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Wonkbook: Will 2012 feel like a comeback or a setback?

By Ezra Klein,

Quick! Was 2011 or 2010 a better year for the economy?

Scott Eells

BLOOMBERG

Traders work at the New York Stock Exchange in New York Feb. 29. U.S. stocks fell, after erasing earlier gains, as Federal Reserve Chairman Ben S. Bernanke's remarks to Congress damped speculation of more quantitative easing to stimulate growth in the world's largest economy.

The answer is 2010, at least if you're looking at growth. That year -- widely considered a disappointing one for the recovery -- saw three percent economic growth. As for 2011, even with the strong fourth quarter, growth was only 1.7 percent. That's not so impressive. And yet this, right now, feels like a recovery. It feels like we turned the corner in 2011. 2010, meanwhile, felt like a setback.

That's because we judge the economy based on its trend more than its level. The strongest growth in 2010 came early in the year. In the first quarter, the economy grew at an annualized rate of 3.9. By the fourth quarter, it had slowed to 2.3 percent. We lost speed, and it felt like we were losing our recovery.

In 2011, the trend was just the opposite. The first quarter was terrible. Growth was 0.4 percent. But by the fourth quarter, growth had picked up to 3 percent. We had gained speed, and it felt like we were finally recovering. Still does, in fact.

President Obama's reelection message is that America is making an economic comeback. And the facts back him up. The country is richer now that it was before the financial crisis, or than it's been at any other point in its history.

But the key to his message working is that, in November, it feels like we're coming back. And a lot of that will have to do with the distribution of growth this year. It's easy to imagine 2012 beating 2011's 1.7 percent growth, but if that growth comes mostly in the first two quarters, and the economy slows a bit in the back half of the year -- perhaps due to a summer spike in gas prices -- it will be bad news for Obama. Conversely, if the second quarter is a bit slower, but the economy accelerates in the third and fourth quarters, it will be very good news for Obama.

(For more on the political-science evidence behind this point, head here.)

Top stories

1) The economy did even better in Q4 2011 than we thought, reports Lucia Mutikani: "The economy grew slightly faster than initially thought in the fourth quarter and a gauge of factory activity in the Midwest hit a 10 month-high in February, pointing to underlying strength in the economy. Gross domestic product expanded at a 3 percent annual rate, the quickest pace since the second quarter of 2010, the Commerce Department said on Wednesday in its second estimate. The reading, which was up from the 2.8 percent pace the government reported last month and reflected modest upward revisions to almost all components of GDP, added to the recent run of fairly upbeat economic reports. The tone of the GDP report was further bolstered by upward revisions to income and savings data, which should help support consumer spending in the face of rising gasoline prices...A steady stream of fairly upbeat data ranging from employment to manufacturing has caused analysts to temper expectations of a sharp pullback in growth this quarter. First-quarter GDP growth is seen between 2 and 2.5 percent."

@JustinWolfers: "With GDP growing at 3%, it's no surprise that US unemployment is falling. What remains (mildly) surprising is the pace of this improvement."

2) $5 gas isn't beyond the realm of possibility, reports Clifford Krauss: "Gasoline for $5 a gallon? The possibility is hardly far-fetched. With no clear end to tensions with Iran and Syria and rising demand from countries like China, gas prices are already at record highs for the winter months -- averaging $4.32 in California and $3.73 a gallon nationally on Wednesday, according to AAA’s Daily Fuel Gauge Report. As summer approaches, demand for gasoline rises, typically pushing prices up around 20 cents a gallon. And gas prices could rise another 50 cents a gallon or more, analysts say, if the diplomatic and economic standoff over Iran’s nuclear ambitions escalates into military conflict or there is some other major supply disruption...Although prices plunged late in 2008 as the financial crisis took its toll and the recession deepened, that kind of sharp increase could happen again as summer approaches."

@drgrist: High gas prices are caused by [policies I oppose for other reasons] & could be lowered by [policies I support for other reasons].

3) Regulators are likely to delay implementation of the 'Volcker rule', reports Shahien Nasiripour: "US bank regulators will probably delay implementation of the so-called 'Volcker rule', a small victory for bankers who have objected to a provision that will most likely crimp their trading profits. Ben Bernanke, Federal Reserve chairman, told a congressional committee that the Fed probably will not have the rule in effect by its congressionally-mandated start date in July...Mr Bernanke told lawmakers that the rule, a part of the Dodd-Frank overhaul of US financial regulations in 2010, allows for regulators to delay the provision’s implementation by two years. As regulators received some 17,000 comments by the February deadline on the proposed rule from industry participants, foreign regulators and concerned members of the public, it will take some time for policymakers to tailor the proposal into a final rule."

4) Obama, though running unopposed in his primary, is outspending even Romney, reports Jonathan Salant: "During 2012’s primary campaign, one presidential candidate has bought more advertising, hired more people and spent more on a grassroots organization than any other White House hopeful. If money is ammunition in politics, President Barack Obama so far is outgunning all the Republicans vying to challenge him, building a national network of staff and volunteers even while he’s unopposed for the Democratic nomination. Through Jan. 31, the Obama campaign’s payroll spending was more than twice the total for the four remaining Republican candidates combined. With the general election still more than eight months away, Obama’s re-election committee has spent $66 million overall, almost 20 percent more than the $56 million outlay by the best-financed Republican, former Massachusetts Governor Mitt Romney."

5) Wall Street bonuses shrunk in 2011, reports Brett Philbin: "Wall Street cash bonuses for 2011 are expected to have tumbled 14% from a year earlier and will likely hit their lowest level since the financial crisis of 2008, according to a report released by New York state Comptroller Thomas DiNapoli. New York securities firms will pay employees $19.7 billion in cash bonuses, down sharply from $22.8 billion in 2010. A smaller bonus pool is the latest sign of pain for the big banks, which have been culling their ranks and reducing costs since last spring on the European debt crisis, a slowing U.S. economy and lower client trading volumes. It also has big implications for the budgets of New York state and New York City...According to the report, the average cash bonus fell 13% to $121,150, but declined slightly less than the total cash bonus pool because the pool was shared among fewer workers than a year ago."

...But Wall Street profits are down even more, report Josh Boak and Ben White: "Wall Street profits were down by half in 2011 and cash bonuses fell too -- and many in the industry say tightened oversight pressed by President Barack Obama is the reason. Profits at banks and brokerage houses tumbled to $13.5 billion last year from $27.6 billion, according to a report out Wednesday from the Office of the New York State Comptroller Tom DiNapoli. The report also found that average cash bonuses slid 13 percent to $121,000, while firms laid off 4,300 employees during the last nine months of 2011...Financial-sector leaders had predicted that profits would be down as a result of adapting to hundreds of new rules imposed by the 2010 Dodd-Frank reforms -- regulations directed at preventing a repeat of the catastrophic meltdown that resulted in the massive federal bailouts...But industry leaders have made clear that Dodd-Frank -- which has yet to be fully implemented -- is not the sole cause of declines in profitability at the broker-dealer arms of banks."

Top op-eds

1) Mitt Romney's policies overwhelmingly benefit the wealthy, writes E.J. Dionne Jr.: "Romney promised to enact an 'across-the-board, 20 percent rate cut for every American,' pledged to 'repeal the alternative minimum tax' and said he’d abolish the 'death tax' (conservative-speak for the estate tax paid by only the most affluent Americans.) He’d lower the corporate tax rate to 25 percent, 'make the R&D tax credit permanent to foster innovation' and 'end the repatriation tax to return investment back to our shores.'...That 'across-the-board' tax cut sounds fair and balanced. But a Tax Policy Center study in November of the impact of a 20 percent across-the-board rate cut showed that the wealthiest 0.1 percent would get an average tax reduction of $264,000. The poorest 20 percent would get $78, and those smack in the middle would get $791...My friend and colleague Matt Miller wrote recently that 'everyone knows Romney is basically a pragmatic centrist.' No, 'everyone' does not know this. The evidence from his tax plan, in fact, is that he’s an extremist for the privileged."

2) The middle-class welfare state is intentionally invisible, writes Ezra Klein: "The more a government social program benefits wealthier Americans, the less obtrusive it is. We design policies for the poor in ways that make it hard to escape the knowledge that the government is providing help. But richer Americans rely on programs that are 'submerged.'...If Americans who either rent or own their homes outright were asked to accept a tax increase of $150 billion in order to subsidize the mortgage payments of their indebted friends, it seems unlikely they would find that appealing. The same goes for asking Americans who don’t get health insurance through their work to spend $100 billion or so annually subsidizing the benefits for those who do. Of course, that’s exactly what’s happening right now, but it’s hidden in the tax code, so most Americans don’t know it and can’t protest it. It is in part because these policies aren’t visible that they’re so difficult to change. That’s the thing about submerging a large part of your welfare state. Sink it deep enough, and it becomes almost impossible to dredge up."

3) Premium support is the best way to reform Medicare, writes Fred Barnes: "Over the past year, an entitlement revolution has taken place on Capitol Hill. It has gotten relatively little attention from the media. Yet its implications for the budget deficit and the health care of senior citizens are enormous. The revolution involves Medicare, the health-care program for the elderly and the single biggest cause of America's looming debt crisis. Reform of Medicare would be achieved by a policy known as 'premium support.' It would bring consumer choice and spending restraint to the beleaguered program...Medicare in its current form is open-ended, its expenditures uncontrolled and unsustainable. With premium support, the cost of Medicare would be capped. Its payment would rise with the rate of inflation or GDP growth, or slightly above. The salience of premium support doesn't depend on who wins the White House in November. It is bound to be a major part of budget negotiations. Without it, serious deficit reduction would be almost impossible. With it, a debt crisis like Europe faces today is avoidable."

4) The right to organize a union should be a civil right, write Richard Kahlenberg and Moshe Marvit: "From the 1940s to the 1970s, organized labor helped build a middle-class democracy in the United States. The postwar period was as successful as it was because of unions, which helped enact progressive social legislation from the Civil Rights Act to Medicare. Since then, union representation of American workers has fallen, in tandem with the percentage of income going to the middle class. Broadly shared prosperity has been replaced by winner-take-all plutocracy...In fact, the greatest impediment to unions is weak and anachronistic labor laws. It’s time to add the right to organize a labor union, without employer discrimination, to Title VII of the Civil Rights Act, because that right is as fundamental as freedom from discrimination in employment and education."

5) Debt is at the heart of our housing troubles, write Atif Mian and Amir Sufi: "Why is housing holding back the economy? It is because most homeowners use substantial amounts of debt to purchase houses....compare the drop in wealth due to housing post-2007 with the decline in stock-market wealth when the dot-com bubble burst in the early 2000s. The housing collapse has wiped out about $6 trillion in wealth. The dot-com meltdown resulted in a comparable loss of $5.5 trillion in wealth. Yet the bursting of the Internet bubble wasn’t as disruptive for aggregate spending. Why? Because the loss of value in the dot-com bust wasn’t associated with a highly leveraged sector.."

Instrumental hip hop interlude: J Dilla's "Lightworks".

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Still to come: Ben Bernanke testified to Congress; IPAB repeal moves forward; more states want out of NLCB; the EPA's CO2 regulations are likely to hold up in court; and an afternoon in the life of a dog.

Economy

Bernanke sees modest growth for 2012, reports Binyamin Appelbaum: "The Federal Reserve chairman, Ben S. Bernanke, said on Wednesday that the central bank retained its modest expectations for the American economy this year, despite some recent signs of stronger growth. Mr. Bernanke said the recent rise in oil prices also had not shifted the Fed’s view that the economy would expand 2.2 to 2.7 percent this year, about the same pace as during the second half of last year...Some economists see evidence that the pace of growth is increasing. The Bureau of Economic Analysis, an arm of the federal government, said on Wednesday that the economy grew at an annual rate of 3 percent in the last three months of 2011, somewhat higher than its initial estimate of 2.8 percent. The unemployment rate has declined to 8.3 percent in January from 9.1 percent last July."

@BCAppelbaum: Bernanke: "Analytically you're correct, but quantitatively it's trivial." YEAH! SIT DOWN!

The insider trading bill is limping towards passage, reports Seung Min Kim: "Congress is about to show what happens when it’s pressured into drafting new ethics rules for itself: not a whole lot. Much ballyhooed by politicians but warped by legislative sausage-making, a bill to ban insider trading by members of Congress appears headed for adoption. But even the authors of the STOCK Act say it won’t do much to curb the rash of bad behavior that’s sullied Congress’ public image and left it limping toward a single-digit public approval rating...The bill’s most far-reaching provision -- to regulate the the flowering industry of consultants who provide inside legislative knowledge to investors was stripped out by House Republicans. That prompted Rep. Louise Slaughter (D-N.Y.), who’s been working on the legislation for years, to complain that the bill had been 'hijacked' -- a charge parroted by Republican Sen. Chuck Grassley of Iowa."

Fannie Mae will ask taxpayers for more funding, reports Shahien Nasiripour: "Fannie Mae, the US government-controlled mortgage financier, will ask taxpayers for another $4.6bn after recording a $2.4bn loss last quarter, the company has said. The latest appeal brings its total request from the US Treasury to $116bn, of which $20bn is due back to taxpayers in the form of a dividend as part of its government rescue...The mortgage financier’s losses will probably put more pressure on the company and on its regulator, the Federal Housing Finance Agency. Fannie Mae, Freddie Mac and the FHFA are in the middle of a broader debate centred on just how much support the US government should provide to America’s property market. Democrats, including the Obama administration, want the FHFA to allow for Fannie and Freddie to reduce borrowers’ mortgage principal, a type of mortgage restructuring both have thus far refused to do. Republicans fear that principal reduction modifications will deepen Fannie Mae’s losses, hurting its main owner, US taxpayers."

Greece is rushing to approve new spending cuts, reports Niki Kitsantonis: "The Greek government rushed Wednesday to complete a spate of new laws and measures before a European Union summit meeting, where its progress in imposing more austerity in exchange for a second bailout is to come under scrutiny. Prime Minister Lucas D. Papademos arrived in Brussels on Wednesday, a day before the two-day meeting, to discuss his government’s efforts to put the Greek economy back on track, as well as ways to make better use of European Union development funds, a government official said...In Athens, meanwhile, lawmakers were preparing for the third vote in less than a week on a number of 'prior actions' demanded by foreign creditors. In the early hours of Wednesday, Parliament approved by a vote of 202 to 80 a new round of cuts to state pensions that exceed 1,300 euros ($1,750) a month. The cuts amount to 12 percent of the amount over 1,300 euros, as well as a reduction of 10 percent to 20 percent to supplemental pensions."

@goldfarb: I don't think it can be said enough that state and local gov't layoffs are a major drag on the economic recovery.

Robots doing cool stuff interlude: Flying robot quadrotors play the James Bond theme.

Health Care

An effort to repeal the IPAB is advancing, reports Julian Pecquet: "A House subpanel on Wednesday easily approved a measure to repeal a Medicare cost-cutting panel derided by Republicans as a 'rationing board.' Two Democrats -- including the panel’s ranking member -- crossed the aisle and joined Republicans in voting to nix the Independent Payment Advisory Board (IPAB)...The Medicare board is central to Obama’s healthcare reform law because it’s one of the few provisions aimed at reining in federal health costs. Far from endorsing its repeal, the president actually proposed strengthening the board’s powers last year...The provision in the health law that established the Medicare panel originated with Sen. Jay Rockefeller (D-W.Va.) and was never popular in the House, where 17 Democrats are among the repeal bill’s 226 co-sponsors. As a result, the bill is expected to sail through the House, where a Republican leadership aide told The Hill the goal is to pass it in conjunction with Supreme Court arguments on the health law’s constitutionality."

Catholic employers have been navigating state birth control laws for years, reports Louise Radnofsky: "Roman Catholic employers are pushing back against an impending federal mandate on contraceptive coverage partly because the rule would remove an escape hatch that let them opt out of similar state laws that passed in earlier years. The Obama administration's decision requiring that employers, including large Catholic institutions, provide contraception coverage without out-of-pocket costs in their insurance plans has prompted calls by bishops to overturn the regulation. The Senate is set to vote Thursday on a proposal to effectively reverse the decision. But there was less outcry when states first passed laws with similar requirements in the 1990s, according to legislators and some Catholic institutions. A large reason for the difference is that employers were able to opt out of the state requirements by choosing to self-insure--a coverage model in which an employer assumes responsibility for its own health costs."

@pourmecoffee: The Senate's 83 men and 17 women will vote tomorrow on the Blunt Amendment to limit access to contraception.

Domestic Policy

More states asked for NLCB waivers, reports Stephanie Banchero: "Twenty-six more states asked to be excused from key requirements of the No Child Left Behind Act, an exemption that would curb the education law's impact considerably. The states, from Washington to Mississippi to New York, were joined by the District of Columbia. Last month, the Obama administration granted waivers for all 11 states that applied in the first round. If it grants waivers to all the new applicants, three quarters of the states would be exempt. Signed into law with bipartisan support in 2002, No Child Left Behind is now reviled by Republicans, who say it gets the federal government too involved in education, and by Democrats, who complain that its rigid definitions of performance have seen almost half the nation's schools listed as failures. But Congress has been unable to agree on an overhaul. In response, the administration decided to let states get around central tenets of the law, such as ensuring that 100% of students pass reading and math exams by 2014."

Colleges are redoubling their efforts to match students with jobs, reports Steven Greenhouse: "Ever since the deep recession hit four years ago, many colleges have been rethinking their continuing education programs, straining to figure out how best to help the many unemployed Americans who have looked to them as a lifeline. With the unemployment rate still stubbornly high, this rethinking has led to a powerful trend in which many schools, whether prestigious state universities or workhorse community colleges, are trying harder than ever to tailor their continuing-education offerings to where the job openings are -- and where the jobs of tomorrow will be...All told, the nation’s employers have 3.4 million job openings, according to the Bureau of Labor Statistics -- a number of jobs that if filled could cut the unemployment rate, currently 8.3 percent, to around 6 percent."

@irincarmon: Ratio of hourly wage of college grad to HS grad in 1979: 1.5. In 2009, 1.95.

Adorable animals living life to the fullest interlude: A look inside one dog's afternoon.

Energy

The EPA's emissions rules are likely to be upheld in court, reports Brent Kendall: "After a two-day hearing, a federal appeals court appeared inclined to uphold key parts of the Obama administration's first-ever rules for reducing greenhouse gases, but it wasn't clear whether the court would endorse the government's entire approach. During three hours of oral arguments Tuesday, a three-judge panel for the Washington, D.C., appeals court made clear that industry challengers faced a uphill climb in attacking the Environmental Protection Agency's 2009 finding that greenhouse gases endanger public health and welfare...The appeals court also appeared ready to uphold the EPA's greenhouse-gas standards for cars. Auto makers sided with the government and supported those rules in court. However, the EPA appeared to have a rockier ride during a second day of court hearings Wednesday that examined the manner in which the agency tailored initial greenhouse-gas permitting rules for power plants and other industrial facilities."

The House GOP may introduce an 18-month transportation bill, report Burgess Everett and Adam Snider: "House leaders are 'having conversations' with members about an 18-month transportation bill, an aide with GOP whip Kevin McCarthy (R-Calif.) confirmed Wednesday...The proposal now undergoing whip counts will likely come in below the Senate’s $109 billion bill and walk back the controversial decision to eliminate dedicated federal transit funding from the Highway Trust Fund. The bill would also likely retain project streamlining provisions and a link to increased domestic energy production, a GOP leadership aide confirmed. It still might not be an easy sell to an often fractious Republican conference. A source with knowledge of the count said the whip check was a 'bit bumpy.'"

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

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