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Wonkbook: Falling off the fiscal cliff

at 08:01 AM ET, 05/23/2012

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RCP Obama vs. Romney: Obama +1.9%; 7-day change: Obama +0.1%.

RCP Obama approval: 48.7%; 7-day change: +0.7%.

Top stories

1) The CBO says that falling off the fiscal cliff would throw the nation back into recession. "Tax hikes and spending cuts set to take effect in January would suck $607 billion out of the economy next year, plunging the nation at least briefly back into recession, the nonpartisan Congressional Budget Office said Tuesday. Unless lawmakers act, the economy is likely to contract in the first half of 2013 at an annualized rate of 1.3 percent, the CBO said, before returning to 2.3 percent growth later in the year. Canceling those tax and spending policies would protect the recovery in the short run and encourage more vibrant growth, around 4.4 percent, in 2013, the CBO said. However, unless lawmakers adopt policies that would reduce budget deficits by a comparable amount down the road, the CBO said, the national debt would continue to climb, imperiling future economic growth...After the November election, a lame-duck Congress will have barely two months to resolve a grinding standoff over taxes and spending." Lori Montgomery in The Washington Post.

Read the full report: http://1.usa.gov/KnQNtM

2) Republicans are divided on what to do if Obamacare is overturned. "Congressional Republicans are divided over what to do if the Supreme Court strikes down all or part of the health-care overhaul next month. House Republican freshmen from moderate districts say they need to have credible alternatives to present to their constituents if the court--or lawmakers--eliminate the law. They are eager to find ways to replicate popular provisions of the law, such as those requiring coverage for people with pre-existing conditions and allowing young adults to stay on their parents' insurance plans until age 26...Much of their strategy will depend on what gets proposed by Mitt Romney, the presumptive Republican presidential nominee. His campaign is considering proposing a change to the tax code to give individuals incentives to buy health insurance that are similar to those larger employers get." Louise Radnofsky, Naftali Bendavid, and Sara Murray in The Wall Street Journal.

3) A new bill targets conflicts of interest at the Fed. "On the heels of JPMorgan’s stunning trading losses, two senators on Tuesday unveiled a bill that would ban financial executives from regulating themselves by taking positions at the Federal Reserve. The measure is aimed at barring what Sens. Bernie Sanders (I-Vt.) and Barbara Boxer (D-Calif.) call a conflict-of-interest issue that includes JP Morgan Chase CEO Jamie Dimon, who sits on the board of the New York Federal Reserve...Under the bill sponsored by Boxer and Sanders, two of the most liberal members of the Senate, people who work for or invest in companies that can receive financial aid from the Federal Reserve would be banned from sitting on any of the Fed’s 12 boards of directors. Federal Reserve workers and board members would also be barred from owning stock in firms that the Fed oversees. The bill is also co-sponsored by Sen. Mark Begich (D-Alaska)." Seung Min Kim in Politico.

@BCAppelbaum: Sanders bill: "No employee of a bank" can serve on a Fed board, and no Fed employee can own bank stock.

4) The CFPB is considering new rules for prepaid cards. "The new federal consumer watchdog agency is considering drafting new rules governing transparency and safety in the rapidly growing market for prepaid cards. Consumer Financial Protection Bureau Director Richard Cordray said the cards have fewer regulatory protections than bank accounts and debit cards. The agency said it will focus rule-making on three key areas: disclosure of fees and terms, liability for unauthorized transactions and niche product features, such as overdrawing an account. The agency is holding a field hearing on the cards Wednesday in North Carolina...The CFPB said there is no industry-wide standard on disclosures, making it hard for consumers to comparison shop. In addition, some cards offer features allowing customers to overdraw their accounts or build their credit. The agency is seeking feedback on the costs, benefits and consumer-protection issues associated with those features." Ylan Mui in The Washington Post.

5) A group of Senators will start a new push for more high-skilled immigrants. "A bipartisan group of senators will introduce legislation Tuesday that would seek to make it easier for foreign students who hold post-graduate degrees in math, science or engineering from American colleges to remain in the U.S. after they finish their studies. The legislation would also create an entrepreneur’s visa to allow people who start new businesses and create jobs to remain in the country. The four lawmakers who are backing the bill - Democratic Sens. Mark Warner and Chris Coons and Republicans Jerry Moran and Marco Rubio - are hoping to convince leadership of both parties to allow the bill to come to the floor, despite the fact that it deals with the politically toxic issue of immigration in an election year. The bill would also create a targeted tax credit to encourage start up firms to invest in research and development." Corey Boles in The Wall Street Journal.

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Top op-eds

1) RATTNER: Creating jobs wasn't Romney's job at Bain. "On Monday, Mr. Obama struck the right balance, emphasizing that he wasn’t attacking private equity but was questioning Mitt Romney’s Bain Capital credentials to be the job creator in chief. That’s fair, particularly because Mr. Romney himself has been foolishly reweaving history to claim, as recently as last week, that he helped create 100,000 jobs during his time at Bain. In fact, Bain Capital -- like other private equity firms -- was founded and managed for profit: ideally, huge amounts of gain earned legally and legitimately. Any job creation was a welcome but secondary byproduct...That’s not wrong; it’s part of capitalism. Whatever its flaws, private equity has made a material contribution to sharpening management. But don’t confuse a leveraged buyout with job creation...Adding jobs was never Mitt Romney’s private sector agenda, and it’s appropriate to question his ability to do so." Steven Rattner in The New York Times.

@justinwolfers: Rattner's op-ed is the best piece I've read about Romney, Bain and job creation. Worth reading.

2) ORSZAG: History shows that future cuts to the deficit stick. "From 2017 to 2022, Social Security’s normal retirement age is scheduled to gradually increase to 67. And I’ll bet that not only happens as planned, but does so with little fanfare -- which is pretty much what happened several years ago when the age rose from 65 to 66. Therein lies an important point: When policy makers put in place measures carefully designed to reduce the federal deficit in the future, most of them happen. This is a good thing, since enacting more stimulus today and more deficit reduction to take effect later is exactly what the U.S. needs...The second argument is that any delayed deficit-reduction legislation would be reversed by future Congresses. Why bother? History suggests a rosier view. The increases in Social Security’s retirement age were legislated in 1983 -- almost 30 years ago -- and Congress has allowed them to take effect. The same holds for most Medicare changes Congress has passed, even those phased in over time." Peter Orszag in Bloomberg.

3) PORTER: Big banks' bigness doesn't add much value. "What has our high-tech financial industry really done for the rest of us of late? It appears that the answer is less than Mr. Dimon would have us believe...Effective credit allocation increases productivity. Performing these services requires banks to bear risk. For instance, banks use deposits that we can withdraw at a moment’s notice to finance long-term loans. It is easy, however, to overstate what this is worth. Value added by the financial industry, its direct contribution to the economy, topped $1.2 trillion in 2011, according to government statistics. That’s 8.3 percent of gross domestic product, double its share of three decades ago. To paraphrase Goldman Sachs’s Lloyd C. Blankfein, this looks like God’s work on steroids. But the measure is hopelessly flawed...This is not to say that finance is useless. But there is no evidence that we need a financial industry of the huge size and complexity we have." Eduardo Porter in The New York Times.

4) GOLUB: The recovery is one of the weakest in recent history. "President Obama, in speech after speech, proudly makes the following point: Although we inherited the worst recession since the Great Depression, we have generated net new jobs every month, and while we need to do more, we are going in the right direction. Of course, recoveries always go in the right direction--that is, things get better over time. But merely going in the right direction is an incredibly low performance standard. Moreover, since deep recessions are generally followed by more robust recoveries, this should have been one of the strongest recoveries ever. So what went wrong? All the available Keynesian levers for achieving economic growth have been pulled, yet the recovery is one of the weakest since World War II. The problem lies with the way the 'stimulus' was carried out, the uncertainty of looming higher taxes, and the antibusiness rhetoric and regulatory strong-arming of this administration." Harvey Golub in The Wall Street Journal.

5) KIRKENGAARD: A Greek exit could make the eurozone stronger. "A Greek exit from the euro area would inflict heavy damage in Greece and throughout Europe. It could also be one of the best things that ever happened to the currency union...In a union of partially sovereign members without a supranational authority, concerns about moral hazard -- the possibility that lenience toward Greece will encourage other countries to misbehave -- still carry a lot of weight. Euro-area leaders are not bluffing when they threaten to cut off support from the European Central Bank and let the Greek government run out of money...What Europe’s leaders will not countenance is a breakup of the euro. Therein lies the silver lining of a Greek exit. To protect the currency union from the fallout, the remaining members will have to move very quickly toward the economic and financial integration that has always been necessary for the euro’s long-term survival." Jacob Kirkegaard in Bloomberg.

Instrumental hip hop interlude: Flying Lotus' "1983."

Got tips, additions, or comments? E-mail me.

Still to come: The FDIC thinks it's prepared for a big bank failure; a loophole stops cheap generic drugs; the foreign student work-travel program is under fire; Jaczko may stick around; and a dog enjoys a bike ride.

Economy

Existing home sales ticked up. "Sales of existing homes rose in April and remain higher than a year ago, while home prices continued to climb during the month, according to a report released Tuesday by the National Association of Realtors. The uptick in sales and the higher home prices are the latest in a series of signals that the nation’s housing market might be inching toward recovery. But perhaps more encouraging than the numbers was the fact that the improvements 'were broad based across all regions,' the report stated...Total sales of existing homes increased 3.4 percent in April, to a seasonally adjusted annual rate of 4.6 million -- 10 percent higher than a year ago. The total inventory of existing homes in the country rose in April to 2.5 million, a seasonal increase that represents about a six-month supply at the current sales rate. But the inventory of listed homes remains far lower than a year ago, when there was a nine-month supply." Brady Dennis in The Washington Post.

@DLeonhardt: At long last, is housing recovering? April home sales "surprisingly good," says Global Insight. Median US price up 10.1% vs a year ago.

Germany flatly ruled out 'euro bonds.' "European leaders are set to descend on Brussels on Wednesday for a showdown over suggested drastic remedies for the region’s debt crisis, even as fresh signs emerge that Europe’s escalating woes could plunge the region into a recession capable of undercutting the global economic recovery...The push for common borrowing, or euro bonds, would be a major step in the direction of a fully integrated euro-zone economy, creating a titan that would rival the U.S. economy in size and strength. Such newly issued bonds could restore reasonable borrowing rates for troubled economies such as Italy and Spain by putting the might of Germany’s frugal taxpayers behind them...However, German officials bluntly ruled it out Tuesday. 'You can wake me up in the middle of the night, at 3 a.m., and I will tell you our position. Or 5 a.m., it doesn’t matter. We think that euro bonds are not the right path for many reasons,' a senior German government official told reporters" Michael Birnbaum and Anthony Faiola in The Washington Post.

The FDIC says it could handle a big bank failure. "A top U.S. banking regulator said his agency could handle the failures of large, complex banks including J.P. Morgan Chase & Co., the nation's largest bank by assets, if they faltered and presented a risk to the broad financial system...In his speech to the American Securitization Forum conference here, Mr. Gruenberg sketched out the agency's efforts to develop powers stemming from the 2010 Dodd-Frank financial overhaul law to dismantle behemoth firms that would otherwise deal a blow to the financial system if they were to fail...The FDIC's new liquidation authority is a step toward ending the notion of 'too big to fail'--the idea some firms are so large and interconnected they are guaranteed a taxpayer-funded bailout when they get into trouble. The FDIC, armed with new details about its plans, is trying to convince investors and bankers that it is building a capable framework that will put an end to future bailouts." Maya Jackson Randall in The Wall Street Journal.

China is the only country that can bid and buy debt directly from the Treasury. "The revelation that China is the sole country that can bid on and buy debt directly from the United States Treasury, rather than through a financial intermediary, has raised concerns that the Obama administration is giving a secret, sweetheart deal to its biggest creditor. But experts said that the arrangement was probably beneficial to both parties, and was a product of changing trends in the market for Treasury debt as much as the deep economic ties between the two countries. Recently, more and more big buyers of Treasury debt -- large pension funds, mutual funds, broker-dealers and money managers -- have chosen to bypass the primary dealers on Wall Street and bid for themselves. Indeed, at a Treasury auction on Tuesday, direct bidders bought about 9 percent of the $35 billion in two-year notes for sale." Annie Lowrey in The New York Times.

The CFTC is investigating JPMorgan's loss. "The Commodity Futures Trading Commission is investigating the recent multibillion-dollar trading loss at JPMorgan Chase, the agency’s head told lawmakers Tuesday. Gary Gensler, chairman of the commission, cited the losses incurred at a JPMorgan office in London to argue for tighter regulation of trading in derivatives -- and against carving out a loophole for foreign affiliates of U.S. firms. Both the 2008 financial crisis and the recent trouble 'strongly suggest this would be a retreat from much-needed reform,' Gensler said of the offshore exception in written testimony to the Senate banking committee...The trading commission’s probe of JPMorgan focuses on credit derivatives traded by the firm’s chief investment office, Gensler said. Securities and Exchange Commission Chairman Mary Schapiro told the panel that the agency is investigating the accuracy of the firm’s financial disclosures." David Hilzenrath in The Washington Post.

@crampell: Economic confidence in U.S. just hit a new high: negative 16! Woohoo! bit.ly/JlIa0W

Time lapse interlude: Sunday's solar eclipse.

Health Care

Some say changes to healthcare will continue no matter what happens in the SCOTUS. "The new health care law is already transforming the way care is delivered, and the changes will continue regardless of how the Supreme Court rules on the mandate for most Americans to carry health insurance, a Democratic senator and an Obama administration official said Tuesday...Increasingly, Dr. Gilfillan said, private insurers are embracing ideas that Congress authorized for Medicare...Dr. Gilfillan and Senator Whitehouse said other changes in the delivery and financing of health care were gaining momentum. These include paying a fixed amount to doctors and hospitals for a bundle of services, rather than a separate fee for each service; designating a 'medical home' with a primary care doctor to coordinate services for each patient; and imposing financial penalties on hospitals with large numbers of patients who are readmitted within a few weeks after they are discharged." Robert Pear in The New York Times.

Drugmakers say a loophole is preventing cheaper generic versions of drugs. "Some drugmakers assert they are unable to create cheaper generic versions of drugs because their rivals are exploiting a legal loophole. It all comes down to process: To get a generic drug approved for sale, a company has to test a sample of the brand-name version and show regulators that the generic version is essentially identical and as effective. But the government has placed restrictions on distributing some drugs that are dangerous or prone to abuse. Critics say manufacturers of those brand-name drugs are using the restrictions to stop generic makers from getting samples to test...At issue are brand-name drugs that federal regulators approve only if the drugmaker agrees to tightly control their distribution -- providing them only for hospital use, for instance. These restrictions, which are imposed by the Food and Drug Administration on a case-by-case basis, block the flow of drugs to the wholesalers that generic firms rely on for their must-have samples." Dina ElBoughdady in The Washington Post.

An old law could be the downfall of the birth control mandate. "The biggest legal threat to the White House’s birth control mandate could come from a decades-old law that was championed by liberal Democrats, according to legal experts. The Religious Freedom Restoration Act (RFRA) has been mentioned in nearly all of the more than 30 lawsuits pending against President Obama’s administration over the mandate. One, filed by the University of Notre Dame on Monday, cited RFRA’s protections in the first paragraph. Legal scholars see the merit in challenging the mandate with RFRA, which then-Rep. Charles Schumer (D-N.Y.) and the late Sen. Edward Kennedy (D-Mass.) introduced in 1993 to protect religious exercise from laws that might unintentionally restrict it...Now it will force the government to prove that federal regulators did not have another way to expand women’s access to birth control that would be less burdensome on religion -- an argument experts say conservatives can win." Elise Viebeck in The Hill.

@sam_baker: Really wish HHS had taken this $20M prevention campaign to "The Pitch," so I would have a reason to watch "The Pitch."

Domestic Policy

Funding basic R&D isn't enough for innovation. "The myth of the lone genius toiling away still reigns supreme in the eyes of ordinary Americans and politicians alike. And so policymakers neglect the links in the innovation chain that come after that first Eureka moment. The possibilities often fall by the wayside, leaving scientific breakthroughs in the lab instead of in the hands of consumers or society at large. That was the upshot of the New America Foundation’s event on the future of innovation, research and development, where Isaacs spoke before an audience packed into a narrow conference room on Monday afternoon. Too often, he argued, the conversation about R&D in Washington ends up stopping at that first phase: funding basic research aimed at letting scientists make their discoveries in peace...But what gets forgotten are the two 'Ds' that come after R&D-- 'demonstration and deployment,' which are essential to applying basic research to real-life problems and creating commercial products." Suzy Khimm in The Washington Post.

Some are questioning the foreign student work-travel program. "The Obama administration is going to great lengths to make sure Scherbina and about 100,000 other foreign student workers are not disappointed. Last summer, the popular program, aimed at creating goodwill abroad, was rocked by scandal when students working at a candy warehouse in Pennsylvania staged a protest, complaining of isolation and overwork. The State Department acted swiftly. On May 11, it issued rules that ban foreign students from jobs that could be harmful, limited them to light, seasonal occupations that are not likely to displace U.S. workers and required closer scrutiny of their conditions. But the new rules do not address a broader, more profound question that some immigration and labor experts have raised about many sectors of the economy. Today, more than 50 ­million Americans of traditional working age are not employed, and yet a growing number of domestic jobs...are being performed by foreign-born workers." Pamela Constable in The Washington Post.

@justinwolfers: I wish folks were clearer about what they mean by a "student loan bubble." I don't think they mean "bubble" in any conventional sense.

Dogs are super cool interlude: Norman the dog rides a bike.

Energy

NRC chair Gregory Jaczko may be around for a while longer. "Senate Majority Leader Harry Reid (D-Nev.) suggested Tuesday that he’d be fine with outgoing Nuclear Regulatory Commission (NRC) Chairman Gregory Jaczko staying around for quite a while longer. Jaczko, a former aide to Reid, announced his resignation Monday but plans to stay until the Senate confirms a successor. His term doesn’t expire until the end of June of 2013...The White House said Monday that President Obama plans to soon nominate a replacement for Jaczko, whose tenure has been marked by tumultuous relationships with his fellow commissioners and Capitol Hill Republicans...Jaczko told E2 Monday that while he’s heading for the exits, he realizes that it might not be a quick process. 'I’ll let that process play out and if that takes a few months or a month, then that’s fine with me,' Jaczko said of the Senate confirmation process." Ben Geman in The Hill.

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

 
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