Posts Tagged ‘Ezra Klein’

Campbell’s Law

Wednesday, March 30th, 2011

Andrew Sullivan and Ezra Klein both posted today about Campbell’s Law, citing an article by Dana Goldstein in the Daily Beast about corruption in schools under Michelle Rhee’s chancellorship in Washington, D.C.:

In the social sciences, there is an oft-repeated maxim called Campbell’s Law, named after Donald Campbell, a psychologist who studied human creativity. Campbell’s Law states that incentives corrupt. In other words, the more punishments and rewards—such as merit pay—are associated with the results of any given test, the more likely it is that the test’s results will be rendered meaningless, either through outright cheating or through teaching to the test in a way that narrows the curriculum and renders real learning obsolete.

I can think of cooler things that might be called Campbell’s Law — but such as it is, it goes a long way to explaining the flaw in capitalism without enough regulation. Organizing an economy around the pursuit of currency is efficient but not in the way it was intended — as any shortcut or corruption is utilized, as every possible cost is externalized.

It also goes a helps explain — but not as completely — how government tax incentives subsidizing gasoline, corn, middle class mortgages, student loans, and health care costs has led to escalating demand for these resources — seemingly distorting the market more than a direct intervention would. There seems to be something about tax incentives that distorts markets more than direct interventions. (A topic that seems up Matt Yglesias‘s alley to explore.)

On a related note, when taxpayers demand their receipt for government services– it should reflect not only disbursements, but the cost of tax benefits and loopholes.

Some brief thoughts on Rand Paul

Thursday, May 20th, 2010

All those people who brand Rand Paul a racist and use this clip to prove it aren’t worthy of serious consideration. It is either ignorance of libertarian philosophy or partisan hackery to claim so. It isn’t racism to claim that the government has no right to intervene in private businesses to stop discrimination.

As Ezra Klein explains though, it is relevant:

Paul’s defense of himself is that his take on the Civil Rights Act has nothing to do with race and so he is not a racist. But by the same token, the fact that Paul’s view on the Civil Rights Act is so dominated by his libertarian ideology that he cannot even admit race and segregation into the calculus is exactly why this is relevant to Paul’s candidacy, why it’s an issue and why it’s among the best evidence we have in understanding how he’ll vote on legislation that comes before him. If this isn’t about race, then it is about all questions relating to federal regulation of private enterprise. As a senator, Paul will be faced with that question frequently. And his views on it are clearly very, very far from the mainstream.

These libertarian views do reflect accurately an ideology whose language is gaining prominence in the GOP in the form of the Tea Party movement. This movement in its different incarnations has been around for some time, and emerged as a populist right-wing backlash to John F. Kennedy, to Bill Clinton, and now to Barack Obama. In each instance, the movement died as soon as it gained a toehold on power as it had no real agreed-upon agenda other than opposition to “liberalism=socialism=communism.”  Andrew Sullivan puts his finger on an important aspect of this:

[T]he tea-party movement [is] un-conservative. It is dealing with the world as it would like it to be, not as it is. It has an almost adolescent ideal it cannot compromise. I think that makes the movement, in its more serious incarnation (like Paul), a useful addition to the public debate, especially in reminding the GOP of some core principles it threw away under Bush and Cheney… Its bright, fixed glare also helps us illuminate what we believe in – merely by revealing what we no longer believe in.

I agree with Connor Friedsdorf and Andrew Sullivan and Daniel Larison that Rand Paul’s nomination is a good thing. Even if he wins the Senate seat, I see this as a good thing. To have his voice, his ideological clarity, as 1 of 100 would improve the Senate. The fact that his extremism could lead him to side with the Democrats on some issues (if he was able to resist the partisan pressures in Washington, which is a big if) and that his extremism could simultaneously help discredit and marginalize the GOP are both bonuses. Even without these, I would see his election as a net positive as it would give some measure of power to those people whose inchoate anger has helped form the Tea Party movement and force its members to make hard decisions about what they actually want.

Rand Paul is the rare right-wing politician who doesn’t just bad-mouth government but wants to get rid of the Federal Reserve, who opposes the government encroachment represented by the Civil Rights Act of 1964 as well as the PATRIOT Act and the Affordable Care Act, who opposes Social Security and Medicare as well as any new additions from Obama. He would never campaign in favor of Medicare while calling Obamacare socialism — he would deride them both as such.

This is why I see Rand Paul as a clarifying figure who can help move our national debate forward — if he remains honest.

[Image by Gage Skidmore licensed under Creative Commons.]

How the Supreme Court Nomination Process Rewards the Type of People Who Defer to Presidential Authority

Wednesday, May 12th, 2010

David Brooks did a great job today of describing the type of individual our current Supreme Court confirmation process tends to reward (to paraphrase):

A person whose career has dovetailed with the incentives presented by the confirmation system, a system that punishes creativity and rewards caginess, and who therefore we are forced to construct arguments based on speculation because they have been too careful to let their actual positions leak out.

Brooks locates this type of individual — as is his wont (see for eg. bobos) — in a general sociological group:

About a decade ago, one began to notice a profusion of Organization Kids at elite college campuses. These were bright students who had been formed by the meritocratic system placed in front of them. They had great grades, perfect teacher recommendations, broad extracurricular interests, admirable self-confidence and winning personalities.

If they had any flaw, it was that they often had a professional and strategic attitude toward life. They were not intellectual risk-takers. They regarded professors as bosses to be pleased rather than authorities to be challenged. As one admissions director told me at the time, they were prudential rather than poetic.

Brooks sees this as a flaw in his evaluation of Elena Kagan:

Kagan has apparently wanted to be a judge or justice since adolescence (she posed in judicial robes for her high school yearbook). There was a brief period, in her early 20s, when she expressed opinions on legal and political matters. But that seems to have ended pretty quickly…

But I was struck by the similarity of David Brooks’s evaluation of Elena Kagan now and Dahlia Lithwick’s evaluation of John Roberts when he was nominated:

I knew guys like [John Roberts] in college and at law school; we all knew guys like him. These were the guys who were certain, by age 19, that they couldn’t smoke pot, or date trampy girls, or throw up off the top of the school clock tower because it would impair their confirmation chances. They would have done all these things, but for the possibility of being carved out of the history books for it…

My sense that Roberts has been preparing for next month’s confirmation hearings his whole life was shored up by a glance at the new memos released by the Library of Congress yesterday. As early as 1985, Roberts was fretting about how federal government records disclosed to Congress before confirmation hearings could tank a nomination.

Roberts was widely seen to have been very “careful” and “cautious” throughout his life — intellectually and otherwise. Yet David Brooks had a different reaction to Roberts nomination:

Roberts nomination, how do I love thee? Let me count the ways.

Less important than this minor bit of hypocrisy (which Bill Scher for the Huffington Post mines for all it’s worth) – or perhaps partisan blindness — on the part of David Brooks (and haven’t we all been there?) — is the substance of his critique. Brooks never quite connects the dots — but seems on the verge of making a profound point.

There seems to be a connection between the personality type of Kagan and Roberts — the type of cautious, establishment-minded personality rewarded by our current nomination process — and the tendency of this type of person to defer to the highest authority figure in the American psyche, the President of the United States. In Roberts and Alito, we have 2 of Brooks’s Organization Kids who also happen to be 2 of the most pro-presidentialist Supreme Court justices in history. Though Kagan’s views on this aren’t clear — as she has made some comments indicating an expansive view of executive power only in the context of discussing the views of others — we do know that she felt the Bush administration went too far, unlike Roberts and Alito.

Though I would have preferred a justice more wary of executive power, for me personally, this concern is not enough to give me reason to oppose Kagan’s nomination and appointment. I do want to know more about Kagan’s views on this — to see whether and to what degree she conforms to Glenn Greenwald’s fears (which are, as it should go without saying regarding Greenwald, hyperbolic). Lawrence Lessig has pushed back convincingly against Greenwald on this issue — and of course, Greenwald responded by going ad hominem.

Both Greenwald’s and Brook’s critique ignores the structural element to this pick as neither addresses the degree to which our current confirmation process tends to reward cautious people whose public views are somewhat ambiguous but who are close enough to those in the executive branch that the President nominating them trusts them. The type of person who would meet these criteria would not tend to be the strongest supporters of the Court as a check on executive power. Even aside from the generational category of “Organization Kids,” this would tend to place people deferential to presidential authority into the Supreme Court.

—–

Also interesting: Ezra Klein posits a better analogue than John Roberts to understand the Kagan pick is Barack Obama himself:

When Obama announced Kagan’s nomination, he praised “her temperament, her openness to a broad array of viewpoints; her habit, to borrow a phrase from Justice Stevens, ‘of understanding before disagreeing’; her fair-mindedness and skill as a consensus-builder.” This sentence echoes countless assessments of Obama himself.

Obama is cool. He makes a show of processing the other side’s viewpoint. He’s more interested in the fruits of consensus than the clarification of conflict. In fact, just as Kagan is praised for giving conservative scholars a hearing at Harvard’s Law School, Obama was praised for giving conservative scholars a hearing on the Harvard Law Review. “The things that frustrate people about Obama will frustrate people about Kagan,” says one prominent Democrat who’s worked with both of them.

[Image by the Harvard Law Review licensed under Creative Commons.]

Must-Reads of the Week: The Obama 20-somethings, Graham’s Cojones, Fannie/Freddie, Naive Conspiracy Theorists, Saban, Obama=Socialism, Political Imitations, Underdogs, Lost!, and Julián Castro

Friday, May 7th, 2010

This is a busy season for me — but there should be some more substantive blog posts next week…

1. The Obama 20-somethings. Ashley Parker for the New York Times Magazine profiles “all the Obama 20-somethings” in an interesting profile of the new crowd in D.C. of smart, highly educated, highly motivated, civic-minded, young Obama staffers.

2. Lindsey Graham’s Cojones. You gotta hand it to Lindsey Graham — if nothing else, he’s got guts — from Dana Milbank of the Washington Post:

The lone pro-gun lawmaker to engage in the fight was the fearless Lindsey Graham (R-S.C.), who rolled his eyes and shook his head when Lieberman got the NYPD’s Kelly to agree that the purchase of a gun could suggest that a terrorist “is about to go operational.”

“I’m not so sure this is the right solution,” Graham said, concerned that those on the terrorist watch list might be denied their Second Amendment right to keep and bear arms.

“If society decides that these people are too dangerous to get on an airplane with other people, then it’s probably appropriate to look very hard before you let them buy a gun,” countered Bloomberg.

“But we’re talking about a constitutional right here,” Graham went on. He then changed the subject, pretending the discussion was about a general ban on handguns. “The NRA — ” he began, then rephrased. “Some people believe banning handguns is the right answer to the gun violence problem. I’m not in that camp.”

Graham felt the need to assure the witnesses that he isn’t soft on terrorism: “I am all into national security. . . . Please understand that I feel differently not because I care less about terrorism.”

Jonathan Chait comments:

There’s a pretty hilarious double standard here about the rights of gun owners. Remember, Graham is one of the people who wants the government to be able to take anybody it believes has committed an act of terrorism, citizen or otherwise, and whisk them away to a military detention facility where they’ll have no rights whatsoever. No potential worries for government overreach or bureaucratic error there. But if you’re on the terrorist watch list, your right to own a gun remains inviolate, lest some innocent gun owner be trapped in a hellish star chamber world in which his fun purchase is slowed by legal delays.

3. Why Isn’t Fannie/Freddie Part of FinReg? Ezra Klein explains why regulation of Fannie Mae and Freddie Mac isn’t in the financial regulation bill.

4. Naive Conspiracy Theorists. William Saletan contributes to the whole epistemic closure debate with a guide on how not to be closed-minded politically, including this bit of advice:

Sanchez goes through a list of bogus or overhyped stories that have consumed Fox and the right-wing blogosphere: ACORN, Climategate, Obama’s supposed Muslim allegiance, and whether Bill Ayers wrote Obama’s memoir. Conservatives trapped in this feedback loop, he notes, become “far too willing to entertain all sorts of outlandish new ideas—provided they come from the universe of trusted sources.” When you think you’re being suspicious, you’re at your most gullible.

5. Saban. Connie Bruck in the New Yorker profiles Haim Saban, best known for bringing the Mighty Morphin Power Rangers to the United States — but who made much of his fortune licensing the rights to cartoon music internationally. As a side hobby, he tries to influence American foreign policy towards Israel. He doesn’t come off very well in the piece, but at least this one observation seems trenchant to me at first glance:

Saban pointed out that, in the late nineties, President Clinton had pushed Netanyahu very hard, but behind closed doors. “Bill Clinton somehow managed to be revered and adored by both the Palestinians and the Israelis,” he said. “Obama has managed to be looked at suspiciously by both. It’s not too late to fix that.”

6. The Obama=Socialism Canard. Jonathan Chait rather definitively deflates Jonah Goldberg’s faux-intellectual, Obama=socialism smear:

For almost all Republicans, the point of labeling Obama socialist is not to signal that he’s continuing the philosophical tradition of Roosevelt, Eisenhower, Kennedy, Johnson, Nixon, Carter and Clinton. The point is to signal the opposite: that Obama embodies a philosophy radically out of character with American history. Republicans have labeled Obama’s agenda as “socialism” because the term is widely conflated with Marxism, even though Goldberg concedes they are different things, and because “liberalism” is no longer a sufficiently scary term. Republicans endlessly called Bill Clinton a liberal, Al Gore a liberal — the term has lost some of its punch. So Obama must be something categorically different and vastly more frightening.

Goldberg is defending the tactic by arguing, in essence, that liberalism is a form of socialism, and Obama is a liberal, therefore he can be accurately called a socialist. But his esoteric exercise, intentionally or not, serves little function other than to dress up a smear in respectable intellectual attire. [my emphasis]

7. Imitating the Imitators of the Imitation. This Politico piece by Mike Allen and Kenneth P. Vogel explains how some elite Republicans are trying to set up a right wing equivalent of the left wing attempt to imitate the right wing’s media-think tank-political infrastructure:

Two organizers of the Republican groups even made pilgrimages earlier this year to pick the brain of John Podesta, the former Clinton White House chief of staff who, in 2003, founded the Center for American Progress and was a major proponent of Democrats developing the kind of infrastructure pioneered by Republicans.

And of course, that right wing infrastructure was meant to imitate the left wing policy-media infrastructure of the left — the Brookings-New York Times axis. The whole imitation of imitation of imitation of imitation — spawning more and more organizations — reminds me a bit of those old Mad magazine comic strips:

8. The Underdog. Daniel Engber in Slate explores the underdog effect and various scientific studies of the underdog effect, including how it affects expectations:

The mere act of labeling one side as an underdog made the students think they were more likely to win.

9. Lost! Ed Martin in the Huffington Post is concerned with how the tv show Lost will end:

Not to put too much pressure on Lindelof and Cuse, but the future of broadcast television will to some extent be influenced by what you give us over these next few weeks.

10. Julián Castro. Zev Chafets of the New York Times Magazine profiles Julián Castro, mayor of San Antonio, Texas, and one of the up-and-coming Democrats. The article entirely elided his policy ideas or and barely mentioned his political temperament — but was interesting nevertheless.

[Image by me.]

Why Can’t Right-Wingers Recognize Democratic Efforts to Tackle the Deficit?

Friday, May 7th, 2010

Ezra Klein defined epistemic closure as:

the conditions necessary for a political movement to fool itself into believing whatever’s convenient.

Which makes mine and Jonathan Bernstein‘s continued frustration at the blissful ignorance of the GOP towards Democratic deficit reduction measures quixotic:

Remember the mantra from Brad DeLong that I’m fond of quoting, but which I’ll paraphrase this time: in the short run, what matters is getting the economy moving.  In the middle term, PAYGO to keep things under control.  And in the long run, health care (see also this similar analysis from Ezra Klein).  Well…that sounds like the direction that the Democrats have followed for the last year, no?  Certainly, there are questions about whether they’ve doing the correct things. But it’s just wrong for deficit hawks to completely ignore an enacted plan to take a significant whack at the deficit in the second decade…

At some point though, reason must begin to seep through? Right?

Perhaps not. Opposition to the Democratic plans to reduce the deficit seem universal on the right.

The worst — either through deliberate or authentic ignorance — rail against the unprecedented deficits of Obama which are expanding government! And then easily conflate that with the out-of-control growth of entitlement spending (though they generally refuse to even acknowledge that the driving force behind the out-of-control spending growth is mandated entitlement spending, instead focusing on the ever-amorphous, “waste” — which is spending money on not-them). These people regard the cost-control measures in the health care bill — and the claims that it will reduce the deficit — as pure lies — or perhaps gimmicky accounting in which the plan taxes for 10 years and only provides benefits for 6. (In fact, the plan provides roughly the same amount of benefits as it raises in taxes/cuts each year it is in effect.)

Other more reasonable right wingers have adopted 1 of 2 alternative approaches:

(1) Acknowledging the health care plan reduces costs, but stating that these cost-cutting measures cannot happen and won’t. Given this argument, it’s hard to see why anyone should try to cut costs at all — and this leaves America apparently doomed to never reduce spending, even if it is mandated by law.

(2) Believing that Obama should be using his political capital to push for drastic cuts in spending and large tax increases to head this crisis off — and that by using some of the “low-hanging-fruit” that could easily generate revenue and reduce spending in a revenue-neutral way, Obama is making the solution harder. Donald Marron made this critique in his recent piece. However, this arguments seems mainly ignorant of political realities and doesn’t acknowledge the attempt to bend the cost-curve that health care reform represents.

The point is: Even the most reasonable commentators on the right do not acknowledge that the Democrats have a plan to tackle the deficit. For the most part, they pretend it doesn’t exist.

Why is this? Because challenging this orthodoxy gets you banished from right-wing circles and accepting the Democrats do have a plan means that Republicans need to come up with an alternative — which would undoubtedly be much less popular.

Must-Reads of the Week: American Power, Inequality, 1 Billion Heartbeats, Hacking Life, Anthora Cups, Structural Deficit, Financial Doomsedays and Crises, China, the Tea Party’s Views on Immigration, and Lady Gaga

Friday, April 30th, 2010

There were a lot of good articles and posts I came across this week — so brace yourself…

1. The American Power Act. David Brooks makes the case for progressive reform — specifically the American Power Act regarding climate change:

When you read that history, you’re reminded that large efforts are generally plagued by stupidity, error and corruption. But by the sheer act of stumbling forward, it’s possible, sometimes, to achieve important things…The energy revolution is a material project that arouses moral fervor — exactly the sort of enterprise at which Americans excel.

Matt Yglesias had earlier this week critiqued Brooks (among others) for taking the exact opposite stance of the one he was adopting here:

Oftentimes in the Obama Era the difference between “reasonable” conservatives (David Brooks and Greg Mankiw often leading the charge) and reasonable liberals has been that reasonable liberals look at flawed legislation that would improve on the status quo and support it while “reasonable” conservatives look at flawed legislation that would improve on the status quo and oppose it, while claiming to support alternative flawed proposals that they don’t actually lift a finger to organize support for within their own ideological faction.

2. Inequality, social mobility, and the American Dream. The Economist had a good piece that can serve as a starting point for a post I’ll be writing soon on inequality, social mobility, and the American dream:

The evidence is that America does offer opportunity; but not nearly as much as its citizens believe.

Parental income is a better predictor of a child’s future in America than in much of Europe, implying that social mobility is less powerful.

3. The Science of Life. Jonah Lehrer for Seed magazine has a brilliant piece on how cities are like living organisms. As a side matter, he notes this beautifully poignant data point:

[A]n animal’s lifespan can be roughly calculated by raising its mass to the 1/4 power. Heartbeats scale in the opposite direction, so that bigger animals have a slower pulse. The end result is that every living creature gets about a billion heartbeats worth of life. Small animals just consume their lives faster.

4. Fine-tuning life. Gary Wolf for the New York Times Magazine explains how the accessibility of computers is creating data about every aspect of our lives — and of the efforts of some people to begin to catalog and find insights in their own data. Surprisingly, Lifehacker was never mentioned.

5. The Anthora Cup. Margalit Fox of the New York Times writes the obituary for Leslie Buck, the designer of the Anthora cup:

It was for decades the most enduring piece of ephemera in New York City and is still among the most recognizable. Trim, blue and white, it fits neatly in the hand, sized so its contents can be downed in a New York minute. It is as vivid an emblem of the city as the Statue of Liberty, beloved of property masters who need to evoke Gotham at a glance in films and on television.

6. Unified Theory of the Financial Crisis. Ezra Klein synthesizes various narratives into a unified theory of the financial crisis.

7. The Structural Deficit. Donald B. Marron provides a coherent and reality-based conservative look at America’s structural deficit. Absolutely a Must-Read.

8. The Financial Doomsday Machine. Martin Wolf dedicated his column in the Financial Times last week to describe the “financial doomsday machine“:

[T]he financial sector has become bigger and riskier. The UK case is dramatic, with banking assets jumping from 50 per cent of GDP to more than 550 per cent over the past four decades…The combination of state insurance (which protects creditors) with limited liability (which protects shareholders) creates a financial doomsday machine. What happens is best thought of as “rational carelessness”. Its most dangerous effect comes via the extremes of the credit cycle.

9. Realism on China. Stephen Walt explains his take on China’s strategic ambitions — and its inevitable rivalry with the United States and other regional powers.

10. The Tea Party & Immigration. Radley Balko explains his take on the widespread support among the Tea Party for the massive government power grab that is Arizona’s new immigration law:

It also makes a mockery of the media narrative that these are gathering of anti-government extremists. Seems like in may parts of the country they’re as pro-government as the current administration, just pro-their kind of government.

Coincidentally, I made that exact point about the Tea Party back in September 2009 entitled: These Protests Aren’t Against Big Government, But About Liberals Running the Government.

Andrew Sullivan piles on:

Worse, on the fiscal front, they’re total frauds. They have yet to propose any serious cuts in entitlements and want far more money poured into the military-imperial complex. In rallies, the largely white members in their fifties and older seem determined to get every penny of social security and Medicare. They are a kind of boomer revolt – but on the other side of that civil conflict, and no longer a silent majority. In fact, they’re now the minority that won’t shut up.

More and more, this feels to me like an essentially cultural revolt against what America is becoming: a multi-racial, multi-faith, gay-inclusive, women-friendly, majority-minority country.

11. Sovereign Debt Crisis. Felix Salmon and Paul Krugman are both very pessimistic about how Greece will get out of this crisis — and what it means for the global economy.

12. Lady Gaga’s Ambition. Brendan Sullivan for Esquire chronicles the life and ambitions of Lady Gaga:

“There is a musical government, who decides what we all get to hear and listen to. And I want to be one of those people.” The girl who said that didn’t yet have the number-one hits (although she had already written most of them).

She was not yet the creative director of the Haus of Gaga, which is what she calls the machine of more than a hundred creative people who work for her. She didn’t make that statement in an interview or from the stage. She made it in 2007, when she was a go-go dancer sewing her own outfits and I was her DJ. She wrote it in one of my notebooks…

Lady Gaga is a student of fame, and the fame she studies most is her own — being famous seems to both amuse and fascinate her.

[1st image by me; 2nd image by LarindaME licensed under Creative Commons.]

Wall Street’s enormous profits are evidence of a poorly functioning market (cont.)

Wednesday, April 21st, 2010

This is something that really needs to get more attention. William Cohan in the New York Times:

The easiest and most profitable risk-adjusted trade available for the banks is to borrow billions from the Fed — at a cost of around half a percentage point — and then to lend the money back to the U.S. Treasury at yields of around 3 percent, or higher, a moment later. The imbedded profit — of some 2.5 percentage points — is an outright and ongoing gift from American taxpayers to Wall Street.

H/t Ezra Klein.

I also came across this from James Kwak at the Baseline Scenario:

[I]f you see a company that has very high profits over a sustained period, there are two possibilities: either it is benefiting from a non-competitive market (e.g., it is a monopoly), or it is simply exceptional at innovating and staying ahead of the competition for years on end. If you see a whole industry that has sustained high profits, however, the latter explanation cannot hold, and you should immediately suspect a lack of competition.

[T]he thing that we should celebrate is not high profits, but competition. The pursuit of high profits is what motivates competition; but if a whole industry achieves high profits, then what you are seeing is not competition, but its opposite.

Wall Street’s enormous profits are evidence of a poorly functioning market.

Wednesday, April 21st, 2010

Matt Yglesias and Ezra Klein had 2 complementary points in posts yesterday. (Damn you, JournoList!) Yglesias:

…[L]ooking at this chart I think it’s hard to avoid the conclusion that Wal-Mart is the last thing we should be worried about. The worrying trend is the domination of the corporate landscape by super-profitable firms in the heavily regulated energy, banking, and telecom sectors.

Yglesias is making a point most commonly associated with libertarians that large firms often use the government — through favorable regulation, tax breaks and incentives, etc. — to increase their profits. For example, increasing the barriers for new firms in the industry and restraining their indirect competitors from direct competition. This follows the well-known principle that any government policy whose costs are diffused and whose benefits are concentrated will be adopted more often than not. Thus highly regulated industries tend to be dominated by a small number of large firms that make very large profits — because thanks to government regulation, there isn’t much competition. However, Ezra Klein observed:

In a competitive market, there’s really no place to make 27 cents on the dollar. Some other firm will come in and offer the same services for 24 cents, and then someone will undercut them at 19 cents, and so it will go until the profit margin narrows. Wal-Mart, for instance, has a profit margin of around 3.5 percent. Ah, capitalism.

Not so in the financial sector, though, which ever since deregulation has been posting higher and higher profit margins.

So, the exception to this trend is Wall Street — where deregulation has lead to higher profits. All of this seems quite intuitively true — both from a libertarian and from a liberal perspective — and even from a liberaltarian one.

The enormous profits taken out of every dollar (as seen in much of the the financial industry) is a demonstration of a lack of competition and thus a poorly functioning market. Of course, Goldman Sachs didn’t manage to make it on the list above — but it had more than double the amount of profit out of every dollar it took in as compared to each of the companies here. Goldman managed to take $0.26 of every dollar they made as profit to their shareholders. (And that includes the massive bonuses given to employees as expenses.) I think I need to see more data though to draw the conclusion that Klein is hinting at — that the deregulation of Wall Street increased it’s profits as a percentage of revenues — while deregulation generally has the opposite effect (as in the case of Wal-Mart).

Annie Lowery drives the point home in analyzing the 1Q results from Wall Street:

This is not quite a picture of a healthy industry. In a competitive marketplace, prices and fees at Wall Street firms should fall and margins should become thinner. On the one hand, Wall Street firms like J.P. Morgan and Goldman Sachs have seen a number of their competitors die in the past two years, and have absorbed business from the failed Lehmans and Bear Sterns of the world. But on the other hand, Wall Street profit margins have remained sky high except for a short blip during the worst of the credit crunch. And, an economist would tell you, such sustained levels of high profitability point to anti-competitive behavior…

[T]he profits point to a lack of competition. That is one thing the Dodd bill — via derivatives regulation — attempts to fix. Right now, Wall Street firms do not bid for big derivatives contracts — they simply quote a price and work over-the-counter. For that reason, derivatives are wildly profitable for the companies. The Dodd bill will force derivatives pricing to become public to the market, driving down margins as companies compete.

There’s a whole lot to unpack within these points about the nature of American capitalism and the government’s role in it.

But one key takeaway seems to be a repudiation of the most ideological take of either the left or right — and an acknowledgment that free markets are not merely what happens when the government is out of the way — but are created and maintained by a complex balancing act in which government regulates and participates. What you end up with is something less than socialism or libertarianism and more like liberalism:

Contemporary liberals reject the doctrinaire distinction between the “market” and the government that animated so much of the conflict in the 20th century. The free market should not be treated as some theoretical utopian ideal or as a perpetually lost state of innocence. And the government is not some evil force which must be reduced until it is of a size that it “could be drowned in a bathtub.” Rather the government and the free market exist together – and in a capitalist republic such as ours, each is dependent on the other. The free market does not exist in a state of nature but must be created by and maintained by the society and the state which provide the values and the rules and other conditions without which a market cannot be free. In other words, a free market is a product of a just government.

Follow-up post here.

[Image by f-l-e-x licensed under Creative Commons.]

How Financial Innovation Causes Financial Crises

Monday, April 19th, 2010

Ezra Klein explains how financial innovation causes financial crises:

Investors want to make more money with less risk. Someone invents a financial product that appears to make investors more money with less risk — in this case, subprime securities. Demand for this new product explodes. But few understand this new product, and even the people who do understand the new product don’t know how it performs under stress (it’s a new product, after all). At the beginning, this actually helps the product: because its risks aren’t known, they’re ignored, and so it looks like a better deal than it is and sells more of itself than it should.

Then something bad happens. The new product shows its flaws. And precisely because no one really understands it, the market cracks. Investors all run away at once, as they don’t really have the tools to assess the situation. Where lack of knowledge about the product originally drove demand, now it accelerates flight.

Republicans have an absolutely brilliant strategy on financial reform. Too bad it’s evil.

Thursday, April 15th, 2010

How did the GOP oppose Obama during the campaign? They raised fears that he was a radical, Marxist, leftist, Communist, Socialist, Muslim, Arab who hates America.

How did the GOP oppose Obama’s stimulus plan? They claimed it didn’t include tax cuts (which it did) which are the most effective way of stimulating the economy (which most research doesn’t support) that it hasn’t helped the economy at all (something which virtually all mainstream economists disagree with), and that it was part of a socialist government takeover of the economy (which it’s not).

How did the GOP oppose Obama’s health care plan? They claimed there were death panels (nope), government mandated euthanasia and abortion (nope and nope), coverage for illegal immigrants (not at all), secret socialist indoctrination of children (huh?), and that it represented a government takeover of 1/6th of the economy (so far from being true) that would increase the deficit (when it actually reduces the deficit more than any bill in history).

How does the GOP oppose net neutrality? They claim it would enable the government to control political speech on the internet – likening it to the Fairness Doctrine for radio (which is so far from what it actually does).

How does the GOP oppose cap and trade legislation? They call it a massive redistribution of wealth (which it’s not) and based on thoroughly debunked lies (which is rather dangerous bullshit).

How does the GOP oppose Obama’s national security policies? They claim he is deliberately weakening America (when his focus has been on strengthening America), abandoning all of Bush’s policies (which he is not, to the disappointment of many progressives and libertarians), along with many other debunked claims.

How then does the GOP oppose financial reform? They are claiming that it “allow[s] endless taxpayer-funded bailouts for big Wall Street banks” and creates a “slush fund” for future bailouts. And here’s the brilliant part: while trashing Wall Street and the bailouts that saved the big firms, they are simultaneously promising Wall Street and the big firms that they will block the reforms Wall Street doesn’t want in return for massive campaign contributions.

They are following – almost to the letter — Republican pollster Frank Lutz’s proposed strategy to rake in the dollars from Wall Street for blocking any reform while railing against bailouts and how Democrats are too soft on the banks. The best way to oppose something is to pretend it’s something it’s not.

Absolutely brilliant strategy. Too bad it’s evil.

The policies they are attacking include a FDIC tax on the banks to create holdover money to allow regulators to go in and dismantle the company. Contrary to some cushy authority to bailout big firms, Senator Mark Warner describes the process being created by the financial reforms in an interview with Ezra Klein:

“Resolution,” Warner continued, “will be so painful for any company. No rational management team would ever choose resolution. It means shareholders wiped out. Management wiped out. Your firm is going away. At least in bankruptcy, there was some chance that some of your equity would’ve been retained and you could come out in some form on the other side of the process. The resolution that Corker and I have tried to create means the death of the company. The institution is gone.”

The financial reform bill is far from perfect — but it’s a good bill and nothing at all like what the Republicans are describing it as.

[Image by DonkeyHotey licensed under Creative Commons.]