# The terrible, horrible, no-good very-bad budget bill

JDN 2457005 PST 11:52.

I would have preferred to write about something a bit cheerier (like the fact that by the time I write my next post I expect to be finished with my master’s degree!), but this is obviously the big news in economic policy today. The new House budget bill was unveiled Tuesday, and then passed in the House on Thursday by a narrow vote. It has stalled in the Senate thanks in part to fierce—and entirely justified—opposition by Elizabeth Warren, and so today it has been delayed in the Senate. Obama has actually urged his fellow Democrats to pass it, in order to avoid another government shutdown. Here’s why Warren is right and Obama is wrong.

You know the saying “You can’t negotiate with terrorists!”? Well, in practice that’s not actually true—we negotiate with terrorists all the time; the FBI has special hostage negotiators for this purpose, because sometimes it really is the best option. But the saying has an underlying kernel of truth, which is that once someone is willing to hold hostages and commit murder, they have crossed a line, a Rubicon from which it is impossible to return; negotiations with them can never again be good-faith honest argumentation, but must always be a strategic action to minimize collateral damage. Everyone knows that if you had the chance you’d just as soon put bullets through all their heads—because everyone knows they’d do the same to you.

Well, right now, the Republicans are acting like terrorists. Emotionally a fair comparison would be with two-year-olds throwing tantrums, but two-year-olds do not control policy on which thousands of lives hang in the balance. This budget bill is designed—quite intentionally, I’m sure—in order to ensure that Democrats are left with only two options: Give up on every major policy issue and abandon all the principles they stand for, or fail to pass a budget and allow the government to shut down, canceling vital services and costing billions of dollars. They are holding the American people hostage.

But here is why you must not give in: They’re going to shoot the hostages anyway. This so-called “compromise” would not only add $479 million in spending on fighter jets that don’t work and the Pentagon hasn’t even asked for, not only cut$93 million from WIC, a 3.5% budget cut adjusted for inflation—literally denying food to starving mothers and children—and dramatically increase the amount of money that can be given by individuals in campaign donations (because apparently the unlimited corporate money of Citizens United wasn’t enough!), but would also remove two of the central provisions of Dodd-Frank financial regulation that are the only thing that stands between us and a full reprise of the Great Recession. And even if the Democrats in the Senate cave to the demands just as the spineless cowards in the House already did, there is nothing to stop Republicans from using the same scorched-earth tactics next year.

I wouldn’t literally say we should put bullets through their heads, but we definitely need to get these Republicans out of office immediately at the next election—and that means that all the left-wing people who insist they don’t vote “on principle” need to grow some spines of their own and vote. Vote Green if you want—the benefits of having a substantial Green coalition in Congress would be enormous, because the Greens favor three really good things in particular: Stricter regulation of carbon emissions, nationalization of the financial system, and a basic income. Or vote for some other obscure party that you like even better. But for the love of all that is good in the world, vote.

The two most obscure—and yet most important—measures in the bill are the elimination of the swaps pushout rule and the margin requirements on derivatives. Compared to these, the cuts in WIC are small potatoes (literally, they include a stupid provision about potatoes). They also really aren’t that complicated, once you boil them down to their core principles. This is however something Wall Street desperately wants you to never, ever do, for otherwise their global crime syndicate will be exposed.

The swaps pushout rule says quite simply that if you’re going to place bets on the failure of other companies—these are called credit default swaps, but they are really quite literally a bet that a given company will go bankrupt—you can’t do so with deposits that are insured by the FDIC. This is the absolute bare minimum regulatory standard that any reasonable economist (or for that matter sane human being!) would demand. Honestly I think credit default swaps should be banned outright. If you want insurance, you should have to buy insurance—and yes, deal with the regulations involved in buying insurance, because those regulations are there for a reason. There’s a reason you can’t buy fire insurance on other people’s houses, and that exact same reason applies a thousandfold for why you shouldn’t be able to buy credit default swaps on other people’s companies. Most people are not psychopaths who would burn down their neighbor’s house for the insurance money—but even when their executives aren’t psychopaths (as many are), most companies are specifically structured so as to behave as if they were psychopaths, as if no interests in the world mattered but their own profit.

But the swaps pushout rule does not by any means ban credit default swaps. Honestly, it doesn’t even really regulate them in any real sense. All it does is require that these bets have to be made with the banks’ own money and not with everyone else’s. You see, bank deposits—the regular kind, “commercial banking”, where you have your checking and savings accounts—are secured by government funds in the event a bank should fail. This makes sense, at least insofar as it makes sense to have private banks in the first place (if we’re going to insure with government funds, why not just use government funds?). But if you allow banks to place whatever bets they feel like using that money, they have basically no downside; heads they win, tails we lose. That’s why the swaps pushout rule is absolutely indispensable; without it, you are allowing banks to gamble with other people’s money.

What about margin requirements? This one is even worse. Margin requirements are literally the only thing that keeps banks from printing unlimited money. If there was one single cause of the Great Recession, it was the fact that there were no margin requirements on over-the-counter derivatives. Because there were no margin requirements, there was no limit to how much money banks could print, and so print they did; the result was a still mind-blowing quadrillion dollars in nominal value of outstanding derivatives. Not million, not billion, not even trillion; quadrillion. $1e15.$1,000,000,000,000,000. That’s how much money they printed. The total world money supply is about $70 trillion, which is 1/14 of that. (If you read that blog post, he makes a rather telling statement: “They demonstrate quite clearly that those who have been lending the money that we owe can’t possibly have had the money they lent.” No, of course they didn’t! They created it by lending it. That is what our system allows them to do.) And yes, at its core, it was printing money. A lot of economists will tell you otherwise, about how that’s not really what’s happening, because it’s only “nominal” value, and nobody ever expects to cash them in—yeah, but what if they do? (These are largely the same people who will tell you that quantitative easing isn’t printing money, because, uh… er… squirrel!) A tiny fraction of these derivatives were cashed in in 2007, and I think you know what happened next. They printed this money and now they are holding onto it; but woe betide us all if they ever decide to spend it. Honestly we should invalidate all of these derivatives and force them to start over with strict margin requirements, but short of that we must at least, again at the bare minimum, have margin requirements. Why are margin requirements so important? There’s actually a very simple equation that explains it. If the margin requirement is m, meaning that you must retain a portion m between 0 and 1 of the loans you make as reserves, the total amount of money supply that can be created from the current amount of money M is just M/m. So if margin requirements were 100%—full-reserve banking—then the total money supply is M, and therefore in full control of the central bank. This is how it should be, in my opinion. But usually m is set around 10%, so the total money supply is 10M, meaning that 90% of the money in the system was created by banks. But if you ever let that margin requirement go to zero, you end up dividing by zero—and the total amount of money that can be created is infinite. To see how this works, suppose we start with$1000 and put it in bank A. Bank A then creates a loan; how big they can make the loan depends on the margin requirement. Let’s say it’s 10%. They can make a loan of $900, because they must keep$100 (10% of $1000) in reserve. So they do that, and then it gets placed in bank B. Then bank B can make a loan of$810, keeping $90. The$810 gets deposited in bank C, which can make a loan of $729, and so on. The total amount of money in the system is the sum of all these:$1000 in bank A (remember, that deposit doesn’t disappear when it’s loaned out!), plus the $900 in bank B, plus$810 in bank C, plus $729 in bank D. After 4 steps we are at$3,439. As we go through more and more steps, the money supply gets larger at an exponentially decaying rate and we converge toward the maximum at $10,000. The original amount is M, and then we add M(1-m), M(1-m)^2, M(1-m)^3, and so on. That produces the following sum up to n terms (below is LaTeX, which I can’t render for you without a plugin, which requires me to pay for a WordPress subscription I cannot presently afford; you can copy-paste and render it yourself here): \sum_{k=0}^{n} M (1-m)^k = M \frac{1 – (1-m)^{n+1}}{m} And then as you let the number of terms grow arbitrarily large, it converges toward a limit at infinity: \sum_{k=0}^{\infty} M (1-m)^k = \frac{M}{m} To be fair, we never actually go through infinitely many steps, so even with a margin requirement of zero we don’t literally end up with infinite money. Instead, we just end up with n M, the number of steps times the initial money supply. Start with$1000 and go through 4 steps: $4000. Go through 10 steps:$10,000. Go through 100 steps: $100,000. It just keeps getting bigger and bigger, until that money has nowhere to go and the whole house of cards falls down. Honestly, I’m not even sure why Wall Street banks would want to get rid of margin requirements. It’s basically putting your entire economy on the counterfeiting standard. Fiat money is often accused of this, but the government has both (a) the legitimate authority empowered by the electorate and (b) incentives to maintain macroeconomic stability, neither of which private banks have. There is no reason other than altruism (and we all know how much altruism Citibank and HSBC have—it is approximately equal to the margin requirement they are trying to get passed—and yes, they wrote the bill) that would prevent them from simply printing as much money as they possibly can, thus maximizing their profits; and they can even excuse the behavior by saying that everyone else is doing it, so it’s not like they could prevent the collapse all by themselves. But by lobbying for a regulation to specifically allow this, they no longer have that excuse; no, everyone won’t be doing it, not unless you pass this law to let them. Despite the global economic collapse that was just caused by this sort of behavior only seven years ago, they now want to return to doing it. At this point I’m beginning to wonder if calling them an international crime syndicate is actually unfair to international crime syndicates. These guys are so totally evil it actually goes beyond the bounds of rational behavior; they’re turning into cartoon supervillains. I would honestly not be that surprised if there were a video of one of these CEOs caught on camera cackling maniacally, “Muahahahaha! The world shall burn!” (Then again, I was pleasantly surprised to see the CEO of Goldman Sachs talking about the harms of income inequality, though it’s not clear he appreciated his own contribution to that inequality.) And that is why Democrats must not give in. The Senate should vote it down. Failing that, Obama should veto. I wish he still had the line-item veto so he could just remove the egregious riders without allowing a government shutdown, but no, the Senate blocked it. And honestly their reasoning makes sense; there is supposed to be a balance of power between Congress and the President. I just wish we had a Congress that would use its power responsibly, instead of holding the American people hostage to the villainous whims of Wall Street banks. # What just happened in that election? JDN 2456970 PST 11:12. My head is still spinning from the election results on Tuesday. Republicans gained a net of 12 seats to secure their majority in the House. Even worse, Republicans gained at least 7 seats in the Senate (note that each Senate seat should count for 4.35 House seats because there are 100 Senators and 435 Representatives) and may gain two more depending on how runoffs go. This gives them a majority in both houses of Congress. So people like Republicans then? Maybe they’re fed up with Obama and dissatisfied with his handling of the economy (even though it has actually been spectacular given what he had to work with). But then when we look at actual ballot proposals, the ones that passed were mostly liberal issues. California passed proposition 47, which will reduce sentences for minor drug and theft crimes and substantially reduce our incidence of incarceration. (There’s no sign of releasing current prisoners, unfortunately; but at least we won’t be adding as many new ones.) Marijuana was legalized—fully legalized, for all purposes—in Alaska, Oregon, and DC, further reducing incarceration. At last, the US may finally stop being the incarceration capitol of the world! We currently hold the title in both per-capita and total incarceration, so there can be no dispute. (Technically the Seychelles has a higher per-capita rate, but come on, they don’t count as a real country; they have a population smaller than Ann Arbor—or for that matter the annual throughput of Riker’s Island.) The proposals to allow wolf hunting in Michigan failed, for which many wolves would thank you if they could. Minimum wages were raised in five states, four of which are Republican-leaning states. The most extreme minimum wage hike was in San Francisco, where the minimum wage is going to be raised as high as$18 over the next four years. So people basically agree with Democrats on policy, but decided to hand the Senate over to Republicans.

I think the best explanation for what happened is the voting demographics. When we have a Senate election, we aren’t sampling randomly from the American population; we’re pulling from specific states, and specific populations within those states. Geography played a huge role in these election results. So did age; the voting population was much older on average than the general population, because most young people simply didn’t vote. I know some of these young people, who tell me things like “I’m not voting because I won’t be part of that system!” Apparently their level of understanding of social change approaches that of the Lonely Island song “I Threw it on the Ground”. Not voting isn’t rebellion, it’s surrender. (I’m not sure who said that first, but it’s clearly right.) Rebellion would be voting for a radical third-party candidate, or running as one yourself. Rebellion would be leading rallies to gather support—that is, votes—for that candidate. Alternatively, you could say that rebellion is too risky and simply aim for reform, in which case you’d vote for Democrats as I did.

Your failure to vote did not help change that system. On the contrary, it was because of your surrender that we got two houses of Congress controlled by Republicans who have veered so far to the right they are bordering on fascism and feudalism. It is strange living in a society where the “mainstream” has become so extremist. You end up feeling like a radical far-left Marxist when in fact you agree—as I do—with the core policies of FDR or even Eisenhower. You have been told that the right is capitalism and the left is socialism; this is wrong. The left is capitalism; the right is feudalism. When I tell you I want a basic income funded by a progressive income tax, I am agreeing with Milton Friedman.

This must be how it feels to be a secularist in an Islamist theocracy like Iran. Now that Colorado has elected a state legislator who is so extreme that he literally has performed exorcisms to make people not gay or transgender (his name is apparently Gordon Klingenschmitt), I fear we’re dangerously on the verge of a theocracy of our own.

Of course, I shouldn’t just blame the people who didn’t vote; I should also blame the people who did vote, and voted for candidates who are completely insane. Even though it’s just a state legislature, tens of thousands of people voted for that guy in Colorado; tens of thousands of Americans were okay with the fact that he thinks gay and transgender people have demons inside us that need to be removed by exorcism. Even in Iran theocracy is astonishingly popular. People are voting for these candidates, and we must find out why and change their minds. We must show them that the people they are voting for are not going to make good decisions that benefit America, they are going to make selfish decisions that benefit themselves or their corporate cronies, or even just outright bad decisions that hurt everyone. As an example of the latter (which is arguably worse), there is literally no benefit to discrimination against women or racial minorities or LGBT people. It’s just absolute pure deadweight loss that causes massive harm without any benefit at all. It’s deeply, deeply irrational, and one of the central projects of cognitive economics must be figuring out what makes people discriminate and figuring out how to make them stop.

To be fair, some of the candidates that were elected are not so extreme. Tom Cotton of Arkansas (whose name is almost offensively down-homey rural American; I don’t think I could name a character that in a novel without people thinking it was satire) supported the state minimum wage increase and is sponsoring a bill that would ban abortions after 20 weeks, which is actually pretty reasonable, rather than at conception, which is absurd.

Thom Tillis of North Carolina is your standard old rich White male corporate stooge, but I don’t see anything in his platform that is particularly terrifying. David Perdue of Georgia is the same; he’s one of those business owners who thinks he knows how to run the economy because he can own a business while it makes money. (Even if he did have something to do with the profitability of the business—which is not entirely clear—that’s still like a fighter pilot saying he’s a great aerospace engineer.) Cory Gardner is similar (not old, but rich White male corporate stooge), but he’s scary simply because he came from the Colorado state legislature, where they just installed that exorcist guy.

Thad Cochran of Mississippi was re-elected, so he was already there; he generally votes along whatever lines the Republican leadership asks him to, so he is not so much a villain as a henchman. Shelley Moore Capito of West Virginia also seems to basically vote whatever the party says.

Joni Ernst of Iowa is an interesting character; despite being a woman, she basically agrees with all the standard Republican positions, including those that are obviously oppressive of women. She voted for an abortion ban at conception, which is totally different from what Cotton wants. She even takes the bizarre confederalist view of Paul Ryan that a federal minimum wage is “big government” but a state minimum wage is just fine. The one exception is that she supports reform of sexual harassment policy in the military, probably because she experienced it herself.

But I’m supposed to be an economist, so what do I think is going to happen to the economy? (Of course, don’t forget, the economy is made of people. One of the best things that can ever happen to an economy is the empowerment of women, racial minorities, and LGBT people, all of which are now in jeopardy under a Republican Congress.)

The best-case scenario is “not much”; the obstructionism continues, and despite an utterly useless government the market repairs itself as it will always do eventually. Job growth will continue at its slow but steady pace, GDP will get back to potential trend. Inequality will continue to increase as it has been doing for about 30 years now. In a couple years there will be another election and hopefully Republicans will lose their majority.

The worst-case scenario is “Republicans get what they want”. The budget will finally be balanced—by cutting education, infrastructure, and social services. Then they’ll unbalance it again by cutting taxes on the rich and starting a couple more wars, because that kind of government spending doesn’t count. (They are weaponized Keynesians all.) They’ll restrict immigration even though immigration is what the First World needs right now (not to mention the fact that the people coming here need it even more). They’ll impose draconian regulations on abortion, they’ll stop or reverse the legalization of marijuana and same-sex marriage.

Democrats must not cave in to demands for “compromise” and “bipartisanship”. If the Republicans truly believed in those things, they wouldn’t have cost the economy \$24 billion and downgraded the credit rating of the US government by their ridiculous ploy to shut down the government. They wouldn’t have refused to deal until the sequester forced nonsensical budget cuts. They wouldn’t make it a central part of their platform to undermine or repeal the universal healthcare system that they invented just so that Democrats can’t take credit for it. They have become so committed to winning political arguments at any cost that they are willing to do real harm to America and its people in order to do it. They are overcome by the tribal paradigm, and we all suffer for it.

No, the Republicans in Congress today are like 3-year-olds who throw a tantrum when they don’t get everything exactly their way. You can’t negotiate with these people, you can’t compromise with them. I wish you could, I really do. I’ve heard of days long gone when Congress actually accomplished things, but I have only vague recollections, for I was young in the Clinton era. (I do remember times under Bush II when Congress did things, but they were mostly bad things.) Maybe if we’re firm enough or persuasive enough some of them will even come around. But the worst thing Democrats could do right now is start caving to Republican demands thinking that it will restore unity to our government—because that unity would come only at the price of destroying people’s lives.

Unfortunately I fear that Democrats will appease Republicans in this way, because they’ve been doing that so far. In the campaign, hardly any of the Democrats mentioned Obama’s astonishing economic record or the numerous benefits of Obamacare—which by the way is quite popular among its users, at least more so than getting rid of it entirely (most people want to fix it, not eliminate it). Most of the Democratic candidates barely ran a campaign deserving of the name.

To be clear: Do not succumb to the tribal paradigm yourself. Do not think that everyone who votes Republican is a bad person—the vast majority are good people who were misled. Do not even assume that every Republican politician is evil; a few obviously are (see also Dick Cheney), but most are actually not so much evil as blinded by the ideology of their tribe. I believe that Paul Ryan and Rand Paul think that what they do is in the best interests of America; the problem is not their intentions but their results and their unwillingness to learn from those results. We do need to find ways to overcome partisanship and restore unity and compromise—but we must not simply bow to their demands in order to do that.

Democrats: Do not give in. Stand up for your principles. Every time you give in to their obstructionism, you are incentivizing that obstructionism. And maybe next election you could actually talk about the good things your party does for people—or the bad things their party does—instead of running away from your own party and apologizing for everything?