Half Changed World

Since I think I’ll be a bit distracted on Tuesday night, I’m posting this week’s book review tonight.  The book is The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash, Charles R. Morris.

Morris wins a huge amount of credit for having written this book last winter, before everyone and her brother was talking about credit derivative swaps.  That said, his crystal ball wasn’t perfect — he spends a fair amount of time worrying about what will happen if other countries decide not to invest in the dollar anymore, while what seems to have happened is that everyone seems to have decided that the US Treasury is the one safe place to put your money in a world gone mad.

I definitely learned some useful things reading this book.  Nothing else I’ve read on the current economic collapse points out that there was a previous crash of collaterized mortgage obligations crash in 1994 when the Fed raised rate by 1/2 a percent.  But even more interesting than reading what Morris thought in February would happen in September would be to find out what he now thinks will be happening next March.

In the rush to get a full-length book out in a matter of months, the editing also suffered a bit.  Morris has some great lines: "That is the Greenspan Put: No matter what goes wrong, the Fed will rescue you by creating enough cheap money to buy you out of your troubles."  But at other times, he falls into a bit of jargon: "Similarly, the notional value of a derivative refers not to the derivative but to the size of the portfolio it is referencing."

Planet Money remains my pick for translating economist-speak into English. 

An organ transplant — especially when it’s a repeat job — is never a simple operation, but all things considered, Annika seems to be doing pretty well.  I’m still keeping her and her family in my thoughts and prayers.

On one of the posts about her (not here, on another blog), someone posted a comment urging people to join something called LifeSharers.  Their stated goal is to increase the number of organs donated and reward the people who choose to donate, by giving people who commit to donate organs higher priority to receive organs themselves.  They’re doing this by creating a free membership organization, where the condition to belong is that you commit to a) donating your organs and b) specifying that other members should get priority for those organs.

There’s an interesting logic here.  It gets around the primary objection to paying people for their organs (e.g. that the amounts involved could be coercive, and might motivate your next of kin to make decisions that were in their best interest rather than yours).  They explicitly don’t require that you be in good enough health for anyone to use your organs to join, so there’s no discrimination in membership.  (Although, as T points out, since they seem to be mostly recruiting through the internet, there’s a procedural bias towards the populations that are more likely to use it.)  And this doesn’t appear to be one of the predictably irrational cases where you make people less altruistic by offering an external reward.

But, in looking at their site, it seems like many of the people who are endorsing it are at least as motivated by a desire to show that incentives and free markets can produce a better outcome than government solutions as they are by they desire to have more organs transplanted.

Because there’s another very simple way to increase the number of organs that are available for transplant, that they don’t mention at all.  Make organ donation opt-out, rather than opt-in.  In other words, rather than having to specify that you want to donate your organs (and then have your next of kin confirm that intention), it would be assumed that you gave consent for donation unless you specified otherwise.  This sounds like a radical concept, but  a bunch of European countries do it, and they have donation consent rates between 85 and 99.9 percent*, compared to less than 30 percent in countries that have opt-in policies.

Fundamentally, these alternative approaches to increasing donation are based on very different hypotheses about why more people don’t donate.  LifeSharers is based on the hypothesis that there’s not enough of an incentive to donate.  Opt-out is based on the hypothesis that thinking about dying freaks people out and so they avoid doing it as much as possible.  I’d put my money on the latter.

The UK is considering moving to a system of presumed consent.  Does anyone think it has a chance in the US?

*Sweden is the outlier here, at 85.9 percent, with no other opt-out country at under 88 percent.  I wonder if there’s some cultural issue here against organ donation, or if they’re more aggressive than the other countries in making sure people know of their right to opt-out.  Either way 85.9 percent is a heck of a lot higher than 30 percent.

I highly recommend this week’s This American Life, appropriately titled Another Frightening Show about the Economy.  After listening to it, I finally feel like I have a decent idea about why the rest of the economy, not just Wall Street, is at risk, and what the heck a credit default swap is.  Enough so that I was annoyed at how bad the explanation of a CDS on Marketplace tonight was by comparison. 

The main thing I took away from it was just how massively leveraged the whole system was.  In Bonfire of the Vanities, my favorite scene is where the main character’s daughter asks him what he does.  She says that her friend’s daddy (a publisher) "makes books."  "So what do you do, daddy?"  And he tries to explain what an investment banker does, and totally confuses her.  So her mother, his wife (who despises him), jumps in and explains that what he does is like slicing up a cake, and passing it around, and whenever some crumbs fall off, he gets to keep them.  (This of course pisses him off, as he thinks he’s a Master of the Universe.)

Well, as far as I can tell, what happened is that the ibankers decided that crumbs weren’t enough, so they started passing the cake faster and faster.  And then they decided that they didn’t actually need to pass the cake, they could just promise to deliver a cake next week, and they didn’t have to own a cake, but they could get someone else to promise them a cake next week.  And they got to keep more and more crumbs.  But now someone’s actually asking for the cake, and it turns out there isn’t one.

In the comments on my last post about the meltdown, Amy and amy have been going on about how everyone who bought a house they couldn’t afford, or who financed a better life than their cashflow justified through cash-out refinancing is guilty of contributing to this mess.  And on some level, they’re right.  But if Wall Street hadn’t leveraged all this to the nth degree, it wouldn’t be threatening to take down much of our economic system.

Judith Warner had an interesting column last week on how much "regular" upper-middle-class New Yorkers, especially those who are by education upper-class, but not especially affluent, resented the huge amounts of money sloshing through Wall Street over the past decade.  And similarly, I think the people who didn’t take out huge mortgages are bitter about bailing out those who did.

There’s a good discussion going on at 11d about how much people feel like they’re personally being affected.

Two weeks ago, I had the chance to testify before a Congressional subcommittee.  It was quite exciting, even though the room was more than half empty, and only four of the members of Congress were present.  The whole thing was a little surreal, though, because the witness invited by the Republicans used all his time to argue that the biggest challenge facing American families is high energy costs, and so that we should expand domestic production of oil (in ANWR and offshore).  The ranking member therefore asked each of testifying whether we’d support expanding domestic production.

While those of you read this regularly can probably guess what I personally think of that, my organization certainly doesn’t have a position on the matter.  So when it was my turn, I responded that I would decline to offer a position on an subject outside my area of expertise.  Representative Davis then commented that I had disqualified myself from ever running for Congress, as having opinions on topics that you know nothing about is an absolute prerequisite for members of Congress.

This week has certainly proved the truth of that observation.  I haven’t been blogging about the bailout because I don’t know what the right thing to do is, and I wish I had any confidence that anyone else really does.  I’m afraid that they’re all making it up as they go along, and we’re going to be left holding the bag at the end.

While I recognize the symbolic appeal of limiting executive pay, I think I’d actually rather see the banks commit to opening no fee bank accounts — tied to debt cards, but programmed not to allow overdrafts — for everyone in the country.

This made me laugh.  (No video, safe for work).

Until today, I had never head of Christopher Cox.  He’s the chairman of the Securities and Exchange Commission, and he seems to be becoming the poster boy for the total failure of the regulatory agencies to do anything to try to prevent the Wall Street meltdown.

Well, that’s not quite fair.  As I learned this afternoon by listening to This American Life, he acted to ban naked short sales (e.g. the practice of selling stocks that you don’t actually own and haven’t borrowed from anyone) but only for Fannie Mae, Freddie Mac, Lehman, and 18 other financial institutions, and only for a limited period this summer. 

I’m not defending the idea that you should be able to sell things that you don’t own (and it’s apparently illegal in any case), but what this says to me is that he wanted to shoot the messenger.  Short sellers aren’t what’s bringing these institutions down.  Bad lending standards, massive leverage, and generally really bad judgment are.

When specifically asked by Senator Shelby (who is not exactly known for being an advocate for government intervention) if he wanted more regulatory authority, he said no.

John McCain says that Cox should be fired.  Bush says that he’s doing a great job, Brownie.  (And as in FEMA, I think the problems go much further than the top leadership…)

Via Bitch PhD and Yglesias, this terrific graph showing the Obama and McCain tax plans and how much they’ll affect different income brackets’ taxes, with the bands scaled to reflect the number of people affected:

This is from a site called chartjunk, which attempts to use Edward Tufte‘s principles in designing charts.  Definitely lots to learn from.

The Freakonomics blog at the NY Times picked up on this too.

While we’re on the topic of taxes and distribution, I’ll point out that the big tax cut bill coming out of the Senate, which includes both the Alternative Minimum Tax patch and a bunch of business tax extensions, does include one provision that is really important for low-income families: allowing families to start to receive the child tax credit starting at an income of $8,500, down from the $12,050 under current law.  This would help 13 million low-income children.  It’s not at all guaranteed that the House bill will also include this provision, so it’s worth dropping a line or calling your representative.

I’m going to use the blogger’s prerogative to add this to the post, rather than risking having it get buried in the comments with all the back and forth about child support.

Maria commented on the stat that’s shown in the third chart on the Freakonomics post — that the top .1 percent of the country pays 20 percent of the income tax.  I haven’t seen that elsewhere, but it seems plausible.  There are great statistics on US income and wealth inequality here.

It’s worth noting that for all conservatives in the US mutter about European socialism, the tax system in almost all European countries is far less progressive than the US system, because they collect a large portion of their government funding through a Value Added Tax (VAT) which is if anything, somewhat regressive.

I

I was at an all day class on Sunday, in downtown DC, and the teacher was from New York.  Some cultural differences appeared quickly — she was shocked to discover that 90 percent of the restaurants downtown aren’t open on Sunday.  Another difference showed up when during a break the teacher said something like "so, do you think Lehman is going to make it?"  And all the students sort of made polite murmurs and no one really answered.  If you live in New York (or nearby), the Wall Street collapse is something that is happening to you, or people you know, but here in DC, it all feels pretty abstract.

This doesn’t mean that I’m not affected at all.  For one thing, each American’s personal share of the debt has increased by more than $1,000 in the past 6 months.  For another thing, I’ve lost about $4,000 that we’d invested in Fannie Mae.  I’m also covered by an AIG life insurance policy, but everything I read seems to say that I don’t need to worry about that.

I’m not sure either Presidential candidate has said anything particularly brilliant about the economy.  I do think it helps Obama for the conversation to get pushed back to the things that government does, rather than lipstick.  I think this ad  using McCain’s words against him is effective.

Here’s what I’ve been working on this week:

This is pretty different from the usual way these numbers are presented, which is based on families rather than workers.  (Remember, if half of the families with children have an at-home spouse and the other half is dual income, only 1/3 of the workers will have an at-home spouse.)

For what it’s worth, the furthest back I was able to come up with
roughly comparable numbers for is 1975, when 41.5 percent of the
workforce were parents, and 35 percent of the working parents had an
at-home spouse.

I’d love some feedback on these graphs — what interests you?  Surprises you?  Is the second one too many slices to be easily interpreted?

Update:  I’m responding in the comments. But I also want to register my fury that Microsoft in Excel 2007 has made it impossible to apply patterns to different slices on a pie chart so that you can tell them apart when you print them in black and white.

Update 2: Ok, here’s one that shows part-time vs. full-time.

• I thought this article on the growth in Fairfax school enrollment was interesting  It says enrollment is up by 2,500, in part due to a shift of 1,000 students from Prince William county.  Some hypothesize it’s due to Prince William’s crackdown on undocumented immigrants; others suggest it’s due to the high price of gas.  It’s likely that both contribute, and may even affect the same families. I wonder what the typical shifts between the two counties are.

• Via Yglesias, I ran into this study arguing that redshirting of kindergarteners leads to reduced high school completion, since it means that kids have completed fewer years of school when they reach the age where they’re no longer required to attend school.  This doesn’t make sense to me, as it’s overwhelmingly upper-middle-class families who hold their kids back a year, but lower-income kids who drop out as soon as they’re legally able to.  Anyone want to take a crack at it?

• I love Alan Blinder’s idea of stimulating the economy by buying back polluting clunkers for more than book value.  One of my pet bugaboos is that when people talk about "green jobs" they always focus on the sexy futuristic stuff like solar and wind power, when you could get a lot more bang for the buck subsidizing new boilers and more insulation in low-cost rental housing.  (As long as renters pay for the utility bills, it almost never makes economic sense for landlords to make those investments on their own.)

Parke at US Food Policy poses the bold question: "Are high food prices unambiguously bad?"

The obvious problem with high food prices is that they mean that people on the edge eat less, and often poorer quality food.  Food is one of the most flexible part of the budget for most people — in the short term, you can’t reduce your rent, but you can skip a few meals, or see if the local food pantry can help you out.  There’s a study that shows that poor families eat less in cold winters, when utility bills are especially high.

So what’s good about high food prices?  Let’s start by thinking about the parallel question for gas.  I don’t think that high gas prices are unambiguously bad.  While I worry about the effect on low-income folks, especially in rural areas, I think high gas prices generally send the right economic signals: buy more fuel-efficient cars, use more carpools and mass transit, think about the costs of commuting when you decide where to live.  I’d like to see more of the cost of gas going into funding things like better mass transit, and less going to enrich oil companies and OPEC, but that’s a different issue.

So, is there something parallel for food?  Well, a big part of why food in the US is so cheap is that energy has been cheap.  When Michael Pollen says that the US food economy runs on corn, he could just as easily say it runs on oil — in the form of fuel for tractors and combines, in the form of fertilizer (which is largely made from petroleum), in the form of the fuel for the trucks that move the corn from farm to processing plant to grocery store.  So, it’s hard to imagine how food prices could stay as low as they’ve been in a world of higher energy prices.

It’s also likely that the relative costs of different kinds of food will change.  Bananas may be more expensive compared to apples, free range chicken may only cost twice as much as factory farmed chicken, rather than five times as much.  Some things that have been unsustainably cheap will be more expensive, and that might be a good thing.

But, none of this makes the basic problem of low-income people not being able to afford food go away.  The Center on Budget and Policy Priorities has been doing a lot of thinking about how to make sure that low-income households are protected in the context of climate change legislation that will increase energy costs — basically, the idea is that if the government auctions off all carbon permits, rather than assuming that companies are entitled to permits at the left that they currently pollute, it generates enough money to provide generous refunds to low and moderate income households.  I’m not sure what the food equivalent of that is.