Derek Thompson

How bad is the Great Recession? Housing prices have slid more sharply than the Great Depression, and the federal deficit free fall is without precedent. That's bad. But in just about every other category, the Great Depression was must worse. That's good! What else? Paul Swartz, an International Economics analyst at the Council on Foreign Relations, presents the recession, in context, in graphs (in a PDF).

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On such a summer's day in 2009, when too big to fail has practically become a national slogan, you would think that the Obama administration would find it in their hearts and their pockets to lend some bailout money to the state of California, which now faces a $24 billion deficit. But no. The early word from DC is that the administration has refused to bail out California and that Arnold Schwarzenegger will be forced to take whatever lessons he learned when playing Mr. Freeze and apply them to government spending.

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Martin Feldstein got kicked around the blogosphere a couple of weeks ago for an op-ed in the Washington Post arguing against cap-and-trade legislation. (See, eg, David Roberts, Matt Yglesias, Mark Thoma, Paul Krugman, Daniel Drezner and Henry Farrell.) Upping the ante, I see Feldstein's now gone and published an even longer version of the exact same argument in the current issue of the Weekly Standard.

The portion of Feldstein's argument that had to do with international relations -- basically, that the US shouldn't act on climate change without extracting similar agreements from China and India -- got picked over pretty well last time around. But the rest of Felstein's argument -- basically, that cap and trade would impose a huge cost on the average American family -- is worth noting:

Bloomberg reports that the Obama administration's emphasis on health care reform and climate control will likely push bank reform and re-regulation to late 2010, just in time for election-year grandstanding. One year doesn't seem like a long time, but politics is about momentum and we Americans have a habit of jumping from one national fixation to another. (Remember, 12 months ago, we were worrying about whether algae blooms and toxic smog would totally ruin the Olympics.) As we speak, popular resentment toward the banks on Capitol Hill and Main Street is ripe and ready for plucking. A year from now, it will be moldy, smelly and stashed away in the refridgerator compartment where you hide lumpy fruit that didn't make last week's fruit salad. In other words, this won't kill the will for financial reform, but it could turn the will into mush.

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As the healthcare debate picks up in the US, there has been much discussion about how to pay for it. Coinciding with this debate are vocal concerns about the country's underlying fiscal position - which some have suggested as a reason to delay healthcare reform.

What this argument ignores is that healthcare is central to the long-term fiscal and economic prospects of the US. If costs per enrollee in Medicare and Medicaid grow at the same rate over the next four decades as they have over the past four, those two programmes will increase from 5 per cent of gross domestic product today to 20 per cent by 2050.

I'm not quite prepared to say that John Tamny's column on "the Flip Side of Failure" is the worst piece I've read since the onset of the recession, but it's arguably the most overblown.

Tamny's thesis is pretty simple. Another way of looking at a devastating recession is that it represents "assets falling into the hands of those who can either afford them, or who possess a stated objective to use them more wisely. In short, the flipside of failure is opportunity." And Tamny, to his credit, gives examples. Buffalo Wild Wings, for instance, which has taken over eight restaurants formerly owned by the Don Pablo's chain. And Panera Bread Co., which is moving into some of the buildings previously inhabited by the now-shuttered Bennigan's. This seems, to me, like a fundamentally sad macroeconomic story: A lot of jobs were lost and a couple of jobs were gained. This is like taking consolation because you won $50 at slots even as you lost several thousand in Vegas. But Tamny is more enthused. "The failure of certain chains and restaurants has created opportunities for other eating establishments to expand," he writes.

Richard Posner writes:

There are two distinct compensation issues arising from the current economic crisis. One involves the compensation of executives of firms that are owned or controlled by the federal government, such as General Motors, American International Group, Fannie Mae, and Freddie Mac, as a result of federal bailouts in the form of equity investments rather than loans. The other issue involves recipients of federal bailout money that nevertheless remain under private ownership and control.

This distinction makes perfect sense to me, but it doesn't seem like the big one. The big distinction seems like it's between compensation as it relates to systemic risk, and compensation as it relates to populist anger.

The latter category includes all the firms that received help from the federal government -- firms that will fall under the whip (or at least the suggestion) of special master for compensation Kenneth Feinberg. (Everyone is using "pay czar," but "special master for compensation" -- his actual title! -- seems like the more intrinsically enjoyable term.) Seven of these firms (those in which the government has an equity stake) will have their compensation set by Feinberg's fiat, and the rest (about 80 firms) will receive advisory guidelines from his office. But the trick with all of Feinberg's work seems to be balancing the fear of populist pitchforks against the fear of spooking firms out of participating in the administration's Public Private Investment Program.

On the other hand, the concerns about systemic risk are much broader -- which is why Geithner proposed general corporate governance reform to deal with them. But they should actually be less controversial. If you think industry-wide compensation structures created systemic risk, then of course it makes sense -- almost by definition -- to think about regulating them.

Does anyone think they did not create systemic risks? Even the Wall Street Journal editorial page agrees with Geithner on this, in principle. You might say that, in the grand scheme of the financial meltdown, the risks created by executive compensation weren't as big as persistently low interest rates or mass housing market hysteria. But that's not really an argument against regulation; at best it's an argument for different priorities. Isn't the real argument is over the best way to regulate?


The Misty-eyed Tim Geithner is from Wikimedia Commons.
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(For more: James Kwak has had some good posts on this, and points to a paper from Harvard's Lucian Bebchuk -- who also testified on the Hill last week -- that makes the case for a relationship between compensation structures and systemic risks.)

In the future, writes WIRED editor Chris Anderson, everything will be free. And in the case of jobs, the future is now, because unpaid internships abound, especially in the summer months, with college students flocking to DC and New York like the salmon of Capistrano. Even former masters of the universe are prepared to trade the expectation of comp'ed lunches for the expectation of hot office coffee. Are unpaid internships one-part education/one-part natural expression of the labor market? Or are they spoiling rich young Millennials and transforming the country for the worse?

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Paul Krugman is doing his thing again, talking up the 1937 recession and Japan's lost decade, repeating last week's lesson on liquidity traps, and blasting critics who have begun calling for an end to stimulus spending. He's got columns. He's got graphs. Hey Europe, are you paying attention?

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As the health care debate boils over this summer, one meme sure to be be stirred into the stew is the frequently recited fact that Americans lead the world in health spending but have no similar world-leading claim to life expectancy. In fact, we rate 50th out of more than 220 countries with an average age of 78. But as the graph after the jump shows, the disconnect between health spending and life expectancy isn't unique to America.

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Nancy Folbre hits on one of my favorite rejoinders to the annoying, if fading, liberal yawner that Democrats lost so many elections because millions of heartland Americans voted Republican against their self-interest. This argument, which received its most public treatment in Thomas Franks' "What's the Matter with Kansas?" posits that Republicans learned to make the class war about values instead of economics and tricked millions of poor, poor Americans into voting against their economic self-interest.

But as Folbre rightly notes, this is a very silly argument because "the most visible support for raising taxes on the rich comes from ... the rich," like the chief executive of Netflix begging the president to raise the highest income tax bracket to 50 percent. Raise my taxes! is another pretty bizarre strain of economic self-interest. Maybe we should ask: What's the matter with America?

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As you've probably heard, Obama's Department of Justice issued a legal brief to a federal judge defending the Defense of Marriage Act, which Obama previously derided as "abhorrent." I finally got around to reading it (late as always). This paragraph jumped out at me.

DOMA maintains federal policies that have long sought to promote the traditional and uniformly-recognized form of marriage, recognizes the right of each State to expand the traditional definition if it so chooses, but declines to obligate federal taxpayers in other States to subsidize a form of marriage their own States do not recognize. This policy of neutrality maximizes state autonomy and democratic self-governance in an area of traditional state concern, and preserves scarce government resources. It is thus entirely rational.

Does DOMA really preserve "scarce government resources"? Would repealing it really "obligate federal taxpayers" to subsidize gay marriage? No. This is factually incorrect.

At least, it is factually incorrect according to the federal government itself. Five years ago the Congressional Budget Office did an analysis (pdf) of the potential budgetary effects of recognizing same-sex marriages. (The CBO is a truly wonderful place.) That analysis concluded:

The potential effects on the federal budget of recognizing same-sex marriages are numerous. [...] In some cases, recognizing same sex marriages would increase outlays and revenues; in other cases, it would have the opposite effect. The Congressional Budget Office (CBO) estimates that on net, those impacts would improve the budget's bottom line to a small extent: by less than $1 billion in each of the next 10 years (CBO's usual estimating period). That result assumes that same-sex marriages are legalized in all 50 states and recognized by the federal government.

I think the Defense of Marriage Act is a terrible law for many reasons -- equality before the law is where I'd start -- so I'm not desperately concerned about a 0.1% increase in federal revenue. Nonetheless, I think it is worth pointing out a pretty clear error in the DOJ's brief. Federal recognition of gay marriage will save the federal government hundreds of millions of dollars. 

Tonight Facebook is doing something not-so-crazy that you probably shouldn't care about, but I'll tell you anyway. They're allowing users to replace the messy sequence of letters and numbers after the facebook.com with a username, just like Myspace does. No biggie, right? Wrong. Because this is a story that involves 1) The Internet, 2) A change 3) Room for speculation, it follows that somebody had to write a story saying that this not-so-crazy update will make Facebook obsolete and change the face of the Internet as we know it. Thank you, Daily Beast!

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When the current crisis is over, the reputation of American-style capitalism will have taken a beating--not least because of the gap between what Washington practices and what it preaches. Disillusioned developing nations may well turn their backs on the free market, warns Nobel laureate Joseph E. Stiglitz, posing new threats to global stability and U.S. security.

WASHINGTON -- A bill allowing the Food and Drug Administration to regulate tobacco is on the way to the White House for President Barack Obama's signature.

A day after the Senate overwhelmingly approved the measure, the House passed it Friday on a 307-97 vote.

Mr. Obama said the legislation gives the government much greater power to regulate tobacco "truly defines change in Washington." The president spoke in the Rose Garden Friday and promised to sign the bill.

Health and Human Services Secretary Kathleen Sebelius said Thursday that her agency looked forward to implementing it.

The FDA now will take on an unprecedented role overseeing the production and marketing of cigarettes. Health advocates are happy about the prospect, saying at long last regulators can determine exactly the types of toxins involved in making and smoking cigarettes.

THE worst global economic storm since the 1930s may be beginning to clear, but another cloud already looms on the financial horizon: massive public debt. Across the rich world governments are borrowing vast amounts as the recession reduces tax revenue and spending mounts--on bail-outs, unemployment benefits and stimulus plans. New figures from economists at the IMF suggest that the public debt of the ten leading rich countries will rise from 78% of GDP in 2007 to 114% by 2014. These governments will then owe around $50,000 for every one of their citizens.

"History is one big laboratory experiment that only gets run once," Niall Ferguson muses to the New York Times today. Actually that's not quite true, responds Tim Fernholz. In the worldwide science project called Recessionomics, we're seeing many countries' labs experiment with a bevy of downturn-busting strategies. Let's see who's winning:

In Lab USA, which has experimented with a Keynesian stimulus plan and massive federal involvement in the bank system, we expect to see a bottom of the recession in the fall. Lab European Union, which has limited both its monetary and fiscal response, expects a recovery in the middle of 2010, and its GDP has contracted 50 percent more than the States, where the shock began. Keynes wins again?

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California is a mess. Barring major intervention from the governor or legislature, it's about seven weeks away from a financial meltdown and crumbling under a budget deficit of $24 billion. Dark days call for drastic measures. If there was ever a time for a liberal-leaning state to start experimenting with illicit drugs or the taxable revenues thereof, this would be it. (With Update!)

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These days it is fashionable to compare Obama's health care reform to Bill Clinton's failed attempts to reform health in 1993, as Matt Bai did most recently, and most extensively, in his New York Times story. But maybe the best allusion isn't to Clinton, but to George Bush and Social Security reform -- the most recent blockbuster, partisan battle to change a major entitlement program.

At Time, reporter Jay Newton-Small compares the current debate over the public option for health care to the debate over privatizing Social Security, which reared its head after the 2004 election and promptly crashed and burned. Could the same thing happen to health care? I wouldn't be so sure. In many ways, the Social Security debate is not the right template for the health care reform debate.

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