Wonkbook: U.S. threatened with another credit downgrade

September 12, 2012

Welcome to Wonkbook, Ezra Klein and Evan Soltas's morning policy news primer. To subscribe by e-mail, click here. Send comments, criticism, or ideas to Wonkbook at Gmail dot com. To read more by Ezra and his team, go to Wonkblog.

Wonkbook dashboard

RCP Obama vs. Romney: Obama +3.6%; 7-day change: Obama +2.5%.

RCP Obama approval: 49.6%; 7-day change: +1.9%.

Intrade percent chance of Obama win: 61.2%; 7-day change: +4.2%.

Top story: Are you in the mood for a downgrade?

The U.S. just received another warning of a credit downgrade. "Moody’s Investors Service said Tuesday that it would most likely cut its Aaa rating on United States government debt, probably by one notch, if Washington’s budget negotiations failed. The warning came a little over 13 months after Moody’s rival, Standard & Poor’s, took the drastic step of stripping the United States of its AAA rating on its bonds after partisan wrangling over raising the government’s debt limit led the nation to the brink of default...In its report on Tuesday, Moody’s said it was concerned that the partisan stalemate would continue, saying it was difficult to predict when Congress would reach a deal on the budget." The Associated Press.

Read: Moody's statement.

@pdacosta: It's that time of year: Moody's says would likely review U.S. Aaa credit rating if debt limit reached.

Moody's is saying that they want real cuts, no dodge to cliff. "[I]t said if Congress repeals looming spending cuts and tax increases set to begin next year and doesn't replace them with large-scale deficit-reduction measures, the government would lose its top-notch rating...In its report, Moody's said negotiations should 'lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt' to the size of the economy "over the medium term." It didn't express a preference for whether new policies should rely more heavily on tax increases or spending cuts." Damian Paletta in The Wall Street Journal.

@TheStalwart: This is the part where Moody's threatens to destroy the American economy.

The risk of shutdown is falling, but not of the fiscal cliff. "Congress appears on track to avert a politically perilous fight over a government shutdown, but the top House Republican said Tuesday he has little confidence that lawmakers will be able to prevent an economically damaging combination of tax increases and spending cuts due to take effect in the new year...Congress, which returned to work this week after a five-week recess, is preparing to pass just one major bill before returning to the campaign trail next month: a $550 billion measure to fund the government through March. This would prevent the government from halting nonessential services when its fiscal year ends Sept. 30, even though Congress failed to pass a single one of the 12 spending bills that are required each year to fund the various departments and agencies."Corey Boles and Damian Paletta in The Wall Street Journal.

@Goldfarb: Fiscal cliff idea: Don't end it. Keep it. But weight it more heavily at the back-end over a 10 year window. QED.

The Democratic congressional leadership is confident a deal can be worked out. But the GOP leadership is far less certain. "House Speaker John Boehner said Tuesday that he’s not confident Congress can reach a budget deal and avoid a downgrading of the U.S. debt rating...'I’m not confident at all,' said Boehner...'I’m hopeful we will reach some kind of agreement,' countered Reid, D-Nev., suggesting that the results of the election will weaken the GOP’s resolve to block tax increases on wealthier earners and that Republicans will be more willing to compromise. 'I believe that once the elections are over, the tea party’s strength will be significantly weakened,' Reid added." The Associated Press.

Top op-eds

ORSZAG: The extent of waste in healthcare spending is remarkable. "Last week, two important reports underscored the potential for improving the value of health care in the U.S...The first of these, 'Best Care at Lower Cost: The Path to Continuously Learning Health Care in America,' issued by the Institute of Medicine, highlights two crucial facts. The first is that the health system provides a great volume of care that doesn’t help patients...Estimates vary on waste and excess health care costs, but they are large -- possibly amounting to more than $750 billion in a single year...Second, medicine is becoming so complex that it is virtually impossible for an individual doctor to keep pace -- especially without help from computers, the institute says." Peter Orszag in Bloomberg.

TURNBULL AND WAKEMAN: Why financial markets need 'naked' credit default swaps. "Many regulators, politicians and academics consider credit default swaps to be insurance contracts. These folks then use the insurable-interest rule -- which limits life-insurance claims to individuals adversely affected by the death of the insured—to recommend banning 'naked' CDS purchases, that is, buying sovereign credit default swaps without holding the underlying sovereign bond...The premise that only sovereign-debt holders suffer when a country defaults is false. Many other agents are adversely affected by a default, and they should be allowed to purchase sovereign CDS...Rather than destabilizing the market for euro-zone sovereign debt, credit default swaps, by providing a mechanism to shift risk, grow the market and reduce government financing costs." Stuart M. Turnbull and Lee M. Wakeman in The Wall Street Journal.

GRAMM AND TAYLOR: The hidden costs of monetary easing. "Inflation is not, however, the only cost of these unconventional monetary interventions. As investors try to predict the timing and effect of Fed policy on financial markets and the economy, monetary policy adds to the climate of economic uncertainty and stasis already caused by current fiscal policy. There will be even greater costs when the economy begins to grow and the Fed, to prevent inflation, has to reverse course and sell bonds and securities to the public...Rational decision making comes down to a comprehensive measure of cost and benefits. The Fed's effort to use monetary policy to overcome bad fiscal and regulatory policy long ago reached the point of diminishing returns. The benefits of a third round of quantitative easing will almost certainly be de minimis. But when economic growth does return, Fed actions will have to be reversed in an era of rising interest rates, and the marginal cost of a QE3 tomorrow will almost certainly be far greater than the marginal benefit today." Phil Gramm and John Taylor in The Wall Street Journal.

PORTER: No need to raise fuel economy standards. Rather, hike the gas tax. "Just the other day, President Obama unveiled another example of how our hostility to anything that even remotely looks like a tax is leading us down the wrong path, ultimately making us worse off. The president proudly announced energy-efficiency standards negotiated with the nation’s carmakers, which will have to nearly double the average fuel economy of cars and light trucks sold, hitting 54.5 miles a gallon in 2025...What the government didn’t mention is that these improvements come at a high cost for drivers, automakers and society in general. They could be achieved much more cheaply by raising taxes on gasoline to a level comparable to that of pretty much every other industrialized nation. The new mileage rules are so expensive, in fact, that even if one factors in all the expected gains from the policy — like less damage from climate change and fewer deaths from respiratory disease — many economists think that the costs actually outweigh the benefits." Eduardo Porter in The New York Times.

FRIEDMAN: Why innovation needs protection. "When there is trust in society, sustainable innovation happens because people feel safe and enabled to take risks and make the long-term commitments needed to innovate. When there is trust, people are willing to share their ideas and collaborate on each other’s inventions without fear of having their creations stolen." Thomas L. Friedman in The New York Times.

Top long reads

Michael Lewis' oh-so-long-awaited profile of President Obama: "From the time his wife goes to bed, around 10 at night, until he finally retires, at 1, Barack Obama enjoys the closest thing he experiences to privacy: no one but him really knows exactly where he is or what he’s up to. He can’t leave his house, of course, but he can watch ESPN, surf his iPad, read books, dial up foreign leaders in different time zones, and any number of other activities that feel almost normal. He can also wrestle his mind back into the state it would need to be if, say, he wanted to write."

Math interlude: So the discipline may be near a major breakthrough.

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

Still to come: low-paying jobs are only thing on offer since recession; a primary care provider pays for his own poll; a Texas court blocks state's voter ID law; the GOP's rightward shift on energy; and stunning digital mapping of the nation's winds.

Economy

Is endless economic growth about to, well, end? "there’s another, more controversial theory making the rounds these days. It’s possible that our expectations for future economic growth are just too high. Perhaps the last century or so of strong economic growth in the United States was all just an aberration that’s now coming to an end. Before the Industrial Revolution took off in Great Britain, after all, the world barely experienced anyeconomic growth. Then we got a whole bunch of nifty, life-changing technologies — from electricity to cars to airplanes. But what if that process has run its course, and we’re now entering another low-growth phase?" Brad Plumer in The Washington Post.

The trade deficit is expanding again. "The United States trade deficit grew to $42 billion in July, widened by fewer exports to Europe, India and Brazil that offset a steep decline in oil imports. The Commerce Department said Tuesday that the trade deficit increased 0.2 percent from June’s deficit of $41.9 billion. American exports fell 1 percent, to $183.3 billion. Sales of autos, telecommunications equipment and heavy machinery all declined. Imports dropped 0.8 percent, to $225.3 billion." The Associated Press.

Cheap natural gas causes coal plants to shut down. "Coal has been losing ground to natural gas ever since a boost in shale-gas production sent the price of natural gas tumbling four years ago. But now the natural-gas price advantage is beginning to affect the coal units that seemed most protected from the shift. Many of these plants have the latest environmental upgrades and are often close to coal deposits. The reason: With natural gas priced below $3 per million British thermal units, down from about $8 in 2008, many gas-fueled plants can make electricity for about two cents a kilowatt hour, less than half what it costs to run many coal units." Rebecca Smith in The Wall Street Journal.

Fed easing right before an election: well, this sounds familiar. "On Thursday, the Federal Reserve is poised to announce that it will once again seek to stimulate the economy in the middle of a presidential election season. Fed officials insist that they do not consider politics in setting policy. But the imminence of the election makes it inevitable that the decisions reached by the Fed’s policy-making committee will be judged through a political lens...While some analysts have argued that the Fed is less likely to act in an election year, history offers evidence to the contrary. The Fed has announced policy changes in September or October during 10 of the last 15 presidential election years, dating back to 1952." Binyamin Appelbaum in The New York Times.

@TheStalwart: Ironic that the best polices over the last few years (bank bailouts, car bailouts, stimulus, Fed easing) are the least popular.

Economic outlooks are increasingly colored by political views. "With the election less than two months away, partisan differences in views of economic news have become wider than ever… Just 15% of Democrats say recent economic news is mostly bad, down from 31% a month ago and among the lowest percentages over the last four years. Six-in-ten Republicans (60%) say news about the economy is mostly bad, as do 36% of independents. Opinions among Republicans and independents are largely unchanged from a month ago." Ezra Klein in The Washington Post.

Americans are dropping out of the formal financial system. "Middle-class Americans are spending less time in the bank lobbies their parents would recognize. Today, 8.2% of the nation's households -- nearly 12 million -- are managing their finances without a bank, according to Census-based data the Federal Deposit Insurance Corp. will make public Wednesday. That is up from the 7.7% the bank regulator found in its 2009 report. Another 24 million households, defined by the government as 'underbanked'...This population that has left banks, or uses their services infrequently, makes up 28.3% of America's households, the agency says. That is a slight increase from the 25.6% who fit into those categories in 2009...The phenomenon shows how consumer behavior has changed in the five years since the onset of the global financial crisis." Gary Fields and Maya Jackson-Randall in The Wall Street Journal.

Music you really ought to know interlude: Jackson Browne, "Somebody's Babe," 1982.

Health Care

The average employer-provided health insurance plan now cost $15,740, and that's kind of good news. "The average health insurance plan offered by a large company now costs $15,745. That’s the bad news. But there’s also some good news buried in this report: Health insurance premiums rose by 4 percent between 2011 and 2012. That’s not nothing, but it’s a whole lot less than the double-digit premium increases that were common about a decade ago. In fact, since 2004, the Kaiser Family Foundation has not seen any double-digit increases at all. Just like national health expenditures, employer-based premiums are seeing a cost-growth slowdown." Sarah Kliff in The Washington Post.

Fresh count of the uninsured is due today. "The Census Bureau is set to release new figures Wednesday on the number of uninsured Americans. If the number rises, the report could provide Republicans with another avenue to attack the slow economic recovery (people are often uninsured because they’re unemployed) and perhaps to knock the Affordable Care Act, even though the vast majority of its coverage expansion hasn’t happened yet...Tomorrow’s figures will measure the number of uninsured people in 2011. In 2010, the number stood just shy of 50 million, or roughly 16 percent." Sam Baker and Elise Viebeck in The Hill.

Domestic Policy

Immigrants waste no time to file 'deferred action' papers. "One month after the Obama administration started a program to suspend deportations of young illegal immigrants, more than 72,000 of them have applied for the temporary reprieve, senior immigration officials said on Tuesday, and this week the first approvals have been granted. The figures for applications received so far — the first results the administration has released since a federal agency began receiving the documents on Aug. 15 — show that large numbers of young immigrants are ready to take the risk of coming forward, administration officials and immigrant advocates said, and that the agency in charge has been able to manage the rush of paperwork. The immigrants requesting two-year deportation deferrals do not reach the high estimates of 250,000 that officials had said they were prepared to handle in the first month of the program." Julia Preston in The New York Times.

Romney's cabinet-in-waiting coalesces. "Mitt Romney's presidential transition team, stocked with veterans of the George W. Bush administration, is studying personnel and policy moves that would prepare Mr. Romney to reorder federal spending and quickly propose a budget, should he win the White House. The team, which moved into Washington, D.C. offices last week, offers an early peek at how a Romney administration might run. It is peppered with old GOP hands and fresh faces from the business world." Sara Murray and Damian Paletta in The Wall Street Journal.

@ReformedBroker: Romney's only solace about losing is how much fun he'll have dismantling the campaign and laying off staffers. Old school!

Obama asks for extension of gov't surveillance tool. "The Obama administration is lobbying for renewal of a controversial 2008 surveillance law, warning that the U.S. would lose a critical intelligence-collection tool if Congress allows the measure to expire at year's end. As President Barack Obama emphasizes his national-security record in his re-election campaign, he's facing strong resistance from some lawmakers who say the law lacks sufficient privacy protections...The 2008 law allowed the secret court to approve a surveillance program -- rather than an individual wiretap -- to intercept communications into and out of the U.S. by groups of people of interest to intelligence agencies." Siobhan Gorman in The Wall Street Journal.

9/11 memorial interlude: What that tragedy looked like from space.

Energy

Climate change could lead to more crime. "It’s possible that climate change could in the years to come make our hot, violent summers even worse on both fronts. A fascinating new academic paper statistically spells out just what this might look like(hat tip to Per Square Mile). As part of his Ph.D. dissertation at Harvard, Matthew Ranson culled 50 years of weather data from across the country, from the National Climatic Data Center, and similarly comprehensive crime statistics over that time from the FBI’s Uniform Crime Reports database. All of this macro national data confirmed the same story that researchers have found at the local level: There is a linear relationship between hot temperatures and violent crime. As one goes up, so does the other. And this has direct implications for climate change." Emily Badger in Grist.

Gap identified in nuke regs. "For almost 40 years, the Nuclear Regulatory Commission’s mantra has been that public health and safety are adequately protected by the agency’s regulatory standards. But the triple meltdown at Japan’s Fukushima Daiichi plant 18 months ago suggests that the commission needs to go beyond direct health impacts in adopting safeguards, commission staff members and outside experts argued at a three-hour hearing on Tuesday." Matthew L. Wald in The New York Times.

Wonkbook is produced with help from Michelle Williams.

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