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Wonkbook: The Fed chooses a side

By Ezra Klein,

Joshua Roberts BLOOMBERG Ben Bernanke’s first press conference wasn’t much for pomp and circumstance. Bernanke sat, he didn’t stand. The few cameras in the room didn’t hunt for the dramatic angles or work to heighten the tension between the chairman and his interrogators. Very few jokes were cracked, and Bernanke made no major missteps. It looked like what it was: an economist talking to econowonks about the economy. But tucked inside the talk of “anchoring inflation expectations” and “the economy’s central tendency” was perhaps the most important economic policy statement that Americans will hear this year: the Fed, Bernanke admitted, has chosen a side.

Yesterday, Bernanke made it quite clear that the fear of future inflation, and not the crisis of current unemployment, would be foremost in the Fed’s mind. When the New York Times’s Binyamin Appelbaum asked whether the Fed could do more for jobs, and if so, why it wasn’t doing more for jobs, Bernanke dodged like an experienced politician: he said the Fed had done a lot for jobs, and he said the Fed had to worry about inflation, and he said that in all conventional ways, the Fed’s policies were going to remain loose. Left unsaid was that of course the Fed could do more for jobs. See this February op-ed by Christina Romer for more on how. And left implicit was Bernanke’s real answer to the question: it won’t do more because it is afraid to do more.

Various Fed watchers have various theories. There’s no doubt that the institution is under enormous pressure, with Republicans like Ron Paul, Paul Ryan and Sarah Palin showing an increasing interest in making an activist Fed a major campaign issue. There’s no doubt that many on Bernanke’s board are inflation hawks who came of economic age in the 70s, when inflation got out of control, and still see the Federal Reserve’s primary job as preventing a repeat of that grim decade. There’s no doubt that inflation can move quickly, and this keeps many very knowledgeable economists up at night. But there’s also no doubt that 8.8 percent unemployment and slow economic growth are a real crisis, not, like inflation, a speculative one, and Bernanke is pulling the Fed out of the game.

This, then, is what the economic policymaking world looks like today: Congress has long since given up on further stimulus, and is arguing over how big its spending cuts should be in 2012 (in one of his most interesting answers, Bernanke said the long-term deficit was a top priority, but large, short-term spending cuts by Congress would force compensatory action from the Fed to protect the economy). The Federal Reserve has given up on doing more, and in June, will pull back to doing slightly less. And the recovery remains shaky, with first quarter GDP growth expected to come in under two percent and few signs that some dam of pent-up demand for workers is about to burst forth. In short? Sucks to be you, unemployed Americans.

Five in the morning

1) Harry Reid will force a Senate vote on Paul Ryan’s budget, reports Sam Stein: “Senate Majority Leader Harry Reid (D-Nev.) announced on Wednesday that he would host a vote on Rep. Paul Ryan’s (R-Wis.) budget as a means of forcing moderate GOP senators to weigh in on the legislation’s controversial proposals. He did not provide a specific date for when that vote will take place..Reid, who had been traveling with other senators in China, accused the Ryan plan of fundamentally changing Medicare and burdening health care consumers with uncertainty and higher costs. By holding a vote on the bill -- which his own party will vote against en masse -- the majority leader is hoping to not only drive a wedge within the GOP but keep the Ryan budget in the news.”

Check out the Kaiser Family Foundation’s meta-analysis of polling on Ryan’s Medicare plan:

2) Ben Bernanke met the press, announced an end to QE2, reports Neil Irwin: “The Fed will allow a controversial program to buy $600 billion in Treasury bonds, known as the second round of quantitative easing, or ‘QE2,’ to expire as scheduled at the end of June. In its statement, the Fed also maintained its near-zero target for short-term interest rates, where it has been since December 2008, and indicated that it expects to keep rates ‘exceptionally low’ for ‘an extended period.’ In responding to criticism that the Fed’s monetary easing policy has not done enough to bring down unemployment to sustainable levels, Bernanke said, ‘We were very clear this was not going to be a panacea.’...’Most of the factors that account for the slower growth in the first quarter appear to us to be transitory,’ Bernanke said.”

The word cloud of Bernanke’s remarks show how much more concerned the Fed is with inflation than with jobs:

My take: Here’s what Ben Bernanke should’ve said, or perhaps would’ve said if he’d had a few drinks before walking out.

3) Leon Panetta’s impending nomination as Defense Secretary signals defense cuts, reports Charles Hoskinson: “By choosing Leon Panetta as his next secretary of defense, President Barack Obama has signaled that he’s serious about cutting the Pentagon budget -- even if that just happens to make life more difficult for the GOP. Obama’s plan to cut hundreds of billions of dollars worth of defense and security spending has exposed a growing chasm in the Republican Party -- a split between security hawks who want to protect the Pentagon budget and deficit hawks who say that everyone has to share the pain...Panetta is expected to apply his experience as Office of Management and Budget director and White House chief of staff to the process, finding savings where Defense Secretary Robert Gates might have been reluctant to go.”

4) Democrats look willing to bargain on debt reduction rules, report Janet Hook and Danny Yadron: “Republicans have said they don’t want to raise the government’s borrowing limit without also taking steps to curb spending. Many Democrats have argued that the debt-limit increase shouldn’t be linked to deficit-reduction measures, but some kind of pairing has become increasingly likely. Mr. Reid, during his conference call with reporters, said he wanted to include a ‘deficit cap’ in any legislation that raises the current borrowing limit. An aide to Mr. Reid said such a cap would trigger automatic spending cuts if lawmakers weren’t able to agree on a plan to lower spending. The concept is similar to one Mr. Obama included in a broad deficit-reduction plan unveiled earlier this month.”

5) The Supreme Court put the kibosh on a number of class-action suits, reports Robert Barnes: “Large corporations won a substantial victory at the Supreme Court on Wednesday, as ideologically split justices ruled that consumers may not band together in class-action arbitration to pursue their complaints. The specific case involved cellphones and a familiar contract that requires customers to press claims through arbitration rather than lawsuits. Such ubiquitous contracts, which mandate individual rather than group claims, are becoming standard for companies offering loans, cable service, credit cards and even employment. Business interests praised the 5 to 4 decision in AT&T Mobility v. Concepcion as a recognition that class-action efforts can defeat the purported advantage of arbitration: quick and efficient settlement of consumer complaints.”

Live interlude: PS I Love You and Diamond Rings play “Leftovers”.

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Still to come: The SEC is trying to be less reliant on rating agencies; seniors hate Ryan’s Medicare plan; Matt Yglesias on the Fed; big business says giving it a tax cut would mean free money for America; the Supreme Court cracked down on class action lawsuits; the FTC says gas prices aren’t being fixed; and a toddler who is better at soccer than you are.


The SEC is trying to ween itself off S&P and Moody’s ratings, reports David Hilzenrath: “Congress may have ordered agencies that regulate financial institutions to stop relying on credit ratings by firms such as Moody’s and Standard Poor’s, but regulators are still struggling to come up with an alternative. One of the painful lessons of the mortgage meltdown was that securities stamped with the highest ratings turned out to be poor investments. Yet those private ratings had been enshrined in the nation’s laws and regulations as official benchmarks of quality, helping to determine, for example, what assets certain financial institutions could buy and how much money they needed to hold in reserve in case the securities imploded.”

Ben Bernanke doesn’t care about unemployed people, writes Matthew Yglesias: “Only The New York Times’ Binyamin Applebaum asked about the Fed’s timid approach to the economic recession. In response, Bernanke basically said that fixing the labor market would be too risky...Bernanke is clearly willing to act to stave off total economic collapse, but he’s deeply unwilling to improve the overall economy in any way that might even slightly risk sparking inflation. Imagine a tightrope walker with a net on his left side and a fiery pit to his right. He’s going to try to stay on the rope. But he’s going to make damn certain that if he falls, he falls to his left. That’s essentially Bernanke’s take on the American economy. But there’s a problem. He and other members of the policymaking elite may have a net to their left, but unemployed people and vulnerable communities don’t.”

Big business dreams of a year with no taxes, reports Dan Eggen: “As Washington politicians grapple with how to lower the federal deficit, a coalition of powerful corporations has a seemingly tantalizing offer: Give us a big tax break, and we’ll give you $50 billion or more in fresh revenue. More than two dozen major companies and business groups -- including the U.S. Chamber of Commerce and technology giants Apple, Google and Microsoft -- have joined together under the banner of the ‘Win America Campaign’ to push for a one-time tax holiday on overseas profits...The idea is to encourage U.S.-based corporations to bring back, or ‘repatriate,’ up to $1 trillion now stashed in overseas tax havens by sharply reducing standard corporate income tax rates on that money from 35 percent to perhaps 5 percent.”

Capping tax revenue at a certain level is silly, writes Roberton Williams: “There’s nothing intrinsically right or wrong with any given level of taxation. As Americans get older, spending on Social Security and healthcare will necessarily rise. Doing what we do now will simply cost more. At the same time, the new technologies that will help doctors provide better care will boost costs still further. And, as we grow wealthier, we may choose to spend more for things we want--helping those in need, improving our roads and schools, or paying to build more and better infrastructure Or we may decide we don’t want to do those things...Those are political decisions that lawmakers make all the time. But there’s nothing magical about 18 or 19 percent.”

Both parties can agree on funding research, writes David Wessel: “Ronald Reagan was the Republican revolutionary hero in the 1980s, and Newt Gingrich in the 1990s. Today, it’s Paul Ryan...Now comes Mr. Gingrich, former speaker of the House and possible presidential candidate, accusing Mr. Ryan of a big mistake: Spending too little on medical and scientific research...In making the case for more government investment in research, he sounds like Barack Obama...The debate over the balance between tax increases and spending cuts to reduce the deficit is loud. But it threatens to distract us from something also important. What will matter to our children and grandchildren isn’t only how much of our money the government spends, but on what it spends that money.”

The US doesn’t have to raise the debt ceiling, writes Emil Henry: “It is critical that we not default, but we don’t have to. Hitting the ceiling means that we can spend only what we collect in taxes. According to the Congressional Budget Office, tax revenues for 2011 will be around $2.2 trillion, with net interest on the debt costing $225 billion. We can afford that interest and therefore not default. Also, Congress could pass legislation requiring the government to honor interest payments before any other expense, thereby avoiding a technical default. Not raising the current ceiling would please our creditors who, like all lenders, care simply that they be paid timely interest and principal. Leaving the ceiling in place and restricting further debt would, in the long run, make that more likely.”

Adorable animals failing enthusiastically interlude: A four-month-old puppy tries to jump over an ottoman.

Health Care

Seniors hate Ryancare, reports Phil Galewitz: “Senior citizens, whose fierce opposition to the 2010 health overhaul law helped propel Republicans’ midterm election gains, have little appetite for the House GOP’s plans to turn Medicare into a voucher-type program that sends beneficiaries to private plans but limits the amount of federal funding, according to a poll released today. The survey this month by the Kaiser Family Foundation found just 30 percent of seniors supported the idea of restructuring Medicare into a system where seniors are given government subsidies to shop for private coverage. In contrast, 62 percent of seniors said they wanted Medicare to be left alone with the program continuing to guarantee the same benefits to all enrollees. Overall, the poll found Americans evenly divided on dramatically changing Medicare, part of a Republican plan to reduce the federal deficit.”

That said, a Gallup poll found that seniors were the age group most favorable to Ryan’s budget, though it didn’t ask about his Medficare plan specifically:

Domestic Policy

Most states are raising unemployment taxes, reports Michael Cooper: “As persistently high unemployment has drained the funds that are used to pay jobless benefits, more than two-thirds of the states expect to raise taxes on businesses this year to replenish them, according to a survey of labor agencies released Wednesday. Unemployment taxes remain low by historical standards: the survey, by the National Association of State Workforce Agencies, found that states have effectively cut the unemployment tax rate on businesses by 64 percent since the unemployment program began collecting taxes from employers in 1938. The stubbornly high unemployment that has upended the lives of millions of Americans has also depleted the unemployment trust funds of most states: 32 of them owe the federal government more than $48.3 billion that they borrowed to continue paying jobless benefits.”

Court rulings aren’t stopped states from passing Arizona-style immigration laws, reports Scott Wong: “The Justice Department sued over the law, prompting a federal judge to block the most controversial parts of Arizona’s SB 1070 before they could take effect, a decision upheld by an appellate court earlier this month. While those rulings may have persuaded many states to abandon similar Arizona-style immigration bills this session, others are plowing ahead with their own legislation targeting illegal immigrants...The Florida House is weighing a bill that would allow local law enforcement to check the immigration status of people who are under investigation or who they suspect are in the country illegally...The South Carolina Senate approved similar legislation. And Georgia GOP Gov. Nathan Deal is expected to sign a similar immigration bill that recently cleared the legislature.”

GOP Senators want Obama to ditch his executive order forcing campaign spending disclosures, reports Ed O’Keefe: “Republican senators are asking President Obama to drop plans to sign an executive order forcing government contractors to disclose donations to groups participating in political activities, saying the White House shouldn’t use a company’s political history to determine if they’re eligible for government work... Many Republicans however believe that the move could allow the White House to muzzle political critics. And now they want to know exactly how Obama would go about reviewing a contractor’s political history. Doing so ‘could have a chilling effect on the First Amendment rights of individuals to contribute to the political causes or candidates of their choice,’ according to a letter written by Sen. Susan Collins (R-Maine) and signed by 24 other GOP senators.”

Adorable children rocking at sports interlude: This 18 month old has already signed a professional soccer contract.


The FTC says the rise in gas prices isn’t due to fraud, report Tennille Tracy and Jamila Trindle: “The U.S. Federal Trade Commission, one of the federal agencies involved in the Obama administration’s new investigation of rising gasoline prices, determined just a few days before being named part of the investigation that prices are going up because of normal market forces. The FTC’s findings run counter to the Obama administration’s recent effort to suggest that price manipulation, fraud and collusion could be driving spikes in gas prices. According to AAA, the average price of a gallon of gas has gone from $2.86 to $3.88 over the course of a year. In many parts of the country, the price has moved well above $4 a gallon. Experts agree that illegal activity can and does take place in energy markets. But the degree to which the activity influences gas prices remains a source of contention.”

Harry Reid is planning a vote on cutting oil subsidies for next month:

History suggests that cutting oil subsidies will be tough, reports Ben Geman: “Senate Majority Leader Harry Reid (D-Nev.) on Wednesday pledged to bring up legislation that would repeal various incentives for major oil companies. But the last two Senate efforts to nix various industry tax breaks came nowhere near passage, although they were brought up as amendments to other bills and when prices were lower. In February, the Senate voted 44-54 against Sen. Carl Levin’s (D-Mich.) amendment that would pay for stripping the Section 1099 reporting provision from the health care law by repealing several incentives...On June 15, the Senate voted 35-61 against Sen. Bernie Sanders’ (I-Vt.) oil tax repeal amendment to an unemployment insurance bill.”

The EPA is toughening up water pollution rules, reports Juliet Eilperin: “The Obama administration announced Wednesday that it will impose stricter pollution controls on millions of acres of wetlands and tens of thousands of miles of streams. The new guidelines from the Environmental Protection Agency, which will be codified in a federal regulation later this year, could prevent the dumping of mining waste and the discharge of industrial pollutants to waters that feed swimming holes and drinking water supplies. The specific restriction will depend on the waterway. The question of which isolated streams and wetlands qualify for protection under the Clean Water Act has been in dispute for a decade. The Supreme Court has issued two decisions, and the George W. Bush administration issued guidance in 2003 and 2008 limiting the scope of the act.”

Daniel Esty and Michael Porter want you to pay more for gas: “The best way to drive energy innovation would be an emissions charge of $5 per ton of greenhouse gases beginning in 2012, rising to $100 per ton by 2032...Our proposal would apply to all greenhouse gas emissions, so that everybody, and every fossil-fuel-dependent form of energy, would be included. Coal-burning power plants would pay based on the emissions measured at their smokestacks. Oil companies would pay for every gallon of gas or oil delivered. Yes, these costs would be passed on to consumers, but this is what motivates changes in behavior and technological investments. Some will say that even the modest emissions charge we propose is politically impossible, given the death of the cap-and-trade bill that the House passed in 2009. But the ballooning federal deficit has created a new political imperative.”

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

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