Matt Zeitlin

I think Kevin Drum’s comments regarding Obama’s “core principles” for regulatory reform are very smart. All the stuff about “consumer protections” and “accountability for executives” are really beating around the bush. In the broad sense, there are two macro causes of our current downturn that can be dealt with through smarter regulation, or more generally, just a smarter approach to public policy. One is excessive leverage. Simply put, large amounts of leverage let traders turn long-term dumb bets into short-term smart bets that made a lot of money due to an asset bubble. Drum is also right to suggest a counter-cyclical regulatory approach, with high leverage requirements during booms, so as to discourage excess risk taking, and low leverage requirements during busts, so that banks aren’t hamstrung when they most need to be lending.

But I think that financial regulation, per se, isn’t really what’s needed. Regulation of specific forms of financial insturments oftentimes just leads to regulatory arbitrage, and as long as the smarter people are going into banks as opposed to regulatory agencies, the traders will always be one step ahead of the regulators.

What’s needed  is a change of the structure of incentives in finance. So, instead of trying to kill the hydra-headed beast that is the creation of newer financial instruments, we should instead just deal with the incentives that lead to the creation of these instruments and encourage high-risk, high reward strategies for traders. I’m thinking specifically of more tax brackets for people at the tippity top of the income distribution, nearly all of whom are in finance, so as to discourage them from making a lot of money in the short term. Putting real confiscatory tax rates on, say, incomes above $ 10 million would have something like this effect. Also, if you think that these leverage based booms that piggyback on bubbles in asset prices inevitably result in a crash, it’s better to take some of those high incomes and do something socially useful with them, instead of just losing all that wealth in the resulting downturn.

It’s a widely known that lots of journalists are innumerate. And while a lot of people are innumerate, and journalists are just that, people, it becomes a problem when it comes to reporting economic news and data. A popular mistake is reporting nominal dollar figures instead of inflation adjusted figures when comparing wages or sales in two given years. Or you get the horrible mangling of simple statistical comments like signifigance or margin of error. The point is, journalists need to know math! Or at least some very basic statistics and economics.

One problem, I feel, is one of cultures. Most journalists studied humanities in college, and best I can tell, people who study the humanities are largely the same people who say “Thank God I don’t have to take any math classes again.” And while you don’t actually need to know any college math to be a good journalist, you really do need to know some statistics, or more generally, quantitative methods.

At Medill, Northwestern’s Journalism school, they require students to take some sort of Math for journalists class. And, if a friend of mine’s facebook status — since when does journalism involve math? seriously? — is any indication, there is still a lot more work to do.

…comes, ahem, more creative ways to raise money.

Seriously, in California, Democratic lawmaker Tom Ammiano has proposed to legalize the sale of marijuana for those over 21 . What’s interesting about this proposal is that it’s about the exact opposite of the type of incremental reform that many drug policy reformers, like Mark Kleiman, are proposing.

Whereas Kleiman wants a system where marijuana use and possession wouldn’t be a crime, but the sale would be, so that there wasn’t a full-fledged marijuana industry with billboards, ads etc; Ammiano, because the state is so desperate for cash, especially wants the sale to be legal so that the California government can get its hands on some sales tax revenue.

And while this proposal may seem really extreme, in the context of California, it really isn’t. That’s because marijuana, for the cost of a doctor’s visit, is totally legal. If you can get a doctor to say you have migraines, or chronic knee pain or anything, you can buy practically as much marijuana as you want and not get arrested for it. Sure, there was always a risk that the DEA would do a sweep of your favored dispensaries, but it was very rare for regular users to get caught up in the mix.

In some ways, the California program is ideal. It’s liberal enough so that users aren’t getting arrested, but there is also enough ambiguity in the law so that the “above-board” marijuana industry in California is still limited to those users dedicated enough to go through with the minimal process to get medical permission. But from the perspective of a state starved for revenue, what we really get is all the “downsides” of widely available, quasi-legal marijuana, with none of the tax revenue that would generally accompany the selling of legal items in a legal manner.

I think the ideal compromise would be to combine the current quasi-legal medical marijuana arrangment with Ammiano’s proposal. Not only would the state sell licenses to people who wish to sell marijuana (and then tax the sales), they would also sell licenses to those who want to smoke marijuana. This way, you get tax revenue, but you might be able to keep the increases in the number of smokers down and just generally avoid the possible problems with a full fledged marijuana industry.

Of course, there would be a problem with illegally selling to those without licenses, but seeing as plenty of people are willing to go through the identical process now, it’s hard to believe that they wouldn’t shell out, say, $100 for the possibily of totally legal weed.

Friend: So Zeitlin, doing anything fun for your birthday?

Me: Yeah, liveblogging Obama’s not-State of the Union

Friend: That’s uh, pretty lame….

Here it is.

Everyone knows that having more than half a million people live in between Maryland and Virgina as tax-paying US citizens without any meaningful representation is absurd. But largely because giving those people representation would mean one solid Democratic seat in the house and two Democratic senators, there’s been a ton of dithering on respecting our national obligations to the people of D.C. Sure, they’re probably going to get one House seat, which will be conveniently set-off by an extra representative for Utah, but they probably won’t get anyone in the Senate. Most liberals either favor putting D.C., with the exception of the area right around the White House and the Hill into Maryland or just giving it two senators. So what do conservatives support? Well, in Jonah Goldberg’s case, it’s exempting D.C. from the income tax.

Goldberg facetiously notes that this would benefit him quite a bit. But for a lot of D.C.’s poorer residents, of which there are many, getting rid of the income tax would do diddly-squat. Extra representation in Congress, on the other hand, would make it more likely that a big stimulus with lots of state-aid (as opposed to regressive tax credits) would get passed and that a whole host of economically and socially progressive measures that would benefit the residents of D.C. more than being exempt from a tax they probably don’t pay(due to lack of income) would also be passed. So, no wonder Jonah Goldberg would happily get rid of the income tax. It’s just about the only “solution” to the lack of representation problem that primarily benefits not-poor conservatives!

In 1803, Marbury vs Madison was decided, thus creating judicial review….

In 1868, the first Mardi Gras parade, with floats, went through the streets of New Orleans…

In 1970, NPR was founded…

In 1977, Floyd Mayweather Jr was born…

In 1989, Ayatollah Khomeini offered a $3 million bounty for Salman Rushdie…

And, in 1990, I was born! Happy Birthday to me!

(Joe Lieberman’s birthday is also today, but that’s one I’d just rather not mention)

Josh Patashnik has a very good post about how crappy things are in California. He does a good job of correcting the mistake that I — and many other observers — made in saying that our inability to pass a budget and avoid fiscal apocalypse is partially due to gerrymandered districts. The problem isn’t so much the districts, it’s the combination of California having a bi-modal voting public, with white, very conservative, anti-tax mavens making up 30 or so percent of the population and ideological liberals (along with the poor, minorities, government employees etc) making up the rest.

But this shouldn’t be a problem. The problem is the 2/3rds majority required to pass a budget and raise taxes. So, instead of reaching a compromise that roughly reflects the views of the median voter or the “center,” we instead get this bizarre charade where the Democrats have to cajole a few Republican lawmakers everyyear to support their budget (with the Republican Governor on the side of the Democrats, oddly enough).

The ramifications of the 2/3rds requirement also helps entrench this polarization because the only possible role in governance elected Republicans can play is by holding up Democratic budgets. So, instead of having legislators elected to write laws, we have legislators elected to make a big hue and cry every year when it comes down to vote on a budget.  And so we have the craziness of the Republicans in the state Senate removing their Senate leader who was amenable to reaching a deal with Democrats over the budget and instead electing a new leader who’s dead set against taxes.

Oh while it’s fun to laugh at the sheer stupidity of the California Republican caucus, this budget impasse is having very real short term effects. One quick fact. It’s going to cost $400 million just to stop and then start up all the infrastructure projects currently being worked on.

Gabriel Sherman has a great article in TNR about the rise of the Politico. The main point of the article, besides the fact that most of their editorial staff will probably die ten years earlier than expected due to over work, is that Politico – and outlets that adopt their approach — will survive, and might even thrive.

The Politico‘s model is almost a hyper-distillation of the models that are thought to “work” today.

For one, it’s primarily online. Sure, it has a print edition (which brings in 60% of its revenue), but its reputation and nearly all of its readership comes from their website and web content. So, unlike basically every other poltical news organization, it’s as-close-to-ideally suited for the day when no one can count on print revenue. And, even if it needs print revenue to survive, its print readership is constrained to influential people in DC who are likely to get something out of Politico’s ads that they can’t get on craigslist.

The other way it almost perfectly embodies current trends in political reporting and journalism is that, unlike more august institutions, they have no illusions about providing a public service, keeping government accountable or anything like that. Instead, as their founder Roger Allbritton puts it when describing investigative or explanatory work, “I think we have to acknowledge that the money is spent for reputational benefits and a public service play” and since the investors in the Politico are there to make money (as opposed to anyone investing in a news magazine or just about any newspaper), we can expect them to stay with their revenue-maximizing model.

And what does that model entail? A whole lot of one-day inside-beltway stories whose main purpose is to get play on Morning Joe that morning or on Anderson Cooper that afternoon. It also means emphasizing speed over just about anything else, which can mean the occasional scoop that’s based on nothing (which Sherman details).

Basically, what the editors and Allbritton have figured out is that if you want to make money and be influential as a news organization, you have to do the type of reporting that, say, infuriates the left-wing blogosphere or just about anyone who thinks that the day-t0-day politics of Washington is orders of magnitude less important than the real policy outcomes.

Now, political journalism of this kind — the type of journalism that treats politics just like any other news story — has generally existed side by side with journalism that actually deals with why politics is important. So, the Times or the Post might report similar types of scoops as the Politico and have parts of their reporting teams do similar type of work, but they’ll also have people who will explain the policies and generally get into why any of these newslets actually matter. But it’s precisely that latter type of journalism — explanatory, analytical and investigative — which isn’t cutting it in today’s much leaner and competitive atmosphere.

So, while many may not like Politico’s approach to political reporting, everyone should recognize that it’s likely here to stay, and soon enough, their approach might be the only one left.

I was pretty busy at the time, so I didn’t get to write about it, but I was always a proponent of the “don’t seat anyone appointed by Blago” view. It was weird. Everyone was just assuming that Rod Blagojevich, the man who openly tried to sell a senate seat when he probably knew he was under investigation, suddenly discovered ethics when appointing Burris. And furthermore, it never occurred to anyone that there might have been something untoward going on when Burris, a man who has already built his own mausoleum,  accepted Blago’s offer when others didn’t.

And now we know that not only was Burris solicited by Blago’s brother to raise money for the now-impeached Governor, but that Burris actually tried to do the fundraising. And while fundraising for a politician who you are trying to garner a nomination from is sketchy enough, there’s also the fact that Burris testified under oath that he “did not donate or help raise a single dollar for the governor.” And while that technically may be true, that’s only because he failed to raise any money.

I guess my question is to all those who said that, despite everything, Burris ought to be seated. Why were you so sure that Burris wasn’t corrupt? What made you think that Blago was capable of making an appointment in a fair and ethical manner? And now, was it worth it to have that one extra Democratic senator for those few weeks?

Will Wilkinson does a good job of noting that a lot of libertarians — and especially those libertarian intellectuals that economic conservatives love citing (Hayek, Friedman etc) — aren’t “anti-statist” in any meaningful sense. This is very important because Jonah Goldberg seems to be holding on to some Nockian dream that the conservative movement is really, at its core,”anti-statist.”

This is really quite unfortunate for Goldberg, because, for him, the conservative movement’s only redeeming factor is that it is against the state, and without that core conviction, our politics would be “a race-to-the-bottom between two statist parties, one cosmopolitan and socialistic one nativistic and nationalistic.”

But look, no conservatives are against the state. If they are at all, they are against the state insomuch as it benefits the interests of the poor or middle class (i.e. the welfare state) and they are for it for a bunch of other purposes (military expansion, American hegemony, national security, protecting the interest of rich people, capital holders and corporations).

I guess the  argument that Goldberg is actually making is that, on the margins of what liberals want to do, conservatives tend to favor paring back specific instances of state action. This means they don’t want to expand the current state role in providing health care, for instance. But to pretend that in the era of Bush, massive military budgets and Lindsey Graham contemplating temporary bank nationalization that there exists any meaningful coalition of actors who are, in general, against the state, is just silly.

The Times has an interesting article about public outrage in Australia directed towards Brendan Sokaluk, the man suspected of the arson which erupted into a full blown wildfire that killed 189 people

While it’s not particularly surprising that people in Australia are really angry and are quite angry with this wrong man, but seeing the problem of wildfire as a problem of arson strikes me as quite daft.

The thing is wildfires, as opposed to things like apartment fires or contained fires in urban areas, are going to happen eventually due to underlying ecological reasons, so it’s just a matter of time before an intentional arson or something else sparks any individual fire. So maybe after Australia is able to let out this paroxysm of national rage, they could address housing, land-use and environmental policy that leads to so many people dying and such destruction in inevitable wild fires.

I feel like, aside Eric Cantor’s dreams of being Newt Gingrich and a standing policy-preference for more corporate and capital gains tax cuts, there are a few conceptual problems that the entirety of the Republican leadership, and much of the conservative commentariat, have about our current economic crisis.

1. Unemployment is, aside from other economic problems (low growth, the financial crisis), is really bad for the welfare of people. This central fact can be elided by models of recessions which assume an average level of income and take a 100% welfare loss to one person being the same as a 1% loss to 100 people (Matt Rognlie has a better, more technical explanation here) and by the fact that, even if the income and modelable effects of unemployment aren’t huge, the happiness effects are very strong. Now, because unemployment is such a big deal politically and too individuals, we can expect the Republicans to get immediate political comeuppance if they can be effectively portrayed as anti-stimulus, and therefore anti-job.But, on the other hand, if unemployment remains too high, then expect Democrats to get pummeled in 2010 and 2012.

2. We really do need stimulus. Republicans and conservatives have had a variety of strategies to avoid confronting this essential fact. One is to adopt the absurd argument, most prominently promulugated by Eugen Fama of U Chicago, that because of the NIPA savings-investment accounting identity (basically, that private sector investment is equal to private savings, corporate savings and the likely-to-be-negative government deficit) means that stimulus can’t work to increase growth or decrease unemployment, in the long term.

The other bad, and equally silly, argument is the one spread by Michael Steele that the government can’t create jobs. This ignores the fact that actually the government creates plenty of real jobs but also that just getting people to work and getting money in their pockets may not be ideal, but as far as closing the output gap, stimuluating spending and increases general welfare, it’s a fine strategy.

There’s also the lack of recognition of the fact that monetary policy has failed and that, unless we want to just wallow in low growth and unemployment, we need to think of some way to close the output gap and stoke consumption. Becuase of this total ignorance about the need for fiscal policy to stimuluate the economy, we generally haven’t heard the good, constructive conservative stimulus proposals like this one sketched out by Greg Mankiw or this one by Bruce Bartlett. And because Republicans have become such No-Nothings, they weren’t able to constructively criticize the Obama stimulus plan. As Noam Scheiber argued, this should have been an engineering debate, not a poltical one. So, the GOP could have agitated to put in more payroll tax cuts or to reinstate the Investment Tax Credit or criticized genuinely non-stimulative spending. Instead, they made their baseline position an opposition to stimulus spending at all and 36/41 on the senate voted for the insane Jim Demint tax cut proposal. And where the centrists did go after the bill, they took out of the most stimulative parts.

But the main things one and two the Republicans understand all lead up to the big number three.

3. This recession really is different from past one. Not only are the drops in employment, growth and projected length exceed both the post WWII average, but they are probably only matched by the Great Depression, but there is no mechanism for us to naturally climb out the hole. As opposed to other recessions, where we eventually climbed out “naturally” (more or less), this recession, because it’s driven by a total crisis/freeze in the financial sector, could last indefinitely. Just look at Japan, which after 20 years of unimpressive growth, has had a one quarter GDP drop of 3.3 percent, with more bad times likely to come. As Matt Yglesias points out, Japan still hasn’t really fixed the problems that lead to the lost decade, and was able to climb out of the hole due to American-lead consumption of their exports.

But an export-lead recovery obviously isn’t an option if the entire world economy is tanking. So, we can’t just sit on our hands and pray for a reversion for the mean. In a depression, or a really large recession, or a finance-driven deep recession or whatever you want to call it, you can either wait a really, really long time and have the entire world face declining living standards for that entire time or you can try to take aggressive, quick action to get things back into shape. Now, obviously, there is no guarantee that whatever government action, be it stimulus or some sort of shock-fix to the financial sector. As far as I can tell, congressional Republicans and some commentators simply don’t understand the gravity of the crisis, or in Rush Limbaugh’s case, hope that Democrats fail anyway.

I got another doozy up at North By Northwesterm. This time, I’m cautiously optimistic about the Geithner plan.

Everyone read Kevin Drum on California’s budget and political woes.

The immediate problem is that California needs to pass a budget. And since budgets require 2/3rds legislative majorities, the Democrats in the State Senate needs 3 Republican votes. And they can only get two.

This is despite the fact that the budget is pretty balanced, at least from the weird California perspective. We have a 41 billion gap, and Schwarzenegger and the Democrats wanted “$15 billion in spending cuts, $15 billion in temporary tax increases, and $11 billion in new borrowing.” And, despite the fact that we’re facing total fiscal apocalypse, we can’t get one Republican vote.

But the fact that Republicans are cheerfully ranting to their neanderthal constituents about the virtue of small government while California falls into utter fiscal ruin doesn’t mean that our current impasse is all their fault. The problem is three fold.

One, the state-level Democrats are essentially bagmen for public employees unions and will always support a bigger, more expansive and inefficient government that can hire more and more people. Not only is there constant pressure to expand government, but there is diehard opposition to any cuts, or any institutional reforms that could result in there being less taxpayer cash distributed to public employees.

Two, the referendum system allows the voters to mandate new spending that comes from the same pool from which the legislature spends. So, the voters think they are getting a free lunch, when they really aren’t.

Third, the Republicans are bizarrely out of touch with California as a whole. Notice how a charismatic and moderate Republican can win election easily. Californians that aren’t in public employees unions or are otherwise dependent on government largess don’t like California Democrats. It’s just that our Republicans are real rock-ribbed conservatives. Not only are they socially conservative, which puts them out of touch with a lot of Californians, they think that the only appropriate fiscal policy is tax cuts. And when the government is facing a massive short fall, that is simply not a serious response. This problem with conservative Republicans is compounded by the insanely gerrymandered districts which ensures that A. the Republicans that are elected are as conservative as possible and B. that despite the general composition of the California electorate, there will always be enough of these wannabe-Reagans to obstruct a budget negotiation.

So, yeah, California’s governance is totally screwed up. But there’s a slight silver lining. Kevin Drum ends his post with “aren’t you happy you don’t live here?” Well, I don’t hink so. California, despite our horrible governance, is still, well, California. It still has amazing weather, still has a the first or second most important cultural center in the world (LA), still has a world class destination city (LA), the best public universities anywhere and did I mention the awesome weather?

Notice how a lot of awesome states — California, Illinois (Chicago especially), New York — have very dysfunctional governments. And notice how states with good government traditions, like Iowa, are, well, like Iowa. That’s probably because there are a lot more spoils to be won by rigging state governance in states with lots of productive activity and lots of people. And California is a pretty good example of that.

Randi Weingarten, president of the American Federation of Teachers, one of the two major national teachers unions, has an op-ed advocating for the creation of national standards in education. She points to research showing that “common, rigorous standards lead to more students reaching higher levels of achievement” and that when states do adopt high standards, their educational outcomes improve. And while she peppers in her advocacy for high standards with routine teacher union desire for more certification programs, money what not (“professional development, and the teaching and learning conditions”), her overall point is pretty damned forward looking.

I should add, however, that nationalizing education policy isn’t a be all end all. A state like Massachusetts, with relatively low child poverty (14%) will always do better in meeting high national standards than a state like Mississippi, with its 30% child poverty rate. But withstanding all the variation in different school districts and states that affect educational outcome, there is the simple fact that there isn’t a ton of special “local knowledge” about what kids need to know or what constitutes good education.

Instead, most countries with really good educational systems have nationalized them. Now, sure, the United States is much, much larger than most all these countries, but the central insight is the same. And, the US has probably gone too far on the localizing side, with school jurisdiction at the state, county, city, and even sub-city level.

Also, insomuch as local knowledge is important in education, then that local knowledge can be part of the implementation of these standards. So, the federal government would set the standards, and individual jurisdictions would figure out how to meet them.

Now, I’m hardly an education expert and can’t even really pretend to be one. So, please check out Dana Goldstein, the quick and the ed, eduwonk, Sara Mead and all the other wonderful edu-experts out there in the ‘sphere.

I would also reccomend reading Matt Miller’s excellent Atlantic article advocating for nationalizing education policy.

I’m a sucker for Michael Lewis. He wrote both my favorite sports book and my favorite business book, so when he writes about basketball, I’m basically going to agree with every word.

And his piece on Shane Battier is vintage Lewis. And by vintage Lewis, I mean that there’s a very weird tension between the message of the piece and his way of writing it.

Moneyball, the archetypal Lewis sports book, is a weird hybrid. On one hand, there is Lewis the biographer, the chronicler of individuals. Much of the book is an extended profile of Billy Beane, the perceptive and out-of-the-box thinker behind the Oakland A’s. We learn a lot about Beane’s upbrining, his approach to baseball and, generally, get a very good idea of who he is.

But Moneyball isn’t a book about Billy Beane, per se. It’s also a book about the revolution in player evaluation in Major League Baseball. And what Lewis found was that baseball talent evaluators — scouts, coaches, baseball writers — essentially had major psychological blocks to effectively figuring out which players most helped their team win. And the one most consequential block was an obsession with easily recognizable individual ability. So, the player who hustled, played showy defense, hit for average and got steals was considered better than the player who may have been big and slow, but got a lot of walks and got on base all the time. The bias, in short, was for players who people enjoyed watching, instead of players who won games.

Lewis says the same thing is true about basketball. This is for two reasons. One, the stats which most people refer to (and this is certainly changing) are stats that reflect ones indiviudal contribution to a game, with little reference to the effect he has on the team. So, someone like Gilbert Arenas is considered to be a great player, despite being a mediocre defender and shooting a low percentage (which is equivalent to taking shots away from higher percentage shooters) all because he scores a lot of points. Battier, on the other hand, is a great player who, when he’s on the floor, greatly improves his teams chances of winning, despite not scoring many points, getting many assists, grabbing a lot of boards or steals or blocks.

Instead, Battier is a smart defender who is able to shut down superstars, he only takes the most efficient shots and is able through his smart play to make his team rebound more and score more. He’s the exact type of player whose contributions one misses when they focus on the amazing, visible skills of individual greats.

But the tension is that Lewis isn’t just someone who is able to elegantly relay what analysts think of sports, he is also a great journalist, and a great profiler. So, we learn about what made Battier the player his, about his background, his college recruitment process and so on and so forth.

At the end of the piece, the reader comes away with two things. One, there is a better way to evaluate talent in basketball, and two, that Shane Battier is a really interesting guy. But the psychological block which prevents general managers from seeing Battier’s hidden greatness is the very block that makes us appreciate his unique character.

Free Exchange has an interesting post on the boom in finance salaries, discussing a recent Times article about research showing that “finance salaries display bubble characteristics that inflate when new innovation comes along. The bubble occurs when innovation is financed by debt or equity rather than existing capital. That creates demand for financial services, inflating paychecks and attracting skilled labour. The presence of skilled labour begets financial innovation, further inflating the bubble.” This makes sense a whole lot of sense. So, what’s our response to his bubble of a bubble behavior that results in massive inequality and eventually screws us all? Well, the research Norris, the author of the Times article, cites says that finance innovators will, in response to low salaries, go into government where they will become regulators.

This seems like a salutary development. The authors of the study, Thomas Philippon and Ariel Reshef, say that in the two times where sky-high pay in the financial sector immediately preceded a financial collapse, “regulators did not have the human capital to keep up with the financial industry, and to understand it well enough to be able to exert effective regulation. Given the wage premia that we document, it was impossible for regulators to attract and retain highly skilled financial workers.” So, now, better people will go into the regulatory profession and all will be well. The only problem is that more regulation (which is certainly needed) isn’t necessarily smart regualation. The problem Philippon and Reshef document is wasteful or superfluous financial innovation that, due to being debt financed, can expand to the point where it takes down the entire economy. So, if we get a bunch of new regulations that just result in similar chicanery and regulatory arbitrage, we won’t have gotten anywhere. Instead, Free Exchange argues, we need “smart” regulation. This is a rather banal answer, of course we need smart regulation that doesn’t result in wasteful regulatory arbitrage!

But how likely are we to get the regulatory balance just right? It seems like we shouldn’t put all our faith in financial regulation and instead adopt simpler policies to prevent these bubbles. So, along with higher capital requirements and trying to push back against bank consolidation (so we don’t get so many too-big-to-fail situations), I feel like increased marginal tax rates on the super-rich, along with more brackets for those at the pinnacle of the income distribution will do a lot to discourage this high-reward, socially non-optimal financial behavior without trying to outsmart the finance industry. 

And for all you who are thinking “Zeitlin, why are you writing about finance at 8 on Valentine’s Day?” let me say that I’ve already been out to dinner with a friend and I’m going to a play soon, so stop your crowing!

It’s pretty weird that the Democratic congress, and more specifically the Senate, is moving sharply to Obama’s left and put in provisions greatly restricting executive bay in their version of the stimulus bill. This is weird because it shows how misplaced, or if not misplaced, how oddly aligned the leftism is in the Congress. So, the Senate Democrats could have pushed for a bill without an AMT patch and with more money shifted towards infrastructure and transit spending, which would have moved their position to the left without being openly antagonistic towards the president. Instead, they inserted these pay provisions.

But let’s talk about the pay provisons. The Times says that they would “would prohibit cash bonuses and almost all other incentive compensation for the five most senior officers and the 20 highest-paid executives at large companies that receive money under the Treasury’s Troubled Asset Relief Program, or TARP.” Clearly, there are going to be two reactions from Wall Street. One is ceaseless complaining about the provisions. And so we see in the Post story on the provisions, the financial services industry’s cheap lobbyist crowing about how these provisions “undermine the current incentive structure.” The more sophisticated response would be to simply rearrange compensation for executive around the new restrictions. For example, the awards of restricted stock or other bonuses, under the Dodd Amendment, are limited to “one-third of their [executives] annual pay.” The other way around the restrictions is to give back the TARP money (or never receive it) and get a different job.

And so we have the dilemma, both in the short term and the long term. Clearly, we don’t want executives at banks which only exists due to incredibly generous taxpayer support to be taking huge bonuses and pulling down large salaries. But more important than just restricting salaries in general is to try to reform the institutional set-up of financial institutions that encourages relatively little money paid in salary and instead has  most compensation be paid in large, performance based bonuses.

The problem, and this has been known for a while, is that big bonuses encourage excessive risk taking. And while one would hope that some people who overleveraged on bad bets would get out of the game or not get bonuses, thus encouraging people to be more conservative, the facts of the last 6 or so years of the housing bubble clearly refute that. The problem is that, for reasons of human psychology and due to the general nature of finance, bubbles form and so it basically always makes sense to get a bunch of people to give you money, leverage it, and make bets on assets whose price you think are going to go up indefinitely.

And once so much of your pay is tied to performance, you realize that the ones taking the bigger, more leveraged and riskier bets are getting even bigger bonuses. In fact, the guy working at the next office may not have any skepticism about whatever bubble you’re both investing in and is thus making better returns than you are. You may even be at risk for losing your job, so you start making similar big bets. Expand this dynamic out to an entire industry with trillions of dollars are their disposal, and you get our current crisis.

Now, I don’t know how to reform the bonus-incentive structure in the long term. After the government no longer has the excuse of only restricting those receiving government money, real, harsh pay restrictions will be impossible to pass.

And while one consequence of any restriction on income is that it discourages income seeking behavior, I can’t help but suspect that somehow discouraging the best and the brightest from going into finance wouldn’t be a good thing. Do we really need such a large finance sector, if it has shown itself to be incompetent at the one thing of social value it provides: the spreading around of risk?

Of course, there’s a backdoor way of changing the incentives for people going into finance. Just raise marginal income rates on rich people, or better yet, create more brackets at the tippity top of the income scale. It is by no means guaranteed that, once (and if) the crisis is over, we will have the same income distribution that we had before. But it’s worth remembering that much of the growth in inequality, and specifically the assent of the hyper rich (the .1,.01,.001 percentiles) was attributed to people making a lot of money in the financial sector. So, if we had made it so that those risk-fed, bubble-based bonuses based on work that had little social value were highly taxed, maybe we would have gotten the double social benefit of more generously funding government programs that people use while discouraging this bad risk taking.

Part of the mission at this blog, in so much as it has one besides providing a forum for my own writing is to promote the work of other young writers and bloggers. One of them I want to direct your attention to is Dara Lind. Part of the Yale/Culture 11 (RIP) mafia, she’s a senior there and has written for the standard smorgasbord of publications and blogs that young conservatives find themselves at (Doublethink Online, Culture 11, The American Scene). And, most importantly, she occasionally comments on this very blog. So, since she has the official IYW stamp of approval, check her stuff out!

Her’s a perceptive piece on Gawker land she wrote for Culture 11 and here’s her archive at TAS. Enjoy!

I was pretty upset when Lieberman held on to his committee chair and his seniority after supporting John McCain. But I must admit that Obama’s/Reid’s decision looks pretty canny in light of this Huffington Post story detailing how Lieberman reinvigorated stimulus talks and used his credibility with Democratic centrists (Nelson) and Republican moderates to get them to start moving on voting for a bill they had painstakingly negotiated for.

What’s unique about Lieberman in these situations is that he is, for the most part (social security reform notwithstanding) an economic liberal. And since the big components of Obama’s agenda are primarily on the domestic/fiscal/economic policy side (stimulus, bank plan, cap-and-trade, health care), we should be able to expect Lieberman’s support. And since Lieberman has a weird sort of centrist credibility and a good rapport with the Republicans, he can be a good guy to get those crucial few GOP votes on these major legislative process.

Of course, any account of Lieberman behavior has to take into account his tendency towards pontification and self-righteousness, along with his prickly and oft-wounded sense of pride. I think if Obama could make it clear that he expects and wants Lieberman to be his point-man for wrangling up GOP votes on, say, cap-and-trade, then Lieberman would jump at the opportunity. Or maybe he wouldn’t. But as a matter of pure legislative maneuvering, letting Lieberman keep his seniority and his chairmanship seems to have worked out.