How to do a second stimulus

My new column for National Journal looks at the case for a jobs bill.

Speaking to the Economic Club of New York this week, Federal Reserve Board Chairman Ben Bernanke gave a gloomier assessment of the economy than many were expecting. The recession is over, he declared, but the Fed expects no more than "moderate" growth next year. Banks are still reluctant to lend, and "jobs are likely to remain scarce for some time, keeping households cautious about spending." In the past, steep recoveries typically followed steep recessions. This time will be different, Bernanke said. The recovery might be more L-shaped than V-shaped.

Democrats in Congress were already turning their attention to a new fiscal stimulus -- and if Bernanke is right, a second stimulus may indeed be needed. Of course, Congress would rather call it something else. Polls suggest that voters are less than enchanted with the first one. With unemployment at 10.2 percent and rising, many see the $787 billion program already in place as an outright failure. Why throw good money after bad, they ask? Public debt is already on a sharply rising trajectory. Sooner or later, voters know, that will mean higher taxes. Why make this problem even worse, they say, if the extra spending will make no difference on unemployment anyway?

Avoiding the term "fiscal stimulus," House Speaker Nancy Pelosi has said nonetheless she hopes to move a "jobs bill" before Christmas. But she wants to be sure of backing the right initiative, she says, and exactly what that might be is in doubt. President Obama has called for a "jobs forum" next month. A tax credit for new jobs, direct public service employment, and measures to promote job sharing are all being talked about. Just don't say "stimulus."

With a still-weak economy, confusion over what the first stimulus has achieved, and rising fears over the long-term consequences of debt, the political options have narrowed in a dangerous way. This was never going to be an easy situation for the White House, and one needs to remember that it inherited this mess. Even so, I think that the Obama administration and its allies in Congress deserve some of the blame for the way their hands are tied.

Read on.

What's at stake in Afghanistan

Support for the war continues to slide in the US.

Support for the war in Afghanistan has ebbed to a new low in ABC News/Washington Post polls, with concerns over strategy and broad doubts about the reliability of the Afghan government leaving Americans sharply divided on where to go from here.

Just 44 percent now say the war in Afghanistan has been worth fighting, the fewest in a question dating to early 2007. Fifty-two percent instead say the war has not been worth it, up 13 points from its low last December - still well below Iraq levels, but majority negative nonetheless.

Steve Coll asks, what happens if we fail? Among other things,

The Nineties Afghan Civil War on Steroids: Even if the international community gave up on Afghanistan and withdrew, as it did from Somalia during the early nineties, it is inconceivable that the Taliban could triumph in the country completely and provide a regime (however perverse) of stability. About half of Afghanistan's population is Pashtun, from which the Taliban draw their strength. Much of the country's non-Pashtun population ardently opposes the Taliban. In the humiliating circumstances that would attend American failure, those in the West who now promote "counterterrorism," "realist," and "cost-effective" strategies in the region would probably endorse, in effect, a nineties redux--which would amount to a prescription for more Afghan civil war. A rump "legitimate" Afghan government dominated by ethnic Tajiks and Uzbeks would find arms and money from India, Iran, and perhaps Russia, Europe and the United States. This would likely produce a long-running civil war between northern, Tajik-dominated ethnic militias and the Pashtun-dominated Taliban. Tens of thousands of Afghans would likely perish in this conflict and from the pervasive poverty it would produce; many more Afghans would return as refugees to Pakistan, contributing to that country's instability

Also, "momentum for a Taliban revolution in Pakistan"; "increased Islamist violence against India, increasing the likelihood of Indo-Pakistani war"; and "increased Al Qaeda ambitions against Britain and the United States".

Cultural curriculum

Further reading on the conditions for an opportunity society (see previous post).

At his Senate confirmation hearing in February, Arne Duncan succinctly summarized the Obama administration's approach to education reform: "We must build upon what works. We must stop doing what doesn't work." Since becoming education secretary, Duncan has launched a $4.3 billion federal "Race to the Top" initiative that encourages states to experiment with various accountability reforms. Yet he has ignored one state reform that has proven to work, as well as the education thinker whose ideas inspired it. The state is Massachusetts, and the education thinker is E. D. Hirsch, Jr.

The "Massachusetts miracle," in which Bay State students' soaring test scores broke records, was the direct consequence of the state legislature's passage of the 1993 Education Reform Act, which established knowledge-based standards for all grades and a rigorous testing system linked to the new standards. And those standards, Massachusetts reformers have acknowledged, are Hirsch's legacy. If the Obama administration truly wants to have a positive impact on American education, it should embrace Hirsch's ideas and urge other states to do the same.

Restoring the American Dream

Many Americans think they live in a society which, more than most, offers citizens the chance to prosper. The US is not the most equal society in the world, and does not want to be. What matters is that a poor man can raise himself up.

Creating an Opportunity Society begins by showing that, especially for the poorest children, this is something of a myth. By international standards, intergenerational mobility in the US is quite low. This will surprise few who have ventured into a US public housing project or troubled inner-city school, but many middle-class Americans never have. The figures show that US children born in the lowest and highest quintiles of the income distribution are more likely to stay there than in Britain, for example, and much more likely than in countries such as Sweden and Denmark.

But what to do about it? The book confirms a finding well established in the literature, that transition to the middle class is all but guaranteed for poor children if they do three things: finish high school, work full time and marry before having children. The US underperforms as an opportunity society because so many of its young people fail at one or more. The book focuses on these areas.

Read on here.

Craig Brown channels Malcolm Gladwell

1989

An expectedly interesting essay by Timothy Garton Ash. I applaud the strictures against hindsight bias, an endlessly recurring analytical error which practitioners of my trade seem especially prone to.

Every writer on 1989 wrestles with an almost unavoidable human proclivity that psychologists have christened "hindsight bias"--the tendency, that is, to regard actual historical outcomes as more probable than alternatives that seemed real at the time (for example, a Tiananmen-style crackdown in Central Europe). What actually happened looks as if it somehow had to happen. Henri Bergson talked of "the illusions of retrospective determinism." Explanations are then offered for what happened. As one scholar commented a few years after 1989: no one foresaw this, but everyone could explain it afterward. Reading these books, I was again reminded of the Polish philosopher Leszek Kołakowski's "law of the infinite cornucopia," which states that an infinite number of explanations can be found for any given event.

And this--the direct quotation from Gorbachev, I mean--was something I hadn't seen before.

[Gorbachev] mistakenly believed such changes would stop at the frontier of the Soviet Union, which he saw as a country, not an internal empire. Instead, as [Harvard's Mark] Kramer shows, the revolutionary changes in East-Central Europe contributed directly to the dissolution of the Soviet Union itself. Robert Conquest, the historian of the Soviet Great Terror and Ukrainian famine, asked Gorbachev many years later whether, if he had known where it would all lead, he would have done the same again. He replied: "Probably not."

Well, well. Though always a plausible speculation, I had not previously seen those words attributed to the great man himself.

In contrast, by the way, I thought this column by Garton Ash was pretty lame. Though it might be that what put me off was his closing appeal to "Europe": play your full part in shaping the future of the world!

So, 20 years on, the question before us Europeans is this: Can we recapture some of the strategic boldness and historical imagination of 1989? Or shall we now leave it to others to shape the world, while we snuggle down, Hobbit-like, in our national holes, and pretend there are no giants yomping overhead?

Grandiosity bias. No, Europe, enough with the historical imagination. Take a breather and think small for a while.

Thanks to A&L for both links.

Something else for Democrats to smile about

They are on a roll. The good news just keeps coming.

Republicans have moved ahead of Democrats by 48% to 44% among registered voters in the latest update on Gallup's generic congressional ballot for the 2010 House elections, after trailing by six points in July and two points last month... Over the course of the year, independents' preference for the Republican candidate in their districts has grown, from a 1-point advantage in July to the current 22-point gap.

Obama has lost sight of the center

Barack Obama and the Democrats want you to know they had a good week. Last Tuesday Republicans threw away a New York congressional seat they had held for a century, preferring to fight each other than win an easy contest. Excellent, say Democrats. Civil war in the Republican party augurs well for next year's mid-term elections.

What's that, you say? Oh, yes, Democrats did lose the governorships of New Jersey and Virginia, with huge swings to the other side, but this was to be expected with the economy in such bad shape. Read nothing into that, say Democratic strategists.

Still joyous over this electoral affirmation, Democrats in the House of Representatives then made history over the weekend, with passage of their health-reform bill. The margin was narrow, admittedly, in a chamber they dominate. So what? A win is a win (except in New Jersey or Virginia). Everything is going to plan.

Here is the disturbing part: watching administration officials shovel this nonsense, one begins to wonder if they believe it. If they do, and keep it up, they are asking for a drubbing in 2010 that will do for Mr Obama's agenda what the wipe-out of 1994 did for Bill Clinton's.

Why Democrats are...smiling?

A lot of the post-election commentary has been entertaining, if not very enlightening. To any disinterested observer,  the Republicans had a good day on the whole last Tuesday. Not an unalloyed success, bearing in mind the self-inflicted wound in New York, but looking at New Jersey and Virginia, a pretty good day. So the question was how this good result for the Republicans was going to be turned into a bad result, or a result of no significance either way.

Eric Alterman explains "why Democrats are smiling". Sort of explains.

While the Democratic brand is obviously not what it was when so many of us were brought to tears a year ago by that beautiful scene in Grant Park, Republicans are on the verge of civil war. The sure-to be-a loser side appears to have all the soldiers and the reasonable-sounding side, and the one that can win, appears to have well, not much going on. The Republicans' suicide will be anything but painless if this keeps up--and it will, if only to continue to juice Fox's ratings.

Well, as you can see, the piece is not a model of clarity. I've read that second sentence four or five times and I'm still not sure what it means. (Didn't the reasonable-sounding side that can win, in fact, just do so? Can you win and still have "not much going on"? What else apart from winning do you really need to have going on?) But over the course of the article it does emerge that Alterman sincerely believes the Democrats have cause to celebrate Tuesday's results. Well done!

Gail Collins in the NYT also deserves special mention, I think. She is not alone in believing that the elections were meaningless, but she gets extra credit for regarding their meaninglessness as so self-evident that she does not have to establish the point. She can just celebrate it, by lampooning the view that elections convey any information whatever. Love that title: "Hark! The Voters Speak!" What delicious irony. How we laughed. As though any such thing could happen in an election.

Even Charlie Cook, doyen of poll-gazers and a reliably informative commentator, comes off a little blase in this piece for National Journal. He says Tuesday did not tell us anything we didn't already know. (Maybe he meant anything he didn't already know.) We already knew that independents were turning in droves against the Democratic party. We already knew that Jon Corzine was so unpopular he would lose even to a divided opposition. We already knew that a staunchly conservative Republican could win a purple state by a big margin if he "projects a moderate, mainstream, nonthreatening, tolerant image". Did we really know all those things? If I were a Republican, I'd still be pleased to have them confirmed, and if I were a Democrat I definitely wouldn't be smiling.

What to do about bankers' pay

My new column for National Journal agrees with the Fed that bankers' pay needs to be supervised, but warns that by itself this will do little to improve financial safety.

The pay changes that the Fed proposes are worth making, but by themselves are insufficient. Other regulatory reforms in the works would do more to promote safety -- and, indirectly, curb the excesses of Wall Street pay at the same time. Regulators are proposing to increase the capital that banks and other financial firms are required to set aside against the risk of loans or other assets going bad. They are also considering new rules on leverage (the amount of borrowing a firm can do as a multiple of its equity) and liquidity (the amount of easily salable assets it must hold). A financial institution with more capital, less leverage, and more liquidity would be a safer operation -- and a less profitable one.

In thinking about future financial regulation, that is the fundamental trade-off. Taxpayers have learned that Wall Street's profits, and the fabulous pay that went along with them, have come partly at their expense. In effect, the industry has enjoyed a disguised public subsidy, in the form of a promise to underwrite its losses when things go wrong. Heads we win, tails you -- the taxpayer -- lose. In demanding a safer financial industry, as we should, we will be withdrawing that subsidy and thus insisting on a somewhat smaller and less profitable industry as well.

This, in turn, will mean less-outlandish pay. Shareholders in banks and Wall Street firms have given their employees a very generous deal in recent years -- far better than they have had themselves -- handing over about half of their revenues in pay. If finance shrinks, pay in finance will shrink. Reviewing the wreckage of the past two years, both of those things look eminently desirable.

How to mend financial regulation

More than a year after the US financial emergency went critical and threatened the global economy with its worst reverse since the 1930s, the underlying causes have yet to be addressed. When it comes to improving financial regulation, the crux of the matter, there has been a lot of talk - usually about the wrong things - and next to no action.

Last week, a committee of the House of Representatives, which has been co-operating with the Obama administration on this front, released a draft bill. It has some good ideas, such as creating an early resolution regime for non-bank financial institutions. It has some crazy ideas, such as aiming to keep secret a list of institutions subject to special oversight. Above all, it has plenty of material to get Congress riled up - especially the proposals to enlarge the supervisory role of the Federal Reserve.

Nothing matters to Capitol Hill so much as apportioning responsibilities and the power that goes with them. But who makes the rules is less important than what the rules say. Here the bill mostly opts out, granting discretion to regulators left and right. On issues of substance as opposed to form, it is vague to the point of silence.

Read on here, for what I think needs to be done.

The best show in America

Last weekend I went to one of Levon Helm's Midnight Rambles. I wrote a gushing, and entirely sincere, review of the event for the FT. I suggested "The best show in America" as the title for the article but my editor, I think, deemed this a little over the top. If she had come along I think she might have agreed with me.

[Incidentally, the second picture was miscaptioned. That's Teresa Williams not Amy Helm--to be fixed shortly on the website. Thanks to Dennis and Mari, and to Michael, Michael, and Stacy for a great weekend.]