James Kwak wants to see a heftier fee levied on large banks, calculating thusly:

The tax isn’t going to prevent a future financial crisis. And it isn’t going to hurt any bankers, at least not very much. Basically it will get passed on to customers, and shareholders will take a small hit. The best thing about the tax is that it helps level the playing field between large and small banks. From Q4 2008 through Q2 2009, large banks had a funding cost that was 78 basis points lower than that of small banks, up 49 basis points from 2000-2007. Closing that gap could lead some of those customers, faced with lower interest payments on deposits or higher fees, to take their money elsewhere. (Of course, they are already getting lower interest and paying higher fees, so there may not be much of an effect.)

But the tax isn’t nearly big enough! It’s being calculated as 15 basis points of uninsured liabilities, calculated as assets minus Tier 1 capital minus insured deposits. 15 basis points is a lot less than 78 basis points. And if the FDIC cost of funds data are based on all liabilities (not just uninsured liabilities),* then charging 15 basis points on uninsured liabilities only increases the overall cost of funds by about 7 basis points (at least in the administration’s example). This doesn’t come close to compensating for the TBTF subsidy.

A couple of points on this. One is that insofar as both large and small banks exist, any levy that specifically falls on large banks does in fact hurt them. I don’t think it makes sense to look at the 78 basis point funding gap (“78 basis points” means “0.78″) and conclude that a 77 basis point tax is too small to “prevent a future financial crisis” whereas as 79 basis point tax would be big enough. A tax of any size has an impact at the margin. A bigger tax would have a bigger margin.

The other is that a tax arguably shouldn’t be the main way we tackle the “too big to fail” subsidy and it certainly shouldn’t be the only way. The problem we faced in 2008 is that the process spelled out in the Bankruptcy Code doesn’t work for financial institutions and the FDIC process doesn’t apply to these kind of companies. This is a problem that needs to be tackled head on through legislation that sets some kind of workable rules up in advance. That will then set up a situation where nobody is “too big to fail,” but the details of how you work it out will determine what failure amounts to. At that point you’d need to redo the whole calculation again of whether or not big banks are getting an implicit subsidy.

But this brings me back to my previous point that starting in 2012 or 2013 we’re going to need higher taxes one way or the other. That’s going to be a tough, tough, tough political fight. A tax on large banks seems like a relatively winnable tax fight. But it’s not an easy one! Even with this small tax on the table, banks are prepared to fight it and conservatives in congress are eager to go to the mat in defense of the banks. If you can beat them, then why not do it in a way that raises a much more substantial chunk of revenue? Why not at least try? We really don’t know where the pivotal members of congress stand on this, and the administration is opening with a very low bid

Yesterday, I wrote that Cold War hawks had overestimated the resiliency of the Soviet economy. David Frum says I have this backwards, and hawks argued that the CIA’s official estimate of the size of the Soviet economy was too big, and that therefore military spending accounted for a larger share of GDP than the CIA thought. They drew various strategic inferences from this.

I wasn’t alive at the time, so I don’t really know what the general tenor of the debate was except to say that my understanding of this reflects my reading of secondary sources (Zelizer’s “Arsenal of Democracy,” Scoblic’s “U.S. vs Them,” Mann’s “The Rise of the Vulcans,” etc.). After read Frum’s piece, I took the opportunity to download and read “Intelligence Community Experiment in Competitive Analysis: Soviet Strategic Objectives, an Alternative View”. This is the famous Team B report on Soviet capabilities and intentions.

Given the nature of the assignment, the report actually dedicates almost shockingly little time to assessing the state of the Soviet economy. The way it does come up is that Team B’s main conclusion is that the USSR is seeking not rough military parity with the USA, but such clear superiority that they would be able to initiate and win a war with the United States. One obvious rebuttal to that would be that it would be impossible for a country as economically weak as the USSR to achieve that kind of military superiority. Team B says this is wrong and reach the following conclusion on page 23 (emphasis in the original):

The primacy of the military priority in Soviet resource allocation decisions has long been strongly indicated by the magnitude of Soviet military programs and forces. This evidence is now reinforced by evidence of much higher military budgets than previously estimated. While Soviet military claimants for resources may compete with one another for resources, they face no serious competition from claimants in the civilian economy sector—nor is this surprising. Within what is, after all, a large and expanding GNP, the Soviets have made it absolutely clear that defense requirements have an almost absolute first call on available resources. Denial of consumer needs is not a new or inconsistent pattern of Soviet behavior—exactly the contrary is the case. Therefore, Soviet strategic forces have yet to reflect any constraining effect of civil economy competition and are unlikely to do so in the foreseeable future.

The idea that Soviet resource allocation was completely unconstrained by domestic political concerns is I think just mistaken. But this is largely a misconstruction of the whole issue. Whether or not the military has absolute priority in the allocation of resources, it’s still the case that Soviet military production can only overtake the United States if the economy grows and the presence or absence of growth thus operates as a constraint on Soviet military capabilities. It’s true that this report doesn’t explicitly state that it believes in bright growth prospects for the Soviet Union, merely referring to “a large and expanding GNP.” But given the Soviet economy’s smaller base, either Soviet GDP would grow faster than US GDP or else the absolute size of the GDP gap between the US and USSR would grow.

Incidentally, the whole report is full of amusing accusations that the CIA has erred in its analysis of the Soviets by engaging in “mirror-imaging”—basically assuming that the Soviet state is prudent and risk-averse—by not recognizing the Russians’ inherent and insatiable thirst for conquest. This leads them to the claim that “The expansion of Russia as a continental empire is without parallel in world history: no country has grown so fast and none has held on so tenaciously to its conquest.” The parallel to Russia’s continental expansion would, of course, be the United States of America which I believe is an observation people were making as far back as de Tocqueville.

Brad Plumer and Julia Whitty bring us the results of a neat social psychology experiment which proves that people are dumb framing is really important. Brad’s summary:

Test subjects were broken up into two groups, and each group was allowed to pick between pricier and cheaper versions of various items like airline tickets. Group A was told that the more expensive items included the price of a “carbon tax,” whose proceeds would go toward clean-energy development. Group B was told that the costlier items included the price of a “carbon offset,” whose proceeds would go toward clean-energy development. Exact same policy, just different names for each.

You can guess what happened next. In the “offset” group, Democrats, Republicans, and independents all flocked toward the pricier item. They were perfectly happy to pay an extra surcharge to fund CO2 reduction—even Republicans gushed about the benefits of doing so. Not only that, but most of the group supported making the surcharge mandatory. In the “tax” group, however, Democrats were the only ones willing to pay for the costlier item. Republicans in this group were much more inclined to grumble about how much more expensive the tax made things.

I guess we can expect to hear a lot of proposals for different kinds of fees in the years to come, but never again a “tax.”