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Wonkbook: The economic crisis has become a political crisis

By Ezra Klein,

SONYA SCHOENBERGER REUTERS Traders work at their desks in front of the DAX index board at Frankfurt's stock exchange Sept. 5. European shares fell Monday, extending its previous session slide on concerns that the United States could be heading towards recession following Friday's weaker than expected U.S. nonfarm payroll data. "The world economy is paying a price for democracy," write Rich Miller and Simon Kennedy. How big of a price? Well, some of the continent's major indexes, such as the German DAX, dropped five percent on Monday morning, and the futures markets say we're headed for a tumble, too. And this isn't just the invisible fist punching the global economy in the gut. JP Morgan, Morgan Stanley, Citicorp, UBS and Societe Generale SA have named political paralysis as one factor contributing to their ever-gloomier outlooks for the recovery.

But perhaps the most telling example came from John Lanchester, who notes that Belgium is seeing better growth than the French, German, and U.K. economies. What makes Belgium so special? Gridlock in Brussels has meant Belgium doesn't currently have a government. It hasn't had one for 15 months.

Normally, that would portend bad things for an economy. But as Lanchester notes, "no government means none of the stuff all the other governments are doing: no cuts and no ‘austerity’ packages. In the absence of anyone with a mandate to slash and burn, Belgian public sector spending is puttering along much as it always was; hence the continuing growth of their economy...It turns out that from the economic point of view, in the current crisis, no government is better than any government - any existing government."

If phase one of the economic crisis was the financial crisis, and phase two was the jobs crisis, we're now seeing phase three: the political crisis.

Politicians all over the world are finding themselves stuck in the same vise: The policies needed to help the economy now, like spending in America and further fiscal integration in Europe, are unpopular. Pass them and you might lose your job. But letting the economy worsen is also unpopular. Let that happen and you will lose your job.

So governments around the world have tried to walk the middle path. In America, we had a stimulus that was bigger than anything we had seen before, but still only a half-to-a-third of what was needed to close the output gap. The result? No depression, but a prolonged period of high unemployment. In Europe, there has been more fiscal integration than the world ever imagined possible, but it has not been enough to actually solve the continent's debt crises -- or the various governments' political problems.

The result of this strategy hasn't just been continued economic weakness. It's been accelerating political weakness. Doing not-quite-enough is, in some ways, the worst of both worlds: you take the hit for making unpopular decisions and then you take the hit for failing to fix the problem. In America, both Obama and the Congress are watching their poll numbers fall to all-time lows. In Germany, Angela Merkel's party just suffered its fifth defeat this year -- and this one was in her home state. Unpopularity, of course, makes it even harder for governments to make tough decisions, and so the market is increasingly beginning to believe that the tough decisions won't be made, and the economic crisis will be unnecessarily prolonged. "Policy-induced slowdown," Morgan Stanley calls it.

It's easy and proper to blame politicians for this, but as Miller and Kennedy write, in the West, politicians are constrained by public preferences. Our paralysis is, in part, the price of democracy. In the long-run, it's a price worth paying. But in the short-run, it is going to be a high price indeed.

Five in the morning

1) European markets are in free fall as the crisis deepens, report Howard Schneider and Anthony Faiola: "European stock markets tumbled Monday on warnings of a broad crisis developing in the region’s financial sector and intensifying doubt about the ability of euro-area politicians to effectively respond. Major indexes such as Germany’s DAX and the Stoxx 50 of blue-chip companies were down more than 5 percent for the day. Confidence in the health of the region’s banks is falling, economic growth is slowing and governments are so hamstrung with debt that they will have little room to respond with new stimulus or other programs. An economic downturn in areas that account for much of the world’s trade would be damaging on its own. But a full-blown financial crisis in Europe could have a devastating impact on both sides of the Atlantic."

The fall follows Greek bailout talks breaking down: http://nyti.ms/oKi4Wk

2) The continent might be moving toward an all-out fiscal union,report Louise Story and Matthew Saltmarsh: "As leaders in Europe try to contain a deepening financial crisis, they are also increasingly talking about making fundamental changes to the way their 17-nation economic union works. The idea is to create a central financial authority -- with powers in areas like taxation, bond issuance and budget approval -- that could eventually turn the euro zone into something resembling a United States of Europe. Officials have been hesitant to publicly endorse such a drastic change. But privately they say the issue has gained urgency in recent months, as it has become clear that Europe’s current approach, which requires unanimity on any significant moves, is unwieldy and inefficient. The idea is being promoted by some global financial officials, who worry about the risks that continued uncertainty in Europe poses to the global economy."

3) But even steps that drastic may not be enough, reports Anthony Faiola: "The debt crisis rocking Rome, Madrid and Athens has plunged the region into a heated debate over a historic step that could see the advent of the euro zone’s equivalent of U.S. Treasurys -- a bond jointly backed by the taxpayers of all 17 nations that share the euro. But even that step toward integration -- one many nations in the region are fiercely resisting -- speaks to only part of the problem. Even more fundamental is Europe’s inability to create a single functioning economy stretching from the warm Mediterranean waters of Cyprus in the south to the frosty Baltic coast of Finland in the north...In short, to ensure the euro’s survival, even prosperous large economies such as France must begin to look more like Germany, which cut social benefits and reinvented its economy as an export-driven dynamo in the 2000s."

4) And proposed debt limits for the continent may not help, reports Howard Schneider: "European leaders have been confronting their continent’s debt crisis by pushing for new limits on how much borrowing countries can do, part of a trend across much of the world toward balanced budget amendments and similar restrictions. But economists say there is scant evidence that such constraints do much good...A Swiss constitutional amendment helped the country control debt that was rising during economic stagnation in the 1990s, analysts conclude...[Also good] is an Australian program that requires officials to budget in four-year cycles and keep their accounts balanced over time. Other experiences have been disappointing. Germany is trying a constitutional amendment for the second time after finding that its initial one in the 1980s did not prevent debt from rising over time."

5) The whole meltdown represents a failure of government, writes John Lancaster: "Instead of the surge of rebounding growth which historically accompanies successful exit from a recession, we have the UK’s disappointing 0.2 per cent growth, the US’s anaemic 0.3 per cent and the glum eurozone average figure of 0.2 per cent. That number includes the surprising and alarming German 0.1 per cent, the desperately poor French 0 per cent and then, wait for it, the agreeably frisky Belgian 0.7 per cent. Why is that, if you’ve been following the story, laugh-aloud funny? Because Belgium doesn’t have a government. Thanks to political stalemate in Brussels, it hasn’t had one for 15 months. No government means none of the stuff all the other governments are doing: no cuts and no ‘austerity’ packages...It turns out that from the economic point of view, in the current crisis, no government is better than any government - any existing government."

Canadian pop interlude: Sloan plays "Follow the Leader" live.

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Still to come: Obama's poll numbers on the economy are terrible; Rich Cordray is headed to the Senate; Rick Perry is tagging Mott Romney for being a "buyout specialist"; the political psychology of the GOP's newfound opposition to stimulus; the administration withdraws a rule regulating smog; and a police horse licks a dog's face.

Economy

Obama's poll numbers on the economy are in the toilet, report Jon Cohen and Dan Balz: Of the more than six in 10 who now disapprove of Obama’s work on jobs and the economy, nearly half of all Americans 'strongly' disapprove. On the deficit, which was at the heart of the pitched battle over the debt ceiling earlier this summer, Obama has reaped no dividends for trying to produce a compromise agreement with Republicans. Six in 10 disapprove of Obama’s work on the federal budget deficit, a percentage that is relatively unmoved in recent surveys and basically where it was a year ago.

It's confirmation hearing day for Richard Cordray, report Maya Jackson-Randall and Victoria McGrane: "The new Consumer Financial Protection Bureau will use many tools other than lawsuits to do its job, Richard Cordray, President Barack Obama's pick to run the agency, plans to tell senators at his confirmation hearing Tuesday....His comments are aimed at allaying concerns in Congress and business that he would be quick to use litigation as an enforcement tool if confirmed as the first director of the agency...Mr. Cordray earned a reputation as an aggressive litigator during his years as a state attorney general...Months before Mr. Cordray was nominated, 44 Senate Republicans--a group large enough to block the nomination--signed a letter pledging to oppose any nominee until the Obama administration agrees to revamp the agency."

Mitt Romney's business background could hurt him, report Karen Tumulty and Jia Lynn Yang: "Romney is turning more and more to his record as a spectacularly successful turnaround artist in the 1980s and 1990s...What Romney rarely brings up, however, is that the corner of the 'real economy' where he excelled is a specialized, little-understood world known as private equity. It represents one of the most un­sentimental sides of modern capitalism -- as Romney’s opponents are sure to point out. With funds they have raised from big investors, private-equity firms go looking for companies to buy -- usually by borrowing more money, which the firm itself is then on the hook to repay. The goal is to unload them a few years later at a big profit...In that book, 'No Apology,' Romney uses the term 'creative destruction' to describe the downsizing that’s sometimes needed to make a company more efficient and valuable."

@ByronYork"Perry aide Dave Carney on Romney and jobs: 'I don't think the country is looking for somebody to be a buyout specialist.'http://ow.ly/6lgWB"

New CEA chair Alan Krueger and Paul Krugman may both work at Princeton, but have very different styles, reports Jason Horowitz: "Krueger and Krugman have opposing approaches to fixing the economy. 'They think about the issues differently,' said Grossman, the department chair. Krugman, the big-picture guy, is likely to focus on sweeping theories, aggregate spending and interest rates and monetary and fiscal policy. Krueger, whose reputation is that of an empiricist, is focused on how regulations and other economic mechanisms can be manipulated to spur job growth. Blinder pointed out that the two professors probably disagreed only on a quarter of the issues. But that quarter happens to be the crucial battlefield for the direction of Obama’s jobs plan, and probably his presidency."

Obama doesn't have the unilateral power to create many jobs, reports Suzy Khimm: "Any new spending or tax changes would have to receive the green light from Congress, including infrastructure spending, job training, tax credits and other measures that Obama has touted. For all intents and purposes, his hands are tied...What’s more, the two agencies that have huge levers to shape the economy -- the Federal Reserve and the Federal Housing Finance Agency -- are legally independent from the White House...Some who support a looser monetary policy argue that White House officials could be making a stronger case for the central bank to weaken the dollar to facilitate trade and strengthen exports. But in the end, both agencies, 'tend to jealously guard their authority,' as is within their mandate, notes Jared Bernstein, former chief economist to Vice President Biden."

Obama's holding up free trade deals, writes Mitch McConnell:"Publicly, the White House claims to support all three agreements. It even said in July that Republicans are the ones standing in the way of ratification. But this is absurd because Congress can’t ratify trade agreements until the president submits them for congressional approval. He knows as well as I do that once he does, all three would garner wide bipartisan support. What’s the real holdup? For three years, the administration has delayed finalizing these deals because unions have been extracting concessions in exchange for their support. Early on, they demanded further concessions and political reforms from our trading partners, all of which have been satisfied. Now, they’re demanding taxpayer funds for worker training programs that many believe are not only duplicative and costly but may not even be effective."

Left-wing critiques of Obama are driven by magical thinking,writes Jonathan Chait: "The most common hallmark of the left’s magical thinking is a failure to recognize that Congress is a separate, coequal branch of government consisting of members whose goals may differ from the president’s. Congressional Republicans pursued a strategy of denying Obama support for any major element of his agenda, on the correct assumption that this would make it less popular and help the party win the 2010 elections. Only for roughly four months during Obama’s term did Democrats have the 60 Senate votes they needed to overcome a filibuster. Moreover, Republican opposition has proved immune even to persistent and successful attempts by Obama to mobilize public opinion. Americans overwhelmingly favor deficit reduction that includes both spending and taxes and favor higher taxes on the rich in particular. Obama even made a series of crusading speeches on this theme. The result? Nada."

The supercommittee deal must include jobs measures, writes member James Clyburn: "People didn’t want to hear about cuts or revenue; they wanted to hear about jobs. We cannot get the economy back on track until we put people back to work. Job creation will generate tax revenue and reduce the need for government assistance...Targeting waste, fraud and abuse; eliminating unnecessary and duplicative spending; and ending military adventurism need not be accompanied by slashing essential services such as education and shredding our social safety nets -- Social Security, Medicare and Medicaid...While I think our current tax code is unfair and in need of massive overhaul, the supercommittee does not have the time or resources to sufficiently reform the tax code. But we do have time to reduce inequities, close loopholes, and eliminate outdated and unnecessary tax subsidies."

Why have Republicans turned against so many ideas, like fiscal stimulus, that they supported only a few short years ago? Ask a psychologist, writes Ezra Klein: "My favorite study in this space was by Yale’s Geoffrey Cohen. He had a control group of liberals and conservatives look at a generous welfare reform proposal and a harsh welfare reform proposal. As expected, liberals preferred the generous plan and conservatives favored the more stringent option. Then he had another group of liberals and conservatives look at the same plans, but this time, the plans were associated with parties. Both liberals and conservatives followed their parties, even when their parties disagreed with their preferences. So when Democrats were said to favor the stringent welfare reform, for example, liberals went right along. Three scary sentences from the piece: 'When reference group information was available, participants gave no weight to objective policy content, and instead assumed the position of their group as their own. This effect was as strong among people who were knowledgeable about welfare as it was among people who were not. Finally, participants persisted in the belief that they had formed their attitude autonomously even in the two group information conditions where they had not.'"

Queen interlude: The Google doodle on what would have been Freddie Mercury's 65th birthday.

Health Care

Political benefits from health care reform haven't surfaced for Obama, report Sam Baker and Niall Stanage: "When healthcare reform passed in March of 2010, Obama hit the road to tout its benefits. Supporters predicted that the law would grow more popular as temperatures cooled and the public learned more about what it actually does. Neither has happened: The law still polls unfavorably, and the public knows even less about what’s in it. And it’s a far smaller part of Obama’s rhetoric Democratic operatives say that the president is now faced with a conundrum: The benefits of healthcare reform will almost inevitably fade from public view if he does not use the bully pulpit to remind people of them, yet the nation is hardly in the mood for anything that could be perceived as bragging."

Health care is adding more jobs than other sectors, reports Sam Baker: "Healthcare added nearly 30,000 jobs last month -- by far the most of any sector of the economy. The health industry added 29,700 jobs in August, according to data the Labor Department released Friday morning. No other sector came close to those numbers. Overall, growth in healthcare and other sectors was offset by job losses. The economydid not gain any jobs and the unemployment rate remained flat at 9.1 percent. Within healthcare, 'ambulatory health care services' showed the largest growth, adding roughly 18,000 jobs. Hospitals gained more than 7,700, and home health companies added more than 6,000 people to their payrolls. Healthcare also led U.S. hiring in July."

Domestic Policy

Obama is pledging aid to Hurricane Irene victims, reports Jeff Bater: "President Barack Obama traveled to New Jersey Sunday afternoon to view flood damage caused by Hurricane Irene and emphasized that the U.S. would provide the resources necessary to rebuild. 'We are going to meet our federal obligations,' he said, adding that in times of disaster, 'we come together as one country and we make sure that everybody gets the help that they need.'...In brief remarks about the flooding and the government's recovery efforts, he said the visit 'gives you a sense of the devastation that has taken place.'...Mr. Obama was joined on his tour by Federal Emergency Management Agency Administrator Craig Fugate, FEMA Coordinating Officer Bill Vogel, Environmental Protection Agency Administrator Lisa Jackson, New Jersey Republican Gov. Chris Christie, Paterson Mayor Jeffrey Jones and Red Cross CEO Gail McGovern."

Supercommittee members have close lobbying ties, reports Dan Eggen: "Nearly 100 registered lobbyists used to work for members of the supercommittee, now representing defense companies, health-care conglomerates, Wall Street banks and others with a vested interest in the panel’s outcome, according to a Washington Post analysis of disclosure data. Three Democrats and three Republicans on the panel also employ former industry lobbyists on their staffs. The preponderance of lobbyists adds to the political controversy surrounding the supercommittee, which will begin its work in earnest this week as Congress returns to Washington. The panel has already come under fire from watchdog groups for planning its activities in secret and allowing members to continue fundraising while they negotiate a budget deal."

Denser cities would create jobs, writes Ryan Avent: "Economists studying cities routinely find that after controlling for other variables, workers in denser places earn higher wages and are more productive. Some studies suggest that doubling density raises productivity by around 6 percent while others peg the impact at up to 28 percent. Some economists have concluded that more than half the variation in output per worker across the United States can be explained by density alone; density explains more of the productivity gap across states than education levels or industry concentrations or tax policies. Put two workers with similar skill levels in cities of different densities and the one in the denser place will be more productive, according to two decades’ worth of research from economists. The resistance to greater density slows job creation in productive places."

If rich people voluntarily give up Social Security, it could save $1 trillion, writes Perry Golkin: "I estimate the impact of a voluntary program at $1 trillion over three decades. Here’s the calculation. If 1 million of the rich waive their Social Security benefits for one year, the annual reduction in payments, net of taxes, would be at least $20 billion. If this occurred each year for the next 30 years, the trust fund would have $600 billion. If the funds were held for 30 years and earned 3.5 percent annually over this period, the interest earned would result in an additional $400 billion. A total of $1 trillion of cash would be available for the next generation if we had the discipline to wait 30 years. The Social Security Administration couldn’t pay out benefits from this fund until a specified date, for example, 2040."

Adorable animals hanging out with other adorable animals interlude: An NYPD horse licks a bulldog's face.

Energy

Obama's backtracking on smog regulation, reports Juliet Eilperin: "Facing fierce resistance from congressional Republicans, industry and some local officials, President Obama abruptly pulled back proposed smog standards Friday that would have compelled states and communities nationwide to reduce local air pollution or face federal penalties....Members of the business community had launched an all-out public relations blitz against the rules, saying that they should be delayed in light of the economic downturn. Obama’s decision was announced shortly after disheartening employment numbers were released Friday morning. It drew harsh reaction from environmentalists and their allies -- including a statement from MoveOn.org questioning why its members should work for the president’s reelection -- highlighting the dangers the White House faces as it seeks middle ground among competing interests."

Obama might backtrack further during his Thursday speech,report Deborah Solomon, Carol Lee, and Thomas Catan:"President Barack Obama is expected to use his jobs speech to Congress on Thursday to blunt business and Republican criticism that his administration is engaged in regulatory overreach. In the run-up to the speech, Mr. Obama on Friday abandoned a proposed Environmental Protection Agency rule tightening air-quality standards. The administration also says a regulatory review will save businesses more than $10 billion over five years, and it eased offshore drilling restrictions in the Gulf of Mexico and Alaska...Mr. Obama may also talk Thursday about giving industry more time to comply with other regulations, including environmental rules that businesses have complained are coming too quickly, according to people familiar with the matter."

Regulations don't necessary hurt job growth, report Motoko Rich and John Broder: "Do environmental regulations kill jobs? Republicans and business groups say yes, arguing that environmental protection is simply too expensive for a battered economy...Many economists agree that regulation comes with undeniable costs that can affect workers...But many experts say that the effects should be assessed through a nuanced tally of costs and benefits that takes into account both economic and societal factors. Some argue that the costs can be offset as companies develop cheaper ways to clean up pollutants, and others say that regulation is often blamed for job losses that occur for different reasons, like a stagnant economy. What’s more, some economists say, previous regulations, like the various amendments to the Clean Air Act, have resulted in far lower costs and job losses than industrial executives initially feared."

Clean energy isn't a jobs panacea, writes David Brooks: "There’s a wealth of other evidence to suggest that the green economy will not be a short-term jobs machine. According to Investor’s Business Daily, executives at Johnson Controls turned $300 million in green technology grants into 150 jobs -- that’s $2 million per job. Sunil Sharan, a former director of The Smart Grid Initiative at General Electric, wrote in The Washington Post that the Smart Grid, while efficient and environmentally beneficial, will be a net job destroyer. For example, 28,000 meter-reading jobs will be replaced by the Smart Grid’s automatic transmitters. A study by McKinsey suggests that clean energy may produce jobs for highly skilled engineers, but it will not produce many jobs for U.S. manufacturing workers...despite lavish public support."

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.

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