Russian roulette

Worldwide, political and economic actors are watching Congress and the President with a combination of horror and astonishment.  Everyone from the Chinese government, one of the United States government’s largest bondholders, to the average American is aghast at the spectacle unfolding in Washington.  America’s top political leaders are playing Russian roulette with America’s long-term economic viability, passing the gun back and forth.  Outside actors, even the U.S. Chamber of Commerce, an otherwise influential lobbying group, are sidelined; political considerations for both leaders and rank-and-file members take precedence.

And yet, financial markets and outside actors have been relatively calm, given the circumstances.  I think there are two reasons for this.  First, a reason repeated often in the left blogosphere, most financial analysts believe that a default on American debt is an unthinkable, crazy possibility.  But, just because it’s an unthinkable possibility doesn’t obviate its likelihood.  If anything, denial of the possibility brings us closer to the brink.

Second, I don’t think anyone stands to benefit economically from an American default.  In fact, if our politicians do end up shooting America in the head, economic and political actors around the world stand to gain by propping up the American corpse.  Should the American dollar lose value, the Chinese government stands to lose significant value in their currency reserves.  

In this way, America stands as a polar opposite to Greece.  While no one seems willing to bailout the Greeks, America has a number of actors standing in wait to prop us up.  Today, we’re too important to the world economy.

But, this isn’t to say that the potential for a default isn’t troubling or dangerous.  A default would help to send the American economy down an accelerated path toward international irrelevance, and would puncture the safety net which awaits us should our political leaders fail us.

Fortunately, a resolution to the debt ceiling hostage crisis seems to be in sight.  But, Speaker Boehner and the president were close to a deal last week, and that quickly fell apart.  It’s going to be a tense forty-eight hours.

(belated) Saturday music blogging: Meat Puppets, Lake of Fire (as performed live by Nirvana)

I think one of the few things I can agree on with the average Gen Xer is the awesomeness of Kurt Cobain, and grunge in general.

Also, one could make the argument that Nirvana was the Peter Frampton of their generation; recordings of their live performances are played as often or more than their studio work.

Matt Yglesias on home loan subsidies, homeownership, and minority wealth

In response to the new Pew Research Center report on the the racial wealth gap in the United States, Matt Yglesias writes:

When Fannie Mae or other government entities create special targeted programs to “help” low-income families achieve homeownership what they’re doing is extending an extra special amount of leverage to said families. This is a real subsidy, and it can provide a real benefit to the families in question, but it’s a mighty strange thing to be doing. After all, nobody ever proposes that the government create a program to subsidize poor people making leveraged investments in oil futures. Why not just take the expected cost of the program and give it to poor people? Of course, with housing it’s complicated because the government runs other programs, mostly on the tax side, to subsidize speculative leveraged investments in land when undertaken by higher income people.

I think Matt gets this wrong in a lot of ways.  First, Matt uses the Pew Center graph that shows the disparity in median net worth, in other words, wealth, between whites and blacks and Latinos.  It may be that government-backed home loans, leverage as Matt terms it, could help to flatten this inequality.  In the two decades following World War II, racially exclusionary policies prevented African Americans and Latinos from purchasing homes or obtaining federally-subsidized home loans in most areas of the country.  While homeowning whites accumulated wealth in the form of home equity, minority communities were unable to reap similar benefits.

Decades of wealth accumulation through home equity have allowed even middle-class whites to diversify their holdings to include other assets like retirement savings and investment accounts.  This has helped to make the median white family less susceptible to the effects of a collapse in housing prices than the median black or Latino family, whose net worth is concentrated most in housing equity.

Matt’s aside about handing out subsidies for poor people to make leveraged oil futures purchases is in jest, of course, but it produces a false equivalence.  While there is substantial evidence for speculatory activity in housing and land markets across history*, major structural deficiencies in the mortgage and housing markets helped to fuel the speculative bubble in housing in the early- to mid 2000s.  In other words, for most home buyers prior to the housing bubble and construction boom of the 2000s, a home purchase was NOT primarily a speculative venture.  A look at the Case-Shiller Home Price Index and a cursory examination of the reportage before and during the housing bubble bears this out as well.

Third, say what you will about the wisdom of the federal government subsidizing home loans for anyone, but increasing homeownership is something that has been advanced as a government priority on both sides of the aisle.  As long as the middle class dream includes homeownership, political actors, however enlightened they may be, will find it is harder to slash federal home loan subsidies than it is to squeeze blood from a stone.  While I agree with Matt that home loan subsidies, especially in poorly-designed programs, create perverse incentives in the housing market, I doubt we will see a change in the system until our national myth takes a different turn.

Finally, I’m puzzled by Matt’s continual flogging of cash payments to low-income individuals and families over the provision in-kind benefits.  I mean, apart from the Econ 101 exam answer, that cash payments are more efficient, which seems like an unsatisfying explanation to me, what’s the deal?

(belated) Saturday music blogging: Harry McClintock, Big Rock Candy Mountain

In light of the brinkmanship being practiced by our federal elected officials in Washington, I propose changing our national anthem from "The Star-Spangled Banner," a story of military glory, to "Big Rock Candy Mountain," a song about hobo paradise.

Infrastructure Investment and America's Slow, Sad Path to Irrelevance

Investment in infrastructure at this stage seems like a no-brainer; interest rates are at historic lows (which should continue into the near-future, provided Congress passes an increase in the federal debt ceiling), construction workers are unemployed at a rate much higher than the national average, and a good deal of construction equipment lays idle.  

Pressing these resources into action in the months to come would provide continued short-term stimulus through increased employment and would provide a greater boost to the overall economy through the multiplier effect of infrastructure investment.  Mark Zandi, chief economic advisor for Senator McCain’s 2008 presidential campaign and economist at Moody’s Analytics, made the calculation that government investment in infrastructure projects would produce a 60 percent return on investment and would have three to six times more stimulative effect on the GDP growth than permanent tax cuts.  

Over the long-term, federal investment in infrastructure may just help to prevent America’s long, slow decline into irrelevance on the world stage.  Irrelevance?

The United States government has always undertaken efforts to improve its infrastructure, whether actively or passively.  Road, rail, air traffic, communications, energy, and water infrastructure underlie the accumulation of fantastic sums of wealth in this country.  We, as a nation, need to sow the seeds for future prosperity in the form of infrastructure investment.  

The most forward-looking leaders in American history recognized the necessity of improvements in transportation and communication for economic growth and prosperity.  The U.S. government’s continual attention to infrastructure from the nation’s founding through the 1960s provided the foundation for the prosperity of the American Century.  In a survey of the literature on the impacts of infrastructure investments on economic growth, Francisco Rodriguez, economics professor at Wesleyan University, concludes that indeed infrastructure improvements produce robust economic returns, despite the claims of conservative economists to the contrary.

Since the construction of the Interstate Highway System in the 1960s and 1970s, the federal government has embarked on few new major infrastructure projects and has lapsed in its funding of infrastructure maintenance.  The reasons for this, the development of environmental impact reports, the public comment process in building projects, the complacency of American voters, and the diminution of the federal gas tax, are all topics for another post.  However, none of these factors, taken separately or all together, are formidable enough to prevent the construction of the next round of America’s great infrastructure projects.

The U.S. government, with the help of state and local governments, historically has directly or indirectly subsidized the construction of the following types of projects:

turnpikes/postal roads, canals, railroads, telegraph and telephone lines, power plants, dams, bridges, roads, irrigation for farming, drinking water provision, interstate highways, airports and air traffic control systems, and the internet

Today, all Americans, regardless of class, political orientation, race, or other ascriptive category, benefit in some way, and most in a significant way, from these infrastructure improvements.  These projects helped to substantially raise our national productivity, and consequently, our standard of living.

As a friend reminded me last week, not many countries have the resources or the political will to develop such all-encompassing infrastructure.  This has largely been to the detriment of the citizens of those countries.  He noted that Ireland had only recently completed major stretches of motorway (roughly equivalent to American interstates) in the last few years; prior to today, many of Ireland’s major intercity roads were narrow and treacherous.  This served to restrain development in Ireland’s interior; Limerick and other interior cities continue to lag behind their coastal counterparts, like Galway and Dublin, in economic development.

We cannot take for granted that our infrastructure advantage over the rest of the world will last.  Indeed, American infrastructure, suffering from lack of maintenance funding, crumbles as the Chinese build tens of thousands of miles of highway, lay thousands of miles of high-speed rail, and create the foundations for, one would hope, a clean energy system.  The Chinese and other rising powers in the world will not lag behind for long and will not wait for us as our economic relevance wanes.  

President Obama’s administration keeps talking about “winning the future”; I think we need to be more concerned about America’s current slow, sad path to irrelevance.  Unless federal spending for infrastructure projects, like high-speed rail, modernization of the power grid, scaling up public transportation, and retrofitting and maintenance of our existing systems, increases markedly, we will almost certainly lose the present and forfeit the future.

The Twelve Days of Debt Ceiling

On the twelfth day of debt ceiling dealings, the Tea Party gave to me:

Twelve cyanide pills,



Eleven cans of beans,



Ten MREs,



Nine space blankets,

Eight booby traps,



Seven giant guns,



Six barrels of oil,



Five golden bars!



Four propane lamps,



Three gas masks,



Two bomb shelters,



And the Constitution drenched in pee!

Counterfactual of the day: President McCain's afternoon siesta

counterfactual, noun, a conditional statement the first clause of which expresses something contrary to fact

Counterfactual of the day: would Tea Partiers and Republicans be screaming about deficits, the national debt, and the debt ceiling if President McCain was taking his afternoon siesta in the West Wing?  Shh, he’s napping.

* * *

Ezra Klein’s interview with Stan Collender about the ideological discipline of the Tea Party goes to the heart of my post on the Tea Party, federal budgeting, and the debt ceiling.  Republican lawmakers are scared to death of the consequences of crossing the Tea Party leadership, and maybe rightly so.

The notion that there will be no consequences to a breached debt ceiling is wishful thinking at best and willful mendacity at worst.  Members of Congress swear an oath to support and defend the Constitution, even the parts they don’t like.  For people who claim the Constitution as their guiding principle, destroying the full faith and credit* of the United States Government feels a lot more treasonous than patriotic.

*It turns out that most everyone is using the phrase “full faith and credit” wrong.  In the Constitution, it actually has to do with the applicability of judicial rulings among the many levels and jurisdictions of American courts.  It has nothing to do with the national debt, which is explicitly addressed by Article 4 of the Fourteenth Amendment.  Shame on you, Pat Toomey.  As a Tea Party-backed member of Congress, you should know your Constitution backwards and forwards.

A love letter to the Millennials

Dear Millennial Generation,

Complacency* and unthinking consumption today will inexorably lead to persistent declines in living standards in the future.  Unfair as it may seem, a future (and present) in which upper and middle class kids attempt to replicate the lifestyles and consumption patterns of their parents is a future that’s racked by untenable levels of personal debt , declining health outcomes, and yawning economic** and political*** inequalities.  

In short, you can do better.

Love,
the future

Now, don’t you wish someone had written the baby boomers this letter forty years ago?

*EthnoSense, a blog produced by an up-and-coming Aussie ethnographer, has an interesting take on first-world youth complacency in relation to world affairs and development issues.  A worthwhile read.

*Ezra Klein, as wonkish as they come, is always a good read, too.

***At the very least, read the summary of Bartels’ paper at the top.

Saturday music blogging: Radiohead, Creep

Ever wondered how would it change the meaning of Radiohead's Creep if you reversed the personal pronouns?

When I was here before
Couldn't look me in the eye
I'm just like an angel
My skin makes you cry
I float like a feather
In a beautiful world
And you wish you were special
I'm so fucking special

But you're a creep
You're a weirdo
What the hell are you doing here
You don't belong here

You don't care if it hurts
You want to have control
You want a perfect body
You want a perfect soul
You want me to notice
When you're not around
I'm so fucking special
You wish you were special

But you're a creep
You're a weirdo
What the hell are you doing here
You don't belong here

I'm running out the door
I'm running out
I'm run, run, run, running out

Whatever makes me happy
Whatever I want
I'm so fucking special
You wish you were special

But you're a creep
You're a weirdo
What the hell are you doing here
You don't belong here
You don't belong here

Awesome.

Whither financial literacy?

Do you know what a treasury bond is?  Can you explain a stock dividend?  How compound interest works?  Amortization of capital?  If you’re like the majority of America’s young people, these concepts are as foreign as borscht.  Yet, in a country which prides itself on its free-market principles, economic knowledge should be commonplace.  America’s public schools need to incorporate financial literacy into their curricula, starting in primary school and culminating in a year-long business, economics, and personal finance course in high school.  

Most American students leave high school, and even college, without learning basic personal finance skills, greatly raising the likelihood for high levels of personal debt.  According to research conducted by Dartmouth economist Annamaria Lusardi and her co-authors, Olivia Mitchell and Vilsa Curto, financial literacy among young people is distressingly low.  Drawing data from the Bureau of Labor Statistics’ 1997 National Longitudinal Survey of Youth, the authors noted that “fewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification.”  They also highlighted the tight correlation between “sociodemographic characteristics and family financial sophistication,” finding that “a college-educated male whose parents had stocks and retirement savings was about 45 percentage points more likely to know about risk diversification than a female with less than a high school education whose parents were not wealthy.”

In a 2009 National Bureau of Economic Research working paper, Lusardi and Tufano concluded that low financial literacy correlates strongly with “incurring higher fees and using higher-cost borrowing”, while “[t]he less knowledgeable also report that their debt loads are excessive or that they are unable to judge their debt position.”  Lusardi and Tufano found that “as much as one-third of the charges and fees [on credit card accounts] paid by less knowledgeable individuals can be attributed to ignorance.”  Lusardi, Mitchell, and Curto noted that low financial literacy also led to lower rates of investing and retirement planning.

Participants who started the 1997 survey were between 12 and 16 years of age, placing their years of birth between 1980 and 1984.  Each year from 1997 to 2007, researchers circulated surveys, tracking the aggregate progress of thousands of American students from adolescence to young adulthood.  In 2007, surveyors added questions about financial literacy to the annual questionnaire for the first time.  Lusardi, Mitchell, and Curto asked subjects questions about interest rates, inflation, and investing, and found “that lack of financial knowledge is widespread among the young.”

This cohort of Americans, currently aged 26 to 31, came of age financially (getting their first jobs, obtaining credit cards, making their first housing purchases) during the years immediately preceding the great recession of 2008.  It is not coincidental that the subprime mortgage crisis occurred at time when financial literacy in this country is at such a low level.  Planet Money, a co-production of NPR News and This American Life, has the definitive story of unscrupulous lenders originating variable rate mortgages for ignorant or negligent borrowers.  Many borrowers were surprised when their interest rates adjusted upward and their previously affordable monthly payments skyrocketed.

Anecdotally, my experiences confirm the work of Lusardi, Mitchell, and Curto.  Many of my friends and I struggle with our understanding of borrowing agreements, taxes, and investing, even though most of us are highly-educated.  Much of my understanding of personal finance comes from informal conversations with my father, a pattern of financial education observed by the researchers.  While a simplification of credit card agreements and the tax code would go a long way to increase financial comprehension, young people crave the opportunity to gain financial literacy.  According to a 2009 study conducted by Sallie Mae, “[e]ighty-four percent of undergraduates indicated they needed more education on financial management topics. In fact, 64 percent would have liked to receive information in high school and 40 percent as college freshmen.”

Who would benefit from an increase in financial literacy?  A more financially-literate society would benefit everyone; the dissemination of economic principles in the wider population would almost certainly produce a more stable, more dynamic American financial system.  A reduction in personal debt, the deleveraging of the American public, may only be possible with a substantial increase in financial literacy.  An increase in financial literacy might one day lead to a society-wide increase in retirement savings, helping to ease reliance on Social Security.  Increased microeconomic knowledge could boost entrepreneurial drive in this country.

The stakeholders and structural obstacles lined up against increased financial literacy are formidable, though.  Wealthy parents pass their financial expertise on to their children; in some sense, guarding financial knowledge helps to protect high-class status.  Credit card companies, for all their posturing on financial literacy, derive most of their profits from the interest and fees charged on outstanding debts.  No one stands to lose more from an increase in financial literacy than credit card companies; and perhaps, few industries have a stronger lobbying presence in Washington than credit card companies.  Discomfort in talking about financial issues persists in a society where television and radio shows about financial planning are ubiquitous.

None of these obstacles are insurmountable though.  In a society awash with entrepreneurial spirit, kids should be learning how to balance the books along with their grammar rules and periodic tables.  Financial literacy should be as American as apple pie.

Forgive them, for they know not what they do. The Tea Party, the debt ceiling, and end times.

(With apologies to Jesus.)

Say what you will about the ideals or organization of the Tea Party movement, but they have won the battle for dominance over political messaging in the run up to and aftermath of the 2010 midterm elections.  This relatively small, yet extremely well-funded and highly vocal, group has succeeded in advancing ideas previously regarded as belonging to an unrepresentative fringe, even by Republican standards.  

Perhaps the most insidious of the Tea Party positions which have been incorporated into Republican doctrine in the 112th Congress is that a vote against an increase in the debt ceiling will set the country on a path toward fiscal responsiblity and long-term solvency.  While focusing on the symbolic significance of a ‘nay’ vote on increasing the federal government’s debt ceiling, Tea Party Republicans and Republicans, in general, are missing the real world implications of a breached debt ceiling.  Father, forgive them, for they know not what they do.  Or do they?

There are a number of reasons why establishment Republicans may have adopted an intransigent stance on the debt ceiling.  According to a McClatchy-Marist poll, most Americans want the federal government to focus on debt reduction over economic stimulus.  This perplexing stance comes in spite of the fact that an even larger majority believes the country is still in a recession.  Establishment Republicans want to stake out the high ground on debt reduction, a position they hope to use as a cudgel against the president and congressional Democrats in the 2012 elections.  

Nate Silver suggests that the Republican Party is merely trying to capture the spirit of its base in the hostage crisis which is the debt ceiling negotiations.  Certainly he’s correct, but I think the truth is more insidious than that.  While debt reduction, and its attendant budget cutting, is popular with the party’s conservative base, the congressional Republican leadership’s approach to the debt ceiling has been nothing less than feckless and cynical.  Are Republicans really willing the risk the full faith and credit of the United States government to score a few points with their base?  If nothing else, the Republican leadership’s primary goal is to harness the vitriol of the Tea Party movement and translate it into campaign contributions and votes come 2012; nothing short of co-optation will do.  

While fecklessness typifies the establishment position on the debt ceiling, faithlessness in the American government is the backbone of the Tea Party movement’s ideology.  Tea Partiers want to destroy or dismantle the federal government as we know it; Ron Paul, the movement’s ideological godfather, advocates disestablishing the Federal Reserve and the re-adoption of the gold standard, abolishing income taxes and the Internal Revenue Service, and eliminating federal regulatory oversight, including abolishing the Environmental Protection Agency and handcuffing the Food and Drug Administration.  For Tea Party-affiliated members of Congress, a breach of the debt ceiling is just one step down a long road toward their goal of an ineffectual federal government.  For the unimaginably wealthy benefactors of the Tea Party movement, clearing their businesses from the fetters of government regulation would greatly enhance their bottom line.

If the ultimate goal of the Tea Partiers is to dismantle government regulation and services in favor of allegedly lower taxes and, consequently, more freedom through the market, what is an acceptable level of privatization of heretofore public goods?  Should we have an entirely privatized road network paired with a private mass transit system?  How about outsourcing federal and local law enforcement?  Could we decommission our armed forces and use private contractors (read: mercenaries) to defend our vital national interests?  All of these questions challenge deeply the notion of a social contract in this country; a narcissistic few yearn to opt out of the responsibilities of society while wrapping themselves in the rights and privileges conferred by the Consititution.

If one were to analyze the rhetoric of Tea Party movement sympathizers, one would quickly observe a culture of quasi-apocalyptic, militaristic preparation.  In the fringe libertarian roots of the Tea Party lies a desire for the complete dismantlement of the American government’s regulatory and welfare-protecting apparatus in favor of lawless, Wild West-style free marketism.  One begins to wonder whether an ideal world for many Tea Partiers looks something like a cross between Waterworld and The Postman, two classics of American cinema.  (Kevin Costner campaigned for Barack Obama, by the way.)

Why would we, as a nation, want to follow the policy prescriptions of a group of people who are doing everything in their power to accelerate the collapse of the American government as presently constituted?

The answer to that question is not particularly clear.  In contrast, the consequences of a breached debt ceiling and the impacts of a potential government shutdown and default are absolutely clear.  As David Min at the Center for American Progress highlighted last October, failure to pass a debt ceiling increase would “forc[e] the immediate cessation of more than 40 percent of all federal government activities (excluding only interest payments on the national debt), including Social Security, military operations in Iraq and Afghanistan, homeland security, Medicare, and unemployment insurance.”  

President Obama summarized the ramifications in the capital markets during his Twitter town hall thusly, “Potentially the entire world capital markets could decide, you know what, the full faith and credit of the United States doesn’t mean anything.  And so our credit could be downgraded, interest rates could go drastically up, and it could cause a whole new spiral into a second recession, or worse.”

The shining irony of Republican posturing on the debt ceiling and the national debt is the following, a default would potentially drive up interest rates for Treasury bonds, making the cost of government borrowing much higher.  A downgrade to the government’s credit rating would make any future borrowing, beloved by Democratic and Republican administrations alike, increasingly more difficult and more expensive.  The ultimate outcome of a default would certainly be an increase in the federal debt, passing the pain of one stupid decision down to all the generations that follow.

The Republican leadership is threatening to subprime mortgage the future to win the present.  President Obama has come to the negotiating table willing to compromise with the Republicans.  It’s time to pass a debt ceiling increase.