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Wonkbook: The GOP's simple solution

By Ezra Klein,

William F. Buckley described the conservative impulse as the desire to stand athwart history and yell, “Stop!” But the candidates vying for the GOP’s 2012 presidential nomination want to go considerably further than that. They want to stand in front of history and yell, "Back!"

Toni Sandys

THE WASHINGTON POST

Rep. Michele Bachmann (R-Minn.) makes a point during the presidential debate sponsored by The Washington Post and Bloomberg at Dartmouth College in Hanover, New Hampshire, October 11.

The Republicans at the debate Tuesday evening were clear in their diagnosis of America’s economic woes: It’s the government’s fault. Rep. Michele Bachmann was quite explicit on this point. “If you look at the problem with the economic meltdown, you can trace it right back to the federal government,” she said. No one around the table disagreed. Quite the opposite, in fact. “I want to second what Michele said,” offered Newt Gingrich.

If the problem is government, then it stands to reason that the solution is less government. A lot less. And the discussion, at times, took the form of a game of one-upsmanship over just how much less government the candidate would promise.

“I introduced the bill to repeal Dodd-Frank,” bragged Bachmann, referring to the financial regulation overhaul.

“Repeal Dodd-Frank, and get rid of the capital gains tax,” countered Herman Cain.

“Dodd-Frank obviously is a disaster,” agreed Rep. Ron Paul. “But Sarbanes-Oxley costs a trillion dollars, too. Let’s repeal that, too!”

It was Gingrich, however, who emerged with the most creative solution to dissuade Congress from expanding the reach of government. “If you want to put people in jail,” he said, “you ought to start with Barney Frank and Chris Dodd.”

Protesters may want to occupy Wall Street, but the Republican candidates want the government to vacate it as quickly as possible.

The proposals to roll back the growth and complexity of the state did not stop with the financial sector. Former Utah governor Jon Huntsman promoted his plan to “clean all of the loopholes and the deductions” out of the tax code, which would mean removing the mortgage-interest deduction and the exclusion for employer-based health care, just for starters.

Cain scoffed at such incrementalism. His 9-9-9 plan, he said, “starts with throwing out the current tax code,” and then replaces it with a 9 percent sales tax, a 9 percent income tax and a 9 percent corporate tax.

Paul was not impressed. “What I hear here is just tinkering with the current system and not looking at something new and different,” he said, going on to suggest “a free-market economy without a Federal Reserve system.” That would be new and different.

Mitt Romney promised that on Day One, “all 50 states” would get a waiver to slip free from “Obamacare.” And on Day Two? “We have to repeal Obamacare,” he said.

If every idea uttered around moderator Charlie Rose’s table was made into law tomorrow, the financial-regulation bill would be gone, as would health-care reform and the Federal Reserve. The tax credits that support the housing market would vanish, and so too would Fannie Mae and Freddie Mac, the government-backed housing giants that guarantee the majority of new loans. There would be a balanced-budget amendment to the Constitution, which would require more than $1 trillion in spending cuts if it was to be satisfied in 2013, and China would be branded a currency manipulator.

It is hard to predict the effect all of that would have on the economy. The housing sector, which is already weak, would probably freeze. The financial markets, which depend heavily on the central bank’s management of the economy, would be in uncharted territory. The tax code would be completely different. Businesses would no longer be able to offer health care to their employees without paying taxes on it, which would kick the struts out from under the employer-based health-care market that provides insurance to more than 150 million Americans.

Of course, not every solution proposed at the debate will become law. And Romney, the candidate who leads in most of the polls, was more careful with his recommendations than his competitors were. Challenged by Cain to recite his 59 economic recommendations by heart and persuade the audience that they are “simple, transparent, efficient, fair and neutral,” Romney replied that “simple answers” are “oftentimes inadequate.”

This got a laugh out of Cain. “So, no, it is not simple, is what you are saying?” he asked.

But Romney didn’t back down. “To get this economy restructured fundamentally,” he said, “to put America on a path to be the most competitive place in the world to create jobs, is going to take someone who knows how to do it. And it is not one or two things. It is a good number of things.”

For Romney, however, like for all the Republican candidates, all of those things are really the same thing: less government. In that way, even Romney’s solution is simple. The question is whether our economic problems are simple — whether weak consumer demand and heavy household debt and millions of vacant homes and 9 percent unemployment and turmoil in Europe and paralysis in Washington can be solved by the steady application of small-government principles.

Top stories

1) Slovakia is derailing Europe's bailout plans, reports Anthony Faiola: "Tiny Slovakia defied its mightier neighbors Tuesday and rejected an expanded rescue fund to save Europe’s ailing debtor nations and troubled banks, effectively holding hostage the region’s plan to fend off a broader economic crisis. The 'no' vote after a marathon session of parliament in the sleepy Slovak capital of Bratislava threw up another stumbling block to Europe’s efforts to ease a debt crisis that is threatening the global financial system. After months of wrangling over what to do about nations such as near-bankrupt Greece, European leaders agreed to the expanded plan for a $588 billion rescue fund as far back as July. But its creation has been contingent on parliamentary approval in the 17 nations that share the euro, with all but Slovakia signing off."

2) The jobs bill failed to break a filibuster, report Rosalind Helderman and David Nakamura: "President Obama’s $447 billion jobs plan foundered in the Senate on Tuesday night, as a unified Republican caucus and a pair of Democrats joined to deny the proposal the 60 votes needed to allow it to proceed to full consideration. Obama will now use Republican opposition as part of a campaign to paint the GOP as obstructionists blocking his efforts to improve the economy while offering no alternative to create jobs...Senior White House officials said the vote was the first step to spur action on job creation. Next, they said, Obama will work with Senate leaders to break the jobs bill down into its parts -- which polls show are very popular with voters -- and challenge Republicans to reject each individually...Democratic Sens. Ben Nelson (Neb.) and Jon Tester (Mont.), who each face tough reelection bids, voted against the bill."

3) Last night's GOP debate focused on Herman Cain's tax plan, report Binyamin Appelbaum and Jackie Calmes: "A major source of contention at Tuesday night’s debate was Herman Cain’s 9-9-9 plan, which is basically a pair of proposals: deep cuts in the existing federal taxes on individual and corporate income, both of which would be reduced to a flat rate of 9 percent from existing rates that run above 30 percent, combined with a new 9 percent national sales tax...One clear feature of the proposal is that it would shift the burden of taxation, as Bruce Bartlett, a former official in the Reagan and first Bush administrations noted in a recent article in The New York Times. By cutting income tax rates and imposing a sales tax to make up the difference, the plan would reduce taxes on higher-income families and raise taxes on lower-income families -- including many families who pay no taxes under the current system."

4) Hedge funds won't face tougher oversight, report Tom Braithwaite and Shahien Nasiripour: "US regulators will examine non-bank financial groups with more than $50bn in assets to decide whether they are dangerous enough to merit tougher supervision and higher capital requirements - a threshold that will be a relief to most hedge funds and private equity firms. The Federal Reserve, Treasury and other regulators on the Financial Stability Oversight Council voted on Tuesday for criteria to designate companies as 'systemically important', a category that the industry has been lobbying hard to escape because of the potential hit to profits. The rule’s focus on size is likely to be good news for hedge funds - which typically fall below the $50bn threshold - and private equity firms such as KKR and Blackstone, but bad news for the insurance industry, where institutions from Prudential Financial to Allstate exceed the threshold. All banks with more than $50bn in assets are automatically included."

Top op-eds

1) Angela Merkel should fully embrace European integration, writes Wolfgang Ischinger: "The question now is whether she can generate support and enthusiasm among status-quo-loving Germans for the long-term solution -- yet another major change to the European Union treaty. Taking such a risk is not exactly Mrs. Merkel’s traditional way of doing business. She prefers to take the cautious step-by-step approach, leading from behind...Helmut Kohl...as chancellor in 1989 and 1990...surprised the country and the world by tightly embracing German reunification. It was a bold step forward, and it worked. If Mrs. Merkel does the same today by defining a forward strategy for the euro zone and the European Union, by proposing powerful new institutions like a European finance minister and a permanent European monetary fund, Germans might grumble, but they will follow."

2) Governments should start issuing "cocos," writes Barry Eichengreen: "Extending this idea to sovereign debt, government bond covenants could stipulate that if a sovereign’s debt/GDP ratio exceeds a specified threshold, principal and interest payments to bondholders would be automatically reduced. The idea is that if there is no adequate incentive to restructure once a crisis starts, it should be built in before the fact. 'Sovereign cocos' have the advantage that their activation would not constitute a credit event triggering the credit-default swaps written on the bonds. The existence of large quantities of CDS, together with uncertainty about who has written them, has fed the reluctance to proceed with restructuring. Sovereign cocos would assuage the fear of creating an AIG-like event, in which a too-big-to-fail underwriter is over-exposed."

3) Politicians should pledge to not take bank money, writes Harold Meyerson: "Here’s a modest proposal: Refuse all campaign contributions from banks, hedge funds, private equity funds and their partners and employees. From the whole financial sector. Sign a pledge to go off the sauce. Unlike the signatories to Grover Norquist’s no-tax pledge, lawmakers wouldn’t be asking voters to trust them once the election is over. They’d be honoring their pledge before the election. And unlike the Groverians, they wouldn’t surrender their powers of judgment and freedom of action once they’re in office. Indeed, their freedom of action would expand because they wouldn’t be indebted to 'what is far and away the largest source of campaign contributions to federal candidates and parties,' as the Center for Responsive Politics, which tallies all federal campaign contributions, characterizes the financial sector.

4) The 47% of Americans not paying income taxes just don't make enough to have to, writes Annie Lowrey: "The 53 Percent campaign does raise an interesting question: What is going on with that other 47 percent? Why are so few people paying income taxes?...The short answer is: deductions and poverty. About half of households within that 47 percent do not end up paying federal income tax because they qualify for enough breaks to cancel their tax obligations out. Of that group...30.4 percent are claiming credits for 'children and the working poor,' like the child-care tax credit...So what of the claim that the 53 percent are subsidizing the 99 percent? Well, just because 47 percent of households do not pay federal income tax does not mean that they do not pay any federal taxes. Indeed, almost everyone pays some: There are federal taxes for Social Security and Medicare, on gas, alcohol, and cigarettes."

Live interlude: Youth Lagoon's "July."

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

Still to come: Regulators have released a draft version of the "Volcker rule"; Massachusetts' Medicaid waiver could be in trouble; the Senate's at work on overhauling No Child Left Behind; green groups are suing the administration for its ozone rule decision; and dozens of adorable, hungry kittens.

Economy

Regulators have released a draft of the "Volcker rule," reports Brady Dennis: "Federal regulators unveiled a 298-page draft Tuesday outlining new rules to prevent big banks from trading for their benefit rather than on behalf of customers, nearly two years after the Obama administration endorsed such a measure. The 'Volcker Rule,' named after former Federal Reserve chairman Paul Volcker, would forbid banks from owning hedge funds and private-equity funds and prohibit them from making certain kinds of trades merely for their profit. It was included in the far-reaching Dodd-Frank financial overhaul legislation passed by Congress last year. A key motivation behind the rule was to preclude Wall Street banks that benefit from government safety nets, such as deposit insurance, from making certain types of risky trades that benefit only themselves. Some large banks have begun spinning off or shutting down their proprietary trading units ahead of the expected new regulations."

The Senate China currency bill finally passed, report Michael Crittenden and Bob Davis: "The U.S. Senate voted Tuesday to pass legislation targeting China's management of its currency, the yuan, underscoring U.S. frustration with one of its largest trading partners. Although the bill is unlikely to become law, the Senate debate has kept a public focus on the currency issue as the two countries remain at odds over China's control of the yuan. In recent days, the Chinese central bank has intervened in currency markets to drive up the value of the yuan against the dollar, a development in line with U.S. goals. A bipartisan group of 63 lawmakers voted in favor of legislation intended to force the White House to be more aggressive in seeking tariffs and other penalties against countries with 'misaligned' currencies, while 35 lawmakers opposed it."

A small business lending program isn't doing much, reports David Rogers: "To understand how hard it is for Washington to make a dent in today’s economy, look back at Treasury’s Small Business Lending Fund, a one-year experiment that closed its window last month after failing to use but a fraction of the $30 billion in capital approved by Congress. Gene Sperling, now President Barack Obama’s top economic adviser, had championed the idea when he served in Treasury...Sen. Mary Landrieu (D-La.)...won a late-night 60-37 vote that saved the initiative in July 2010. Yet just $4.03 billion made it out the door before the program shut down Sept. 27. Indeed, the first dollars weren’t approved until nine months after enactment and almost a full year after Landrieu’s stand. And two-thirds of the 933 applicants came away empty-handed, leaving scores of banks blindsided without time to appeal to Treasury."

Elizabeth Warren has come to represent everything that Wall Street fears, writes Suzanna Andrews: "Warren’s opponents lacerated her. She was called incompetent, power-hungry, ignorant, a media whore, and, in a widely televised moment, a liar, by a Republican congressman during a hearing in May. 'It was like she was the Antichrist,' says Roger Beverage, the president of the Oklahoma Bankers Association and one of the few bankers who publicly supported her. She had become the lightning rod for the opposition to the C.F.P.B. Says Barney Frank, the Massachusetts congressman who is the 'Frank' in 'Dodd-Frank,' 'It’s partly sore-losership. They are blaming her for something they all swore would never happen.” But it was also because she was eloquent and convincing, and relentlessly tough in her criticism of Wall Street and its enablers."

Talks over Greece are centered on the size of the "haircut" it will receive, reports Costas Paris: "Efforts to resolve Greece's financial crisis now are focusing on asking banks to take a major write-down on their holdings of Greek government bonds. These write-downs, or 'haircuts,' could range between 40% and 60% depending on the modality used, people with direct knowledge of Greece's talks with European governments and the International Monetary Fund say. The question remains whether European governments and the European Central Bank also will have to accept losses to provide Greece with debt relief. On Tuesday, Greece's international creditors--the International Monetary Fund, the European Commission and the European Central Bank--cleared the way for Athens to receive another slice of aid needed to stave off a Greek default."

Movie preview interlude: The first trailer for The Avengers movie.

Health Care

Massachusetts' Medicaid waiver is in jeopardy, reports Jason Millman: "The extension of the Medicaid waiver that allows Massachusetts to operate its landmark health care reform has hit a roadblock over funding for 'safety net' providers, who are facing a growing demand for care even though the state’s coverage expansion was supposed to limit their burden of caring for the poor. The waiver, which was part of the framework for the state reform, has been extended since June 30, when the current three-year agreement with the Centers for Medicare & Medicaid Services was set to expire. Renewal is on hold as Massachusetts and CMS try to settle federal payments to the safety net institutions, according to sources who have been briefed on the closely guarded negotiations. Many of the patients seeking care at these hospitals and community clinics do have health insurance now -- but many are covered by Medicaid, so payment rates are low."

Orrin Hatch is backing an administration policy on Medicare, reports Sahil Kapur: "Senate Finance Ranking Member Orrin Hatch said Part D drug rebates should be considered as one of the many ways to bring down the country's deficit...The proposal to extend Medicaid drug rebates to low-income subsidy beneficiaries is a critical part of President Obama’s deficit-reduction proposal. Not only does the proposal constitute the single largest portion of the president's $320 billion in Medicare and Medicaid cost-savings ideas, it is one of the few proposals that would take place immediately. That means that in the first three years of deficit reduction under the president's proposal, the Part D rebates account for roughly 80 percent of all health care cuts, a drug lobbyist said. Others targeted for cuts will have time to reverse them, and the drug makers will get stuck having paid for most of the bill, the lobbyist suggested."

Domestic Policy

A No Child Left Behind overhaul bill has been introduced in the Senate, reports Stephanie Banchero: "A top Senate Democrat introduced a draft bill Tuesday that would significantly alter the No Child Left Behind education law and drastically roll back the federal government's role in public schools. The proposal from Sen. Tom Harkin (D., Iowa), chairman of the Senate Health, Education, Labor and Pensions Committee, would shift the federal focus from intervening in all struggling schools to targeting only the bottom 5% and those with significant achievement gaps between poor, minority students and their more affluent peers. It would eliminate the federally mandated achievement goals that schools must now meet, and get rid of the sanctions attached to failing schools, such as requiring them to provide free after-school tutoring or closing them down if they fail to improve."

Harry Reid's procedural maneuver could set the stage for more rule changes, reports Manu Raju: "While the actual change amounted to a relatively minor tweak of Senate floor procedures, the tactics Reid used to force through a rules change by 51 votes -- rather than 67 votes -- could be replicated by future majorities. That means if future majorities believe Senate minorities are unfairly abusing Senate rules, they’ll be more apt to find ways to bypass the 60-vote requirement. And that could have enormous implications for major national laws -- like health care reform -- which could suddenly face a simple majority for repeal if Republicans take control of the Senate...By a simple majority of 51 senators, Democrats established a new precedent in the body. It’s a rarely used maneuver to overturn the parliamentarian -- it hasn’t happened in 11 years -- and it’s been avoided by both parties for fear of the consequences."

Bill Daley's leaving after the election, reports Scott Wilson: "William Daley, the White House chief of staff, told the NBC Chicago television affiliate this week that he will leave his post after the November 2012 election. 'I made a commitment to the president thru his re-election, which I’m confident he will do, and then my wife and I will return to Chicago,' Daley told the television station, which posted the interview on its web site. Daley took the job in the fall of 2010 when his predecessor and close friend, Rahm Emanuel, left the White House to run successfully for mayor of Chicago. Daley did not know Obama well at the time, but he left a senior position at JPMorgan Chase to take the senior White House job. Some White House officials say Daley does not particularly like it, and his comments this week seem to provide supporting evidence of that sentiment."

The administration is speeding up infrastructure projects, reports Adam Snider: "The Obama administration picked 14 projects Tuesday that will undergo expedited permitting and environmental reviews with the goal of getting construction workers on the job site sooner than normal. The projects include replacing the Tappan Zee Bridge in New York, new equipment for the air traffic control system at two Houston airports, two water treatment plants in New Mexico and a retail and affordable housing complex in D.C. Following a recommendation from his Council on Jobs and Competitiveness, Obama issued an executive order in late August asking federal agencies to identify projects that could be expedited...The 14 projects will create tens of thousands of jobs, the White House said."

Adorable or scary interlude: Dozens of adorable kittens cry for food.

Energy

Green groups are suing the administration over its ozone rule reversal, reports John Broder: "Five health and environmental groups sued the Obama administration on Tuesday over its rejection of a proposed stricter new standard for ozone pollution, saying the decision was driven by politics and ignored public health concerns. The groups said that President Obama’s refusal to adopt the new standard was illegal...George W. Bush overruled the Environmental Protection Agency’s scientific advisory panel and set the permissible ozone exposure at 75 parts per billion. The current E.P.A. administrator, Lisa P. Jackson, wanted to set the standard at 70 parts per billion, near the maximum level recommended by the advisory panel. But President Obama rejected that proposal on Sept. 2, saying that compliance would be too costly and create too much regulatory uncertainty for industry."

Green energy projects in general aren't producing results fast, reports Vauhini Vara: "While Solyndra LLC's flameout has fueled criticism of federal initiatives to encourage alternative power sources, the solar-panel maker is hardly the only disappointment among U.S.-backed energy programs... program to install insulation and other energy-saving improvements in homes that received $185.8 million has been hobbled by delays, and a plan to remodel buildings to be more energy-efficient, which received $113 million, has struggled to persuade enough home and building owners to upgrade, according to California officials. Meanwhile, $15 million went to train workers in skills such as solar-panel installation, but 62% of that program's alumni remain jobless, according to the state Employment Development Department."

The BP-spurred reorganization of oil regulators has been completed, reports Talia Buford: "MMS begat the Bureau of Ocean Energy Management, Regulation and Enforcement -- a transitional agency meant to bridge the gap, and separate the conflicts of interest -- while Interior undertook a more intensive restructuring...This month, Interior completed the nearly 18-month reorganization when it officially established the Bureau of Ocean Energy Management and the Bureau of Safety and Environmental Enforcement as successor agencies to MMS. BSEE will oversee permitting, inspections, enforcement and safety of offshore oil and gas operations, while BOEM will handle energy leasing and planning in federal waters...Some environmentalists and industry officials are leery that the reorganization will...either be plagued with the same problems as MMS or choke industry development with red tape and bureaucracy."

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

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