Tag Archives: Stephen Spruiell

Look, We’ve Got A Heartbeat!

Heather Horn at The Atlantic with the round-up. Horn:

GM has had a fantastic second quarter, reporting a $1.3 billion profit. That “set[s] the stage,” reports Bill Vlasic for The New York Times, “for the automaker to file for an initial public offering, possibly as soon as Friday.” How well GM stock does, he explains, “will determine how much money American taxpayers will recoup from the $50 billion government bailout of G.M.”

Steve Schaefer at Forbes:

A year ago, General Motors was fresh off a spin in bankruptcy court and an IPO was the light at the end of a very long tunnel. By January the automaker’s executives were laying out the key checkpoints on a journey back to the public markets and now, just over 14 months since filing for Chapter 11 GM is on its way to a public offering that is widely anticipated for the fourth quarter.

Everybody’s got a view on the GM story and on Thursday the IPO specialists at Renaissance Capital offered their own take on how the automaker should go about returning to the public market, offering up a four-point plan for how GM can get out from under the government’s thumb and ensure it is offering a valuable opportunity for IPO investors.

Here are a few highlights from the four-point plan outlined in the Renaissance Capital commentary, which I encourage you to read in its entirety:

Transparency means full and fair disclosure. The Treasury has the duty to ensure that all material fundamental and governance issues are fully disclosed to potential public investors. Thus far, GM has largely avoided specifics on its strategy, but the company now must clearly lay out a chronology for regaining market share, realigning costs and transitioning from government control.   Assuming that GM does a $20 billion raise in this upcoming IPO, what’s the plan for the other $30 billion held by the government?

Assure IPO allocation transparency.  Prior IPO bad practices included spinning shares to favored executives or giving hot IPOs as “free money” to institutional investors as a quid pro quo for other business.

Decision-making roles must be clarified. GM and the government have been silent on how the competing interests of shareholders, the administration and the United Autoworkers will be resolved.

Value the stock for success. In thinking about valuation, the government and management need to understand that the GM IPO is in a similar position as a debt-laden private equity company with backers eager to monetize an investment. Recent sales of shares by such highly motivated selling shareholders have been accomplished only with deep discounts.  Over the last two years, between 50% and 70% of private equity IPOs have been forced to price below the originally proposed ranges.  GM needs to adjust its expectations accordingly.

Among the other issues that need addressing according to Renaissance Capital’s roadmap: the post-IPO succession plan for CEO Ed Whitacre; how GM’s product mix will be driven by the administration’s environmental policy and will the Treasury take a backseat to management as it offloads its stake in the automaker over time.

John Ogg at 24/7 Wall Street:

We are expecting somewhere around $15 billion per discussions we have had with others.  Here is the big question… Will the GM IPO become a busted IPO right out of the chute like so many others have?

The company recently secured a new $5 billion credit line and when the IPO will actually come, that may be as long as 45 to 60 days after the filing and will be somewhat dependent upon market conditions.

Richard Read at The Car Connection:

The line of credit has been pieced together from ten banks, including big-hitters like Bank of America and Morgan Stanley — two corporations that have shared GM’s pain of bankruptcy and bailout. More may join the ranks, since the line of credit is a potential cash cow for lenders.

But today’s news isn’t just important for GM, it’s also a major development for politicians. GM and the Obama administration both took a lot of heat for last year’s controversial bailout, and the nickname “Government Motors” still hangs around GM’s neck. Filing for an IPO now means that GM’s return to the stock exchange could happen before November’s mid-term elections. That would be a boon for Democrats, who could point to the IPO as evidence that the bailout was successful and that taxpayers will eventually recoup their loan from GM.

But even if the IPO runs on schedule, Republicans will probably still be able to point to government ownership of GM, which currently hovers at 61%. GM wants the Treasury Department to sell off about $10 billion of its $43 billion stake in the company as soon as the IPO launches, which would bring the government’s position below the 50% mark. However, the Treasury isn’t completely onboard with that plan; they’re afraid — as they should be — that selling off that much equity at once would dilute the value of the company and the government’s remaining shares. And right now, “diluting” is the last thing that probably needs to happen for GM.

That said, demand could be high for GM stock when it does relaunch — not least because of the company’s earnings, which are rumored to ring in above the $1 billion mark for the second quarter. We’ll have more about that later, but in the meantime, check John Voelcker’s post about Ed Whitacre’s sudden retirement.

John Neff at Autoblog:

The announcement today that General Motors will soon be welcoming its fourth CEO in just 14 months was startling news, but the real unanswered question is just who is Dan Akerson? We’ve already told you what his business chops are and it’s clear the man can run a lemonade stand, but there’s virtually no other information available out there besides his resume. And as for pics, the entirety of the internet has but one to offer, which is Akerson’s glamor shot as a member of GM’s board of directors. Flattering? No. Looks like a high school principal’s year book picture.

Well, we dug a little and found some interesting info on one Mr. Daniel F. Akerson. For one, he lives in McLean, Virginia and is reportedly an avid golfer. Ok, not too surprising, as most corporate executives can swing a club. How about this: He’s said to be worth an estimated $190 million. Yeah, CEOing is a good gig if you can get it. Also, he currently drives a Cadillac CTS.

Finally, we’re told that Mr. Akerson’s first car was an MGB roadster, which he quickly traded in for a 1970 Oldsmobile Cutlass. Now, we don’t have confirmation on which Cutlass he had, and it makes a difference. The 1970 Cutlass was nothing special, unless you’re talking about the 442, which was a legitimate muscle car. The fact that Akerson first had an MGB makes us hopeful that he is a car guy after all and that the Olds in question was the 442… or at least was powered by a Rocket V8 of some sort.

Derek Thompson at The Atlantic:

The good news is coming from good places. Although the company cut 20,000 jobs and a dozen U.S. plants, the profits aren’t coming all from cost cuts. Revenue grew from $32 billion to $33 billion in the second three months of the year. What’s more, the company is seeing a strong North American market for its goods. While it’s certainly not bad to have a strong overseas market, any indication that the American consumer is actually breathing out there is nice to hear.

There’s lots of silver lining, but the dark cloud for tax payers is that an IPO won’t end the government’s significant stake in the company. As the Michigan Messenger reports, the federal government will reduce its stake in the company from about 60 percent to below 50 percent in the initial IPO, and sell off the rest of the taxpayers’ stake in the company bit by bit.

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The Path, The Road, The Depression Not Taken

Sewell Chan at NYT:

Like a mantra, officials from both the Bush and Obama administrations have trumpeted how the government’s sweeping interventions to prop up the economy since 2008 helped avert a second Depression.

Now, two leading economists wielding complex quantitative models say that assertion can be empirically proved.

In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year.

In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation.

The paper, by Alan S. Blinder, a Princeton professor and former vice chairman of the Fed, and Mark Zandi, chief economist at Moody’s Analytics, represents a first stab at comprehensively estimating the effects of the economic policy responses of the last few years.

Calculated Risk:

I’ll post a link tomorrow (if it is available). David Leonhardt adds:

As Mr. Blinder and Mr. Zandi note, their estimates of the fiscal stimulus are similar to the estimates of othersincluding the Congressional Budget Office.

Although Zandi completely missed the housing bubble, I’ve been using his estimates of the impact of policy (and estimates from Goldman Sachs), and I think they have been very useful in forecasting.

Brad DeLong:

It is very nice to see that they are attempting this. The hard part of it, of course, is figuring out what would have happened to the flow-of-funds through financial markets in the absence of TARP, of quantitative easing, and of other extraordinary financial policy interventions. That they were, collectively, about twice as big as the ARRA smells right to me, but the only pieces of information I have to support that are even shakier than back-of-the-envelope calculations.

Derek Thompson at The Atlantic:

When I go to conferences with conservative economists, I often hear the line: “Now that we know the stimulus isn’t working…” I want to respond, what do you mean by “working”? The first few hundred billion dollars went primarily to three things: tax cuts, Medicaid funding, and state rescue. The tax cuts were pocketed as families paid down their debt, and the state funding mostly salved budget wounds that would have bled out in a worse recession. It wasn’t a stimulus. It was a stopgap.

Today, economists Alan Blinder and Mark Zandi release a new analysis of the recession that reaches a similar conclusion. Yes, the economy stinks today. And yes, it would have been a lot worse without the stimulus, or TARP, the stress tests, and the Fed actions. The stimulus didn’t fail. It just didn’t succeed enough. When I read that over, it sounds like shady justification. But there’s a difference between something that doesn’t work, and something that works, but is insufficient. To cop Blinder’s analogy, the Recovery Act was a baseball team that scored a healthy 7 runs, and lost 20-7.

Stephen Spruiell at The Corner:

Blinder and Zandi still give the stimulus credit for saving (or creating?) around two million jobs, but I suspect this has more to do with the assumptions built into their models than with any empirical evidence to that effect. The Times is good enough to acknowledge this as well:

Told about the findings, another leading economist was unconvinced.

“I’m very surprised that they find these big impacts,” said John B. Taylor, a Stanford professor and a senior fellow at the Hoover Institution. “It doesn’t correspond at all to my empirical work.”

Mr. Taylor said the Fed had successfully stabilized the commercial paper and money markets, but he argued that its purchases of $1.25 trillion in mortgage-backed securities have not been effective. And he said the Obama administration’s stimulus program has had “very little impact and not much to show for it except a legacy of higher debt.”

The disagreement underscored the extent to which econometric estimates are heavily reliant on underlying assumptions and models, but Mr. Blinder and Mr. Zandi said they hoped their analysis would withstand scrutiny by other scholars.

The bottom line is that it’s still pretty early in the game to be evaluating what effects the bailouts, the Fed interventions, and the stimulus actually had — particularly when, with regard to the stimulus, that involves simply re-running Keynesian models that predicted what the stimulus would do. I have some more thoughts on the great stimulus debate on the home page today.

Ryan Avent at Free Exchange at The Economist:

It should go without saying that the paper will be challenged; empirical work on such a matter is fraught with difficulties and heavily dependent on assumptions. And of course, economists haven’t managed to settle similar debates over policy choices made in the 1930s. But Mr Blinder and Mr Zandi point out that their estimates are in line with a number of other empirical efforts, including work by the Congressional Budget Office. The damage done by uncontrolled bank failures in the early 1930s provides a hint of what might have occurred if governments had allowed cascading failures among large financial institutions, and the national growth statistics give some sense of how much worse the output trajectory might have been absent stimulus. The big problem, for supporters of stimulus, is that the public doesn’t observe the 8 million jobs that would have been lost, according to the paper’s authors, without stimulus. But voters are very much aware of the 15 million workers who currently lack work. And they’re not happy about it.

Steve Benen:

Zandi, by the way, was an advisor on economic policy to the McCain/Palin presidential campaign.

The two looked at the totality of the federal response — TARP, stimulus, auto industry rescue, intervention from the Federal Reserve — and concluded that the collected efforts prevented an economic catastrophe.

“When all is said and done, the financial and fiscal policies will have cost taxpayers a substantial sum, but not nearly as much as most had feared and not nearly as much as if policy makers had not acted at all,” they write.

The economists didn’t measure what would have happened if policymakers had followed the right’s recommendations — no TARP, no auto industry rescue, and a five-year spending freeze — but the word “cataclysmic” comes to mind.

Indeed, the Zandi/Blinder paper concluded, “[I]t is clear that laissez faire was not an option; policymakers had to act. Not responding would have left both the economy and the government’s fiscal situation in far graver condition. We conclude that [Federal Reserve Chairman] Ben Bernanke was probably right when he said that “We came very close in October [2008] to Depression 2.0.”

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You Can’t Reinvent The Wheel, But You Can Reinvent The Scribe, Part II

Lee Bollinger at WSJ:

The idea of public funding for the press stirs deep unease in American culture. To many it seems inconsistent with our strong commitment, embodied in the First Amendment, to having a free press capable of speaking truth to power and to all of us. This press is a kind of public trust, a fourth branch of government. Can it be trusted when the state helps pay for it?

American journalism is not just the product of the free market, but of a hybrid system of private enterprise and public support. By the middle of the last century, daily newspapers were becoming natural monopolies in cities and communities across the country. Publishers and editors drew on the revenue to develop highly specialized expertise that enhanced coverage of economics, law, architecture, medicine, science and technology, foreign affairs and many other fields.

Meanwhile, the broadcast news industry was deliberately designed to have private owners operating within an elaborate system of public regulation, including requirements that stations cover public issues and expand the range of voices that could be heard. The Supreme Court unanimously upheld this system in the 1969 Red Lion decision as constitutional, even though it would have been entirely possible to limit government involvement simply to auctioning off the airwaves and letting the market dictate the news. In the 1960s, our network of public broadcasting was launched with direct public grants and a mission to produce high quality journalism free of government propaganda or censorship.

The institutions of the press we have inherited are the result of a mixed system of public and private cooperation. Trusting the market alone to provide all the news coverage we need would mean venturing into the unknown—a risky proposition with a vital public institution hanging in the balance.

Ironically, we already depend to some extent on publicly funded foreign news media for much of our international news—especially through broadcasts of the BBC and BBC World Service on PBS and NPR. Such news comes to us courtesy of British citizens who pay a TV license fee to support the BBC and taxes to support the World Service. The reliable public funding structure, as well as a set of professional norms that protect editorial freedom, has yielded a highly respected and globally powerful journalistic institution.

There are examples of other institutions in the U.S. where state support does not translate into official control. The most compelling are our public universities and our federal programs for dispensing billions of dollars annually for research. Those of us in public and private research universities care every bit as much about academic freedom as journalists care about a free press.

Yet—through a carefully designed system with peer review of grant-making, a strong culture of independence, and the protections afforded by the First Amendment—there have been strikingly few instances of government abuse. Indeed, the most problematic funding issues in academic research come from alliances with the corporate sector. This reinforces the point that all media systems, whether advertiser-based or governmental, come with potential editorial risks.

To take a very current example, we trust our great newspapers to collect millions of dollars in advertising from BP while reporting without fear or favor on the company’s environmental record only because of a professional culture that insulates revenue from news judgment.

Derek Thompson at The Atlantic:

Is it time for another bailout? Should the government save the news? Lee Bollinger argues yes, for at least two reasons.

First, we depend on publicly funded news, already. The BBC, PBS and NPR all receive federal funding. The artery from federal coffers isn’t always large or direct — NPR applies for competitive grants and gets about 2 percent of its funding from the federally supported organizations like the Corporation for Public Broadcasting and the National Endowment for the Arts — but it’s undeniably public funding. And yet, the BBC, PBS and NPR are consistently among the most trusted sources of news.

Second, as Bollinger points out, there are other publicly funded institutions we commonly accept as independent from federal control. “The most compelling are our public universities and our federal programs for dispensing billions of dollars annually for research,” he write. “Those of us in public and private research universities care every bit as much about academic freedom as journalists care about a free press.”

Bollinger’s broader point — serious news struggles to pay for itself — isn’t special to the recession. Newspapers rarely made bank on the kind of undercover investigative stories about City Hall, or Kabul. The money came from somewhere else. Somewhere else used to mean classifieds and lucrative leisure sections. But as James Fallows wrote in his cover story on Google and the news, “the Internet has been one giant system for stripping away such cross-subsidies.”

So there are a few ways to recoup the missing subsidy. For some companies, that will mean seeking rich benefactors (obvious example: Carlos Slim). For others, it will mean relying on foundations. For others, it might mean relying — partially, even indirectly — on government-funding. All of these additional sources of income theoretically compromise news-gathering, because the news is beholden to outside sources who might themselves become newsworthy. But some combination of outside support will probably become increasingly necessary as journalism continues to undergo wrenching change and unspectacular revenue growth. It doesn’t have to be a terrifying future. In fact, we’ve been living with it for decades.

Mark Tapscott at The Washington Examiner:

Bollinger thus makes common cause with the intentionally misnamed Free Press coalition led by the neo-Marxist McChesney, an Illinois university professor of communications who, presumably with a straight face, claims “aggressive, unqualified political dissent is alive and well” in the thug state formerly known as Venezuela.

Several of the Free Press coalition’s flawed assumptions are prominent in Bollinger’s argument, including the notion that America never had a pure free market in news. We can’t do that because “trusting the market alone to provide all the news coverage we need would mean venturing into the unknown – a risky proposition with a vital public institution hanging in the balance.”

Never mind that the Internet with no federal subsidies to preferred media outlets today provides more independent news gatherers and analyzers – they’re called “bloggers” – than ever worked in all the newsrooms combined in the old media’s glory days.

Or that the Internet is driving news delivery technology in new directions at warp speed, thus promising more independent checks on politicians and bureaucrats than Publius could ever have dreamed.

In place of this present and future reality, Bollinger wants to preserve and extend the “hybrid system of private enterprise and public support” he claims has always existed in America. So subsidized postal delivery of publications in Ben Franklin’s day is no different from federal bureaucrats collecting billions of tax dollars to hand out to favored media organizations, as advocated now by Free Press?

Not to worry, though, because we have the comforting example of heavily subsidized colleges and universities where, according to Bollinger, “those of us in public and private research universities care every bit as much about academic freedom as journalists care about a free press.”

Somehow I doubt Bollinger would understand that those of us fighting to preserve freedom of the press are anything but comforted by his example, publicly assisted schools being among the least free-thinking institutions in America, owing to their pervasive speech codes and other forms of censorship.

See, for example, this New York Sun story in 2007 on how Columbia, just one week after proclaiming itself a bastion of free speech for hosting a speech by Iran’s Mahmoud Ahmadinejad, insisted on exercising pre-publication censorship reviews of documentary filming shot on its grounds.

But then maybe we shouldn’t be surprised that Columbia University’s president sees no difference between a government-subsidized university system that perpetuates a suffocating academic orthodoxy and government-subsidized news media like that praised by an apologist for Hugo Chavez’s suppression of the Venezuelan media.

After all, his final argument is a warning that other countries are doing it, countries like still-communist China, with its state-run Xinhua News and Central China Television. Clearly, independent journalism is doomed if it must depend for its defense upon “friends” like Bollinger.

Roger Pilon at Cato:

The argument, in essence, is this. The communications revolution has decimated media budgets. Indeed, “the proliferation of communications outlets has fractured the base of advertising and readers,” leading to shrunken newsrooms, especially in foreign bureaus. Thus the FCC and FTC are now studying the idea of enhanced public funding for journalism. Not to worry, Bollinger assures us, since “we already have a hybrid system of private enterprise and public support” – to wit, public regulation of the broadcast news industry and the Corporation for Public Broadcasting. And the most compelling example of state support not translating into official control, he continues, can be found in our public and private research universities, which receive billions of government dollars annually with no apparent problem.

Really? Try getting your hands on some of those funds, or an appointment in one of those departments, if you have reservations about global warming. Or do we need any better example than the case of Elena Kagan, now before us. When the good dean took her principled stand against admitting military recruiters to the Harvard Law School, the larger university community reminded her of the government funds that were thus put in jeopardy, and she adjusted her position accordingly.

But here comes the kicker: Like those who imagine that there’d be no art without the National Endowment for the Arts, Bollinger tells us that “trusting the market alone to provide all the news coverage we need would mean venturing into the unknown—a risky proposition with a vital public institution hanging in the balance.” Was there no news before the invention of NPR, all things considered? And back on the academic analogy, he adds, “Indeed, the most problematic funding issues in academic research come from alliances with the corporate sector. This reinforces the point that all media systems, whether advertiser-based or governmental, come with potential editorial risks.” True, but government is categorically different than private businesses, of which there is no shortage. Yet those who fail to notice that difference, or discount it, are forever drawn to government because it is, as we say, so easy to get in bed with.

Stephen Spruiell at The Corner:

Bollinger anticipates that the public’s chief concern with his plan will be that a press that gets its paychecks from the government cannot effectively perform its function as democracy’s watchdog. That is not my concern. My concern is that journalists on the public payroll will become even more fervently dedicated to the idea of higher taxes and more spending. If you thought the press had a big-government bias before, wait until it is officially run by quasi-government employees.

Bollinger’s example of how a government-funded enterprise can carry on without its ties to the government compromising its mission is academia. I’d say that illustrates my concern perfectly. I do not think it is any coincidence that the academy has drifted further leftward as its reliance on public funding has grown.

Bollinger’s conception of “watchdog” is too narrow: I am sure the press would continue to try to expose corruption on the part of public officials, as it does now. But I am also sure that many journalists would, consciously or subconsciously, fall victim to the already common tendency to look a little more carefully for corruption on the part of those public officials who oppose missions for thegovernment that fall beyond the protection of basic liberties and the defense of the nation’s strategic interests — missions such as, say, subsidizing newspaper writers and TV reporters.

Jennifer Rubin at Commentary:

What if viewers and readers, um, don’t think they need what Big Government News is serving up? And how do we know what we “need”? Ah, Bollinger and his fellow Ivy Leaguers will tell us. Such is the state of liberal thinking and the mind of an Ivy League president. Yeah, I’m thinking the same thing: people spend money to send their kids to these places?

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This Macaca Moment, So Different And So New

Connie Hair at Human Events:

In the ongoing Wall Street Reform Conference Committee meeting Wednesday to merge the House and Senate versions of the recently-passed finance bills, Rep. Paul Kanjorski (D-Penn.) bemoaned the impact of the recession on his constituents.

“We’re giving relief to people that I deal with in my office every day now unfortunately.  But because of the longevity of this recession, these are people — and they’re not minorities and they’re not defective and they’re not all the things you’d like to insinuate that these programs are about — these are average, good American people,” Kanjorski states.

Kerry Picket at The Washington Times:

Connie Hair at Human Events has posted this shocking video of Rep. Paul Kanjorski, Pennsylvania Democrat, at a Wednesday conference committee hearing to merge the House and Senate versions of the recently-passed financial regulation bills. Here he talks about the debilitating effects of the recession on his constituents. Unfortunately, Mr. Kanjorski may not have realized he offended those he was trying to impress

Stephen Spruiell at The Corner:

Wow

Stephen Gutowski:

Yea. I think its crystal clear that Kanjorski is directly saying that his definition of average, good American people does not include minorities. That is blatant racism no matter how you cut it.

I’m sure that the media will jump all over this indisputable video evidence of a rep with a D next to his name saying something racist. Just like they did when there was indisputable video evidence of a rep with a D next to his name assaulting someone on a public sidewalk. The media is always thorough and diligent when exposing corruption and disgrace within the Democratic party after all.

And I’m sure that Jesse Jackson and Al Sharpton will be demanding Kanjorski apologize for his racist remarks and resign. You know, like they did with Joe Biden and Harry Reid. Surely Jesse Jackson and Al Sharpton, being men of integrity and all, wont stand for a major political party in the United States to allow people who make dubious racial remarks stay in power.

Right?

Ed Morrissey:

This statement is a lot more concrete than George Allen’s “macaca moment,” and that got wall-to-wall coverage in the 2006 election cycle.  Kanjorski is running for re-election in his district, which makes this very similar to the “macaca” coverage.  Will the media provide the same level of exposure to a much more obvious (and deliberate) example of bigotry?

For that matter, the national media has clung to the Joe Barton apology to BP for days, even after almost every other Republican in Congress distanced themselves from it.  Doesn’t this seem a little more newsworthy?

Ed Driscoll at Pajamas Media:

If the name rings a bell, it’s because Paul Kanjorski, the leftwing Democratic Pennsylvania Congressman told his constituents in 2008 that:

“I’ll tell you my impression. We really in this last election, when I say we…the Democrats, I think pushed it as far as we can to the end of the fleet, didn’t say it, but we implied it. That if we won the Congressional elections, we could stop the war. Now anybody was a good student of Government would know that wasn’t true. But you know, the temptation to want to win back the Congress, we sort of stretched the facts…and people ate it up.”

Just ask Moveon.org.

Also that year, Kanjorski was promising to dust off 70-year old antediluvian New Deal programs in May of 2008, when unemployment stood at about 5.5 percent, (it’s currently almost double at 9.70 percent), and the Dow Jones Industrial Average was still 2000 points higher than it is today.

Then there was this Oliver Stone-esque moment.

Jim Newell at Gawker:

Some small-town Republican mayor back in Pennsylvania who’s challenging Kanjorski this fall immediately called on him to apologize. This YouTube clip itself is from House minority whip Eric Cantor’s website. And conservative websites are (pretty tongue-in-cheekly) caling him a horrible racist monster from Hell. Get it, because Democrats are always calling Republicans racist, and now this! The truth must come out.

Kanjorski won’t apologize. And he shouldn’t, duh. Ever since the financial collapse, which Kanjorski and his fellow congressmen are at least half-trying to fix here, the Official Republican Explanation for it has been that the government forced banks to give loans to black and Hispanic people who couldn’t pay them back. All Kanjorski is doing is calling out this pigeonholing demagoguery that anti-regulation folks have been using for years to prevent the regulation we so desperately need of our private financial sector.

Don’t believe us? Here’s a clear example from a September, 2008 Neil Cavuto interview on Fox News with a Democratic congressman:

CAVUTO: All right, but let me ask you — but, Congressman, when — when you and many of your colleagues were pushing for more minority lending and more expanded lending to folks who heretofore couldn’t get mortgages, when you were pushing homeownership —

[…]

CAVUTO: — did you warn or express concern about any of the things that happened? I’m not saying that one or the other is beyond blame —

BECERRA: Oh, absolutely, we did. Absolutely.

CAVUTO: — I’m just saying, I don’t remember a clarion call that said, “Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster.”

This argument is a shameless red herring that has not gone away, and Paul Kanjorski was telling people to stop it. (Mostly because it’s wrong.)

So Paul Kanjorski is not a racist. And perhaps some of you are thinking, “Oh well Gawker would jump all over this guy if he were a Republican,” but what can we say? Hopefully not? Because that would not be truthful? When it happens, let us know.

Moe Lane at Redstate:

I don’t see why words should be minced.  Or why Kanjorski needs to stay in the House past November; I’m fairly certain that Lou Barletta can be counted on to avoid insinuating that ‘minorities’ or ‘defectives’ don’t get to be ‘average, good American people.’

I mean, that’s just ignorant.

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Filed under Economics, Legislation Pending, Political Figures, The Crisis

I’ll Be Paying With Cash, Thanks

Robin Sidel and Dan Fitzpatrick at WSJ:

Bank of America Corp. and other banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules, in a push that is expected to spell an end to free checking accounts for many Americans.

Free checking accounts, which have been widely available for more than a decade, have been a boon to middle-class consumers and attracted low-income customers to the banking system for the first time.

Customers will likely be required to pay new monthly maintenance fees on the most basic accounts that don’t generate a lot of activity. To avoid a fee, customers will have to maintain certain account balances or frequently use other banking services, such as credit and debit cards, automated teller machines and online accounts.

“If you put $1,000 in a checking account and don’t do anything with it, it will be hard to get that for free,” says Sherief Meleis, a managing director at Novantas LLC, a consulting firm that advises banks.

Felix Salmon:

Why do most people hate their bank? Because their relationship is based on the lie of “free checking”, and a relationship based on a lie is always going to be a dysfunctional relationship. Checking is never free, but in recent years banks have been able to conjure the illusion of free through a system of regressive cross-subsidies, where the poor pay massive overdraft fees and thereby allow the rich to pay nothing.Interchange fees are a cross-subsidy too: this time it’s merchants who help pay for the checking accounts of the rich. In fact, they do more than pay for their checking accounts, they pay them a nice tax-free income, when the rich people accept debit rewards cards.

With the federal government finally cracking down on overdraft fees, and with the Durbin amendment threatening interchange fees to boot, the fiction of free checking looks as though it’s reaching the end of its natural life:

More than half of all checking accounts are currently unprofitable, according to a report issued last month by Celent, a unit of Marsh & McLennan Cos. It costs most banks between $250 and $300 a year to maintain one of the roughly 200 million checking accounts, according to industry estimates.

Checking accounts pay zero interest these days, but even being able to borrow money for free from depositors isn’t worth $300 per year to a bank. If a checking account has $1,000 in it on average, and the bank can lend that money out at 7%, net of defaults, then it’s making $70 a year on the account, which isn’t enough to cover its costs.

The natural answer, here, is to restart charging monthly fees on modest-balance checking accounts — and to shed few tears when your low-balance customers leave:

The offers of free checking without any minimum balance requirements attracted a new wave of low-income customers, who previously went to check-cashing stores. Some consumer advocates have warned that the elimination of free checking could drive some of those customers out of the banking system.

From the banks’ perspective, though, many of those customers aren’t profitable.

All of which provides some important background in understanding the stance of Patrick Adams, the CEO of St Louis Community Credit Union. Adams’s customers are relatively poor: his credit union is designated a Community Development Financial Institution, which targets the African-American community in St Louis. And he’s dead-set against any regulation of interchange fees, which provide an important source of income for his institution; he’s written three blogs on the subject, here, here, and here.

Adams, unlike Harriet May, was willing to provide me with concrete numbers:

We have 25,000 debit card holders with a 50/50 split on debit vs signature. We had 3.2 million debit card transactions in 2009 totaling $892,490 in debit interchange income or an average per transaction of just under 28 cents per. At an average interchange rate of 1.3%, our average member debit transaction is for 21.40. Our all in expense (including fraud) is $521,000.

We project that a 50% reduction in interchange would cost us $446,000 of top-line revenue. Something has to give if we lose that revenue. A $20 per year annual fee works, but we don’t want to fee our members.

Essentially, St Louis Community CU is getting about $35 of top-line revenue per year, per debit card. If that revenue disappears, it hurts the credit union’s finances. And so Adams is railing against interchange regulation:

Here’s another surefire lock of a bet. You will be more frustrated than ever. Your costs at the bank will be up. Your costs at the retailer will be up. You will be confused as to which retailers accept your debit card and which ones don’t. You will have no clue what the minimums and maximums of your debit card activity will be because there will be no consistency among retailers.

As a result, you will carry more cash and more checks… And, what about this double-dip possibility? You’ll use more checks at the check-out counter and the retailer will charge you a processing fee for doing it. (See, their handling of checks and cash are more expensive than debit cards.) You’ll pay for that, as well.

If this legislation is passed, I will mark my calendar to re-visit this issue a year after enactment. If I am wrong, I will eat the biggest piece of humble pie ever, including a public apology to everyone – starting with Senator Durbin. I must tell you that I’m extremely confident that an apology won’t be forthcoming.

I’ll take Adams’s bet. Yes, the costs of a checking account will be more transparent and visible to consumers. But costs at the retailer will not rise, since the retailer’s costs will have fallen. There will be no confusion about which retailers accept which debit cards, and debit-card minimums and maximums will be a non-issue. People will not carry more cash, and they certainly won’t carry more checks. And Adams will owe a public apology to Durbin.

Stephen Spruiell at The Corner:

The old model: Banks use high fees on avoidable behaviors that are nevertheless common among the financially inept, such as account overdrafts, to subsidize free checking accounts and other reward programs for customers who use their accounts responsibly.

The new model: Liberals argue that overdraft fees are abusive and should be banned. Democrats enact new restrictions on overdraft fees. Banks end free checking accounts and other reward programs for responsible customers.

And we haven’t seen anything yet. Just wait until the new Consumer Financial Protection Bureau gets to work.

Matt Welch at Reason:

It was just terrible that the fine print of free-checking accounts included language saying “We will charge you for overdrafting your account, loser,” a sad fact easily divined by, for instance, overdrafting your account. So, consumer advocates, noble regulators, and other champions of the little guy came up with a genius solution: require banks to obtain letters from customers saying “Please charge me a lot of money when I write a bad check.” The result?

Bank of America Corp. and other banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules, in a push that is expected to spell an end to free checking accounts for many Americans.

Hooray for progress! Back to the mattress!

Kevin Drum:

This is fundamentally my problem with overdraft and interchange fees: they’re basically surreptitious ways for the poor to subsidize the rich. There’s no law against that, of course, but the practice is so grotesque that in this case I’m perfectly willing to make one.

Basically, what banks have learned is this: it’s mostly poor people who pay overdraft fees. That makes sense, of course: they’re the ones most likely to run out of money, aren’t they? The thing is, it’s easy to fool unsophisticated consumers into not noticing these fees, or into thinking that they’ll never have to take advantage of them. But banks know better. They know to three decimal places how often low-income customers are likely to screw up slightly and overdraw their account by twenty bucks. And when they do, they’re charged obscenely more than the actual cost of servicing the overdraft. So who benefits? I do. I always have plenty of money in my checking account and I’ve never overdrawn it. So the entire debit card system is, for me, free.

The same is true for interchange fees. Banks charge merchants far more in interchange fees than it costs to actually run their payment networks, and merchants pay because they have no choice. Visa and Mastercard are functional monopolies, so if you want to do business with them — and what merchant can afford not to? — you have to pay whatever they tell you to pay. This cost gets passed on to consumers, of course, and the poor and working class pay it. The middle class and the rich, however, don’t: they basically get the fees rebated in the form of reward cards.

So you have two cases here of a system that costs money to operate, and in which the costs are largely borne by the poor in order to make them free (or cheap) to the better off. If you can sleep easily at night even after you understand how this works, you have a heart of stone.

So what’s the alternative? Simple: fees that are fair and transparent. Overdraft fees should cover the average actual cost of overdrafts plus a small amount. Interchange fees should cover the actual cost of operating an electronic payment network. Credit card interest rates should cover the risk-adjusted cost of actually loaning out money.

And to those interchanges, Reihan Salam in Forbes:

As trousers grow skinnier, our mobile phones are following suit, as evidenced by the ultraslim iPhone 4. But the U.S. Treasury, alas, has no intention of altering the design of its coins to accommodate America’s evolving fashion sense. At home my coins accumulate in jars and paper cups and drawers, perhaps to serve as raw material for some future magnetic art project. And as for bills, I only use them when absolutely necessary.

Generally speaking merchants will accept debit cards for even very small transactions. But as we all know, they don’t like it. In New York City, where cab drivers are required to accept electronic payment, many drivers will plead with you to use cash, citing the onerous fees collected by the banks.

These swipe or interchange fees are the target of a new regulation proposed by Sen. Dick Durbin of Illinois, a liberal stalwart keen to pick a fight with the financial sector. Merchants have been urging Congress to take action on swipe fees for years, but it’s only now, when esteem for the financial sector is at a low ebb, that there’s been any hope of a tough regulatory response.

My gut instinct is to distrust sweeping regulatory efforts. When the interests of one set of businesses are pitted against another set of businesses, I’m inclined to let consumers decide who should come out ahead. Yet swipe fees pose a number of interesting puzzles.

In January Andrew Martin of The New York Times published a scathing exposé of how Visa and MasterCard squeeze retailers. The two big payment networks dominate the marketplace by making their offerings attractive to banks and credit unions that, in turn, issue debit and credit cards. Visa and MasterCard set fees for every debit card transaction, fees which vary by type of card, among other things. But the banks collect the fees and, all other things being equal, they like making more money rather than less.

Visa and MasterCard are serving their customers extremely well. The trouble is that their customers are banks–not consumers, who face higher prices as merchants pass on higher fees in the form of higher prices. Indeed Visa was, according to Martin, the first to pursue the high-fee strategy. MasterCard found that it was losing market share to Visa by continuing to offer lower fees, and so it quickly matched its rival. It’s hard to see how Visa and MasterCard might break out of this very stable dynamic; last fall the Government Accountability Office issued a report describing how swipe fees have steadily increased.

One argument, raised by scholars Todd Zywicki and Geoffrey Manne, is that swipe fees are a way to pass on credit losses to merchants. Yet as financial blogger Felix Salmon of Reuters observes, merchants don’t also benefit from the much larger credit profits derived from fees and interest payments enjoyed by banks.

Swipe fees could be increasing due to rising levels of fraud and identity theft. That, however, would represent a case for shifting away from signature debit and towards PIN credit. But signature debit is more profitable for card issuers, which is presumably why there hasn’t been aggressive movement in this direction. In Salmon’s view, rising swipe fees represent pure rents for the effective duopoly of Visa and MasterCard, and the Durbin amendment would help shift the balance of power towards merchants and consumers.

The case for regulation does seem fairly strong. To me that suggests that there’s been a serious failure on the part of entrepreneurs. One wonders how the Visa-MasterCard duopoly has become so robust. In the absence of new swipe fee regulations, it’s possible that merchants will band together to find a superior alternative. The trouble is that the retail sector remains fairly fragmented, and cooperation on this scale would be very difficult to achieve. The past decade has seen a number of innovative payment systems emerge, from PayPal to Square.

Mike Konczal at Rortybomb:

Remember this debate is about reward cards versus debit cards. Merchants love debit cards, they are easier than cash. They don’t want to subsidize the airline industry by having to pay for rich people’s frequent flyer miles reward card for free, without anything in exchange for providing an additional good or service.

But they can’t give incentives for debit cards under current law. They can’t offer you a free loaf of bread with your groceries for typing in your pin, or give you your very own pin express checkout lane, for using debit. That is valuable local information and retail innovation that is lost. So watch for interchange rates being juked between high rewards credit cards, generic credit cards, the abomination that is “signature debit”, and pin debit.

I am not certain whether or not Hill staffers are currently being bombarded with financial lobbyists with vested interests claiming all kinds of decreases in interchange over the past decade. This data is very hard to find, as the credit card companies guard it vicious. Now, I’m just a dude with a matlab license and a free blog, so let me tell you what other credible people have researched and found recently.

Tim Lee at McArdle’s place:

Most of the commentary on interchange fees have focused on the rate paid by merchants, but this is the wrong number to focus on. Rather, we should care about the net of merchant fees minus cardholder benefits. If credit card fees rise but benefits rise by an equal amount, the result is a wash as far as the customer is concerned. I’m not aware of any precise data on cardholder benefits, but judging from the fact that companies used to charge an annual fee to issue credit cards and they now frequently offer generous cash back, I think it’s safe to say that benefits have gotten more generous over time. So looking only at interchange fees gives us a distorted picture.

Now maybe you don’t believe that banks will continue to pass increased fee revenues on to their customers. But notice that this is a symmetrical situation. If you doubt that competition among banks will shift most of the benefits of higher fees to consumers, then you should be equally skeptical of claims that competition among merchants will translate lower credit card fees into lower retail prices.

Konczal writes derisively about cardholder benefits, arguing that merchants “don’t want to subsidize the airline industry by having to pay for rich people’s frequent flyer miles reward card for free, without anything in exchange for providing an additional good or service.” But this misses the point in a couple of important ways. First, the benefits are limited neither to frequent flyer miles nor to rich people. But more fundamentally, what merchants want is irrelevant, because there’s no reason to think consumers’ interests are more aligned with merchants than with banks. Indeed, you could view the credit-card-issuing banks as agents for cardholders, negotiating for discounts that are passed along to their customers.

Advocates of regulation like to tell a populist story of consumers against rapacious banks. But there are wealthy corporations on both sides of the bank-merchant relationship. There’s no reason for regulators to side with Wal-Mart over Wells Fargo. Policymakers should focus on ensuring that both sides of the market (card-issuing banks and card-accepting merchants) are robustly competitive. Then consumers will reap most of the benefits whether interchange fees go up or down.

Konczal responds:

This argument is predicated on the idea that all people in the United States have access to the high-end consumer credit market. In general, the “two-sided markets” argument assumes a single representative consumer and a single representative business in a closed loop, where value can’t really be transfered in or out. That’s not the real world, where there are multiple payment systems, including cash, debit and credit cards with different prices, and multiple people with different access to credit.

Rich is a loaded term, but let’s throw some numbers out there. Here is an estimate that 13.2% of American households don’t own a checking account and about 9.5% of American households hold no bank account at all. They’ll pay the same price for goods and services as Tim, but not receive 1% back in cash. There’s a move to try and get the unbanked decent prepaid debit cards. They’ll definitely not get a good rewards problem out of it.

Is there inequality within the credit market for those who have access to it? From Adam Levitin’s Priceless? The Social Costs of Credit Card Merchant Restraints (19), which gives a history of the “merchant restraints” on distinguishing between debit and credit, we know that: “Visa Signature cards, which carry a high level of rewards and are marketed specifically to affluent consumers, comprise only 3.5% of all Visa cards but have accounted in recent quarters for 22.2% of all Visa purchases.” That’s a high volume of purchases with high rewards going to just a few people. Many people have rewards cards, but the very best ones are reserved for the high end, and those at the high end spend more than those not at the high-end. And everybody pays the same price.

We also know that around 45% of interchange goes to fund rewards. These high interchange rates drive up prices. Tim’s 1% back requires a merchant to pay an estimated 2.22% interchange for that feature alone. People who get less back, or who use debit, or who pay with cash, are paying higher prices to transfer money to Tim.

Want to get even more regressive? The people with poor access to high-end credit are paying higher prices to transfer tax-free income to Tim. Tax-free! It’s true many people have access to rewards cards, but some use them significantly more, and with much nicer, rewards than others. Those few are not scattered randomly among the population.

Tim Lee responds:

Mike Konczal has a sharp response to my post on interchange fees. He’s been following this issue more closely than me, so there’s a lot of good information there. But one part of his argument that doesn’t seem quite right is this:

Is there inequality within the credit market for those who have access to it? From Adam Levitin’s Priceless? The Social Costs of Credit Card Merchant Restraints (19), which gives a history of the “merchant restraints” on distinguishing between debit and credit, we know that: “Visa Signature cards, which carry a high level of rewards and are marketed specifically to affluent consumers, comprise only 3.5% of all Visa cards but have accounted in recent quarters for 22.2% of all Visa purchases.” That’s a high volume of purchases with high rewards going to just a few people. Many people have rewards cards, but the very best ones are reserved for the high end, and those at the high end spend more than those not at the high-end. And everybody pays the same price.

We also know that around 45% of interchange goes to fund rewards. These high interchange rates drive up prices. Tim’s 1% back requires a merchant to pay an estimated 2.22% interchange for that feature alone. People who get less back, or who use debit, or who pay with cash, are paying higher prices to transfer money to Tim.

I’m not sure I follow Mike’s math here. The fact that 44 percent of interchange fees get passed through as rewards doesn’t mean that a dollar of rewards “requires” a fee of $2.22. Offering a credit card at all costs money; you have to do things like printing statements, processing checks, staffing help lines, and the like. For less affluent customers, the revenue from interchange fees may barely cover these fixed costs, leaving little revenue for benefits. For more affluent customers, in contrast, the fixed costs will be a small fraction of interchange fee revenues, and so the company can afford generous benefits. This isn’t a transfer of wealth from poor to rich, it’s just a reflection of the fact that wealthier customers are more lucrative.

If regulatory measures push down interchange fees, it will likely mean that affluent customers get less generous benefits. But it may also mean that the least affluent credit card holders have to start paying annual fees again (or won’t get cards at all) because interchange revenues no longer cover the cost of providing the card. This isn’t an outcome we should cheer if we’re concerned about those at the margins of the banking system.

UPDATE: Katherine Magu-Ward at Megan McArdle’s place

Matthew Yglesias responds to Drum

Drum responds to Yglesias

UPDATE #2: More Drum

Yglesias responds to Drum

Megan McArdle

John Cole

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Once Is Happenstance, Twice Is Coincidence…

Heather Horn at The Atlantic

Edward Cody at The Washington Post:

In a brazen display of stealth, cunning and cool nerves, a thief using a sharp cutting tool opened a gated window and sneaked into the Paris Museum of Modern Art.

Three security guards were on duty at the time, but the thief — or perhaps thieves — detached five major cubist and post-impressionist paintings from their frames without being detected and slid back into the night with a rolled-up treasure worth well over $100 million.

The embarrassing heist — of paintings by Pablo Picasso, Georges Braque, Henri Matisse, Amedeo Modigliani and Fernand Léger — was discovered just before 7 a.m. Thursday, Paris officials said, probably long after the celebrated canvases had disappeared.

Stephen Spruiell at The Corner:

Art lovers, be not afraid: The blackguards are sure to return the priceless works once they get wind of this major scolding from Pierre Cornette de Saint-Cyr, director of a neighboring museum:

“You cannot do anything with these paintings. All countries in the world are aware, and no collector is stupid enough to buy a painting that, one, he can’t show to other collectors, and two, risks sending him to prison,” he said on LCI television. “In general, you find thesepaintings,” he said. “These five paintings are un-sellable, so thieves, sirs, you are imbeciles, now return them.”

The possibility de Saint-Cyr appears to be overlooking: The theft was commissioned by a private collector, and the thieves won’t have to worry about selling thepaintings.

Nick Obourn:

Works stolen include Picasso’s Le pigeon aux petits-pois, and works by Georges Braque, Matisse, and Modigliani. More news on this will surely emerge in the next few hours, but safe to say this is one of the biggest art heists pulled off in recent memory. The works stolen are landmark paintings that once gone off museum walls go underground quickly.

The Guardian reports that the thief was caught on camera taking the paintings.

The burglary was discovered just before 7am. A single masked intruder was caught on a CCTV camera taking the paintings away, according to the Paris prosecutor’s office. A window had been broken and the padlock of a grille giving access to the museum was smashed. The paintings appeared to have been carefully removed from their frames, rather than sliced out.”

Update: Bloomberg is reporting that the $600 million dollar figure affixed to these paintings is incorrect and inflated.

The paintings are together worth about 100 million euros ($123 million,) Christophe Girard, the Paris city official responsible for culture said as he visited the scene of the crime today. He dismissed earlier reports putting the value as high as 500 million euros. The heist was ‘well organized,’ Girard said.”

The Economist:

In a paper called “The Underworld of Art”, published in 2008 in the journal Crime, Law and Social Change, R.T. Naylor argued that art insiders are often involved in these illegal operations, as they “alone have the technical knowledge and circle of intimates necessary to link an illicit supply with a demand”. The criminal underworld he depicts—an illicit mirror image of the legal art world, with all works running through similar channels—is also an intriguing one. But it seems more likely that underpaid museum employees are involved in such thefts, and that the stolen works are either traded for other illegal goods and services, or used as legal bargaining chips by criminals with even greater black marks on their record.

The explosion of the art market as a hotbed of speculation has naturally accelerated the market for art theft. Interpol counts such theft as the fourth-largest type of crime that it tracks worldwide, after drugs, money laundering and arms sales. If these works are recovered, such a high-profile theft would probably increase their value. But stolen works rarely resurface—only 12% to 15% do, according to the London-based Art Loss Register (ALR), which also counts Picasso as the world’s most stolen artist. (The organisation counts more than 500 missing works of his, including two that were stolen in 2007 from the home of Diana Widmaier, the artist’s granddaughter, across the Seine from the museum.) The ALR put the total number of stolen items worldwide at 203,734 in January 2009, up nearly 50% from five years earlier.

So, what should the Paris Museum of Modern Art do? Some say that offering a reward (with help from an insurer, who is otherwise caught out) is the most effective way to recover stolen art, as this allows individuals and institutions to operate without the bureaucracy of law enforcement. But as with kidnapping people, this also creates an incentive for informants to speak up and private investigators to get involved. In the event the thief demands a ransom, whether or not to pay out is somewhat controversial. Some art-industry observers suggest this merely fuels more art crime, and makes the aggrieved institution a bigger target. (For this reason, most museums—such as the Tate, which recovered two stolen Turner paintings in 2002 for £3.1m—keep quiet on whether they pay out.)

Regardless, it is grim to know these paintings—in particular “Dove with Green Peas”—are gone from public view. But if all publicity is essentially good publicity (as the Metropolitan Museum of Art learned in January, when a visitor accidentally tore one of its Picasso paintings), perhaps this heist will now send greater numbers to Paris’s Museum of Modern Art, if only to see the many other works that once accompanied the five that are now gone.

TPM has the photo gallery

Ravi Somaiya at Gawker:

On Thursday art thieves broke into the Museum of Modern Art in Paris and stole $123m of paintings, including a Matisse and a Picasso. Yesterday two men got into the home of a collector in Marseille and stole five works.

The collector, a man in his 60s, was beaten up during the robbery. The value of the stolen works has not been released, but the BBC report that a Picasso lithograph was among them. It is not yet known whether the thefts is connected with the Paris robbery earlier in the week, during which the painting above — Pastoral, by Henri Matisse — was taken. But be vigilant with your masterpieces, people.

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I Am Greece… I Am Greece… I Am Greece

Heather Horn at The Atlantic has a lot of this at a round-up

David Leonhardt at NYT:

It’s easy to look at the protesters and the politicians in Greece — and at the other European countries with huge debts — and wonder why they don’t get it. They have been enjoying more generous government benefits than they can afford. No mass rally and no bailout fund will change that. Only benefit cuts or tax increases can.

Yet in the back of your mind comes a nagging question: how different, really, is the United States?

The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today.

The United States will probably not face the same kind of crisis as Greece, for all sorts of reasons. But the basic problem is the same. Both countries have a bigger government than they’re paying for. And politicians, spendthrift as some may be, are not the main source of the problem.

We, the people, are.

Ryan Avent at Free Exchange at The Economist:

The people are, he says, because they prefer a high level of services and low taxes. Indeed, America’s primary deficit is clear evidence that they prefer this; otherwise, they’d vote tax increases and service cuts until the budget balanced. They haven’t, just as the Greeks didn’t, and so the trajectories appear similar.

But slow down a moment. Degree is important here. America’s trend growth rate is higher than Greece’s. Its political system is less dysfunctional. Its economy is overwhelmingly on the books and taxed. Its labour markets are more flexible, its public sector is smaller, and its unions are less powerful. Its currency floats, and its monetary policy is its own.

The bottom line is that it’s not clear that there is any set of policies Greece can adopt which will prevent default. Debt costs are too high and growth is too slow. There are many different ways that America could close its budget gap; it’s merely having an intense political debate over which way is the best way. This could potentially be a problem, but it’s a different problem from the one in Greece. The Greeks have a massive current primary deficit that markets no longer want to fund. The Americans have a political debate over how to rein in the growth of health costs over the next three decades. Ultimately, casting the American fiscal situation in a Greek light obscures more than it illuminates.

Paul Krugman:

I would really question this comparison:

The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today.

Um, that’s comparing a (highly uncertain) projection of debt 20 years from now — a projection that’s based on the assumption of unchanged policy — with actual debt now. Actual US federal debt is only about half that high now. And it’s worth pointing out that Greek debt is projected to rise to 149 percent of GDP over the next few years — and that’s with the austerity measures agreed with the IMF.

Here’s a more or less apples-to-apples comparison of the medium-term outlook. I’ve taken the Auerbach-Gale projections for the US budget deficit as a percentage of GDP outlook under Obama policies, and compared them with the IMF projections for Greece, subtracting out “measures” — that is, the austerity measures agreed in return for official loans. Here’s what it looks like:

DESCRIPTIONIMF, Tax Policy Center

Basically, the United States can expect economic recovery to bring the deficit down substantially; Greece, which has a larger structural deficit and also faces a grinding adjustment to overvaluation with the eurozone, can’t.

Derek Thompson at The Atlantic:

Now, that’s short-term. Before you interpret those shrinking red bars as evidence that we’re in the clear by 2012, remember that the United States’ projected pain is slated to begin later in the decade, when health care inflation hitches a ride on the retirement of tens of millions of baby boomers, sending the government’s Medicare responsibilities soaring into the 2020s.

We’re not Greece for a lot of reasons: we control our own currency, we’re more productive, we have a much stronger economy and while we suffer from tax avoidance like many countries, Greece faces epic shortfalls.

But we are like Greece in the simple respect that we’ve conditioned the electorate to expect more services and fewer taxes ad infinitum. And We the People consistently elect politicians who promise to preserve that imbalance. I’ve been asked a few times to produce something like a dream budget for America 2020. Here’s a start:

1) Institute a revenue-neutral VAT with off-sets to employer payroll taxes to make it slightly progressive, but grow the VAT to 8 or 10 percent over the next five to ten years. (I’d also entertain arguments for a carbon tax, but I’m less sold on Pegouvian taxes as dependable money machines and we’ll need a dependable money machine before we “solve” the medical inflation conundrum.) Eliminate the mortgage interest deduction. Broaden the corporate income tax base by eliminating loopholes especially on repatriated income, but lower the rate.

2) Raise the retirement age for Social Security, indexed to longevity. It’s important to do something with Social Security before Medicare because it’s easier to move the full retirement age than to put a straitjacket around medical inflation. Tweaking this entitlement would be an important signal to international investors that we can be serious about our deficit drivers. (We should be open to other SS adjustments, like raising the taxable income ceiling.)

3) Put a freeze on discretionary spending — not on each department, but the whole thing, to allow for flexibility. Keep PAYGO. Convene a commission on defense spending to find costly weapons programs to cut, bases to sell, and other savings.

Stephen Spruiell at The Corner:

Ok, let’s start with what we know. As things stand in 2010, the U.S. and Greece are in the same boat, deficit-to-GDP-wise (with a number of obvious differences: The U.S. can print its own currency, has better prospects for growth, etc.). After that, one has to rely on projections. Here’s where Krugman manages something remarkable: On the one hand, he criticizes colleague David Leonhardt (who has a piece up today comparing the U.S. and Greece) for relying on projections “based on the assumption of unchanged policy.” Krugman corrects the error in his own analysis by using projections that assume most of Obama’s policies will be implemented going forward.

But for Greece, he commits the same error for which he faults Leonhardt. He uses the IMF’s projections for Greece’s future debt-to-GDP, but subtracts out the effects of the austerity measures Greece agreed to in exchange for its bailout. In other words, Krugman has matched the worst-case scenario for Greece with a more optimistic scenario for us. It’s not surprising that the resulting comparison looks so lopsided.

Now, I’m not naive enough to think that Greece will do everything asked of it to shrink the size of its deficit — the challenge is just too daunting, and the moral hazard left in the wake of the bailout leaves Greece with little incentive to enact the most painful reforms. But it’s also unrealistic to pretend there will be no changes, and it’s downright tendentious to compare an unchanged fiscal picture of Greece to a picture of the U.S. in which Obama has defied political reality and gotten his way on everything, with all of his policies —including tax hikes and regulations — having static and predictable effects on the deficit.

Let’s re-run the numbers. For Greece, we’ll only subtract out half of the projected effects of the austerity measures, and for the U.S. we’ll use the Auerbach-Gale “extended policy baseline” — which assumes that Congress will act like Congress and thwart the administration’s deficit-reduction plans in key areas. Greece is still worse off, but the differences suddenly aren’t so stark:

Greece_US_2

Krugman obviously has a point, which is that the U.S. is in better shape than Greece and isn’t going to spontaneously generate serious doubts about its ability to service its debt. But we are walking a finer line than he lets on. The more credible concern is that an external event, such as a wave of sovereign defaults, leads investors to think twice about the safety of all sovereign debt, including ours.

David Leonhardt responds to Krugman:

Neal Conan at Talk of the Nation, the public-radio show, just asked me about today’s New York Times debate over the deficit. I compared Greece’s fiscal problems to the long-term ones facing this country. Paul Krugman thinks the comparison is overblown.

I certainly agree that the two situations are not equivalent. Greece’s fiscal problems are worse than ours, and both our underlying economy and our political institutions are stronger than theirs. But the last statistic Mr. Krugman cites highlights why I think the comparison is relevant: “we have a long-run fiscal imbalance of 6-plus percent of G.D.P.” So to get our budget in order, we would need to come up with revenue equal to more than 6 percent of gross domestic product, either through tax increases or spending cuts. (That number comes from this paper, by the economists Alan Auerbach and William Gale.)

That’s an enormous amount of money. Military spending, for instance, is now less than 5 percent of gross domestic product. Medicare’s budget is now about 3 percent of G.D.P. Coming up with the necessary cuts and tax increases — even over many decades, the relevant time frame — will not be easy.

In essence, the country needs to figure out how to pay for the government that its citizens want. It’s a version — albeit a less extreme one — of the problem facing Greece right now.

Ryan Avent responds:

On the face of things, the problems are similar: revenues minus spending equals a negative number in both America and Greece. And Mr Leonhardt seems stuck on that similarity.

But the differences are crucial. Greece needs to come up with that 6% right now, in the space of a couple of years, in an environment of negative economic growth, because markets are close to refusing to lend Greece any additional money. America needs to close that 6% gap over the space of several decades, during which time it is likely to grow at a real annual rate of about 2.5%.

Do you see how these situations are different? Greece needs to make massive, immediate budget cuts all without plunging its economy into a recession so deep that the cuts generate a larger deficit as revenues tumble. It’s quite possible that there is no way to make this happen without massive external assistance. America, by contrast, simply needs to slow the rate of growth of government spending. That’s it. An increase in revenues would help, too, but what we’re basically talking about is slowing spending growth by enough that economic growth can generate the revenues to fund the government’s budget.

Now, slowing spending growth is no piece of cake. There are big demographic headwinds, huge challenges where health cost controls are concerned, and sharp ideological differences over the proper size of government. If fixing the mess were easy it wouldn’t be a mess. But America really is different from Greece, in a fundamental way.

More Krugman:

The truth, however, is that America isn’t Greece — and, in any case, the message from Greece isn’t what these people would have you believe.

So, how do America and Greece compare?

Both nations have lately been running large budget deficits, roughly comparable as a percentage of G.D.P. Markets, however, treat them very differently: The interest rate on Greek government bonds is more than twice the rate on U.S. bonds, because investors see a high risk that Greece will eventually default on its debt, while seeing virtually no risk that America will do the same. Why?

One answer is that we have a much lower level of debt — the amount we already owe, as opposed to new borrowing — relative to G.D.P. True, our debt should have been even lower. We’d be better positioned to deal with the current emergency if so much money hadn’t been squandered on tax cuts for the rich and an unfunded war. But we still entered the crisis in much better shape than the Greeks.

Even more important, however, is the fact that we have a clear path to economic recovery, while Greece doesn’t.

The U.S. economy has been growing since last summer, thanks to fiscal stimulus and expansionary policies by the Federal Reserve. I wish that growth were faster; still, it’s finally producing job gains — and it’s also showing up in revenues. Right now we’re on track to match Congressional Budget Office projections of a substantial rise in tax receipts. Put those projections together with the Obama administration’s policies, and they imply a sharp fall in the budget deficit over the next few years.

Greece, on the other hand, is caught in a trap. During the good years, when capital was flooding in, Greek costs and prices got far out of line with the rest of Europe. If Greece still had its own currency, it could restore competitiveness through devaluation. But since it doesn’t, and since leaving the euro is still considered unthinkable, Greece faces years of grinding deflation and low or zero economic growth. So the only way to reduce deficits is through savage budget cuts, and investors are skeptical about whether those cuts will actually happen.

It’s worth noting, by the way, that Britain — which is in worse fiscal shape than we are, but which, unlike Greece, hasn’t adopted the euro — remains able to borrow at fairly low interest rates. Having your own currency, it seems, makes a big difference.

In short, we’re not Greece. We may currently be running deficits of comparable size, but our economic position — and, as a result, our fiscal outlook — is vastly better.

J.D. Foster at Heritage:

So, no, we are not Greece. Our political system is no beauty, but it tends to work. Our society is under the inevitable strains of a big country with a heterogeneous population, yet we press on. Our economy should recovery smartly if Washington can stop throwing monkey wrenches into the operation. But then there’s the matter of the federal government’s finances (and state finances, but that’s for another day).

We’ve long know that the long-run fiscal outlook is unsustainable because spending on Social Security and Medicare in particular are set to soar. Yes, Paul, it is the spending. Krugman appears to be the only person in America who does not understand this. Certainly the leftish folks in think tanks such as the Brookings Institution, the Urban Institute, the Progressive Policy Institute and others don’t dispute this fact.

But now, under the dual pressures of time passing and Obama spending, the long-run isn’t so long any more. Many will explain away the current Grecian formula budget deficits as the obvious and temporary outcome of recession. Fine to a point, but in between the supposed long-run and the short-run is the medium run, and in this medium run (say the period from 2012 to 2010, America’s debt-to-GDP ratio is projected by the Congressional Budget Office (CBO) to reach a very French-like 90 percent under Obama’s policies. And, of course these numbers don’t reflect the budget busting Obamacare or all the other emergency, important, or just plain excessive spending Obama and friends will be working on over the next couple of years.

Krugman seeks to dismiss those on the right and the left who see trouble ahead. But he cannot dismiss the growing wariness in credit markets toward all countries with fiscally irresponsible governments. What Greece faces today fiscally is a window on our future if we continue down the debt-laden road. We’re not Greece, yet. But we will be if we don’t find an exit. Fortunately, there are many exits, and they all involve a turn to the right at a spending stop.

If the Grecian crisis does befall the United States, and all the journalists and pundits are then screaming, “How did this happen and who’s to blame?” A big finger of the blame will go to the likes of Krugman and his fellow apologists for the “progressive”, read socialist vision. My bet is America will come to its senses first, however, so Krugmanism will quietly join its fellow doctrines in the trash heap of history.

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