reasonable question. Surprisingly, it's one that Geithner didn't have an answer for. Again, maybe his talking points preparers just didn't anticipate it, but wouldn't you figure he'd be smart enough to come up with an answer -- if only one too technical for Lehrer to understand. That he didn't, wouldn't, or couldn't, suggests to me that the term should be retired.

Biggest problem I see with the abyss metaphor is that it suggests we were on the outside looking down. Actually, we went through a short period where about $13 trillion in asset evaluations simply vanished. Anyone who lost a big chunk of that nominal wealth most likely felt they weren't merely sightseeing from a precipice -- more likely they felt they were being swept into the abyss. The sense Geithner et al. want to show is that it could have been a lot worse had they not acted, but the implication that the worst is over is rather myopic. Maybe if you're a banker that's true, but unemployment and all that goes with it are still on the rise, and even when (assuming if) the numbers return to form it will be a long time (if ever) for many people to make up the losses. The abyss metaphor is overly dramatic, but it also tends to mystify and obscure what's really happening.

I watched Jim Lehrer interview Treasury Secretary Timothy Geithner last night, and eventually walked off in exasperation. Lehrer got the deficit bug stuck in his brain and wouldn't let go. Geithner, for his part, didn't help. He kept saying that deficits should be a long term concern, and that the Obama administration will do something about when the time comes. But he never explained why the time hasn't come clear enough to get Lehrer past his broken record point. The fact is that government deficits right now not only aren't a problem; they're a necessary part of the solution. Without government spending making up for the decline in private spending the economy would keep on collapsing until it shriveled up into a pathetic little ball, only checked by the demands of bare existence. Of course, the government could limit its deficits by raising taxes, but that would undercut the effectiveness of the deficit spending. Moreover, there is little need to worry here: when the private sector increases its spending, government deficits will contract -- partly due to increased costs, mostly due to increased taxes. If you're still concerned about paying down deficits, you could safely raise taxes then. But that's never been the point behind the people pushing the deficits meme. Their point is to strangle government, even when it is most needed.

Lehrer's concern is a sign that the meme is working, which is to say that the Republicans are going to make it more difficult than should be necessary to do what's needed to keep the economy afloat. You'd think he would at least take a clue from the fact that as long as Bush was in power the Republicans could care less about deficits -- in fact, they were pumping them to record levels for no good reason (unlike, e.g., the Great Depression, World War II, or now), just as they did under Reagan. You don't need to understand much about macroeconomics to be suspicious, but somehow Republicans never get called for hypocrisy. On the other hand, Geithner most likely does understand enough macroeconomics to give a technical response, the gist of which is that Lehrer has nothing to worry about. But by giving a political response -- that we'll slay the deficits dragon as soon as the recession dragon is good and dead -- he only fuels Lehrer's suspicions. So why doesn't he answer the question in a way that would convince Lehrer? One theory is that his head is stuck so far up the banking industry's arse that he really does think that fighting deficits is the most important thing the government should do, except, of course, when doing so exposes the whole banking industry to collapse. Another theory is that he's simply tone deaf politically, as evidenced by the fact that he never realized the only thing he got for answering the same question the same way five times in a row was the same question asked a sixth time. Most people when they're trying to persuade someone will try a new tactic when they their first shot fails to register. But then I guess that's not true of most politicians, who tend to be trained rigorously to stick to their talking points, counting each opportunity to use one as a score.

Paul Krugman: Reagan Did It. Specifically, Reagan pushed for deregulation of the Savings and Loans institutions, leading to their looting, financial collapse, and bailout -- events unprecedented at the time, but repeated in spades very recently. Reagan was every bit as irresponsible with the federal debt: cutting taxes on the rich while increasing military spending, reversing a trend that had held since WWII of reducing federal debt as a percentage of GDP. Again, Bush doubled up on Reagan. "There's plenty of blame to go around these days. But the prime villains behind the mess we're in were Reagan and his circle of advisers -- men who forgot the lessons of America's last great financial crisis, and condemned the rest of us to repeat it." My stock line on Reagan even before the S&L disaster hit was that under him America's only boom industry was fraud. At the time, I couldn't understood why so many Americans let themselves be conned by him. Now I tend to see it as a flight from reality, which was occasioned as much as anything by the economic collapse of America in the 1970s -- the political fallout of Vietnam and Watergate, the US oil production peak, the trade balance tipping into the red, the collapse of the Bretton Woods system and the devaluation of the dollar, the oil shocks, the stagflation, the jacking up of interests rates to crippling levels. Reagan saw the whole country floudering, so he threw out a lifeline to the rich, and did what he could to cripple the unions and screw all those welfare queens he fantasized about. The economic recovery he got credit for was little more than a windfall for the rich, and we've been watching those reruns ever since, until they've finally collapsed.

[PS: I've seen some critiques to the effect that it was Carter who opened the door to S&L deregulation, which was true. It was also Carter who started arming jihadis in Afghanistan, even before the Soviet Union sent their troops in. Carter had a lot of other screwy ideas, but these two in particular would largely have been forgotten by now had Reagan not come around and inflated the political culture in ways that made them a lot worse than screwy.]

Paul Krugman: The Stagflation Myth: On Robert Samuelson, specifically a quote: "Johnson's economic policies, inherited from Kennedy, proved disastrous; they led to the 1970s' 'stagflation.'" Krugman explains why this is nonsense as economics, and crap as propaganda. Samuelson wrote a book recently, The Great Inflation and Its Aftermath, which tried to argue that the inflation of the 1970s was as dire a disaster as the depression of the 1930s -- a position that only a banker could support, although quite frankly even the bankers were better off in the 1970s than in the 1930s. Krugman offers a couple of textbook explanations, and points out that it was Milton Friedman who argued that the tradeoff between inflation and unemployment was unfounded. The latter is an interesting point given the pains so many economists took back then to lay the blame of inflation on wage increases (and the unions with the muscle to get them).

Atul Gawande: The Cost Conundrum. Medicare spend more money per patient in McAllen/Hidalgo County, Texas than anywhere else in the US -- about twice as much as in El Paso, which is otherwise a nearly identical metropolitan area (size, income, minority population, etc.). Gawande went there to figure out why. Start out with the comparison to El Paso:

Compared with patients in El Paso and nationwide, patients in McAllen got more of pretty much everything -- more diagnostic testing, more hospital treatment, more surgery, more home care.

The Medicare payment data provided the most detail. Between 2001 and 2005, critically ill Medicare patients received almost fifty per cent more specialist visits in McAllen than in El Paso, and were two-thirds more likely to see ten or more specialists in a six-month period. In 2005 and 2006, patients in McAllen received twenty per cent more abdominal ultrasounds, thirty per cent more bone-density studies, sixty per cent more stress tests with echocardiography, two hundred per cent more nerve-conduction studies to diagnose carpal-tunnel syndrome, and five hundred and fifty per cent more urine-flow studies to diagnose prostate troubles. They received one-fifth to two-thirds more gallbladder operations, knee replacements, breast biopsies, and bladder scopes. They also received two to three times as many pacemakers, implantable defibrillators, cardiac-bypass operations, carotid endarterectomies, and coronary-artery stents. And Medicare paid for five times as many home-nurse visits. The primary cause of McAllen's extreme costs was, very simply, the across-the-board overuse of medicine.

One thing to consider here is that this didn't result in better health results. Indeed, the only correlation anyone has ever found between health expenses and results is that more is worse.

That's because nothing in medicine is without risks. Complications can arise from hospital stays, medications, procedures, and tests, and when these things are of marginal value the harm can be greater than the benefits. In recent years, we doctors have markedly increased the number of operations we do, for instance. In 2006, doctors performed at least sixty million surgical procedures, one for every five Americans. No other country does anything like as many operations on its citizens. Are we better off for it? No one knows for sure, but it seems highly unlikely. After all, some hundred thousand people die each year from complications of surgery -- far more than die in car crashes.

To make matters worse, Fisher found that patients in high-cost areas were actually less likely to receive low-cost preventive services, such as flu and pneumonia vaccines, faced longer waits at doctor and emergency-room visits, and were less likely to have a primary-care physician. They got more of the stuff that cost more, but not more of what they needed.

In an odd way, this news is reassuring. Universal coverage won't be feasible unless we can control costs. Policymakers have worried that doing so would require rationing, which the public would never go along with. So the idea that there's plenty of fat in the system is proving deeply attractive. "Nearly thirty per cent of Medicare's costs could be saved without negatively affecting health outcomes if spending in high- and medium-cost areas could be reduced to the level in low-cost areas," Peter Orszag, the President's budget director, has stated.

Gawande talked to some doctors and hospital administrators about why McAllen is so expensive and learned almost nothing. Most in fact were surprised to find out.

One morning, I met with a hospital administrator who had extensive experience managing for-profit hospitals along the border. He offered a different possible explanation: the culture of money.

"In El Paso, if you took a random doctor and looked at his tax returns eighty-five per cent of his income would come from the usual practice of medicine," he said. But in McAllen, the administrator thought, that percentage would be a lot less.

He knew of doctors who owned strip malls, orange groves, apartment complexes -- or imaging centers, surgery centers, or another part of the hospital they directed patients to. They had "entrepreneurial spirit," he said. They were innovative and aggressive in finding ways to increase revenues from patient care. "There's no lack of work ethic," he said. But he had often seen financial considerations drive the decisions doctors made for patients -- the tests they ordered, the doctors and hospitals they recommended -- and it bothered him. Several doctors who were unhappy about the direction medicine had taken in McAllen told me the same thing. "It's a machine, my friend," one surgeon explained.

This partly explains why doctors seem to move in lockstep pushing costs up in some areas but not others. Part of it is peer pressure. Part is seeing what other doctors are getting away with. If everyone else is doing it, you start to feel dumb not getting in on the scam. But until someone sets the model, other factors hold doctor's ambitions in check -- quality care, for instance. Mayo Clinic is one of the highest quality, lowest cost health centers in the country.

The core tenet of the Mayo Clinic is "The needs of the patient come first" -- not the convenience of the doctors, not their revenues. The doctors and nurses, and even the janitors, sat in meetings almost weekly, working on ideas to make the service and the care better, not to get more money out of patients. I asked Cortese how the Mayo Clinic made this possible.

"It's not easy," he said. But decades ago Mayo recognized that the first thing it needed to do was eliminate the financial barriers. It pooled all the money the doctors and the hospital system received and began paying everyone a salary, so that the doctors' goal in patient care couldn't be increasing their income. Mayo promoted leaders who focussed first on what was best for patients, and then on how to make this financially possible.

No one there actually intends to do fewer expensive scans and procedures than is done elsewhere in the country. The aim is to raise quality and to help doctors and other staff members work as a team. But, almost by happenstance, the result has been lower costs.

Mayo replicated its success in establishing campuses in Florida ("one of our most expensive states for health care") and in Arizona.

The Mayo Clinic is not an aberration. One of the lowest-cost markets in the country is Grand Junction, Colorado, a community of a hundred and twenty thousand that nonetheless has achieved some of Medicare's highest quality-of-care scores. Michael Pramenko is a family physician and a local medical leader there. Unlike doctors at the Mayo Clinic, he told me, those in Grand Junction get piecework fees from insurers. But years ago the doctors agreed among themselves to a system that paid them a similar fee whether they saw Medicare, Medicaid, or private-insurance patients, so that there would be little incentive to cherry-pick patients. They also agreed, at the behest of the main health plan in town, an H.M.O., to meet regularly on small peer-review committees to go over their patient charts together. They focussed on rooting out problems like poor prevention practices, unnecessary back operations, and unusual hospital-complication rates. Problems went down. Quality went up. Then, in 2004, the doctors' group and the local H.M.O. jointly created a regional information network -- a community-wide electronic-record system that shared office notes, test results, and hospital data for patients across the area. Again, problems went down. Quality went up. And costs ended up lower than just about anywhere else in the United States.

Grand Junction's medical community was not following anyone else's recipe. But, like Mayo, it created what Elliott Fisher, of Dartmouth, calls an accountable-care organization. The leading doctors and the hospital system adopted measures to blunt harmful financial incentives, and they took collective responsibility for improving the sum total of patient care.

This approach has been adopted in other places, too: the Geisinger Health System, in Danville, Pennsylvania; the Marshfield Clinic, in Marshfield, Wisconsin; Intermountain Healthcare, in Salt Lake City; Kaiser Permanente, in Northern California. All of them function on similar principles. All are not-for-profit institutions. And all have produced enviably higher quality and lower costs than the average American town enjoys.

In a list that long, the fact that all of these examples are non-profits is surely not coincidence. Growth in health care costs as a fraction of GDP and growth in maximum profit seeking companies as a fraction of the health care industry must correlate closely.

Gawande argues that as far as costs are concerned, it makes no difference who pays for health care costs -- private insurance companies or government (single payer). I think that is wrong, in that private insurance companies have their own profit-seeking logic: while sometimes that works to reduce costs -- negotiating discounts, imposing limits, sacrificing coverage -- the long-term trend has been for insurance companies to get their share of the explosion in costs. Gawande skips through several of the arguments, including one he attributes to economists about having "consumers pay with their own dollars, mak[ing] sure that they have some 'skin in the game'" -- note that most of those "economists" turn out to be Republicans. He runs this by one McAllen doctor, a Dr. Dyke:

The third class of health-cost proposals, I explained, would push people to use medical savings accounts and hold high-deductible insurance policies: "They'd have more of their own money on the line, and that'd drive them to bargain with you and other surgeons, right?"

He gave me a quizzical look. We tried to imagine the scenario. A cardiologist tells an elderly woman that she needs bypass surgery and has Dr. Dyke see her. They discuss the blockages in her heart, the operation, the risks. And now they're supposed to haggle over the price as if he were selling a rug in a souk? "I'll do three vessels for thirty thousand, but if you take four I'll throw in an extra night in the I.C.U." -- that sort of thing? Dyke shook his head. "Who comes up with this stuff?" he asked. "Any plan that relies on the sheep to negotiate with the wolves is doomed to failure."

Dyke had previously joined Gawande in arguing that increasing the government role, by expanding Medicare/Medicaid, wouldn't make any difference, but he was pretty curt when Gawande suggested doing the opposite and increasing the role of private insurance companies: "What good would that do?"

Gawande concludes by pointing out that all of the incentives in the current system influence health care providers to become more rapacious, like the norm in McAllen. If left unchecked, the result will be pretty much like we've already seen over the last 20-30 years, as the cost of health care in the US has grown from about 10% of GDP to over 16%, while the US has dropped notch after notch in worldwide health results. The sales pitch today isn't much different from the highwaymen of yore: your money or your life.

Pinning this on the "culture of money" is a good start, but we need first to recognize that the health care industry didn't create the culture of money. It's a big part of American history, basically an idealization of the rags-to-riches myth that became so useful politically during the Reagan-to-Bush era when American politicians took flight from reality. Health care is especially sensitive to this extortion because health is one of the few things Americans still value more than money. But that very point, which allows the industry to rip us off every which way, shows why complaining about costs cannot win the argument for change. The problem with the US health care industry isn't how scandalously expensive it is; the real indictment is the shoddy results and gross unfairness of the system. That's why the Mayo example is so powerful: by seeking a better quality system they incidentally came up with one that is less costly. Gawande doesn't mention it, but the V.A. provides another example, where the drive toward better quality results is paying off in reduced costs. Free software is another case where an initial goal of better software pays off in much reduced costs.

All of this would be easier if we were able to undermine the social instinct toward personal greed. This is a self-conflict that most occupations have -- only businessmen are expected to always choose maximizing profit over whatever value their goods or services may have. Professionals, like doctors, are usually limited by their professional standards. In times when there was relatively less inequality -- e.g., from the New Deal into the 1970s, when top marginal tax rates were confiscatory (our way as a society of saying "enough is enough") -- it was much easier to hold professionals to standards and ethics. In a laissez-faire world not even the rich are ever rich enough, so traditionally responsible professionals are sorely tempted to corruption. That's what we're really seeing in McAllen, which is why part of the solution is to change our political and social view of wealth: we needn't go so far as to treat wealth as proof of vileness, but we do need to reduce its valuation below the threshold of corruption. A more equitable society is less prone to conniving, deceit, dishonesty; it is one where people act more responsibly because responsibility is more esteemed. It is one where "your money or your life" is treated as the reprehensible notion it is.

The June 11, 2009 issue of The New York Review of Books has a roundtable on "The Crisis and How to Deal with It": Jeff Madrick moderating, with Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros, and Robin Wells. Several good points here, including a particularly lucid explanation by Krugman on the "global savings glut" at the heart of the collapse. The argument there is that with net worth falling, those who can afford to want to save more and spend less to build back their asset levels. However, they lack investment opportunities, because there is already a lot of excess productive capacity and no real demand for more:

That saving ought to be translated into investment, but the investment demand is not there. Housing is flat on its back because it was overbuilt; housing bubbles collapsed not only in the United States, but across much of Europe. Many businesses cannot get down the financial system. But even those that do have access to capital don't want to invest because consumer demand is not there. Between the housing bust and the sudden decision of consumers to save, after all, we have a world with lots of excess capacity.

He doesn't go any further in unpacking why this is the case, but I believe that it is based on the growing efficiency of the rich in politically exploiting their advantages vs. everyone else; i.e., it's the consequence of growing inequality. Moreover, this trend goes back well before it turned into crisis, with much of the transfer shunted into asset bubbles. Indeed, it's tempting to say that the whole rich-get-richer process has been illusory, at least to the extent that it's been based in leveraging credit to inflate the asset prices that we now see collapsing. On the other hand, the complementary poor-get-poorer process is all too real. This process has been masked by technological gains, by credit growth compensating for wage stagnation, and by a largely unaccounted for risk shift. However, as the system collapses, debts become unserviceable and risks increasingly become real, reducing demand and dragging the real economy down.

The other important quote here is from Robin Wells:

There were net exporters, such as China, Japan, and Germany, and the net importerse of capital, the largest, of course, being the United States. This import of capital allowed us to consistently live beyond our means, first by running fiscal deficits, not raiaing enough tax revenue to finance the government, and then also through, ultimately, the leverage that we used in housing, and in commercial real estate, and in leverage buyouts. And this continued; it grew because there was no point anywhere along the line at which anyone would say "halt."

The persistent imbalances led us to pretend that we could keep borrowing without having sufficient tax revenue to pay for the government. And if your house prices are rising, if the stock market is going up -- which of course is going to happen if you have cheap money -- it puffs up the value of the assets, and disguises a lot of other structural problems such as rising inequality and corruption.

With this inflow of capital from abroad, the financial secctor in the United States also became larger and larer relative to the rest of the economy, with GDP tilted disproportionately toward the financial sector.

How do we start to get out of this? In many ways we're almost adverse to bringing up the situation in which we find ourselves with the net exporting countries. I thought it was quite interesting a few weeks ago when many Chinese officials were saying that it was proper, and it was good economically, that the US continue to run persistent trade imbalances with China, that the Chinese yuan did not need to be appreciated, that we should continue doing the things we always have, and that the US should make sure that the value of Chinese assets were not diminished by any change in the value of the dollar. It should have been clear that this was not a sustainable relationship, but no one was willing to say that.

China-vs-America is just one example, but it provides a very good example of the problem. China uses its trade advantage to grow its real economy, while the US uses the capital returns to grow its imaginary economy -- basically, to inflate the assets of the rich, whose inordinate political clout sustains it. This cycle depresses working wages in the US, which one way or another come back to the rich in the US, if not as lower costs than as capital flows. So one immediate effect is greater inequality in the US, but the longer term effect is less productivity in the US (and more in China), so there is ultimately less real wealth here (and more there).

Turning this around is going to take a massive political shift in the US, much more so than the Bush-to-Obama shift.

Update: Turns out the piece referred to above is online here. Also see Brad DeLong's analysis here. I didn't pay a lot of attention to what Niall Ferguson said -- because I pretty much never pay attention to what Ferguson says. (And why does Amazon keep sticking his books in my recommended list?) But one thing I did notice that bugged me was his comment that in aiming to stave off a repeat of the 1930s we might wind up with a repeat of the 1970s. Aside from Dick Nixon, what's so bad about that? The inflation created a mixed bag of losers and winners, whereas the depression hurt virtually everyone -- as did, for that matter, the Volcker recession of 1979-82, widely credited for breaking the back of inflation, mostly by cutting the labor movement off at the kneecaps. Add all that up and, sure, the 1970s were a raw deal, but to get there you have to assume that inflation inevitably gave us Reagan. That's pretty much like saying Germany's 1920s inflation gave them Hitler -- sure, there's a connection there, but it's not a necessary one. More like a lot of capitalist and militarist grumbling and the bad luck to get their wishes fulfilled.

Matthew Yglesias: The Market Can Stay Irrational Longer Than You Can Stay Solvent: Starts with a quote from a review of Richard A Posner's The Failure of Capitalism: The Crisis of '08 and the Descent Into Depression, a book which has thus far proven noteworthy primarily for its admission that Chicago School dogma has been outpaced by recent economic events. The interesting thing here is that Posner still argues that the whole mess came about through no lapse of rationality: everyone, it seems, was acting rationally in pursuit of their interests. One could take this further and argue that not only does rational self interest cause problems, it also prohibits solutions: specifically any solution that doesn't allow enough private profit to entice private investment. Yglesias has been reading Keynes, and finding gems like the long one he quotes. Some fairly dense economic logic pays off surprisingly:

Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.

After all, the conventional path is the one you never have to explain or excuse: who could fault one for failing conventionally? Well, unconventional people, but who listens to them? In fact, in any arena that is subject to pundit purview, the unconventional will be relentlessly disparaged and denigrated. This leads to such nonsense as Iraq war supporters, even when acknowledging their own mistakes, denying credit to the Iraq war opponents who were right in the first place.

Moreover, if I read this quote correctly, I think the conclusion is that capitalism will never result in the general good, because it will always pursue short-term advantages over long-term goals. We tend to think otherwise because we tend to link progress with capitalism. Sure, there has been some correlation up to a point, but I have to wonder if we aren't past that point now. A big part of the difference between earlier capitalism and today's is that we've become much more efficient at converting products to profit, and products have been ever more subsumed under the profit motive. (In fact, with financialization the products are nothing more than ruses for pursuing pure profit.) One no longer starts a company to build some useful widget; these days one starts a company to make a profit on investment, and the widget is at best a means to that end. However, before long that logic -- as products are hollowed out to provide the most profit for the least utility -- starts to make everything worthless. With the coming of the supply-side cult, we've been living in a world that pursues production at the expense of consumption. That world has overshot, with too much productive capacity and not enough people who can afford to pay for it. The overshoot is bringing the pendulum back -- after all, the real economy requires consumption and production to match -- and that will change how we think about the economy. We might, for instance, consider applying the reason that so enhanced production to the art of consumption. Consumption, after all, is based on some sense of need. If we start asking how can we fill that need without limiting ourselves to how producers can make money off of it, we open up a lot of new possibilities. Sooner or later I'll pursue this topic at greater length: breaking down the tollgates that frustrate free software, free information, and free entertainment is just the start.

Andrew Leonard: Simon Johnson says: "Break up the banks": Amen to that. It seems like the Obama administration has gone as far as possible not only to avoid nationalizing (actually, just taking receivership) of the banks but to make sure that the banking industry emerges intact. This seems wrong to me, not simply because the industry deserves a good shaking up after what they've done, but because the concentration that Citigroup, Bank of America, etc., had achieved on their way to wrecking the economy wasn't a good thing in the first place. In fact, it was a horrible thing. The very fact that we can talk about banks being "too big to fail" shouts out that we have banks that are too big to be trusted to compete.

Johnson gets all that right. Leonard's summary is:

It's time to get all Teddy Roosevelt on Wall Street, declares the former chief economist of the IMF. Bring out the big antitrust artillery and fire away.

One problem here is that I can't ever recall Obama or Attorney General Holder appointing anyone to head the Department of Justice's antitrust division. Of course, the Bush administration never met a trust they didn't like, so the entire section has had an eight-year sabbatical, but as recently as Clinton there were antitrust cases, like the one against Microsoft -- quickly dismissed by Ashcroft, even after a conviction. I think antitrust is important, not least for old-fashioned reasons: to protect businesses from predatory acts by other businesses, but also to insure that markets function by providing adequate competition, and to prevent companies from overwhelming and disabling competitors. I'd go even further than antitrust law has ever gone before: I'd get rid of patents and other proprietary restraints, and I'd introduce progressive taxation on company size as well as profits to help balance the playing field -- and for that matter to disincentivize excessive growth. The latter might even change the psychology of business: for years now we've lived in a world of winner-take-all schemes, but if those were impossible, most of the corporate management playbook would go out the window. That, I think, would be a good thing. After all, for every disincentivized rich tycoon, there are plenty more would-be entrepreneurs who'd like a shot in the game.

Still, a good start would be to resume enforcing antitrust law. And breaking up the insane conglomeration of banks would be a pretty popular place to start. The only novelty to it would be that instead of breaking up corporations that are too successful, we'd be breaking up failures.

Helena Cobban: On bank governance: A modest proposal: Another variation on this theme, inspired by a picture of the CEO's of 19 major US banks.

Andrew Leonard: The prophets of doom: A parting gift before Leonard went off on vacation: thumbnail sketches of 14 economists, bloggers, businessfolk, and politicians down on Obama's team's economic game plan: mostly because the stimulus isn't big enough and/or the bankers are getting too much gravy and too little castor oil -- the True Republicans, of course, are exceptions, gravitating on a plane in some other universe. Paul Krugman leads off, followed by Greg Mankiw for symmetry, then Simon Johnson for something else. Some pundits are out of my orbit, while other names could easily be added: letters writers nominated Joseph Stiglitz, and Paul Craig Roberts wrote in nominating himself. Actually, none of these people (well, except Michele Bachmann) strike me as true prophets of doom -- that would be more like James Howard Kunstler. They just recognize that the economy has gotten into a bigger mess than the politicians are able to grasp. Not a great analysis, but a useful cribsheet.

Paul Krugman: Green Shoots and Glimmers: On why a little optimism on the economy at this point isn't likely to be enjoyed. Four reasons:

1. Things are still getting worse. Like industrial production, mortgage foreclosures, jobs, world trade . . .
2. Some of the good news isn't convincing. Like bank profits at Wells Fargo and Goldman Sachs.
3. There may be other shoes yet to drop. Like commercial real estate, credit card losses, who knows what else. The Great Depression sunk in stages, not on a steady line.
4. Even when it's over, it won't be over. Like job recovery, which severely lagged the last two recessions.

Seems true to me. I might even say cautiously optimistic. Part of the reason Obama's people have started to play up positive news is that they recognize that psychology is a player in this game. That's also good reason to be skeptical of what they say, and what others in the business say. The problem is likely to come when they feel compelled to back up their optimism by changing course.

One thing I've seen nobody talking about is the Republicans' death wish. I suppose that's because it's so easy and satisfying to focus on how stupid they are, but one thing they've always been able to keep focused on in the past is political edge. They know, for instance, that when they are in power, the economy had better not tank on their watch, or like Bush I it's likely to be a short one. On the other hand, the best route back to power when a Democrat is president is to choke the economy, as happened to Carter. The Republicans stoned Clinton's stimulus in 1993, but the economy recovered anyway. They tried to do the same to Obama in 2009, but in 2001 when their own goose was getting cooked, they cried out for all the stimulus they could get -- especially in the form of tax cuts. If principles mattered to them this would be mere hypocrisy. Now, there behavior is more like sabotage.

The Wichita Eagle had two front page articles today: one on a projected $328 million shortfall in the Kansas state budget due to the economic downturn; the other on $18 million worth of construction projects in the Wichita area that will be built with stimulus money that we couldn't otherwise afford. One of the local Republicans was quoted griping about piling up all of that debt, a complaint they were never able to voice back when Bush launched his trillion dollar bonfire in Iraq and Afghanistan.