Wonkbook: How the economy could come back in 2012
By Ezra Klein,
Justin Sullivan GETTY IMAGES
David Wessel puts it nicely in today's Wall Street Journal. "For the past year and half," he writes, "the U.S. has been caught in a tug of war. On one side is the economy's natural resilience. On the other are the long-lasting effects of a burst credit bubble and some bad luck—the oil-price spike provoked by the Arab Spring, the supply-chain disruption following Japan's earthquake. At the end of 2010, the economy's resilience was winning. In 2011, it gave ground."
But 2012 is a new year. And, as he notes, the early data is encouraging. Unemployment claims are down to their lowest level in more than three years. Housing starts are up. The stock market is bouncing back. Europe's latest round of bond sales wasn't a complete disaster.
"This could be the start of the much-hoped-for virtuous circle," Wessel writes. "The job market improves. Consumers have more income. Spirits and, more important, spending perk up. Meanwhile, weakening economies abroad keep commodity prices down and limit inflation in the U.S. With mortgage rates low and consumer finances improving, home prices turn up at last. Businesses, flush with cash, expand and hire more readily, offsetting the retrenchment by governments."
Of course, having spent about 130 words telling us what could go right, Wessel goes on to spend 350 words on what could go wrong. But I'm trying to be optimistic here. So I'll direct your attention elsewhere in the Wall Street Journal, where Gregory Zuckerman reports that "big money is starting to wager on housing. Hedge funds run by Caxton Associates LP, SAC Capital Advisors LP, Avenue Capital and Blackstone Group LP have been buying housing-related investments, betting on a rebound. And formerly bearish research firm Zelman & Associates now predicts a housing pickup, as does Goldman Sachs Group Inc. Other investors seem to be making the same bet. Shares of home builders are up 30% since the end of the third quarter, as measured by the Dow Jones index tracking those shares, topping a nearly 10.5% gain for the Standard & Poor's 500."
If housing really picks up, that could be a significant driver of recovery.
That said -- and you knew this was coming, right? -- I'm not making the case for optimism. There are too many storm clouds for that. But just as 2010 and 2011 were worse than forecasters expected, there are plausible scenarios in which 2012 is better than forecasters now expect. Let's hope.
In case you missed it: Wonkblog presents 2011 in 11 charts. Highlights include a popularity contest between Congress, Paris Hilton, and Hugo Chavez, and Iowa in one chart.
1) High-level dithering brought Europe to the point of crisis, report Charles Forelle and Marcus Walker: "A Wall Street Journal investigation, based on more than two dozen interviews with euro-zone policy makers, revealed how the currency union floundered in indecision--failing to address either the immediate concerns of investors or the fundamental weaknesses undermining the euro. The consequence was that a crisis in a few small economies turned into a threat to the survival of Europe's common currency and a menace to the global economy. In April, after a year of drama and bailouts, the euro zone seemed to have contained the immediate crisis to Greece and other small countries...But by July, the rift among euro-zone leaders over who should bear the burden of Greece's debt had prompted investors to shun all financially fragile euro nations."
2) New campaign funding rules are shaking up the primary race, report Danny Yadron and Brody Mullins: "Millions of dollars in television advertisements are blanketing Iowa and reshaping the Republican presidential contest just before the first votes are cast. But unlike in other primary elections, a majority of advertisements aren't coming from the candidates themselves, according to media buyers. Instead, most of the on-air politicking is funded by a new breed of political action committee backing individual candidates--dubbed the Super PAC--which has sprung to life this year because of changes in the law. In fact, Iowa is turning into the coming-out party for this new kind of heavy campaign artillery. Super PACs by law can't coordinate with campaigns and are free to take donations of any size, whereas donors can give only $2,500 to a candidate during a primary-election season."
3) Newt's energy flip flops were profitable for him, reports Dan Eggen: "A month after joining Democratic leader Nancy Pelosi in a televised call to fight climate change in 2008, Newt Gingrich pivoted to a much different message: Increase domestic drilling and block legislation aimed at implementing a 'cap-and-trade' system to curb carbon pollution. 'We could drill here, drill now and pay less,' Gingrich said in a May 2008 video for his now-defunct nonprofit group, American Solutions for Winning the Future. Within weeks, the money began pouring in from major U.S. energy firms, which eventually contributed more than $2 million to American Solutions’ pro-drilling and anti-cap-and-trade campaign for the next two years, according to a review of disclosure reports and other records by The Washington Post. The top contributors included Peabody Energy of St. Louis, which gave $825,000, and Devon Energy of Oklahoma City, which contributed $500,000."
4) Investors are betting on a housing recovery, reports Gregory Zuckerman: "Big money is starting to wager on housing. Hedge funds run by Caxton Associates LP, SAC Capital Advisors LP, Avenue Capital and Blackstone Group LP have been buying housing-related investments, betting on a rebound. And formerly bearish research firm Zelman & Associates now predicts a housing pickup, as does Goldman Sachs Group Inc. Other investors seem to be making the same bet. Shares of home builders are up 30% since the end of the third quarter, as measured by the Dow Jones index tracking those shares, topping a nearly 10.5% gain for the Standard & Poor's 500. These stocks rallied during certain periods over the past three years, only to fall again when hopes of a housing rebound proved unfounded. However, home builders haven't outperformed the broader market by this much in a quarter since the third quarter of 2008."
1) There are signs that the economy is recovering, but there's plenty standing in its way, writes David Wessel: "The latest incoming data are encouraging. Initial claims for unemployment compensation, one of the better early-warning signs, have fallen to their lowest level in 3½ years. Consumers say jobs are a little easier to find, another useful indicator. Housing starts and home sales are up. Inventories are lean. And, for what it's worth, the stock market has bounced back in the past month...What could go wrong? At the top of every list of likely suspects is Europe...The games of chicken between Germany and southern Europe and between political leaders and the European Central Bank aren't resolved. Europe is almost surely in recession.
2) The French just don't get it, writes Martin Feldstein: "French officials apparently don’t recognize the importance of the fact that Britain is outside the eurozone, and therefore has its own currency, which means that there is no risk that Britain will default on its debt. When interest and principal on British government debt come due, the British government can always create additional pounds to meet those obligations. By contrast, the French government and the French central bank cannot create euros...The eurozone fiscal deficits and current-account deficits are now the most obvious symptoms of the euro’s failure. But the credit crisis in Europe, and the weakness of eurozone banks, may be even more important. The persistent unemployment differentials within the eurozone are yet another reflection of the adverse effect of imposing a single currency."
3) Republican anti-voting efforts put Rick Perry and Newt Gingrich in a bind, writes Ezra Klein: "Rick Perry said the laws were “among the most onerous in the nation,” and possibly even unconstitutional. Newt Gingrich compared their impact to Pearl Harbor. Michele Bachmann, Jon Huntsman and Rick Santorum were so intimidated that they simply slunk away without a fight. Social Security? Obamacare? Dodd-Frank? Nope. Virginia’s ballot-access laws. Of the seven candidates still in serious contention for the Republican nomination for the presidency, only two of them -- Mitt Romney and Ron Paul -- will be appearing in the Virginia primary on March 6...[The complaints] run directly counter to the efforts Republicans have mounted in dozens of states to make it more difficult for ordinary Americans to participate in the 2012 election...One of the most restrictive laws in the nation, in fact, was signed by Texas Governor Rick Perry."
Irish punk interlude: The Undertones' "Teenage Kicks".
Got tips, additions, or comments? E-mail me.
Still to come: Heterodox approaches to economics are on the rise; Mitt Romney's still trumpeting Massachusetts' individual mandate; the administration is opposing Texas' redistricting plan; BP may face criminal charges in the Deepwater Horizon oil spill; and a cat plays Fruit Ninja on an iPad.
Heterodox economics is on the rise, reports The Economist: "Mr Mosler champions a doctrine on the edge of economics: neo-chartalism, sometimes called 'Modern Monetary Theory'. The neo-chartalists believe that because paper currency is a creature of the state, governments enjoy more financial freedom than they recognise. The fiscal authorities are free to spend whatever is required to revive their economies...'Market monetarists' favour more audacity in the monetary realm. Tight money caused America’s Great Recession, they argue, and easy money can end it...The 'Austrian' school of economics...is more sternly pre-Freudian: more inhibition, not less, is its prescription. Its adherents believe that part of the economy’s suffering is necessary, an inevitable consequence of past excesses. They do not think the Federal Reserve can rescue the economy."
The US' tax collection rules are tightening, report Robin Sidel and Laura Stevens: "Financial institutions around the world are bracing for new U.S. tax regulations that are prompting some foreign banks to ditch their customers and their American counterparts to worry that they could lose crucial deposits. The rules--one of which is being phased in, while the other hasn't been finalized--are aimed at reducing tax evasion by making banks report more details about income earned by customers who keep deposits in countries other than their own. Overseas, some banks have alerted customers that accounts will be closed at the year's end. U.S. banks, meanwhile, are trying to quash a proposed regulation that would require them to report interest income earned by non-U.S. residents to the Internal Revenue Service, which could then pass the information to their home countries."
Behind the scenes interlude: What happens to your bag between when you check it and before it goes into baggage claim.
In 2011, health care was paralyzed in Washington but undergoing rapid change everywhere else, reports Sarah Kliff: "It was the most gridlocked of times, it was the least gridlocked of times. In one sense, nothing much happened in health care this year: Congress and the White House proposed ambitious Medicare reform packages, only to take little action. But in another sense, everything changed--and it changed quickly-- as 2011 saw insurance plans, hospitals and doctors frantically reorganize themselves around the health reform law."
Mitt Romney still calls a state-level individual mandate a "conservative principle", reports Jonathan Easley: "Speaking Wednesday on 'Fox and Friends,' Romney defended the Bay State’s healthcare law, which includes a version of the individual mandate, as inline with the Republican world view. The individual mandate was the centerpiece and most controversial aspect of the Obama administration’s Affordable Care Act, which has widely been blasted by Republicans as governmental overreach. 'I’m happy to stand by the things that I believe. I’m not going to change my positions by virtue of being in a presidential campaign,' Romney said. 'What we did was right for the people of Massachusetts, the plan is still favored there by 3 to 1 and it is fundamentally a conservative principle to insist that people take personal responsibility as opposed to turning to government for giving out free care.'"
Republican Congressmen say Newt Gingrich pushed them to back Medicare Part D, reports Peter Kasperowicz: "A current and a former member of the House said this week that Republican presidential candidate Newt Gingrich lobbied them to pass legislation in 2003 that provided a subsidy for prescription drugs under Medicare. The comments go against previous claims by Gingrich that he never lobbied members of Congress after leaving the House in 1999, because he made plenty of money as a speechmaker. Rep. Jeff Flake (R-Ariz.) and former Rep. Butch Otter (R-Idaho), now his state’s governor, said Gingrich met with on-the-fence Republicans to persuade them to vote for the prescription drug bill...A Gingrich spokesman told the Register that Gingrich was never paid to meet with House members, and thus was never a lobbyist."
The administration is opposing Texas' redistricting plans before the Supreme Court, reports Lyle Denniston: "The Obama Administration on Wednesday afternoon urged the Supreme Court not to allow Texas to use the election district maps drawn up by its state legislature, arguing that if time is too short to draw up new maps, the 'interim' redistricting plans of a federal court should be used for the 2012 elections even though those are flawed in some respects. The friend-of-Court brief filed by the U.S. Solicitor General’s office is here. The Administration takes the position that two of the legislature’s maps -- for seats in the state house and for the state’s congressional delegation in the U.S. House of Representatives -- are illegal because they discriminate against minority voters. 'Both plans,' the brief told the Court Wednesday, 'bore indicia of discriminatory purpose' against minorities in the state."
Stupid pet tricks interlude: A cat plays Fruit Ninja.
Prosecutors are preparing charges against BP, reports Tom Fowler: "U.S. prosecutors are preparing what would be the first criminal charges against BP PLC employees stemming from the 2010 Deepwater Horizon accident, which killed 11 workers and caused the worst offshore oil spill in U.S. history, said people familiar with the matter. Prosecutors are focused on several Houston-based engineers and at least one of their supervisors at the British oil company, though the breadth of the investigation isn't known. The prosecutors assert the employees may have provided false information to regulators about the risks associated with the Gulf of Mexico well while its drilling was in progress, these people said. The felony charges--which might be disclosed early in 2012, if they are brought--could involve providing false information in federal documents, these people said. A conviction on such a charge carries a penalty of up to five years in prison as well as a fine."
Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.