The Dirty Truth about the Fiscal Cliff

There’s a lot of hypocrisy and loose talk out there about the “fiscal cliff.” The term is misleading because it suggests that “jumping off” is something that precisely no one would want to do. But the financial and economic realities are more nuanced, as Matt Yglesias explains:

…the fiscal cliff itself is a policy to produce a downward trend in the ratio of federal debt to GDP over the medium term. Indeed, the main reason to think avoiding the cliff might be a good idea is fear that debt reduction would harm the economy…

The cliff itself is really three separate things that are scheduled to occur roughly simultaneously. Part 1 is the expiration of the Bush tax cuts, which were originally scheduled to expire at the end of 2010 but were extended for two years during the last lame duck session. Part 2 is the expiration of the payroll tax cut that was enacted as part of the same deal. Part 3 is the implementation of spending cuts—half to defense, half to nondefense discretionary spending—that were agreed upon as a condition of raising the statutory debt ceiling. If Congress does nothing, these three factors will drive the budget deficit to less than 1 percent of GDP by 2018 and then stay below that level through 2022, at which point demographics and health care cost issues lead it to start rising again.

The benefits to the wealthy of avoiding the fiscal cliff are clear: the extension of some or all of the Bush tax cuts and the extension of the payroll tax cut. To be sure, these measures could also benefit the middle class, the working poor, small business owners and a whole range of other people, but it’s not as if avoiding the fiscal cliff will promote the shrinking of the debt-to-GDP ratio over the medium term, as the signatories of the letter claim. It might be good growth policy to avoid some or all of the fiscal cliff and it might help put more people back to work next year, but if your sole concern is shrinking the deficit over the next decade then you ought to be pumped about jumping off the cliff.

Greg Smith and the Moral Grounds for Better Banking Regulation

Matt Yglesias rightly points out that you can’t enact a regulatory framework to ensure that people are acting on moral motives. That’s completely correct; if the executive team and the board of directors and the vast majority of the employees at Goldman Sachs all want to make lots of money for its own sake, then some people might take offense at that but it’s not something that can be regulated. Greg Smith’s new book seems to be a window into the morally bankrupt culture at Goldman Sachs and perhaps similar institutions, but nothing I’ve heard suggests that he actually lists ways in which the company has skirted regulations or broken the law.

But I don’t see that that’s a problem for the regulator or politician who wants to protect society from the fallout of the next crisis at Goldman Sachs or elsewhere. Lots of people can get temporarily up in arms about wealthy bankers doing horrible things to make money, but then people forget about all that and go back to what they were doing. Until the government comes knocking at their door asking for money to bail out said bankers. The regulatory question has never been about the moral character of the people who work at Goldman Sachs, nor should it be; it’s about how to insulate society from the inherent risks, sometimes exacerbated by low moral character, of the banking business.

Where Greg Smith’s book may have some broader significance, therefore, is in reminding voters and politicians that if we have the ability to regulate the banks more effectively and smartly then we probably should do that, because left to their own devices these institutions tend not to promote a culture of engaging in deep philosophical reflection on the social consequences of one’s actions. There is no need to go ad hominem on “evil bankers” while developing better regulation, in other words, but there is a need to develop better regulation. Dodd-Frank put forth a lot of ideas in this respect — some good, some not so good. But generally speaking the problem has been that “regulation” is a scary word that plays poorly in most political circles unless it’s tied to some sort of case study of human depravity, which is where Greg Smith’s book comes in.

Obama’s Job Approval and Election Polling Numbers Don’t Add Up

Andrew Sullivan points out the strange numbers mismatch:

When Obama was kicking Romney’s ass in July and August, he was in negative approval territory (red). Since September, he has made a comeback in approval even as he has lost the edge to Romney nationwide. I don’t know quite what to make of this. It used to be the case that Obama’s edge was in personal favorability, not approval ratings. But Romney’s net favorables are now the same as or slightly ahead of Obama’s.

Are Americans saying they appreciate the clean-up that Obama has achieved but now want a new start? Or is this a sign of a recovery in the economy which will eventually show up in the result on election day? Or do voters approve of Obama’s record more now but like Romney as a person and so it all evens out into a dead heat?

I think there’s some significance to the fact that Romney has been the stronger and more energetic — if ruder — candidate during the debates. Polling sometimes reflects rational responses to stated policy positions, but it can also reflect the electorate’s feelings about candidates’ personalities (which are admittedly much harder to tie to objective criteria).

If you think back to July and August, both Obama and Romney were making lots of public appearances and giving speeches back then, but they didn’t come together in the combative format of a debate until earlier this month. And it was jarring for a broad range of people, I’d say, to see the way Obama was tossed around during that conversation.

The presidency isn’t simply about technocratically crafting and implementing policy. Negotiating with adversaries and bonding with allies — both domestically and abroad — is still a big part of the job. And I think for a wide swathe of voters, Obama showed some serious vulnerability on this “interpersonal” front during the first debate, suggesting that it might be a problem that has plagued him over the past few years. Lyndon Johnson, by contrast, wasn’t nearly the scholar or policy expert that Obama is, but he had a way with people. He knew how to roll up his sleeves and duke it out. As did Reagan and Clinton — and even GWB to some extent. American voters want to be charmed by their president, and Obama, for all his brilliance, often displays a remoteness that looks and feels like weakness.

Whether this is a reasonable grounds for deciding how to vote is up for debate. I do think it’s worth thinking about how Obama might perform in a combative discussion with Putin or Hugo Chavez given his performance against the comparatively mild Mitt Romney. I also think it’s relevant that Obama has, rather objectively, not been very effective at winning the negotiations that have arisen over the last few years in the context of legislative battles, foreign affairs, and so on. He has, like all great professors, been great at declaring his agenda, declaring his values, and showing himself to be open to compromise and conversation, but some people are — perhaps rightly — turned off by how much he struggles to control the conversation and get his way when placed into a more combative rhetorical environment.

I would guess therefore that there are center-left and middle-of-the-road undecideds out there who appreciate Obama’s agenda and much of what he’s tried to do, but harbor genuine concerns about his ability to get tough with tough people. Given that those types abound in the Republican Congress and on the world stage, Obama’s interpersonal ability might be a more reasonable electoral question than you’d initially think.

A Big Week for Facebook

Facebook is set to release its much-anticipated second earnings report tomorrow, to be followed later in the week by a conversion of restricted stock units that will promptly turn several of the company’s employees into millionaires:

Facebook’s second earnings report as a public company lands Tuesday, but an even bigger milestone looms later in the week: On Thursday, many of its employees will officially become millionaires.

That’s the day Facebook’s main form of equity compensation — “restricted stock units” — convert into common stock shares. Facebook’s current and past employees hold 225 million of those units, worth around $4.3 billion based on Friday’s closing share price.

The question still looming for Facebook is whether it can boost earnings. It currently has a P/E ratio of 108, which is high for most — though not all — tech companies, and most analysts predict that a revenue push will hinge on mobile advertising of some sort. Part of the puzzle for Facebook is to figure out how to incorporate the higher-margin ad business into the core service of friend-following, news feeds, photo sharing, etc. There’s no doubt that having a user base of a billion people spread across the globe is a highly monetizable situation, but Facebook has to consider the long-term cost-benefit of taking exploitative measures. Turning its users into a captive ad audience could jumpstart earnings in the short term, but if ads become an overwhelming feature of the user experience then people could start to look elsewhere for their social networking needs. Or maybe not — maybe Facebook has become so indispensable to such a large number of users that it can get away with brazen revenue-producing schemes.

Factors Associated with Working from Home

Working from home is on the rise according to a new Census Bureau Report (PDF). Richard Florida at The Atlantic analyzes the data offering several useful points of comparison, but I think a few of the correlations he makes deserve closer inspection. First, he says, “working from home is modestly associated with larger, denser metros (with correlations of .22 to population and .30 to density).” If that were true, one thing you’d expect is that the rate of telecommuting has something to do with the type of work people are doing. Higher-tech industries tend to gravitate more towards New York and San Francisco and Chicago than Central Kansas and Eastern Montana, and as a result businesses in the big metro areas have been faster to adopt telecommuting arrangements with their employees than those in rural areas. Industries like agriculture, energy production, and logging, which tend to be located in the white parts of the map, just aren’t as conducive to telecommuting after all.

However, if you look at the data and then at Florida’s claim, many of the areas with a high rate of telecommuting seem to be further from big metro areas than you would think. Kingston, NY is somewhat near New York City, but not as close as any of the towns in the tristate area which have lower telecommuting rates. Medford, OR doesn’t seem to be particularly close to any big city. Boulder, CO is close to the Denver metro area but still doesn’t stick out as a big city. One point to consider is that there may be more overall people in New York City who telecommute than in Athens-Clarke County, GA, for instance, but because New York City has so many more people the rate is lower. But then it’s worth asking, what conditions need to be in place for a modest-to-small-sized city to adopt a comparatively high rate of telecommuting?

Here I think there are a variety of factors to look at. One would be the types of industries and businesses that can be found in those areas. Telecommuting in the Bay Area and along much of California’s coast is fairly popular, as expected, thanks in large part to the presence of Silicon Valley. The same is true along the northern I-95 corridor, which is home to many service and tech-based businesses. But in other parts of the country there doesn’t appear to be as clear a causal link between industry and telecommuting rate; Santa Fe, Southwestern Oklahoma, and Central Kentucky don’t exactly stand out as hubs of techy business. Another factor to consider is that many companies like to move pieces of their business away from big cities in order to reduce tax liabilities and labor costs. Thus you can find local outposts of service or tech businesses that are nowhere near a big city but nonetheless utilize their workforce in a more “contemporary” fashion than other local businesses. Many companies also do things like customer support and online commerce, which thanks to modern technology are fairly easy to operate out of small cities with a largely telecommuting workforce.

Another set of factors to think about is the cost of transportation and employee compensation. For the mast majority of New York City workers, it is expensive to get to work. However, New York City tends to offer many more high-paying jobs than does Tulsa, for instance, so there is some type of viable equilibrium that businesses can achieve there without resorting to en-masse telecommuting. But one of the dynamics that highlights is that employee compensation is a significant liability for most businesses, and part of the calculus that goes into determining employee compensation is how much it costs employees to live in that city and get to work. If you reduce or eliminate the cost of getting to work, it becomes possible to exercise a greater degree of control over employee compensation, which has to be appealing to certain businesses in certain instances.

For this reason I think it’s telling that cities like Dallas, LA, and Houston, which have have robust business sectors and poor public transportation, don’t have any nearby areas with really high telecommuting rates. That means there are businesses in these cities that are essentially paying their employees to drive to and from work five days a week, which seems like a dubious practice given modern technology. There have to be at least a few businesses in each of these cities that are equipped to utilize telecommuting to a greater extent, but either tradition is overriding common sense or some other set of factors is making the costs outweigh the benefits. I’d have to think, though, that especially as gas and housing prices increase in these metro areas, it would be useful for both businesses and workers to set public policy in such a way as to encourage a higher rate of telecommuting.